SPY CONSOLIDATES NEAR APRIL HIGHS -- RUSSELL 2000 ETF FORMS TRIANGLE AND POSSIBLE RIGHT SHOULDER -- RISING WEDGE IN XLY DEFINES CURRENT UPTREND -- BULLISH WAVE COUNT SUGGEST FIFTH WAVE ADVANCE FOR XLF -- REGIONAL BANK SPDR HOLDS WEDGE BREAKOUT
SPY CONSOLIDATES NEAR APRIL HIGHS... Link for todays video. Stocks stalled over the last several days, but this is not necessarily a sign of weakness. Chart 1 shows the S&P 500 ETF (SPY) moving above 140 on August 7th and then moving into a relatively tight consolidation. Ones interpretation of this stall might depend on their trading bias. Bears will point to lack of follow through and resistance from the prior highs. Bulls will point out the overall uptrend and bullish momentum. Keep in mind that recent advances have been rather sharp. As with a big meal, such moves require a little time for digestion. At this point, SPY is up around 6% from its late July low and up around 11% from its early June low. A little backing and filling is perfectly normal. In fact, the ability to reach its prior high and remain at this position shows sustained buying pressure. As far as the bigger trend is concerned, SPY must be in an uptrend because it is trading near a 52-week high. Momentum is clearly bullish because the Percent Price Oscillator (PPO) remains in positive territory. I am marking key support at 132.5 for SPY and at zero for the PPO. Chart 2 shows the Nasdaq 100 ETF (QQQ) starting to outperform again.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
RUSSELL 2000 ETF FORMS TRIANGLE AND POSSIBLE RIGHT SHOULDER... Chart 3 shows the Russell 2000 ETF (IWM) with a possible inverse head-and-shoulders taking shape. The left shoulder formed in the middle of 2011 with support at 76. The August-October lows mark the head. The right shoulder is currently under construction with neckline resistance set in the 84-85 area. A break above this level would confirm the pattern and argue for higher prices, much higher prices. There are two swings visible on the right shoulder since the March peak (pink). First, IWM swung low with the April-May decline. Second, the ETF rebounded with the June-August advance. This is the advance to watch closely. Notice that two lows formed at 76 to mark support. This upswing, or 11 week uptrend, is in good shape as long as this support level holds. A break above triangle resistance would argue for a challenge to the 2011 highs.
(click to view a live version of this chart)
Chart 3
RISING WEDGE IN XLY DEFINES CURRENT UPTREND... The Consumer Discretionary SPDR (XLY) has been underperforming the last few months, but outperforming the last few years and has yet to actually breakdown. Taking a step back, chart 4 shows XLY advancing within a large rising channel since 2010. Within this big uptrend, the ETF hit the upper trend line in April and fell back to broken resistance in early June. Even though this level turned into support and ultimately held, I am watching the rising wedge that has taken shape since early June. So far the bigger trend remains up and the wedge is rising. Even though the bulls have the current edge, chartists need to watch this wedge carefully.
(click to view a live version of this chart)
Chart 4
(click to view a live version of this chart)
Chart 5
The rising wedge is generally thought of as a bearish consolidation pattern. Typically, there is a sharp decline that creates oversold conditions. The rising wedge represents a corrective rally that retraces a portion and alleviates oversold conditions. A bearish wedge should peak after a 50-62% retracement of the prior decline. If the current wedge turns out to be bearish, then we should see a peak soon, real soon. Chart 5 details this wedge with first support at 44.25. Technically, the trend is up and a break below support from the July lows is needed to actually reverse the uptrend that began with the June low. Such a reversal would project further weakness towards the yellow zone on the chart. Chart 6 shows the Retail SPDR (XRT) for reference.
(click to view a live version of this chart)
Chart 6
BULLISH WAVE COUNT SUGGEST FIFTH WAVE ADVANCE FOR XLF... Chart 7 shows the Finance SPDR (XLF) sporting a rising wedge the since June and this wedge holds the key. There are two Elliott wave counts visible. The green numbers mark the bullish count, which is considered the active count. The red numbers mark the bearish count, which is the alternative count and dependent on a wedge reversal. The decline from March to October 2011 formed five waves and the entire decline represents Wave I down. A sharp ABC correction formed Wave II from October to June and the April-May decline marks Wave 1 of a new leg lower. The current rising wedge is Wave 2 of a bigger Wave III, which suggests that wave 3 of III is next. Before getting too bearish, keep in mind that the current wedge is still rising. A break below support at 14 is needed to reverse this medium-term uptrend and signal a continuation lower.
(click to view a live version of this chart)
Chart 7
The bulls have the current edge as long as the wedge rises. It is clearly feasible to define the trend since October as up. The April-May decline was quite sharp, but prices did reverse in the 50-61.80% retracement zone, which is typical for corrections. Even though XLF has been underperforming since March, it has yet to actually break down and weigh negatively on the broader market.
REGIONAL BANK SPDR HOLDS WEDGE BREAKOUT... Chart 8 shows the Regional Bank SPDR (KRE) with a much stronger chart. Notice that the October-March advance exceeded the 2011 highs and forged a 52-week high. The decline into early June formed a falling wedge and the ETF broke wedge resistance with a surge in mid-late June. This breakout is holding as the ETF established support at 26. The bulls are in good shape as long as this support level holds.
(click to view a live version of this chart)
Chart 8
TLT BREAKS SUPPORT AS TREASURY YIELDS SURGE... Treasuries moved sharply lower early Wednesday and chart 9 shows the 20+ Year T-Bond ETF (TLT) breaking support. With stocks and treasuries negatively correlated, this breakdown is bullish for the stock market. A decline in treasury prices signals confidence in the economy and reduces the need for further easing. This is why treasury yields are moving higher. Also note that money moving out of treasuries needs to find a home, which usually involves riskier assets such as stocks and economically sensitive commodities. The 20+ Year T-Bond ETF (TLT) broke below 124 today and remains within a falling wedge. Last weeks highs mark wedge resistance. Chart 10 shows the 10-year Treasury Yield ($TNX) breaking above its June highs and exceeding 1.75% for the first time since late May.
(click to view a live version of this chart)
Chart 9
(click to view a live version of this chart)
Chart 10
GOLD SPDR BACKS OFF RESISTANCE AS NOOSE NARROWS... The Gold SPDR (GLD) declined from resistance the last few days and moved into the middle of its recent range. Chart 11 shows GLD hitting resistance at 158 and declining below the 20-day SMA, which is the middle band. Also notice that the range has narrowed and the Bollinger Bands are contracting. This means we have a volatility contraction that could be followed by a volatility expansion. The direction of the break holds the key. A break above 158 would be bullish and reverse the bigger downtrend. A break below 152 would be bearish and signal a continuation of the prior decline (late February to late May). Chart 12 shows the Silver Trust (SLV) with a similar setup and a triangle consolidation the last six weeks.
(click to view a live version of this chart)
Chart 11
(click to view a live version of this chart)
Chart 12
US DOLLAR FUND BOUNCES OFF SUPPORT ZONE... Unsurprisingly, the future of gold may be tied to the Dollar. Chart 13 shows the US Dollar Fund (UUP) in a medium-term uptrend (2-6 months) and a short-term downtrend (1-8 weeks). There is a big support zone in the 22.4-22.5 area. This zone stems from broken resistance and the June-July lows. Most recently, UUP formed a falling wedge and bounced towards the upper trend line. Follow through with a breakout would be bullish for the Dollar, and probably bearish for bullion. Failure to breakout and a move lower would be positive for gold. In the indicator window, notice that 20-period RSI broke above 60 in mid May to turn momentum bullish. RSI has since traded in the 40-80 zone, which is the bull zone. A break below 40 in RSI would turn momentum bearish. I chose 20-periods for RSI to make sure the March high held 60 and the June lows held 40. Chart 14 shows the Euro Currency Trust (FXE) with a rising wedge and support marked at last weeks low.
(click to view a live version of this chart)
Chart 13
