NEW TREND EMERGING SIGNAL FROM CCI -- S&P 500 EQUAL-WEIGHT ETF BREAKS FLAG SUPPORT -- NETWORKING AND INTERNET ETFS LEAD TECHS LOWER -- FINANCE SECTOR SHOWS RELATIVE STRENGTH -- US DOLLAR INDEX HOLDS ABOVE FEBRUARY LOW
NEW TREND EMERGING SIGNAL FROM CCI... Link for todays video. Before getting too bearish on the stock market, keep in mind that the S&P 500 ETF (SPY) has yet to break its late September low and is just 2% below its 52-week high. In other words, this decline has yet to reverse the uptrend in this benchmark ETF. Chart 1 shows a rising channel taking shape since June. The lower trend line and the late September low combine to mark support in the 143 area. A move below support would signal an increase in selling pressure and be enough to reverse the uptrend. Upon such a break, I would then use the Fibonacci Retracements Tool to estimate a downside target. A 50% retracement of the June-Sept advance would extend to the 137 area. Broken resistance from the July highs also turns into potential support in this area.
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Chart 1
Even though SPY has yet to breakdown on the chart, there are signs of momentum a breakdown. The indicator window shows the Commodity Channel Index (CCI) moving below -100 for the first time since early June. Notice that CCI bounced in the dip zone during the pullbacks from late June to September. This did not happen in October as CCI clearly broke down. Donald Lambert, creator of CCI, used it to identify the start of a new trend. A surge above +100 signals the start of a new uptrend, while a plunge below -100 signals the start of a new downtrend. It does not always work, but the mid June signal turned out quite well and chartists should use these momentum signals in conjunction with other aspects of technical analysis.
S&P 500 EQUAL-WEIGHT ETF BREAKS FLAG SUPPORT... As pointed out in recent Market Messages, the market has been weighed down by small-caps and large techs since mid September. This is further confirmed with the flag breakdown in the S&P 500 Equal-Weight ETF (RSP). The components for SPY and RSP are the same. The difference is in the weightings. The top ten components for SPY account for over 20% of the ETF. The top ten for RSP account for less than 3%. SPY components are weighted by market capitalization. RSP components are equally weighted. This makes RSP a better representative for the average stock. Chart 2 shows RSP failing to reach its mid September high and forming a rising flag the last two weeks. With a sharp decline the last four days, the ETF broke flag support to signal a continuation lower. The 38.2% retracement, late August lows and June trend line mark first support in the 50.5-51 area. The 50% retracement and July highs mark second support.
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Chart 2
The indicator window shows the price relative breaking the August trend line as RSP started to underperform SPY during September. Relative weakness in the average stock is not a good sign for the market as a whole. The second indicator window shows CCI moving towards -100, a break of which would signal the start of a new downtrend. Chart 3 shows the S&P MidCap 400 SPDR (MDY) failing to hold last weeks breakout. The ETF is on the verge of breaking first support at 178.
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Chart 3
NETWORKING AND INTERNET ETFS LEAD TECHS LOWER... Weakness is spreading within the technology sector as the Networking iShares (IGN) and the FirstTrust Internet ETF (FDN) were hit hard the last few days. Chart 4 shows IGN hitting resistance and turning sharply lower. Notice that the 61.80% retracement and broken support combined for this resistance zone. The peak was quite sudden as the ETF plunged with two sharp declines the last four weeks. Even though IGN is getting short-term oversold and near the early September low, this decline looks like a medium-term trend changer. The early October high turns into first resistance at 27.50.
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Chart 4
The FirstTrust Internet ETF was performing well late last week, but fell apart this week and is testing the late September low. Chart 5 shows FDN forming a small double top formed and a support break would project further weakness towards the next support zone around 36. Broken resistance and the 50-61.80% retracement zone mark support here.
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Chart 5
FINANCE SECTOR SHOWS RELATIVE STRENGTH... The Finance SPDR (XLF) is holding up quite well considering. Chart 6 shows XLF edging below 16 over the last three days. Relative to the decline in the technology sector, this decline is quite tame and looks like a falling flag. A break above flag resistance would signal a continuation higher. Overall, XLF remains in an uptrend with the late September low marking key support. Notice that XLF is well above this low and showing relative strength. The indicator window shows the price relative moving above its mid September high today. This means XLF is outperforming the S&P 500 ETF (SPY).
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Chart 6
Chart 7 shows the Regional Bank SPDR (KRE) firming just above its prior trough. Even though a falling flag did not take shape, the ETF is still holding up better than the broader market this month. Notice that the price relative (KRE:SPY ratio) turned up last week and moved higher this month. KRE could lead should the market get an oversold bounce.
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Chart 7
US DOLLAR INDEX HOLDS ABOVE FEBRUARY LOW... When analyzing ETFs, it is a good idea to also check the underlying index, when possible. For example, chart 8 shows the US Dollar Index ($USD) breaking down in September, but holding above its February low. In contrast, the Dollar Bullish ETF (UUP) broke below this corresponding low. Chartists could assume that the US Dollar Index remains in an uptrend because it held this low. In contrast, the US Dollar Bullish ETF could be considered in a downtrend because it forged a lower low. Which is correct? My vote goes to the underlying index. ETFs are designed to track an index, a basket of stocks or commodity. They are copies of the underlying security and do not trade exactly as the original. Even though the US Dollar Index broke support at 81, there is a lot of support in the 78-79 area and the index is getting a bounce the last four weeks. This bounce reinforces support here and the index has yet to forge a lower low. It, therefore, may be too early to completely write off the Dollar and buy into the Euro. The pink trendlines show a possible rising channel with the upper trendline extending to the 86-87 area by yearend. Given the negative correlation between stocks and the Dollar, such a move would be quite negative for stocks.
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Chart 8
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Chart 9
EURO HITS RESISTANCE AT FIBONACCI CLUSTER... Chart 10 shows the Euro Trust (FXE) within an uptrend since late July, but the ETF is hitting resistance in the 130 area. Resistance here stems from broken support and the Fibonacci cluster. There are two declines over the past year: one from the late October high and one from the February high. Instead of choosing just one, I used the Fibonacci Retracements Tool on both to look for a cluster (overlap). Even though FXE is hitting resistance, it has yet to actually breakdown and reverse the three month uptrend. A break below the late September lows would do the trick.
