FINANCE AND INDUSTRIALS SPDRS BREAK SUPPORT -- QUALCOMM, CISCO AND JUNIPER LEAD NETWORKING STOCKS -- RSI MOVES INTO BEAR ZONE FOR THE S&P 500 -- PERCENT OF SPX STOCKS ABOVE 50-DAY SMA HAS YET TO REACH OVERSOLD LEVELS
FINANCE AND INDUSTRIALS SPDRS BREAK SUPPORT... Link for todays video. The Finance SPDR (XLF) and the Industrials SPDR (XLI) were holding up the best of the four offensive sectors, but these two broke support over the last few days. This indicates that selling pressure is spreading, not narrowing. Note that the Consumer Discretionary SPDR has been trending lower since mid September and the Technology SPDR is down over 10% from its mid September high. Chart 1 shows XLF breaking below the late September low. It looks like a double top formed over the last two months and this break reverses the uptrend that started in early June. This double top is rather small and the next support level resides in the 14.75 area. The indicator window shows the Percentage Price Oscillator (PPO) moving into negative territory the last few days.
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Chart 1
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Chart 2
Chart 2 shows the Industrials SPDR working its way lower the last two months. XLI tested support in the 36.25 area several times since late September. After a strong open, XLI moved lower today and is currently below this support level. Also notice that the PPO is trending lower and negative. At this point, I view the support break and negative PPO as bearish. Look for a surge back above first resistance at 36.75 to re-evaluate.
QUALCOMM, CISCO AND JUNIPER LEAD NETWORKING STOCKS... Even though the major indices remained under pressure on Wednesday, there were a few bright spots in the networking group. Investors reacted positively to Cisco (CSCO) earnings and pushed the stock sharply higher on Wednesday. Chart 3 shows CSCO surging from late July to early September and then corrected into October-November. This correction retraced 62% of the prior advance as the stock gapped higher today. The gap is short-term bullish, but it is just one day and the stock remains below the September trendline. Follow through above this trendline is needed to prove today more than just a one-day wonder rally. The indicator window shows the price relative (CSCO:$SPX ratio) breaking the September trendline as Cisco starts outperforming again.
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Chart 3
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Chart 4
Chart 4 shows QUALCOMM (QCOM) leading the way higher over the last three weeks. The stock turned up in late October, recovered from a gap down on 7-Nov and surged above the September trendline. Not many stocks are trading above their late October highs right now. The indicator window confirms relative strength in QCOM as the price relative broke above the August-September highs. Chart 5 shows Juniper (JNPR) surging in July-August and then correcting with a zigzag lower. The stocks surged to the upper end of its channel the last few weeks and a follow through breakout at 18.50 would be bullish.
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Chart 5
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Chart 6
Chart 6 shows the Networking iShares (IGN) surging at the beginning of November and breaking the September trendline. The ETF got cold feet at the October high and fell back over the last six days. Even though this ETF looks promising, broad market weakness and the failure to take out the late October high loom large. Follow through is needed to produce a clean resistance break and trend reversal.
RSI MOVES INTO BEAR ZONE FOR THE S&P 500... There is oversold and then there is OVERSOLD. Dont confuse these two with OVERsold and overSOLD though. Chartists can use many indicators to measure overbought and oversold levels. Some will become oversold early and often, while others require more selling pressure to become oversold. In other words, there is short-term oversold, medium-term oversold, long-term oversold and everything in between. Momentum indicators like Stochastics and RSI oscillate within defined ranges, which makes it easy to spot overbought and oversold situations. However, the 14-day Stochastic Oscillator is more sensitive than 14-day RSI and will produce more overbought/oversold readings that RSI. Chart 7 shows the S&P 500 with the Stochastic Oscillator becoming oversold at least three times in the last five weeks. In contrast, RSI has yet to dip below 30 and become oversold.
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Chart 7
Despite the overbought/oversold discrepancy, there are two takeaways from these indicators. First, notice that the Stochastic Oscillator became overbought numerous times from mid June to mid September and did not dip below 20 during this period. Oversold readings are rare during a strong uptrend. With three dips below 20 the last five weeks, the Stochastic Oscillator shows strong selling pressure and chartists should now expect resistance in the 60-80 zone. Second, RSI traded in the 40-80 zone from July to late October. This also coincided with the overall uptrend. The late October break below 40 signals a momentum shift. The 20-60 zone now rules and chartists can look for resistance in the 50-60 zone.
PERCENT OF S&P 500 STOCKS ABOVE 50-DAY SMA HAS YET TO REACH OVERSOLD LEVELS... Chartists can also use breadth indicators to identify overbought and oversold levels. Last week I showed the S&P 500 $Above 200-day SMA ($SPXA200), which provides a long-term perspective on breadth. Today we will look at the S&P 500 %Above 50-day SMA ($SPXA50), which triggers more overbought/oversold readings than the %Above 200-day SMA. A move above 80% signals overbought conditions, while a move below 20% signals oversold conditions. Chartists must be careful with this indicator because overbought readings can be quite frequent during strong uptrends. Overbought is not bearish. In fact, overbought is actually a sign of strength because it takes strong buying pressure to push this indicator above 80%.
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Chart 8
Chart 8 shows that a potential bearish reversal occurs when the indicator becomes overbought and then declines below 60%. Conversely, a potential bullish reversal occurs when the indicator becomes oversold and then surges above 40%. This shows an extreme reading followed by a clear upturn. These signals are shown with the red and green arrows on the chart. Keep in mind that this is just one indicator and chartists should not consider this a stand alone trading system. Currently, the indicator is bearish because it became overbought and moved below 60 in mid October. It is near 30% and has yet to reach oversold levels. A move below 20% would signal oversold conditions, but it would take a subsequent surge above 40% to signal an upturn. Chart 9 shows the Nasdaq 100 %Above 50-day SMA ($NDXA50) with similar characteristics.
