MACD TURNS NEGATIVE FOR S&P 500 -- MARKING NEXT SUPPORT FOR THE RUSSELL 2000 AND NASDAQ 100 -- TRUCKING AND RAIL STOCKS WEIGH ON INDUSTRIALS SECTOR -- DJ RAILROAD INDEX BREAKS FLAG SUPPORT -- DIRECTIONAL INDICATORS CROSS FOR DOLLAR INDEX
MACD TURNS NEGATIVE FOR S&P 500... Link for todays video. The Fed came and went without much fanfare on Wednesday. In fact, this was one of the most subdued Fed days that I have seen in a while. Stocks were flat heading into the announcement and flat heading out of the announcement. Volatility just before and after the announcement was also minimal. Has the Fed lost its punch? Perhaps the stock market is more interested in third quarter earnings? Even though I am not a fundamentally oriented analyst, earnings are probably the single most important driver of stock prices. We have seen stocks shrug off weakness in China, a sovereign debt crisis in Europe, anemic employment growth and a looming fiscal cliff. The S&P 500 was trading near a 52-week high less than six weeks ago. It is still around 5% from its 52-week high, but a series of worse-than-expected earnings reports have clearly taken their toll. And earnings season is not yet finished. Chart 1 shows the S&P 500 breaking down the last five days and the next support level residing in the 1370-1380 area. Broken resistance, the 50% retracement and the rising 200-day mark support here. The indicator window shows MACD turning negative for the first time since late June.
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Chart 1
MARKING NEXT SUPPORT FOR THE RUSSELL 2000 AND NASDAQ 100... The Russell 2000 ($RUT) and the Nasdaq 100 ($NDX) led the market lower over the last 5-6 weeks and both remain in short-term downtrends. Relative weakness in these two remains a big concern going forward. Chart 2 shows the Russell 2000 peaking above 860 in mid September and moving below 820 this week. A falling channel or flag has taken shape to define this down swing. It would take a break above last weeks high to reverse this falling channel. Until such a break or reversal, the index could make it way towards the next support level around 800. Broken flag resistance and the 50% retracement mark potential support here.
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Chart 2
Chart 3 shows the Nasdaq 100 with an even sharper decline the last 5-6 weeks. The index has already retraced 50% of the June-Sept advance and is at broken resistance. The yellow retracement zone marks a potential support level, but the index remains in the falling knife category. The indicator window shows the Nasdaq 100 underperforming the S&P 500 since early September.
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Chart 3
TRUCKING AND RAIL STOCKS WEIGH ON INDUSTRIALS SECTOR... Many industry groups and sectors are all over the place lately. The Basic Materials SPDR (XLB) surged 4% last week and then gave it all back the last four days. The Oil Service HOLDRS (OIH) surged 5% last week, but fell over 5% the last four days and gave it all back. The Dow Transports bucked selling pressure with a 1% gain on Tuesday, but fell over 1.5% on Wednesday. The DJ Railroad Index ($DJUSRR) and the DJ US Trucking Index ($DJUSTK) are weighing on the Dow Transports and the Industrials SPDR (XLI) today. Note that Union Pacific (4.91%) is the third biggest holding in XLI. CSX Corp and Norfolk Southern are weighted around 2% each in XLI. This means rails account for around 9% of XLI. Throw in UPS at 4.17%, FedEx at 2.22% and CH Robinson at .76% and transport stocks account for over 15% of XLI. PerfChart 4 shows NSC leading the rails lower since early September. Chart 5 shows XLI breaking support today.
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Chart 4
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Chart 5
DJ RAILROAD INDEX BREAKS FLAG SUPPORT... Chart 6 shows the DJ Railroad Index ($DJUSRR) breaking a key support level in mid September and then bouncing with a rising flag in October. Rising flags are bearish consolidation patterns and todays flag break signals a continuation of the September decline. This targets a move to the next support zone, which is around 760-770. The indicator window shows the $DJUSRR:$SPX ratio trending lower since early August. This means rails are underperforming the broader market.
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Chart 6
Truckers were also under pressure on Wednesday with the DJ US Trucking Index ($DJUSTK) falling over 3%. Chart 7 shows this index hitting resistance in the 385 area. Notice that April trend line and 50-61.80% retracement zone combine to mark resistance here. The indicator window shows the price relative ($DJUSTK:$SPX ratio) hitting resistance from broken support and turning lower this week.
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Chart 7
DIRECTIONAL MOVEMENT INDICATORS CROSS FOR DOLLAR INDEX... The US Dollar Index ($USD) is poised to challenge resistance with a surge over the last four days. First, lets look at a weekly chart to define the long-term trend. Chart 8 shows the index within a rising channel since May 2011. After a sharp decline this summer, the index is testing support in the 78-79 area with a six week consolidation. A break below this consolidation would signal a continuation lower and likely lead to a support break at 78. Such a move would only happen with a surge in the Euro, which would be bullish for stocks, commodities and gold. The indicator window shows the Directional Movement Indicators, +DI and -DI. Long-term directional movement favors the bears because -DI remains above +DI. You an read more about these indicators in our ChartSchool article
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Chart 8
Chart 9 shows the index testing support from the April-May lows over the last two months. $USD remains range bound, but shows some signs of strength with the four day surge above the late July trendline. Also notice that +DI crossed above -DI, which means medium-term directional movement is improving. A follow through break above the October highs would reverse the downtrend in the Dollar. This would mean weakness in the Euro, which in turn would weigh on stocks and commodities. Note that the Euro fell sharply because of weak economic data out of Germany, the Eurozone powerhouse. German services and manufacturing indices declined for the six straight month in October. Economic weakness puts pressure on the European Central Bank (ECB) to ease monetary policy further. Chart 10 shows the Dollar Bullish ETF (UUP) for reference.
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Chart 9
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Chart 10
GERMAN DAX TESTS SUPPORT WITH SHARP DECLINE... Want to know whats happening in Europe? Forget about the news and the headlines. Watch the Euro and the key stock indices for real clues. Chart 11 shows the German DAX Index ($DAX) in an uptrend since early June. The index exceeded the March high and then consolidated over the last seven weeks. In fact, this chart looks eerily similar to the S&P 500. The DAX fell sharply on Tuesday with a 2.11% decline. This is an end-of-day (EOD) chart that will be updated after the close, but I can report that the DAX edged higher with a close at 7192 on Wednesday. Notice that broken resistance, the June trend line and the October lows combine to mark a support zone around 7100-7200. A break below this level would be bearish for the DAX and argue for a retracement of the June-September advance. Chart 12 shows the European Top 100 Index ($EUR) consolidating since mid August and laying down support in the 222.5 area. Notice the strong positive correlation between the S&P 500 and the European Top 100 Index.
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Chart 11
