EAFE ISHARES STILL TESTING MARCH HIGH -- RISING EURO IS GIVING A BOOST TO FOREIGN STOCKS -- EMERGING MARKETS ISHARES CONSOLIDATE IN UPTREND -- CHINESE ISHARES ACHIEVE UPSIDE BREAKOUT -- APPLE CORRECTION IS TESTING SUPPORT LINES
EAFE ISHARES STILL TESTING MARCH HIGH... There's good and bad news in Chart 1 which plots the trend of EAFE iShares (EFA). [EAFE stands for Europe Australasia and Far East]. The bad news is that it has yet to clear its March high (blue line). It did so briefly during September but has since fallen back below it. Why that's important is because a strong correlation exists between EFA and the S&P 500. The Correlation Coefficient (below chart) confirms that. In order for the upturn in the S&P 500 (gray matter) to continue, it's important that EFA clear its spring high. The good news is that the four-month uptrend in the EFA remains intact. The recent pullback is bouncing off its 50-day moving average (blue arrow). One factor working in the favor of foreign stocks is the recent bounce in the Euro. Chart 2 shows the Euro consolidating above its 200-day moving average (red arrow). Chart 3 shows the July Euro bottom occurring from just above chart support at its mid-2010 low (green circles). The chart also shows the Euro rising above a yearlong resistance line. A stronger Euro gives a boost to European shares which make up more than half of the EAFE Index.
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Chart 1
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Chart 2
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Chart 3
CHINA GIVES BOOST TO EMERGING MARKETS ... Chart 4 shows Emerging Markets iShares (EEM) trading well below their spring highs which puts them behind the stronger trend in developed markets. The good news is that the EEM uptrend that started during June remains intact. The red circle shows the EEM consolidating near five-month highs and above its moving average lines. [The ability of the blue 50 day line to cross above the red 200-day is another positive sign]. The EEM also remains above initial chart support along its August high (green line). The EEM is getting a big lift from China today. Chart 5 shows China iShares (FXI) surging 2.5% to clear its summer high and its 200-day line. A stronger Chinese market is good for everyone else.
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Chart 4
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Chart 5
APPLE SLIDE PUSHES NASDAQ LOWER... Last Saturday's message warned that a weaker Apple stock would most likely push the Nasdaq into a downside correction. Chart 7 shows Apple having fallen below its 50-day moving average to turn its short-term trend lower. The stock is now testing a potential support line drawn under its May - July lows (see arrow). Apple is also testing potential support along its July high. A principal of charting holds that a broken resistance level should become a new support level during a subsequent downside correction. That's why the flat trendline drawn over the July peak changed from red to green once the July high was broken. That puts Apple at an important juncture. Chart 7 shows the Nasdaq Composite also trading below its 50-day line. Initial chart support resides along its late August low near 3050. More substantial support lies closer to 3000 (see trendlines). It's important that the 3000 level not be broken to the downside. That would signal a much deeper correction and would have a negative impact on the rest of the market. So far, the Nasdaq damage has been relatively minor.
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Chart 6
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Chart 7
SMALLER STOCKS TEST 50-DAY LINE -- S&P 500 CONSOLIDATES... My last message also expressed concern about the slippage in small cap stocks. So far, that slippage has been relatively minor. Chart 8 shows the Russell 2000 Small Cap Index (RUT) testing its 50-day average and chart support along the July high (flat line). The RUT would have to drop below 820 to signal a more serious setback. Chart 9 shows the S&P 500 Large Cap Index consolidating between 1470 and 1430 (colored box). The lower level concides roughly with the 50-day average (blue line) and a rising support line drawn under the June - July lows. Another initial support line drawn across the April high shows initial chart support around the 1420 level. That makes that an important level to watch.
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Chart 8
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Chart 9
HIGH YIELD BOND ETF REMAINS ABOVE 50-DAY AVERAGE... A recent message showed a short-term pullback taking place in the High Yield Corporate Bond iShares (HYG). Chart 10 shows that the setback has been contained above the 50-day average (blue arrow). It's important that the HYG stay above that support line. That's because a high correlation exists between high-yield bonds and the S&P 500. The 60-day Correlation Correlation (below chart) shows their correlation to be .93 which is very high. When investors are optimistic on stocks, they also tend to favor higher-yielding (and riskier) bonds. A correction in one often coincides with a correction in the other.
