HEALTHCARE SPDR CHALLENGES JULY HIGHS -- XLV UNDERPERFORMS ON RELATIVE BASIS, BUT OUTPERFORMS ON CHART -- UTILITIES SPDR BECOMES VERY OVERSOLD -- SHANGHAI COMPOSITE AND S&P 500 CONTINUE SEPARATE WAYS
HEALTHCARE SPDR CHALLENGES JULY HIGHS... Link for todays video. The Healthcare SPDR (XLV) is showing relative strength on the price chart with a challenge to the July highs. Chart 1 shows XLV surging above 38.75 in late July and then consolidating for the last three weeks. With another surge the last two days, XLV is making another go at resistance. Overall this pattern looks like a flat flag for perhaps even a cup-with-handle (since mid July). Both are bullish patterns and a breakout would signal a continuation of the bigger uptrend. Failure to break out and a move below the mid August lows would be negative. The indicator window shows the price relative (XLV:SPY ratio) turning up the last week or so and breaking the mid July trend line.
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Chart 1
XLV UNDERPERFORMS ON RELATIVE BASIS, BUT OUTPERFORMS ON CHART... Note that there are different forms of relative strength. Comparing the percentage gain over time shows relative performance. Chart 2 shows that the S&P 500 ETF (SPY) is up over 11% from its early June low and the Healthcare SPDR is up around 10%. XLV is up less than SPY and this shows underperformance since early June (relative weakness). Nevertheless, an 11+ percent gain since early June is nothing to sneeze at.
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Chart 2
In contrast to relative performance, there is also relative chart performance. In this regard, XLV is outperforming SPY because it is trading above its mid August high and SPY is not. In fact, XLV is the only sector SPDR currently trading above its mid August high. XLK and XLP are close, but not quite there. This means XLV shows the most chart strength.
UTILITIES SPDR BECOMES MOST OVERSOLD SINCE AUGUST 2011... With the stock market moving to risk-on mode the last three months and treasury yields rising this month, the Utilities SPDR (XLU) took a pretty hard hit this month. In fact, chart 3 shows XLU falling 5% from high to low this month and 10-period RSI moving below 30 for the first time since August 2011**. I am using 10-period RSI instead of 14-period RSI because XLU is less volatile that other sector SPDRs and I want to increase indicator sensitivity. Turning back to the chart, notice that XLU is still in a long-term uptrend. Also notice that there is potential support in the 35.5-36 area from the September trend line, broken resistance and the 50-61.80% retracement. XLU formed a falling wedge this month and a break above the wedge trend line would provide the first sign that the four week downtrend is reversing.
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Chart 3
SHANGHAI COMPOSITE AND S&P 500 CONTINUE SEPARATE WAYS... It is clearly a tale of two markets when we compare the S&P 500 and the Shanghai Composite ($SSEC). The S&P 500 recorded a new high last week, while the Shanghai Composite recorded a 52-week low today. Chart 4 shows this index breaking triangle support in early June and moving to new lows in late July, and again in late August. There is nothing but downtrend and relative weakness on this chart. $SSEC established first resistance with the mid August high around 2180. A break above this level is needed to reverse the downtrend and shows some signs of buying pressure. The indicator window shows the price relative ($SSEC:$SPX ratio) moving to a new low as well. On average, Chinese stocks are seriously underperforming US stocks.
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Chart 4
COAL, METALS & MINERS, AND STEEL ETFS BACK OFF RESISTANCE ... Even though weakness in the Shanghai Composite has not weighed on the S&P 500, it has certainly affected some industry groups associated with raw materials. Last week I noted that the Coal Vectors ETF (KOL), Metals & Mining SPDR (XME) and Steel ETF (SLX) were stalling at resistance. All three had potential bullish reversal patterns working, but all three remained in downtrends and had yet to confirm these patterns with breakouts. New lows in the Shanghai Composite are exerting renewed selling pressure on these three. Chart 5 shows the Coal Vectors ETF breaking flag support on Thursday and gapping below 24 on Friday. First resistance is at 25. Chart 6 shows the Metals & Mining SPDR breaking trend line support at 42 with a decline the last two days. Chart 7 shows the Steel ETF breaking support from the mid August low and continuing the underperforming the broader market.
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Chart 5
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Chart 6
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Chart 7
XLB TESTS BREAKOUT AND UNDERPERFORMS... Despite relative weakness in several materials related industry groups, the Basic Materials SPDR (XLB) is holding its breakout and uptrend. Chart 8 shows XLB with a break above its July highs in early August, Broken resistance turned into support and held over the last few weeks. A move below 35.50 would suggest a failed breakout and be short-term bearish. This would not be enough to reverse the medium-term uptrend though. The May trend line marks support around 34.75 and the late July lows mark key support at 34. The price relative shows XLB underperforming SPY with a series of lower highs.
