IWM AND SPY BREAKDOWN ON P&F CHARTS -- BIOTECH AND MEDICAL DEVICE ETFS HIT SUPPORT ZONES -- TREASURIES IGNORE QE WITH AN UPSIDE BREAKOUT -- KEY BREADTH INDICATORS BREAKING DOWN -- BOLLINGER BANDS NARROW FOR CORN AND WHEAT ETFS
IWM AND SPY BREAKDOWN ON P&F CHARTS... Link for todays video. P&F charts provide unbiased trend information with three features: the pattern at work, the price objective and the trend lines. First, the pattern at work, if any, is listed at the top of each chart. A bearish pattern is at work when P&F Pattern is in red letters. A bullish pattern is at work when green. Second, there is a price objective listed below the pattern. A downside price objective favors the bears, while an upside price objective favors the bulls. I would not, however, read too much into these levels. Instead, I would just keep it simple: bearish when the price objective is below current levels and bearish when the price objective is above. Third, chartists can look at the trend lines. The trend favors the bears when the current trend line is a Bearish Resistance Line (red) and the bulls when there is a Bullish Support Line (blue). Using these guidelines, chart 1 shows the S&P 500 ETF (SPY) in bear mode. This is a user-defined chart with the box size set at 50 cents. SPY broke the Bullish Support Line with this weeks decline. Notice that this line extended up from the early June low. The prior two X-Columns and the Bearish Resistance Line now mark resistance in the 144-145 area. A break above 145 is needed to reverse this decline.
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Chart 1
Chart 2 shows the Russell 2000 ETF (IWM) with 35 cent boxes. IWM broke down in mid October as a falling O-Column exceeded the Bullish Support Line. It has been lower lows and lowers highs ever since. At this point, the Bearish Resistance Line and prior X-Column mark resistance near 83. A move above this level is needed to reverse the downtrend. Chart 3 shows the Nasdaq 100 ETF (QQQ) also breaking down in October.
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Chart 2
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Chart 3
BIOTECH AND MEDICAL DEVICE ETFS HIT SUPPORT ZONES... Biotechs were one of the best performing groups from January to mid September. These high-beta stocks were hit hard the last six weeks as the Biotech SPDR (XBI) declined from 96 to 82. Even though the short-term trend is down, chart 4 shows signs of support emerging in the 82-84 area. First, notice that broken resistance and the August low combine to mark a support zone. Second, notice that XBI retraced 61.80% of the April-September advance. Third, notice that RSI moved below 30 and became oversold for the first time since August 2011. There are also some early signs of buying pressure today as the ETF surged over 2% and StochRSI surged above .80 for the first time since mid September.
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Chart 4
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Chart 5
Chart 5 shows the iShares Medical Device ETF (IHI) finding support in the 65 area. Support here stems from broken resistance, the 50-61.80% retracement zone and the late October low. IHI was hit along with the rest of the market on Wednesday-Thursday, but is getting a bounce today with a gain of around 1%. Also notice that the price relative turned up in late October. This means IHI is outperforming the last three weeks.
TREASURIES IGNORE QE WITH AN UPSIDE BREAKOUT... In September, I posted a chart showing the 30-Year US Treasury ($USB) with the quantitative easing programs highlighted in yellow. As chart 6 shows, $USB plunged sharply soon after QE1 and QE2 started. This is what the Fed wanted. Money moved out of safe-haven treasuries and into riskier assets, such as stocks. The Fed announced QE3 on September 13th and $USB did fall a little after this announcement. This decline, however, was short-lived as $USB formed a falling flag and broke flag resistance with a sharp surge the last three weeks. This unexpected consequence may signal that quantitative easing is losing its punch. The breakout and surge in $USB indicates that money is moving into these safe-havens. With treasuries and stocks negatively correlated, it means money is moving out of stocks. Again, this is not supposed to happen with QE3. Perhaps we can blame the impending fiscal cliff. Whatever the cause, this sharp advance and breakout in treasuries is very bearish for the stock market. Chart 7 shows the 20+ Year T-Bond ETF (TLT) breaking above its October highs with a big move this week.
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Chart 6
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Chart 7
KEY BREADTH INDICATORS ARE BREAKING DOWN... Breadth indicators measure the degree of participation within the market. Chart 8 shows the S&P 500 %Above 200-day SMA ($SPXA200R) over the last two years. There are at least three ways to interpret this indicator. First, breadth favors the bulls when above 60 and the bears when below 40. Second, breadth is improving when this indicator is rising and deteriorating when falling. Third, breadth is at a bullish extreme when above 80 and a bearish extreme when below 20. Breadth was strong and improving from June to mid September as the indicator rose. After edging above 80 in mid September, breadth deteriorated the last two months as the indicator fell below 55 this week. Notice that a bearish divergence formed because the indicator fell well short of its prior high in mid September. Even though the indicator has yet to break into serious bear territory (below 40), breadth is clearly deteriorating and the recent breakdown favors the bears. The next stopping point could be oversold territory below 20. Chart 9 shows the Nasdaq 100 %Above 200-day SMA ($NDXA200R) breaking down in late September and moving below 45 this week.
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Chart 8
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Chart 9
BOLLINGER BANDS NARROW FOR CORN AND WHEAT ETFS... Corn surged in the summer on fears of a supply shortage due to dry weather conditions. Prices corrected a little after this surge and then moved into a narrowing range. This range looks like a triangle that extends to the late September low. The Bollinger Bands confirm this narrowing range as volatility contracted to the lowest levels in months. John Bollinger theorized that volatility contractions are followed by volatility expansions. This means expect a significant move after a quiet period. The Bollinger Bands do not provide any direction clues so we must turn to the price chart for clues on a breakout. A move above 49 would break the upper band and the late October highs. This would be bullish and call for a continuation of the summer surge. A failure at resistance and move below the lower band (call it 46.7) would be bearish. Chart 11 shows the Wheat ETF (WEAT) with a long and narrowing consolidation. Watch resistance around 25.5 and support just above 23 for the next directional clue.
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Chart 10
