QUANTITATIVE EASING AND THE S&P 500 SINCE 2008 -- XME AND SLX SURGE OFF KEY RETRACEMENTS -- SEMICONDUCTOR ETF SURGES ABOVE EARLY SEPTEMBER HIGH -- AMAT AND TXN BREAK CONSOLIDATION RESISTANCE -- QE3 POINTS TO HIGHER INTEREST RATES AND LOWER T-BOND PRICES
QUANTITATIVE EASING AND THE S&P 500 SINCE 2008... Link for todays video. Stocks surged on Thursday after the Fed announced another round of quantitative easing. Obviously, the stock market is pleased with the announcement. Chart 1 shows the S&P 500 since September 2008 and the yellow areas mark the beginning-end of the prior quantitative easing programs. Even though two QE cycles are not enough to establish a trend, notice that the stock market fell sharply after QE1 and QE2 ended (red arrows). Of course, the S&P 500 was up substantially before these declines. More importantly, the index established a higher low after each decline and subsequently advanced to new highs. As the blue channel lines show, the trend is clear on this chart. Even though chartists can debate whether or not $SPX is overbought and ripe for a correction or pullback, there is no arguing the uptrend. Anything trading at a 52-week high is in an uptrend.

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Chart 1
The indicator window shows the Vortex Indicator, which is new at StockCharts.com. This indicator combines elements of the Average True Range (ATR), Plus Directional Movement (+DM), Minus Directional Movement (-DM) and the properties of a vortex flow. See the ChartSchool article for the all the gory details. This indicator consists of two lines: a green line to measure upward price movements and a red line to measure downward price movement. The bulls have the edge when the green line is above the red line and above 1. The bears have the edge when the red line is above the green line and above 1. As with all indicators, it is not immune to whipsaws and bad signals. However, the Vortex Indicator is not ambiguous. It is either bullish or bearish. The green line crossed above the red line in early July and this indicator remains in bull mode.
METALS & MINING SPDR AND STEEL ETF SURGE OFF KEY RETRACEMENTS... With base metals surging over the last two weeks, the outlook for the global economy may improve in the weeks and months ahead. The S&P 500 hit a new 52-week high this week and the German DAX Index ($DAX) is near its 2011 highs. China remains the wild card as the Shanghai Composite ($SSEC) continues to lag and wallow near 52-week lows. Even though performance for the Metals & Mining SPDR (XME) and Steel ETF (SLX) may be dependent on the Chinese market, I am seeing a long-term bullish setup in both ETFs. Chart 2 shows XME surging from late 2008 until early 2011 and then correcting with a large falling wedge. With a two week surge, the ETF broke the wedge trend line and exceeded its July high. This breakout is looking quite bullish from a long-term standpoint. Traders might consider putting this ETF and the stocks within on their watch list to look for bullish setups on the daily chart. The indicator window shows the Vortex Indicator confirming the breakout as the green line crossed above 1 and exceeded the red line. Chart 3 shows the Steel ETF finding support at 40 and breaking the summer highs this week.

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Chart 2

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Chart 3
SEMICONDUCTOR ETF SURGES ABOVE EARLY SEPTEMBER HIGH... Even though the Market Vectors Semiconductor ETF (SMH) has been lagging the broad market since February, the ETF is showing signs of life with a short-term breakout today. Chart 4 shows SMH breaking out with a surge above 33 in early August. The decline into early September looks like a throwback to broken resistance, which turns into support. There was quite a battle over the last few weeks, but it looks like support will hold as SMH broke out with a big move on Friday. This move reinforces support at 32. The indicator window shows the price relative trending lower since February. The indicator has yet to turn up because SMH continues to underperform. A break above .24 is needed to turn performance around.

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Chart 4
APPLIED MATERIALS AND TEXAS INSTRUMENTS BREAK CONSOLIDATION RESISTANCE... Last week I showed Intel (INTC) breaking descending triangle support and leading the way lower. This stock accounts for around 18% of the Semiconductor ETF. While relative weakness in Intel may continue to weigh on SMH, other semiconductor stocks show bullish patterns with recent breakouts. Chart 5 shows Applied Materials (AMAT) breaking resistance in early August and then consolidating with a triangle. The stock broke triangle resistance with a surge over the last two days. Also notice that upside volume has been outpacing downside volume since early August.

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Chart 5
Chart 6 shows Texas Instruments (TXN) with a breakout in August and a falling flag the last four weeks. Notice how the stock found support in the prior resistance zone and retraced around 50% of the prior advance. With a surge the last two days, the stock broke above the upper trend line and volume surged on Wednesday-Thursday.

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Chart 6
QE3 POINTS TO HIGHER INTEREST RATES AND LOWER T-BOND PRICES... Chart 7 shows the 10-year Treasury Yield ($TNX) with the quantitative easing dates in yellow. The 10-year Treasury Yield rose as QE1 and QE2 got started. This means treasury bonds fell, which is bullish for the stock market. Money moving out of treasuries is money that is available for stocks and riskier assets. The yield peaked when QE1 ended and fell sharply at the end of QE2. At the chart now stands, the yield is on the verge of a breakout as QE3 commences. This fits with what happened at the beginning of QE1 and QE2. Also notice that the Percent Price Oscillator (PPO) formed a large bullish divergence and the decline from April 2010 to July 2012 traced out a five wave sequence. A break above the August high would target further strength towards the 24 (2.4%) area.

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Chart 7
Chart 8 shows the 30-Year US Treasury Bond ($USB), which moves opposite to treasury bond yields. Notice how the long bond peaked near the beginning of QE1 and QE2. Sharp declines followed these peaks and the long bond bottomed in the middle of these quantitative easing programs. $USB surged when QE1 ended and again when QE2 ended. Drawing from the past, the long bond looks vulnerable as QE3 commences. The April trend line and broken resistance mark support around 146. A break below this level would be bearish for bonds.
