CONSUMER DISCRETIONARY AND TECHNOLOGY SECTORS HIT NEW HIGHS -- BIG BANKS LEAD FINANCE SECTOR -- RELATIVE STRENGTH LINE TURNS UP -- PNC FINANCIAL, JP MORGAN CHASE AND MORGAN STANLEY BREAK OUT -- 10-YEAR TREASURY YIELD TRACES OUT FIVE WAVE DECLINE
CONSUMER DISCRETIONARY AND TECHNOLOGY SECTORS HIT NEW HIGHS... Link for todays video. Chartists can debate the sustainability of the current rally, but there is no debating the underlying strength in two key sectors. The Consumer Discretionary SPDR (XLY) and the Technology SPDR (XLK) both recorded new 52-week highs last week. New highs form in uptrends, not downtrend. Even though these two may be overbought after big moves since early June, they are clearly within bigger uptrends and clearly strong. Chart 1 shows XLK moving above 31 last week and forming a possible fifth wave of a five wave advance that started in August 2011. Also notice that the ETF is up over 10% from its June low and medium-term overbought. The combination of a fifth wave and overbought conditions could foreshadow a corrective period. Corrections evolve as pullbacks or sideways consolidations. At this point, I would mark first support around 29. The August 2011 trend line and broken resistance zone mark support here. The indicator window shows the price relative (XLK:SPY ratio) in an uptrend since June 2011.
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Chart 1
Chart 2 shows the Consumer Discretionary SPDR moving above 46 and hitting a new high. There is also a five wave advance visible here and XLY could be in the fifth wave up. The August 2011 trend line and broken resistance mark the first support zone to watch around 44. Note that I consider the Elliott Wave count secondary to the overall uptrend. The indicator window shows the price relative (XLK:SPY ratio) trending higher for over two years. The price relative, however, has yet to record a new high to match the new high in XLY. This is not a problem as long as the price relative maintains its uptrend and does not break the August low.
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Chart 2
BIG BANKS LEAD FINANCE SECTOR AS RELATIVE STRENGTH LINE TURNS UP... The Finance SPDR (XLF) came to life last week by surging to its highest level since March. Big banks dominate this ETF: Wells Fargo (WFC), Berkshire Hathaway (BRK.B), JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), US Bancorp (USB), American Express (AXP) and Goldman Sachs (GS). These eight components account for around 45% of the ETF. Chart 3 shows XLF within an uptrend since the October 2011 low. A five wave advance is also present here and the ETF appears to be within the fifth wave. The 2010-2011 highs around 16.6-16.8 mark the logical target zone. The July low and September trend line mark support at 14. Notice that I drew an internal trend line cutting through the October low. This rising trend line captures the current advance quite well. The indicator window shows the price relative (XLK:SPY ratio) turning up and breaking above the January 2011 trend line. The finance sector is slowly starting to outperform and this is positive for the rest of the market. Note that John Murphy featured the Regional Bank SPDR (KRE) as it surged above its summer highs last week.
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Chart 3
PNC FINANCIAL, JP MORGAN CHASE AND MORGAN STANLEY BREAK OUT... There were dozens of big movers within the finance sector recently. Chart 4 shows PNC Financial (PNC) stalling near its July highs with a pennant and then breaking out with a volume surge. The May highs mark the next resistance zone around 67. The pennant now mark support in the 62 area. Chart 5 shows JP Morgan Chase (JPM) stalling around 37 throughout August and then surging above 39 with expanding volume. The April highs mark the next resistance zone around 44-45. Chart 6 shows Morgan Stanley (MS) with a double bottom breakout on expanding volume. Notice that the stock advanced eight days straight to produce this breakout. Based on the height of the pattern (3), the upside target is around 18.20. Broken resistance turns into the first support zone to watch on a throwback.
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Chart 4
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Chart 5
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Chart 6
10-YEAR TREASURY YIELD TRACES OUT FIVE WAVE DECLINE... To QE or not to QE seems to be the question these days. Chartists cannot really go inside the head of the Fed, but we can watch the treasury market for clues on the economy and stock market. There are two assumptions at work here. First, treasury yields will rise if the economy is improving. Second, stocks are positively correlated with yields and will rise along with yields. Chart 7 shows the 10-year Treasury Yield ($TNX) in a clear downtrend since early 2010. This downtrend subdivides into five waves and the July low marks the end of the fifth wave. Does this mean the 10-year Treasury Yield is about to turn up and start an uptrend? Broken support in the 18 (1.8%) area turns into the first resistance zone to watch. The yield surged to this level in mid August and then fell back to affirm resistance. A subsequent upturn and breakout would be quite bullish and argue for a move towards resistance in the 24 area (2.4%). This, in turn, would be bullish for stocks. The indicator window shows the Percent Price Oscillator (PPO) with a large bullish divergence and move above its signal line. Momentum is improving and this weeks Fed meeting may be the decider. Chart 8 shows the 30-year Treasury Yield ($TYX) with resistance at 30 (3%).
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Chart 7
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Chart 8
TLT ESTABLISHES KEY SUPPORT WITH AUGUST LOW... Treasuries and yields move in opposite directions. Yields fall when treasuries rise and rise when treasuries fall. This means treasury bonds are very sensitive to Fed policy and the economic outlook. Easy money and economic weakness translate into lower interest rates, which is positive for treasuries. Tight money and economic strength translate into higher interest rates and this is negative for treasuries. Chart 9 shows the 20+ Year T-Bond ETF (TLT) in an overall downtrend. TLT represents yields at the long end of the curve. Long-term yields are the most sensitive to interest rate changes because the duration of the treasury bond is longer. TLT shows a five wave advance with the fifth wave ending with the July high. Even though the five wave sequence looks complete, the trend has yet to reverse and I put more weight on the trend than the wave count. The August low now marks key support at 120 and a break below this level would reverse the two and a half year uptrend. The indicator window shows the Percent Price Oscillator (PPO) with a large bearish divergence and signal line crossover. Chart 10 shows the 7-10 year T-Bond ETF (IEF) for reference.
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Chart 9
