IWM, MDY AND QQQ CONSOLIDATE WITH TIGHT RANGES -- MARKETS TURNED RISK AVERSE IN MID SEPTEMBER -- TREASURY YIELDS, EURO AND STOCKS RISE AND FALL TOGETHER -- 10-YEAR TREASURY YIELD CONSOLIDATES BELOW SUPPORT BREAK -- EURO ETF STALLS JUST ABOVE SUPPORT
IWM, MDY AND QQQ CONSOLIDATE WITH TIGHT RANGES... Link for todays video. After a sharp decline last week, several of the major index ETFs consolidated with trading ranges the last six days. I am going to look at the Russell 2000 ETF (IWM), S&P MidCap 400 SPDR (MDY) and Nasdaq 100 ETF (QQQ) because these three represent small-caps, mid-caps and big techs. These three groups are important to the health of the overall market. The medium-term trends are still up, but the short-term trends are dependent on the resolution of these consolidations. Chart 1 shows IWM plunging below 84 last week and then forming a rising flag or wedge, which are bearish continuation patterns. A move below 83 would confirm this pattern and signal a continuation of last weeks decline. This would target further weakness towards the next support zone around 81. Support here stems from broken support and the June trendline. The indicator window shows the price relative turning lower the last three weeks. This means IWM is showing relative weakness and underperforming SPY. Chart 2 shows QQQ with a consolidation in the 68-69 area. A break below 68 would signal a continuation lower. Chart 3 shows MDY with a consolidation around 180. Even though these look like short-term bearish consolidations, keep in mind that the medium-term trends are up and breaks above consolidation resistance would be short-term bullish.
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Chart 1
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Chart 2
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Chart 3
MARKETS MOVE TO RISK-OFF MODE ... The markets have moved from risk-on to risk-off over the last three weeks. As its name implies, risk-on indicates that riskier assets are outperforming. These include stocks, the Euro, the Aussie Dollar, commodities and the consumer discretionary sector. An increase in the appetite for risk signals increasing confidence in the economy, which benefits stocks, commodities and the consumer discretionary sector. Note that I am measuring the Consumer Discretionary SPDR (XLY) relative to the Consumer Staples SPDR (XLP) using a ratio chart. XLY is outperforming when the XLY:XLP ratio rises and underperforming when this ratio falls. The Aussie Dollar is a commodity currency that benefits from strength in commodity prices, while strength in the Euro is a positive sign for the troubled Eurozone. Chart 4 shows these five risk-on assets rising and then turning lower in mid September. It is still too early to tell if this is a mere correction within a bigger uptrend or the start of an extended downtrend.
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Chart 4
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Chart 5
Chart 5 shows the four risk-off assets: the 20+ Year T-Bond ETF (TLT), the Dollar Bullish ETF (UUP), the Japanese Yen Fund (FXY) and the XLP:XLY ratio. First, notice that I reversed this ratio and placed the consumer staples as the numerator. This shows the performance of XLP relative to XLY. The consumer staples sector outperforms when this ratio rises and relative strength in the consumer staples sector reflects a defensive market. Consumer staples stocks are less risky than consumer discretionary stocks. As the chart shows, risk-off assets plunged from late July to mid September. All four turned up in mid September as money moved from relative risk to relative safety.
TREASURY YIELDS, EURO AND STOCKS RISE AND FALL TOGETHER... The Euro ETF (FXE), the 10-year Treasury Yield ($TNX) and the S&P 500 rose together in the first half of September and fell together in the second half. The positive correlation for these three is remarkable since early September. Chart 6 shows FXE, TLT and $SPX moving higher from September 6th until September 14th. All three peaked in mid September and moved lower the last 2-3 weeks.
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Chart 6
10-YEAR TREASURY YIELD CONSOLIDATES BELOW SUPPORT BREAK... This could be a big week for treasury yields and the Euro. Note that the European Central Bank (ECB) meets tomorrow and will make a policy statement. The Fed Minutes will be released on Wednesday afternoon and the employment report is due on Friday morning. Chart 7 shows the 10-year Treasury Yield breaking above resistance at 17 (1.7%) twice, but giving back this breakout each time. The overall pattern looks bearish as $TNX broke the wedge trendline and consolidated the last six days. A break below 16 would signal a continuation lower. This would be bullish for treasuries and bearish for stocks. I am marking resistance at 17 and a break back above this level would put the on-again off-again breakout back in play. Such a move would be bearish for treasuries and bullish for stocks.
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Chart 7
EURO CURRENCY TRUST STALLS JUST ABOVE SUPPORT... Chart 8 shows the Euro ETF (FXE) in an uptrend since late July. The ETF pulled back rather hard the last two weeks, but this still looks like a correction within an uptrend. I am marking support at 127. A move below this level would break the July trendline and last weeks low. This would reverse the uptrend in the Euro and further the risk-off trade. Such a move would be bearish for stocks, which are positively correlated with the Euro.
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Chart 8
OIL EXTENDS DOWNTREND AFTER SUPPLY DATA... Oil is getting creamed again on Wednesday with Spot Light Crude ($WTIC) falling below $90 a barrel. Note that oil broke down in mid September and todays decline simply extends the new downtrend. Wednesdays weakness was attributed to a sharp increase in oil production. Chart 9 shows the US Oil Fund (USO) breaking support in mid September and broken support turning into resistance around 35. USO never made it back above the support break and plunged over 2% on Wednesday. With a lower high forming in mid September, this new downtrend looks like a continuation of the prior decline (May-June). Next support resides in the 29-30 area. Chart 10 shows weekly Spot Light Crude ($WTIC) for reference.
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Chart 9
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Chart 10
OIL & GAS EQUIPMENT/SERVICES SPDR LEADS ENERGY SHARES LOWER... Chart 11 shows the Energy SPDR (XLE) with a relatively modest decline on Wednesday. XLE pulled back with the rest of the market over the last 2-3 weeks and is testing support in the 72.50 area. Support here stems from broken resistance and the July trendline. The price relative shows XLE starting to underperform as the XLE:SPY ratio turned down this week.
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Chart 11
Chart 12 shows the Oil & Gas Equipment/Services SPDR (XES) getting hit harder than XLE. XES broke the July trendline this week and next support resides in the 32.50 area. The indicator window shows the price relative breaking the June trendline and the late August low as XES underperforms the S&P 500 ETF.
