IWM AND QQQ HOLD SHORT-TERM KEY FOR BULLS -- MACD TURNS DOWN FOR DOW INDUSTRIALS SPDR -- XLY AND XLF MAY HOLD SHORT-TERM KEY FOR BEARS -- FLAGS CONTINUE TO FALL FOR XRT AND KRE -- NETWORKING ETF PERKS UP WITH FLAG BREAKOUT
MACD TURNS DOWN FOR DOW INDUSTRIALS SPDR ... Link for todays video. A lot can happen between now and Wednesday so I am going to focus on the weekly charts for some perspective that will be relatively immune to whatever happens after the election. Stocks have been weak for seven weeks now. Is this a mere correction within a bigger uptrend or the start of a bigger decline? Truth be told, nobody really knows the answer to that question. Chartists can, however, identify key support and resistance level levels that, if broken, would signal an extension or reversal of said downtrends.
Chart 1 shows the Dow Industrials SPDR (DIA) within an uptrend since 2010. Actually, this uptrend began with the March 2009 low. The channel trend lines define this big uptrend and the ETF almost hit the upper trend line in mid September. A big correction within this rising channel could extend to the lower trend line. Support in the 120 area is also confirmed by the June low and the 50% retracement. The indicator window shows MACD(5,35,5) turning down in October and moving below its signal line the second week of October. Short-term momentum favors the bears as long as MACD remains below its signal line, which means it is falling.
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Chart 1
IWM AND QQQ HOLD SHORT-TERM KEY FOR BULLS... The Russell 2000 ETF (IWM) and Nasdaq 100 ETF (QQQ) hold the key to the current decline. Both led the way lower over the last seven weeks. Relative weakness in small-caps and large-techs is a negative for the market overall. Both formed falling flag patterns over the last seven weeks. These flags define the short-term downtrend, which could morph into a medium-term downtrend should it extend much longer. Chart 2 shows QQQ hitting a new high in mid September and then falling around 7%. This is a pretty steep decline, but not any steeper than the April-May decline or the July 2011 plunge. In contrast to these two declines, the current decline provides a clear pattern upon which to base any reversal. A surge above 67, which would require a 3% move, would break the flag trend line and provide the first signal that the bigger uptrend is resuming.
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Chart 2
Chart 3 shows IWM breaking above its 2011 highs in August, but failing to hold above this breakout and pulling back the last seven weeks. Despite stiff resistance in the 84-86 area, this pullback looks like a correction within an uptrend for two reasons. First, the decline formed a falling flag, which is a corrective pattern. Second, IWM was overbought and a pullback after an overbought condition is perfectly normal. As with QQQ above, IWM provides us with a clear level upon which to base a flag breakout. IWM peaked near 83 last week and closed near 81 after a sharp decline on Friday. IWM needs to overcome this decline by closing the week above last weeks high (call it 83). Such a move would reverse the seven week slide and signal a continuation of the bigger uptrend.
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Chart 3
As we can see from the first three charts, stocks are in short-term downtrends right now. Even though the bigger trends are up, they cannot resume until these short-term downtrends reverse with breakouts. As we have seen in August 2011 and April-May 2012, short-term downtrends can morph into steeper declines. This favors a defensive play until these short-term downtrends reverse.
XLY AND XLF HOLD THE SHORT-TERM KEY FOR BEARS... The broader market (S&P 500 and Dow) held up well over the last seven weeks because the consumer discretionary and finance sectors held up well. The technology sector has been the weakest link since mid September. Both the Consumer Discretionary SPDR (XLY) and the Finance SPDR (XLF) are consolidating with broken resistance zones turning first support. A break below these support levels would spell trouble for the market overall. Chart 4 shows XLY with a potential five wave advance from the 2011 low. Broken resistance just above 45 turned support as the ETF consolidated with a falling flag the last seven weeks. Resolution of this consolidation holds the next directional clue. A break below 45 would be bearish and argue for a deeper decline, perhaps to the 41 area. A successful hold and break above last weeks high would signal a continuation higher.
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Chart 4
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Chart 5
Chart 5 shows XLF recording a new high in early September and then consolidated the last eight weeks. This consolidation looks like a triangle. Notice that the last eight bars (weeks) are all within the bar that marks the early September high. XLF has eight inside weeks working. This amounts to a consolidation within an uptrend and a break above the consolidation highs would signal a continuation higher. Failure to breakout and a move below 15.50 would be bearish. In a nutshell, flag breakouts in IWM, QQQ and XLY would put the bulls back in the drivers seat. Support breaks in XLF and XLY, in contrast, would be bearish and argue for an extended decline.
FLAGS CONTINUE TO FALL FOR REGIONAL BANK SPDR AND RETAIL SPDR ... Regional banking is an industry group within the finance sector and retail is an industry group within the consumer discretionary sector. These two industry groups are more domestically focused than the their respective sectors because large-cap dominate the sectors. Disney, McDonalds, Ford and Nike are big international players in the consumer discretionary sector. Citigroup, JP Morgan, Goldman Sachs and American Express are big international players in the finance sector. The Regional Bank SPDR (KRE) and the Retail SPDR (XRT) reduce the international aspect by focusing on stocks with domestic-centric businesses. Chart 6 shows XRT consolidating within an uptrend. After recording a 52-week high in early September, the ETF pulled back with a falling flag. Last weeks high marks flag resistance and a break above this level would signal a continuation higher. A break below the October low would argue for a deeper correction towards the 54-56 area.
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Chart 6
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Chart 7
Chart 7 shows KRE also hitting a 52-week high just two months ago and then correcting with a falling flag. A break above the flag trend line is needed to end this fall and signal a continuation higher. The indicator window shows the price relative breaking support in October as KRE starts to underperform. Relative weakness is not a good sign.
Charting note: There is really no difference between a falling flag or falling channel because both patterns have the same shape. A falling flag is usually a short pattern (10-25 bars) that forms after a sharp advance. A falling channel is a longer pattern that marks a zigzag lower (25+ bars). A falling flag on a weekly chart would be considered a falling channel on a daily chart. Regardless of the name, both require a bullish catalyst to reverse the fall.
NETWORKING ETF PERKS UP WITH FLAG BREAKOUT... Chart 8 shows the Networking iShares (IGN) jumping the gun with a break above the flag trend line. IGN remains in a long-term downtrend defined by a large falling wedge. Within this downtrend, the ETF surged above 28 and then pulled back to the 25 area last week. This pullback marks a 61.80% retracement of the prior advance. This channel breakout, though in the early stages, is promising for the bulls. A follow through breakout at 28.5 is needed to fully reverse the bigger downtrend. The indicator window shows the price relative (IGN:SPY ratio). A higher low could be forming in October and a break above the September high would show relative strength.
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Chart 8
NOOSE TIGHTENS FOR SEMICONDUCTOR ETF... Chart 9 shows the Market Vectors Semiconductor ETF (SMH) with a triangle taking shape in 2012. At this point, the bears have the edge because the ETF formed a lower high in August and is trading closer to its 2012 lows than its 2012 highs. A break below triangle support at 30 would be bearish and project further weakness. Should triangle support hold, chartist can watch resistance at 33 for a bullish breakout. A move above this level would break triangle resistance and put the bulls back in play. The indicator window shows the price relative moving lower since February. A trend line break is needed to show relative strength and confirm a triangle breakout.
