DOW BACKS OFF RESISTANCE AND NASDAQ STALLS -- RELATIVE WEAKNESS UNDERMINES IWM AND MDY BREAKOUTS -- RISING WEDGES TAKE SHAPE IN XRT AND KRE -- OIL AND OIL & GAS EQUIPMENT/SERVICES SPDR HIT KEY RETRACEMENT
DOW BACKS OFF RESISTANCE AND NASDAQ STALLS ... Link for todays video. After a sharp advance the past 12 weeks, stocks took a breather this week. Keep in mind that the S&P 500 advanced nine of the last twelve weeks and the index is up some 11% from its early June low. With this big advance, the Dow Industrials, S&P 500 and Nasdaq 100 challenged their spring highs. Even though this weeks price action shows indecision at these highs, one week is not enough to affect the bigger uptrends. Stocks were short-term overbought to start the week and a corrective period can be helpful provided it does not extend too far. With this in mind, lets look at some weekly charts to put the current rally into perspective. Chart 1 shows the Dow Industrials surging to resistance in the 13250 area and then backing off with a red bar this week. Notice that the Dow moved above last weeks high, reversed and then declined below last weeks low. Should the senior Average close below 13100, a weekly outside reversal pattern would form. While this might be short-term negative, it is not enough to affect the medium-term or long-term uptrends. We can classify the medium-term trend as up with the blue trend line extending up from the October low. Also notice that the Percent Price Oscillator (5,35,5) is above its signal line. Medium-term trouble could start if we see follow through to this weeks decline and a break below the trend line (12600). This would trigger a bearish signal line crossover in the PPO and turn medium-term momentum bearish. It has not happened yet, but chartists should watch developments closely. Chart 2 shows the Nasdaq with trend line support around 2900.
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Chart 1
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Chart 2
RELATIVE WEAKNESS UNDERMINES IWM AND MDY BREAKOUTS... A lot has been made about relative weakness in the Russell 2000 ETF (IWM) and small-caps over the last few months. This is indeed a concern because small-cap companies are closely tied to the domestic economy. These companies are like the canaries in the economic coal mine. They are the first to suffer when the economy turns down and the first to benefit when the economy turns up. Chart 3 shows the Russell 2000 ETF (IWM) moving higher the last three months and breaking above the triangle trend line last week. This breakout did not last long as the ETF fell back below the trend line this week. Nevertheless, the swing since early June remains up with key support at 76. The bulls have the medium-term edge as long as this support level holds. A break below 76 would signal a continuation of the prior decline (84-73) and target a move below the June low.
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Chart 3
The indicator window shows the price relative (IWM:SPY ratio), which measures the performance of IWM relative to SPY. The green dotted lines mark upside breakouts and periods of relative strength. The red dotted lines mark downside breaks and periods of relative weakness. Even though IWM broke the triangle trend line on the price chart, it was not confirmed with an upside breakout in the price relative. This is potentially negative for IWM and the market as a whole because it shows continued relative weakness in small-caps. A breakout in the price relative is needed for small-caps to start showing relative strength. Such a move would be positive for the overall market. Chart 4 shows the S&P MidCap 400 SPDR (MDY) with a rising channel taking shape since June.
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Chart 4
RISING WEDGES TAKE SHAPE IN RETAIL SPDR AND REGIONAL BANK SPDR... I am also watching the Retail SPDR (XRT) and the Regional Bank SPDR (KRE) for clues on the broader market. These two ETFs are about as broad as you can get. The Regional Bank SPDR has over 70 regional banks and the biggest holding (Synovus SNV)) accounts for just 1.95% of the ETF. The Retail SPDR has over 90 retailers and the biggest holding (Gap Inc (GPS)) accounts for just 1.38% of the ETF. You can find a complete list of holdings at www.spdrs.com. These ETFs are also domestic oriented. Regional banks, by definition, focus on different regions of the US and have little overseas exposure. Retail stores sell most of their merchandise in the US. These two, therefore, are excellent barometers for banking environment and retail spending.
Chart 5 shows the Retail SPDR within a large rising channel since 2010. Most recently, the ETF bounced off broken resistance and formed a rising wedge the last 2-3 months. While a rising wedge is thought of as a bearish continuation pattern, the trend is up as long as it is rising. A break below the July lows (57) would reverse this wedge and signal a continuation of the prior decline. The lower trend line of the rising channel would then become the next target. The indicator window shows the price relative peaking in May and breaking below the 2010 trend line in July. Relative weakness in this key group is potentially negative, but I will keep a bullish bias as long as wedge support holds.
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Chart 5
Chart 6 shows the Regional Bank SPDR with the Elliott Wave count put forth last week. As with XRT, the Regional Bank SPDR is also forming a rising wedge and the price relative peaked in May. The bulls get the benefit of the doubt as long as this wedge rises and key support at 26 holds. A break below 26 would reverse the wedge and target a move below the June low.
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Chart 6
OIL AND OIL & GAS EQUIPMENT/SERVICES SPDR HIT KEY RETRACEMENT ... Chart 7 shows Spot Light Crude ($WTIC) hitting a key retracement and stalling the last three days. With a move from 77.5 to 97.5, $WTIC retraced 61.80% of the prior decline (110 to 77.5). Resistance in this area also stems from broken support and the ETF is overbought after an 11% surge the last three weeks. Despite resistance and a rising wedge pattern, $WTIC has yet to trigger a bearish signal.
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Chart 7
The indicator window shows the Commodity Channel Index (CCI) with three signals over the last six months. The first two are trend line breaks and the second is a horizontal line break. Not all moves are the same. This is why trend line breaks work sometimes and horizontal line breaks work other times. Looking at the current setup, it is clear that CCI is in bull mode as long as it holds above zero (blue line). A break into negative territory would signal a downturn in momentum. Chartists should also keep an eye on the Dollar and the stock market. A strong stock market and weak Dollar are positive for oil. A weak stock market and strong Dollar are negative. Chart 8 shows the US Oil Fund (USO) with similar characteristics. Chart 9 shows the Oil & Gas Equipment/Services SPDR (XES) with a similar pattern (retracement and rising wedge).
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Chart 8
