AUTO STOCKS MAINTAIN UPTREND AHEAD OF KEY REPORT -- GM BECOMES SHORT-TERM OVERSOLD WITHIN UPTREND -- WEEKLY MOMENTUM WANES FOR S&P 500 -- RUSSELL 2000 BACKS OFF LONG-TERM RESISTANCE -- OIL CONTINUES TO UNDERPERFORM STOCK MARKET
AUTO STOCKS MAINTAIN UPTREND AHEAD OF KEY REPORT... Link for todays video. The US equity markets are closed on Monday due to Hurricane Sandy. Even though we are looking at a shortened week, we can expect plenty of fireworks because there are several big economic reports due. Chicago PMI, oil inventories and the ADP employment report are scheduled for Wednesday. Jobless Claims, the ISM Manufacturing Index, Construction Spending and Auto-Truck Sales will be reported on Thursday. Friday finishes with the last employment report before Election Day and Factory Orders closes out a big week. We can get a clue on auto sales by looking at the DJ US Auto Index ($DJUSAU), Ford and General Motors. Chart 1 shows the Auto Index breaking out with a surge in early September and establishing support at 125 the last three weeks. The indicator window shows the price relative turning up in August and moving higher in October. Even though these uptrends are just three months old, they bode well as long as support holds.
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Chart 1
GM BECOMES SHORT-TERM OVERSOLD WITHIN MEDIUM-TERM UPTREND... Chart 2 shows Ford (F) with a similar uptrend since late July. A triangle consolidation formed the last six weeks and a break above triangle resistance would signal a continuation higher. Upside volume has been strong since early September. Chart 3 shows General Motors (GM) surging from late July to mid October. The stock fell back rather sharply the last six days and broke the July trend line, but support from the early October low has yet to be broken. The indicator window shows the Commodity Channel Index (CCI) becoming oversold with a move below -100.
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Chart 2
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Chart 3
WEEKLY MOMENTUM WANES FOR S&P 500 ... Last week I wrote that daily MACD turned negative on the S&P 500. This coincides with a bearish signal line crossover on weekly MACD. Chart 4 shows the S&P 500 using thick OHLC bars, which make it easier to see the price behind the dotted red lines. These red lines mark bearish signal line crossovers in MACD. Momentum favors the bears as long as MACD is below its signal line. This means upside momentum is weakening as MACD moves towards the zero line. A break into negative territory would turn momentum fully bearish. Turning back to the price chart, the index remains within a large rising channel the last three years. A move to the lower trend line would be quite drastic, but declines in 1987, 2008 and 2011 prove that anything is possible. The summer low and low trend line combine to mark a big support zone in the 1280-1300 area. $SPX is currently holding psychological support in the 1400 area and a break below 1390 would increase the validity of this target. I would not expect the auto stocks to hold up if $SPX were to decline sharply.
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Chart 4
RUSSELL 2000 BACKS OFF LONG-TERM RESISTANCE... Chart 5 shows the Russell 2000 ($RUT) with a conflicting picture. On the price chart, the index formed a large inverse head-and-shoulders pattern with neckline resistance around 870. A breakout here would signal a continuation of the prior advance (March 2009 to May 2011). The index, however, is meeting stiff resistance and backing off resistance the last few weeks. The indicator window shows MACD with a bearish divergence extending back to early 2011. I am not a big fan of divergences because these signals do not perform good in backtesting. There are some great signals, but most of them do not pan out. Instead of the bearish divergence, I am more focused on the failure at resistance and the bearish signal line cross in MACD. Weakening MACD suggests that momentum is turning and this pullback may have some legs. A break above 843 would reverse the six week slide and call for a reassessment.
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Chart 5
OIL CONTINUES TO UNDERPERFORM STOCKS... Chart 6 shows Spot Light Crude ($WTIC) locked in a long-term range over the last three weeks. Range support resides in the 75-80 area, while range resistance is north of 100. It is interesting to note that oil formed lower peaks in February and September. The most recent peak formed around 100 and current swing is down. Notice that the 2011 and 2012 lows mark support in the 75-80 area. This is the next target. The indicator window shows oil underperforming the S&P 500 since February 2011. Spot crude formed two lower peaks since February 2011, but the S&P 500 formed two higher peaks. Relative weakness in oil could signal weakening demand and this in turn points to weakness in the economy.
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Chart 6
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Chart 7
Chart 7 shows daily bars to focus on the medium-term downtrend. Crude first broke down in mid September and broken support turned into resistance at 94. Crude broke down again last week with the move below 88 and this broken support zone turns into first resistance. I will leave key resistance at 94 for now. A break above this level is needed to fully reverse the six week downtrend here. The indicator window shows CCI with three momentum shifts in the last six months. Momentum shifted bearish in mid September and the mid October high marks momentum resistance. CCI needs to break this high to turn momentum bullish again.
TSX COMPOSITE FORMS FALLING FLAG AT RESISTANCE ... The TSX Composite ($TSX) has been trending higher since summer, but the index is hitting a major resistance zone in the 12600-12750 area. Chart 8 shows the index surging above 12500 in September and then forming a falling flag the last eight weeks. A break above flag resistance would signal a continuation higher and project a big resistance breakout. Failure to break flag resistance and a move below the October lows would be bearish. This would reverse the five month uptrend and keep the trading range in tact. Chartists should also watch MACD(5,35,5) for clues here. The indicator flattened along with price over the last eight weeks. A downturn into negative territory would turn momentum bearish. The blue lines show the prior two moves into negative territory.
