SPY CONSOLIDATES AT HIGH LEVEL -- MIXED SECTOR PERFORMANCE TURNS SPY FLAT -- XLF CHALLENGES PRIOR HIGHS AS XLK REMAINS IN CORRECTION -- HOME CONSTRUCTION ETF HITS 52-WEEK HIGH -- SURGE IN EURO PUSHES MONEY INTO RISK-ON MODE
SPY CONSOLIDATES AT HIGH LEVEL... Link for todays video. The S&P 500 ETF (SPY) remains in an uptrend since early June, but the short-term trend has turned flat with a consolidation the last six weeks. Chart 1 shows SPY hitting a 52-week high in early September. Trading turned flat after this high as the ETF consolidated between 142 and 147.50. A consolidation after an advance is normally considered bullish because it is a continuation pattern. This means a break above the September highs would affirm the bigger uptrend. Support at 142 holds the key. This support level stems from broken resistance and the last two troughs (reaction lows). A move below 142 would signal an increase in selling pressure and reverse the uptrend. The indicator window shows the Percent Price Oscillator (PPO) holding just above the zero line. Momentum favors the bulls as long as this indicator is positive. A break into negative territory would be bearish for momentum.
(click to view a live version of this chart)
Chart 1
MIXED SECTOR PERFORMANCE TURNS SPY FLAT... SPY is struggling over the last few weeks because of weakness in the technology sector. Continued weakness in this sector could insure a range-bound SPY and even drag it down eventually. Chart 2 shows the percentage gain for the four offensive sectors and the S&P 500 ETF. The Finance SPDR (XLF) is the strongest with a 7+ percent gain since early September. The Consumer Discretionary SPDR (XLY) is also outperforming SPY with a 4+ percent gain. The Industrials SPDR (XLI) is just underperforming SPY, but still shows a gain over the last 6-7 weeks. The Technology SPDR (XLK) tells a different story because this ETF shows a loss since early September. Even though the loss is small, relative and absolute weakness in this key sector is weighing on broader market. Keep in mind that technology represents the biggest sector in the S&P 500 (about 20%). The finance sector is a distant second at around 15%. Charting note: this PerfChart was done using the new features on the SharpCharts workbench.
(click to view a live version of this chart)
Chart 2
XLF CHALLENGES PRIOR HIGHS AS XLK REMAINS IN CORRECTION... The performance difference between the Technology SPDR and the Finance SPDR is clear on the price chart. Chart 3 shows XLF breaking flag resistance with a surge the last three days. With this move, the XLF is near the September high and a 52-week high. The June trend line and late September low define this uptrend. It would take a break above both for a trend reversal. The indicator window shows the price relative near its high and in a clear uptrend.
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
Chart 4 shows XLK within a downtrend since late September. The decline looks like a falling channel and the upper trend line marks resistance just above 30.75. While this decline looks like a correction within a bigger uptrend, the correction remains in force until proven otherwise with a channel breakout. The indicator window shows the price relative (XLK:SPY ratio) breaking its mid July low and forges a fresh 52-week low. Relative weakness in the biggest sector is a negative for the broader market. Notice how this ratio plunged as XLK underperformed the last three weeks.
HOME CONSTRUCTION ETF HITS 52-WEEK HIGH... The Commerce Department reported that the construction of new homes surged 15% in September and permits also increased at a rapid clip. This news boosted the two home construction ETFs on Wednesday. Chart 5 shows the Home Construction iShares (ITB) holding support around 19 and towards its September high today. The pattern at work over the last four weeks looks like a pennant and a breakout would signal yet another continuation higher. This move reinforces support at 19 and a break below this level would reverse the bigger uptrend. The indicator window shows the price relative moving to a new 52-week high today as ITB continues to outperform SPY. Chart 6 shows the Homebuilders SPDR (XHB) with similar characteristics.
(click to view a live version of this chart)
Chart 5
Chart 6
SURGE IN EURO PUSHES MONEY INTO RISK-ON MODE... Strength in stocks can be traced right to strength in the Euro. Chart 7 shows the Euro Currency Trust (FXE) surging over the last two days and breaking triangle resistance. This move signals a continuation of the current uptrend and reinforces support in the 127 area. Support here stems from the July trend line and late September lows. The indicator window shows the Correlation Coefficient (FXE,$SPX). This indicator spends most of its time above .50 and reflects a clear positive correlation between stocks and the Euro. This relationship is at heart of the risk-on trade. Strength in the Euro signals confidence and increases the risk appetite, which in turn benefits equities. Chart 8 shows the US Dollar Fund (UUP) breaking flag/wedge support with a sharp decline the last few days.
(click to view a live version of this chart)
Chart 7
(click to view a live version of this chart)
Chart 8
20+ YEAR T-BOND ETF FAILS AT RESISTANCE... The 20+ Year T-Bond ETF (TLT) surged last week and then gave it all back with a sharp decline this week. Overall, the trend since late July remains down and this is positive for stocks. Money moving out of safe-haven treasuries is money available for riskier assets. Chart 9 shows TLT hitting resistance at 125 this week and plunging below 121 today. The pink lines mark a falling channel and the lower trend line extends to the 114 area by the end of October. Admittedly, that is a pretty drastic decline, but such a move would be quite bullish for stocks. Chartists can now key off resistance at 125 for signs of a reversal. A break above this level would be bullish for TLT and signal a return to risk-off. Chart 10 shows the 10-year Treasury Yield ($TNX) holding at 16 (1.6%) and surging above 17.5 the last two days.
(click to view a live version of this chart)
Chart 9
