STOCKS PULLBACK AND TREASURIES BOUNCE AFTER ISM -- HOUSING ETFS FORM BROADENING PATTERNS -- TIMBER ETF AND LUMBER FUTURES HIT NEW HIGHS -- OIL & GAS EQUIPMENT/SERVICES SPDR CHALLENGES RESISTANCE -- OIL ETF CHALLENGES NOVEMBER HIGHS
STOCKS PULLBACK AND TREASURIES BOUNCE AFTER ISM... Link for todays video. Its could be a big week for the treasury market - and possibly the stock market too. No, I do not think we will see a resolution to the fiscal cliff this week. Instead, it is a big week on the economic front with Factory Orders and ISM Services Index scheduled for Wednesday and the Employment Report on deck for Friday. Today, the Institute for Supply Management reported the ISM Manufacturing Index, which came in below expectations and at its lowest level since July 2009. At 49.5, the index is below 50 and at levels that suggest weakness in manufacturing. The Dow was up around 50 points before the report and fell to breakeven after the report. While this intraday turnaround does not affect the short-term trend, it does reflect stock market that is vulnerable at current levels. Chart 1 shows the Dow hitting resistance from broken support and the 50% retracement line. Also note that the Dow is up around 500 points in two weeks and short-term overbought. The combination of overbought conditions and resistance make the Dow ripe for at least a pullback.
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Chart 1
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Chart 2
Chart 2 shows the 7-10 YR T-Bond ETF (IEF) opening sharply lower and then bouncing after the ISM report. Treasuries are negatively correlated with stocks and the economy. In other words, treasuries move higher when stocks move lower and the economy weakens. IEF broke resistance with a big surge in early November and then consolidated the last three weeks. IEF may resolve this consolidation this week and there would likely be ramifications for stocks. A break above last weeks high would keep the uptrend in place and weigh on stocks. Conversely, a break below key support at 108 would be bearish for treasuries and bullish for stocks.
HOUSING ETFS FORM BROADENING PATTERNS... The chart swings for the Homebuilders SPDR (XHB) and the Home Construction iShares (ITB) are widening as broadening formations take shape. Broadening formations are bearish patterns that reflect increasing volatility. Chart 3 shows XHB with a higher high in early November and then a lower low in mid November. Trend lines extending up from late September reveal a broadening formation. At this point, I would not consider the broadening formation bearish because the bigger trend is up and the ETF forged a new high in early November. I would, however, watch the swings within the formation. The current swing is up after the gap and surge above 26. XHB is currently consolidating with first support marked at 25.50 (blue oval). A break below this support level would reverse the upswing and put the bearish broadening formation into play. Chart 4 shows the Home Construction iShares with similar characteristics.
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Chart 3
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Chart 4
TIMBER ETF AND LUMBER FUTURES HIT NEW HIGHS... Strength in the housing industry means increasing demand for lumber. Even though broadening patterns may be taking shape in the housing ETFs, note that the Timber ETF (CUT) broke above its March highs and recorded a fresh 52-week high. Chart 5 shows CUT hitting resistance at 19.25 in September-October and breaking through this level last week. A new high confirms increasing demand for timber. The October-November lows mark key support. It is possible that a broadening formation is taking shape here as well. I would mark first support at 18.75. A move below this level would negate the breakout and reverse the upswing that started in mid November. The indicator window shows the Correlation Coefficient (CUT,ITB). Unsurprisingly, timber prices and the Home Construction iShares are positively correlated. Chart 6 shows Lumber Futures ($LUMBER) in a clear uptrend and hitting a 52-week high last week.
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Chart 5
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Chart 6
OIL & GAS EQUIPMENT/SERVICES SPDR CHALLENGES RESISTANCE... The Oil & Gas Equipment/Services SPDR (XES) is challenging resistance with a two week surge and outperforming oil during this timeframe. Chart 7 shows XES declining to the 62% retracement line in mid November and then bouncing with a gap two weeks ago. The gap held as the ETF continued higher and gapped up again last week. XES is now challenging resistance from the early November highs. A breakout would be medium-term bullish, but keep in mind that the ETF is short-term overbought and there could be a pullback even after a breakout. The indicator window shows XES relative to the US Oil Fund (USO). XES declined from mid September to mid November, but the price relative remained flat because XES did not underperform oil. The XES:USO ratio turned up the last two weeks as XES began outperforming oil. It is positive to see XES outperforming oil and this could foreshadow a breakout in crude. Chart 8 shows the Energy SPDR (XLE) nearing its resistance zone in the 93-94 area. This is an important test.
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Chart 7
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Chart 8
OIL ETF CHALLENGES NOVEMBER HIGHS... The US Oil Fund came alive on Monday as stocks opened strong and the Dollar moved lower. Chart 9 shows USO surging to 33, which marks resistance from the November highs. 33 held throughout November as oil consolidated in the 32 area for over a month. A consolidation breakout would be bullish and signal a continuation of the summer advance. USO needs a strong close to complete the breakout. Another failure in this area would argue for a rising flag/wedge pattern over the last five weeks. A break below 31 would then signal a continuation lower. The indicator window shows the Commodity Channel Index (CCI) breaking resistance in mid November and then falling back. This signal was a little early and USO needs to confirm with a convincing breakout. A CCI break below its late November low would be bearish for momentum. Chart 10 shows Spot Light Crude ($WTIC) for reference. Note that $WTIC is trading around $90 and also challenging resistance.
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Chart 9
