UTILITIES SPDR FALLS AS TREASURY YIELDS RISE -- A THROWBACK AND BIG TEST FOR THE STEEL ETF -- OIL FAILS AT KEY RETRACEMENT -- GASOLINE BREAKS RAFF REGRESSION CHANNEL -- VIX SHOWS COMPLACENCY, BUT REMAINS BULLISH OVERALL

UTILITIES SPDR FALLS AS TREASURY YIELDS RISE... Link for today's video. While the Consumer Staples SPDR (XLP) and Healthcare SPDR (XLV) trade near 52-week highs, the Utilities SPDR (XLU) trades near its summer lows and remains the weakest of the three defensive sectors. In fact, XLU is the weakest of all sectors at the moment. For hitting the charts, note that XLU, SPY and some other SPDRs are trading ex-dividend today. Chart 1 shows weekly prices with the Utilities SPDR still in a long-term uptrend. With the surge from April to July, the ETF recorded a new 52-week high above 38.50. XLU subsequently pullback the last few months and may be headed for a date with broken resistance in the 35.75 area. The indicator window shows StochRSI moving below .40 in early August and remaining down. The yellow band extends from .40 to .60. Momentum turns bullish with a move above .60 and bearish with a move below .40. Chartists cannot really use the centerline (.50) for signals because there are too many whipsaws.

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Chart 1

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Chart 2

Chart 2 shows daily candlesticks over the last six months with the 10-year Treasury Yield ($TNX) in the indicator window. Notice that XLU peaked within a week of the bottom in the 10-year Treasury Yield. Also notice that XLU declined as yields rose in August-September. Rising rates translate into higher interest payments for debt-laden utilities. Also note that higher yielding treasuries make utility stocks less attractive on a relative basis. Despite these negatives, notice that upside volume surged twice this month and XLU may be trying to put in a bottom. The September highs mark resistance and a break above this level would reverse the two month slide. Barring a reversal, the next support zone resides around 35.75 (yellow highlight).

A THROWBACK AND BIG TEST FOR THE STEEL ETF ... Chart 3 shows the Steel ETF (SLX) surging above its June-August highs and breaking resistance to confirm a triple bottom. There are at least three lows in the 40-41 support zone and two highs in the resistance zone around 46. Based on traditional technical analysis, the height of the pattern (6) is added to the breakout (46) for an upside target (52). SLX broke resistance with a big surge and broken resistance now turns into first support. The ETF pulled back to the breakout zone this week. Such a pullback is considered a throwback and this is the first big test. The breakout is still bullish as long as this weeks low holds.

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Chart 3

OIL FAILS AT KEY RETRACEMENT... Oil and gasoline took big hits this week and these declines may have bigger chart consequences. Chart 4 shows December Light Crude Futures (^CLZ12) surging above 100 last week and then sharply reversing lower this week. I am using the futures contract because it represents oil prices in their purest form. The contract failed around the 61.80% retracement line and broke support. The support break reversed the uptrend that was in place since June. At this point, I will be watching the support break to see if its holds. A move back above 96 would negate the break and suggest that this weeks decline was an overreaction. The indicator window shows the Percent Price Oscillator (PPO) nearing the zero line. A move into negative territory would turn momentum bearish. Chart 5 shows the US Oil Fund (USO) breaking support at 35 and CCI breaking support from the early August low.

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Chart 4

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Chart 5

GASOLINE BREAKS RAFF REGRESSION CHANNEL ... Chart 6 shows December Gasoline Futures (^RBZ12) surging from late June to mid September. The advance is too steep for a trend line so I drew the Raff Regression Channel instead. The channel extends from the late June closing low to the mid September closing high. The middle line is a linear regression. The equidistant outer lines are based on the furthest close from the linear regression (blue arrow). The lower line of this channel ends around 2.77 to mark channel support. Gasoline broke this line and broke the late August low with a sharp decline. This breakdown is considered bearish as long as it holds. It would take a move above 2.82 to reconsider. Chart 7 shows the US Gasoline Fund (UGA) breaking support at 58.5 and CCI breaking into negative territory.

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Chart 6

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Chart 7

VIX SHOWS COMPLACENCY, BUT REMAINS BULLISH OVERALL... Even though the major stock indices are in uptrends and recently recorded 52-week highs, they are overbought and some sentiment indicators are starting to reach extremes. Measuring sentiment is not so difficult, but it is sometimes difficult to time market turns using sentiment indicators. It is kind of like a momentum oscillator that becomes overbought or oversold. Sentiment indicators can remain at relative extremes during strong trends. As with momentum oscillator, sentiment indicators should not be used on their own. Instead, use sentiment indicators in conjunction with basic chart analysis and other indicators. Have said that, lets look at the current state of the volatility indices.

The S&P 500 Volatility Index ($VIX) and the Nasdaq 100 Volatility Index ($VXN) are two of the most popular sentiment indicators. These measure the implied volatility for a basket of near-the-money options for their respective indices. VIX and VXN values are largely driven by the implied volatility for put options, which is basically the fear factor. Option players are confident and bullish when put prices and volatility are relatively low. This turns into complacency when the volatility indices get too low. Option players are fearful and bearish when put prices and volatility are relatively high. This turns into excessive fear when the volatility indices get too high. High and low levels are relative to their historical ranges.

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Chart 8

Chart 8 shows the S&P 500 Volatility Index with the S&P 500 and the Percent Price Oscillator (12,26,1). This is a weekly chart going back to April 2009. First, notice that the general direction of the VIX acts as a good coincident indicator. The green dotted lines show the PPO crossing into negative territory as the VIX turned down. Declining volatility was bullish for the S&P 500. The red dotted lines show the PPO crossing into positive territory as the VIX turned up. Rising volatility coincided with downturns in the S&P 500. The blue oval shows a small whipsaw in June 2011. Currently, the VIX is still trending lower and this is positive for the S&P 500. A PPO move into positive territory would signal an upturn in the fear factor and this would be bearish for the S&P 500. The second item to consider is the overall level of the VIX. Surges above 40 indicate excessive fear that foreshadowed a low in the S&P 500. Moves below 15% suggest excessive complacency and a potential top (blue arrows). The VIX currently shows complacency with two dips below 15% in the last two months, but we have yet to get confirmation with a support break at 1400 in SPX.

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Chart 9

Chart 9 shows the Nasdaq 100 Volatility Index with similar characteristics. Instead of 15%, I am using 16% for the complacency threshold. The blue arrows show when VXN dipped below 16%. Currently, the PPO is in negative territory and this is bullish for the Nasdaq 100. Even though VXN is signaling complacency, we need an upturn in the PPO before complacency turns into actual selling pressure. In other words, an upturn in the fear factor would signal an increase in selling pressure.