CROSSOVER INDICATORS TURNING BEARISH FOR XLY -- INDUSTRIALS SPDR TESTS SUPPORT AND UNDERPERFORMS -- 20+ YEAR T-BOND ETF CHALLENGES RESISTANCE -- GOLD HITS LONG-TERM RESISTANCE -- GOLD SPDR CONSOLIDATES AS DOLLAR FIRMS
CROSSOVER INDICATORS TURNING BEARISH FOR XLY... Link for todays video. The Consumer Discretionary SPDR (XLY) is starting to show relative weakness with a test of the late September low. XLY broke this low with Thursdays close, but rebounded somewhat early Friday. Note that the S&P 500 ETF (SPY) remains above this corresponding low. Chart 1 shows XLY hitting resistance in the 48 area and falling sharply the last four days. A support break would be negative and call for at least a correction of the prior advance (June to October). A 50% retracement would extend to the 44.5 area. Chartists should watch the consumer discretionary sector closely because it is the most economically sensitive sector. A breakdown and/or relative weakness in this sector would be negative for the market.
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Chart 1
The indicator windows shows three crossover indicators set at 20 periods each. The green lines represent upside momentum, while the red lines represent downside momentum. Two of the three indicators triggered bearish signals this week. The first is Aroon, which means dawns early light in Sanskrit. It is designed to identify an emerging trend when one of the lines surges to 100. In this case, Aroon Down (red) surged above Aroon Up (green) and hit 100 on Thursday. You can read more about Aroon in our ChartSchool
The second indicator window shows the Directional Movement with ADX. The green line is Plus Directional Movement (+DM) and the red line is Minus Directional Movement (-DM). A bullish signal triggers when +DM moves above DM and above 30. A bearish signal triggers when DM moves above +DM and above 30. These indicators have yet to cross and trigger a bearish signal. You can read more about the Directional Movement Indicators in our ChartSchool
The third window shows the Vortex Indicators. The green line is Positive Trend Movement (+VI) and the red line is Negative Trend Movement (-VI). A bullish signal triggers when +VI moves above VI and above 1. A bearish signal triggers when VI moves above +VI and above 1. VI broke above +VI and exceeded 1 this week to turn the Vortex bearish. You can read more about the Vortex Indicator in our ChartSchool Chart 2 shows the Technology SPDR (XLK) with the same indicators.
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Chart 2
INDUSTRIALS SPDR TESTS SUPPORT AND UNDERPERFORMS... As with XLY above, the Industrials SPDR (XLI) is also testing support after a sharp decline. Chart 3 shows XLI forming a lower high last week and falling to support this week. A break below wedge support would forecast a break below the late September low. Such a move would reverse the 4-5 month uptrend and chalk up another victory for the bears. Even though XLI is up since early June, it has been one of the weakest SPDRs over the last few months. The indicator window shows the price relative hitting a 52-week low in late September and remaining in a clear downtrend.
Chart 3
20+ YEAR T-BOND ETF CHALLENGES RESISTANCE... The 20+ Year T-Bond ETF (TLT) recovered this week and chartists should watch this ETF carefully because strength in treasury bonds is a negative for the stock market. Chart 4 shows TLT plunging below 122 after the employment report last week. This plunge did not last long as TLT quickly moved back to the 124 area on Friday. The trend since late July remains down as a falling channel takes shape. However, the bigger picture makes this falling channel look like a correction of the March-July advance. Also notice that this decline retraced 50-61.80% of the prior advance. This means a break above resistance at 125 would signal a continuation higher and project further gains above the July high. Such a move in treasuries would signal a serious flight-to-safety (risk-off) and be bearish for stocks, which are part of the risk-on trade.
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Chart 4
Chartists should also watch the 10-year Treasury Yield ($TNX), which is just above support at 16 (1.6%). Yields decline when treasuries advance and visa versa. Chart 5 shows the $TNX in an uptrend since late July, but this uptrend is getting laborious. The July trend line and late September low mark support. A move below 16 would break both and point to lower yields ahead. A breakdown in the 10-year Treasury Yield would suggest weakness in the economy, anemic job growth, troubles in Europe and/or a global slowdown.
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Chart 5
GOLD HITS LONG-TERM RESISTANCE... After a surge and breakout, Spot Gold ($GOLD) hit resistance in the $1800 area and stalled the last four weeks. This stalling comes as the Dollar firmed and stocks weakened. Chart 6 shows gold bouncing off consolidation support in the 1525 area and advancing to consolidation resistance in the 1800 area. Gold has been locked in this trading range since October 2011. A breakout at 1800 would be very bullish and argue for a move above the 2011 high. As long as gold consolidates at resistance, there is a chance of a decline within this consolidation. Broken resistance in the 1650 area turns into the first support level to watch on this weekly chart.
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Chart 6
GOLD SPDR CONSOLIDATES AS DOLLAR FIRMS... Chart 7 shows the Gold SPDR (GLD) over the last six months. The trend is up and GLD is consolidating above 170. The lows since mid September form a support zone in the 168-170 area. A break below this level would argue for a correction of the prior advance, which extends from June to October. A 50-61.80% retracement would extend to the 158-160 area. Also notice that broken resistance turns into support here as well.
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Chart 7
The indicator window shows GLD and the US Dollar Fund (UUP). As expected, these two move in opposite directions for the most part. The advance in gold accelerated when the Dollar turned lower at the end of July. The greenback firmed in mid September and edged higher the last four weeks. Even though this advance is small, it has been enough to produce a consolidation in gold, which was overbought after the big run from early August to early September. Chartists should watch the Dollar closely as it consolidates. The next directional signal will most likely affect gold. Note that John Murphy covered the Euro on Thursday and I covered the Dollar in Wednesdays message.
BOLLINGER BANDS NARROW FOR THE SILVER TRUST... After surging from the mid 20s to the mid 30s, the Silver Trust (SLV) consolidated and formed a trading range the last few weeks. Chart 8 shows volatility surging as the ETF advanced in August-September and declining as the ETF consolidated the last few weeks. These volatility shifts are reflected in the Bollinger Bands and BandWidth indicator. Notice how the bands expanded and BandWidth surged from mid August to mid September. The bands then contracted and BandWidth plunged over the last four weeks. BandWidth is now below 6% for the first time since early August, which was the scene of the last directional move. Low BandWidth and narrow bands do not give us any directional clues. They simply reflect low volatility and this increases the chances of a volatility surge. For directional clues, chartists must turn to the price chart or other indicators. The consolidation boundaries provide support and resistance levels to watch. A resistance break at 24 would exceed the upper band and be bullish, while a support break below 32.4 would exceed the low band and be bearish.
