DOW HOLDS RESISTANCE BREAK WITH CONSOLIDATION -- NASDAQ 100 FORMS ANOTHER LOWER HIGH -- CONSUMER DISCRETIONARY AND INDUSTRIALS HOLD THE KEY -- NETWORKING ISHARES TESTS SUPPORT WITH THROWBACK -- REGIONAL BANK SPDR BREAKS DOWN AND UNDERPERFORMS
DOW HOLDS RESISTANCE BREAK WITH CONSOLIDATION... Link for todays video. The bears have yet to fully arrive as Chart 1 shows the Dow Industrials holding its resistance break with a consolidation the last five weeks. The senior Average broke resistance with the early September surge and broken resistance turned into support in the 13300 area. This support area was reinforced as the Dow bounced back above 13500 this week. Chartists can now watch this level for a break that would reverse the uptrend that began in early June. The indicator window shows the Percent Price Oscillator (12,26,1). I set the signal line as a 1-period EMA to focus on the oscillator itself. Basically, momentum favors the bulls when the PPO is positive and the bears when negative. The PPO has been positive since late June and it would take a break into negative territory to turn this key momentum indicator bearish.
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Chart 1
NASDAQ 100 FORMS ANOTHER LOWER HIGH... The market has been weighed down by the technology sector since mid September. Chart 2 shows the Nasdaq 100 ($NDX) breaking above resistance in August-September, but failing to hold this breakout after declining below 2750 this month. A falling flag or channel has taken shape the last five weeks as the index formed another lower peak this week. With this peak, chartists can mark key resistance at 2800. Barring a break above this level, the 2650 area marks the next support zone for this big tech index. The indicator window shows the PPO breaking into negative territory last week and remaining negative. Momentum favors the bears as long as the PPO remains below zero. Two relative performance items stand out on this chart. First, the Dow held its breakout and the Nasdaq 100 did not. Second, the PPO for the Dow remains positive, but the PPO for the Nasdaq 100 is negative. These two items confirm relative weakness in the Nasdaq 100.
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Chart 2
CONSUMER DISCRETIONARY AND INDUSTRIALS HOLD THE KEY... Weakness in the technology sector has been offset by strength in the finance sector since early September. This is why the S&P 500 is range bound and the Nasdaq is working its way lower. With these two cancelling each other out, chartists must turn to another sector to break the deadlock. My vote goes to the consumer discretionary sector because it is the most economically sensitive sector. One could also consider the industrials sector because it supplies companies with capital-intensive goods and services needed for their operations. Both sectors are clearly important to the economy and health of the broad stock market. Chart 3 shows the Industrials SPDR (XLI) in an uptrend since June. Even though the SPDR did not take out its spring high, it has yet to break down and remains in an uptrend. XLI established support with the last two troughs and the June trend line. Look for a break below this level to reverse the uptrend. The indicator window shows the Percent Price Oscillator (PPO) moving lower the last two months, but remaining in positive territory. The trend line breaks act as early warning signals. Note, however, that it takes a cross of the centerline (zero) to fully reverse momentum.
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Chart 3
Chart 4 shows the Consumer Discretionary SPDR (XLY) with a familiar pattern. XLY broke above resistance from the May high and broken resistance turned into support the last few weeks. XLY declined sharply last week, but ultimately held and bounced off this support zone this week. Chartists should watch support at 46 closely. The indicator window shows the PPO breaking its June trend line and moving lower the last few weeks. Chart 5 shows the Retail SPDR (XRT) for reference. This is the most important group within the consumer discretionary sector. Bottom line: XLI, XLY and XRT are all holding support right now and have yet to reverse their uptrends. A breakdown by two or more would likely push the broader market indices ($SPX,$INDU) below support as well.
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Chart 4
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Chart 5
NETWORKING ISHARES TESTS SUPPORT WITH THROWBACK... Chart 6 shows the Networking iShares (IGN) breaking above resistance with a big move above 26 and then returning to this breakout in October. A key tenet of technical analysis is that broken resistance turns into support. A falling flag/channel is taking shape with first resistance marked at 27. A successful support test and breakout at 27 would be quite bullish.
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Chart 6
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Chart 7
Chart 7 shows weekly bars for IGN over the last four years. The trend since early 2011 is down as a large falling wedge takes shape. There is a lot of support in the 24 area from the prior lows and the 61.80% retracement. This area is where IGN got its big summer bounce. The chart also shows the importance of resistance from the summer high. A move above this high would break the falling wedge trend line and call for a bigger trend reversal in IGN. The indicator window shows the weekly PPO hitting resistance at the zero line.
REGIONAL BANK SPDR BREAKS DOWN AND UNDERPERFORMS... Whats Wrong with Regional Banks? While the finance sector and the big banks are leading the market, the Regional Bank SPDR (KRE) and the smaller banks are lagging the market. Perhaps it pays to be too big to fail. Chart 8 shows KRE breaking support at 28.50 and moving below the June trend line. The indicator window shows the price relative (KRE:SPY ratio) breaking down and hitting a new 52-week low this week. It is rather strange to see XLF challenging resistance as KRE breaks down. The pink channel lines define the five week downtrend. A break above 29 is needed to reverse this slide and put KRE back on track. Note that KRE is a diverse ETF with over 70 components. The largest, M&T Bank (MTB) weighs in at just 2.24%, which means the ETF is not dominated by a few big holdings. Chart 9 shows the Finance SPDR (XLF) for reference.
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Chart 8
