TECHNICAL RANK FOR QQQ BREAKS BELOW 50 -- IWM BATTLES TO HOLD BREAKOUT -- SEMICONDUCTOR SPDR FORMS TWO HEAD-AND-SHOULDERS PATTERNS -- OIL FALLS BACK BELOW $90 -- ENERGY SPDR FORMS BEARISH PENNANT
TECHNICAL RANK FOR QQQ BREAKS BELOW 50... Link for todays video. The Nasdaq 100 ETF (QQQ) and the Russell 2000 ETF (IWM) broke their spring highs in August-September and these are the first levels to watch for signs of a trend reversal. Chart 1 shows QQQ breaking resistance around 68 and broken resistance turning into a support zone (67-68). QQQ formed an outside reversal on Friday (bearish engulfing) and a follow through break below support at 67 would be bearish. The indicator window shows Aroon Up (green) holding above Aroon Down (down) since the bullish cross in mid June. These two would turn bearish should Aroon Down move above Aroon Up. There are two ways to interpret the Aroon indicators. First, a signal is given with a simple crossover (i.e. Aroon Up crosses above Aroon Down). Second, a signal is given when one surges to 100 (i.e. Aroon Up surges to 100).
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Chart 1
Even though the ETF is holding this breakout so far, relative weakness is undermining this key technology ETF. John Murphy showed a weakening price relative (QQQ:$SPX ratio) in Saturdays market message. The lower indicator window shows the StockCharts Technical Rank (SCTR) breaking below 60 in late September and below 50 this month. 50 is the centerline for SCTR. The glass is half full when above and half empty when below. Clearly, the technical situation in QQQ deteriorated in September and the SCTR is flashing a warning sign here in early October.
IWM BATTLES TO HOLD BREAKOUT... Friday I showed the Russell 2000 ETF as it broke above consolidation resistance. To recap: IWM consolidated for seven days and then broke above this consolidation during the day on Friday. This breakout failed to hold by the close, but the failed breakout does not affect the medium-term trend, which is up. Lets take a longer term look at IWM and the key levels to watch. Chart 2 shows IWM breaking above its prior highs in September and this broken resistance zone turning into a support zone in the 82-84 area. Even though IWM stalled the last few weeks, the breakout is holding and the trend remains up. I am setting key support at 82 and a break below this level would reverse the 4 month uptrend. A move below this level would break the June trend line and this support zone.
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Chart 2
The indicator window shows the Aroon indicators again. Notice that I changed the setting to 35 periods instead of 25 periods. I lengthened the timeframe because there were two many whipsaws using 25 periods. Extending the timeframe to 35 periods does not eliminate whipsaws, but it does reduce the number of bad signals. Keep in mind that indicators should be used to confirm what you are seeing on the price chart and indicators should not be used alone. The second indicator window shows the StockCharts Technical Rank (SCTR) hovering just above 50. IWM is holding up better than QQQ. A break below 50 would show relative weakness for IWM. You can read more about SCTR in our ChartSchool and you can see the ETF rakings on the SCTR homepage .
SEMICONDUCTOR SPDR FORMS TWO HEAD-AND-SHOULDERS PATTERNS... Yes, you read right. The Semiconductor SPDR (XSD) has a head-and-shoulders pattern working from January 2011 to October 2012 and a smaller one working from October 2011 to October 2012. Chart 3 shows the larger head-and-shoulders pattern with neckline support in the 40 area. The pattern amounts to one large consolidation extending almost three years. A break below 40 would confirm the pattern and project further weakness. The indicator window confirms current weakness with weekly MACD in negative territory and below its signal line.
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Chart 3
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Chart 4
Chart 4 shows daily bars with a head-and-shoulders pattern extending from August 2011. This head-and-shoulders would be considered a bearish continuation pattern because the prior move was down (February 2011 to July 2011). This head-and-shoulders pattern represents a consolidation after a decline. A break below support would signal a continuation lower. The indicator window shows the price relative (XSD:SPY ratio) moving to a new 52-week low this month. Relative weakness in semis is not a good sign for the technology sector or the market overall. Also note that XSD is a broad-based ETF with 51 stocks. The biggest holding (Linear Tech) accounts for 2.87% of the ETF. This means the weightings of relatively even and XSD is a good barometer for the industry as a whole.
OIL MOVES BACK BELOW $90 AND MAINTAINS BREAKDOWN... It was a volatile few days for oil last weeks, but the mid September breakdown held and the current trend remains bearish. Chart 5 shows Spot Light Crude ($WTIC) breaking support and holding below this breakout into early October. Oil plunged 4% on Wednesday, but surged 4% on Thursday. Despite this immediate recovery, oil moved lower again on Friday and is trading below $90 early Monday. Forget about these day-to-day swings. Broken support at $94 turns into the first resistance level to watch. A break back above this level is needed to put crude back on the bullish track. The breakdown in crude is a potential negative for the stock market because stocks and oil are positively correlated for the most part. Chart 6 shows the US Oil Fund (USO) breaking support at 35 and broken support turning into resistance.
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Chart 5
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Chart 6
ENERGY SPDR (XLE) FORMS BEARISH PENNANT... The Energy SPDR (XLE) declined with along oil in the second half of September and then consolidated the last eight days. Chart 7 shows XLE forming a pennant, which is a short-term continuation patterns. This pennant is viewed as a bearish continuation pattern because the prior move was down (77 to 72.5). A support break would signal a continuation lower and project further weakness towards the 69.5 area. The prior move is subtracted from the upper trend line of the pennant for a downside target. The indicator window shows the Correlation Coefficient spending most of its time in positive territory the last six months. Unsurprisingly, XLE and oil share a strong positive correlation.
