SMALL AND MID-CAPS START LEADING THE STOCK MARKET -- CITIGROUP AND BANK OF AMERICA LEAD FINANCE SPDR HIGHER -- BASIC MATERIALS SPDR TESTS SHORT-TERM SUPPORT AFTER FCX DEAL -- HOUSING STOCKS LEAD CONSUMER DISCRETIONARY SECTOR LOWER
SMALL AND MID-CAPS START LEADING THE STOCK MARKET... Link for todays video. Even though the stock market looks quite mixed overall, small-caps and mid-caps are starting to outperform and this could be positive. Chart 1 shows the S&P MidCap 400 SPDR (MDY) moving all the way back to resistance from the October-November highs. The ETF broke the September trend line last week and then stalled the last four days. A move above 184 would complete the breakout and argue for a move to new highs. Should the ETF extend its stall and fail to breakout, I am watching support at 180 for a short-term reversal. Note that I am using this weeks low and a small price buffer to set first support. The indicator window shows the price relative (MDY:SPY ratio) moving higher in October and breaking out in November. Mid-caps are clearly outperforming large-caps (SPY).
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Chart 1
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Chart 2
Small-caps are also starting to outperform large-caps. Chart 2 shows the Russell 2000 ETF (IWM) surging into its resistance zone last week and stalling the last four days. The ETF is ripe for a pullback, but the gains are holding as the bulls keep up the pressure. A breakout at 83 would be bullish and argue for a challenge to the September high. Resistance aint broken yet though. As long as IWM stalls below resistance, I am watching support at 81 for signs of a short-term trend reversal. The indicator window shows the price relative (IWM:SPY ratio) breaking above its prior high as small-caps start to outperform large-caps.
CITIGROUP AND BANK OF AMERICA LEAD FINANCE SPDR HIGHER... The Finance SPDR (XLF) is showing relative strength on Wednesday with a 1+ percent gain around midday. Even though XLF favors large-cap financials, strength in financials overall is a big reason for outperformance in MDY and IWM. Note that the financial sector accounts for 21.85% of the S&P MidCap 400 SPDR and 23.16% of the Russell 2000 ETF. Chart 3 shows XLF failing to hold the mid November support break and surging right back above 15.40. This amounts to a bear trap. After surging to 15.80, the stock consolidated for a few weeks and is challenging resistance today. Even though XLF is making a breakout bid, note that the Regional Bank SPDR (KRE) remains well below its early November high. Chart 4 shows KRE forming a triangle consolidation the last two weeks. Resolution of this pattern will provide the next directional clue.
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Chart 3
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Chart 4
Strength in the Finance SPDR can be traced to two of the 2008 poster children: Citigroup and Bank of America. Chart 5 shows Citigroup (C) gapping up and breaking wedge resistance with a strong move above 36. The gap and breakout reinforce support at 34 and the bulls have control as long as this level holds. Chart 6 shows Bank of America (BAC) surging above 10 and recording a 52-week high today. Volume expanded as the stock broke above its March 2011 highs.
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Chart 5
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Chart 6
BASIC MATERIALS SPDR TESTS SHORT-TERM SUPPORT AFTER FCX DEAL... The Basic Materials SPDR (XLB) has been underperforming the broader market over the last few months and is now testing short-term support. Chart 7 shows the ETF forming a large bearish engulfing pattern on Monday. This intraday reversal affirms resistance from the early November high. With weakness today, XLB is testing support at 35.75. A close below this support level would call for a continuation of the October-November breakdown. Much of todays weakness can be attributed to Freeport McMoRan Copper & Gold (FCX), which fell sharply after announcing two acquisitions. FCX accounts for around 8% of XLB and chart 8 shows the stock plunging to support from the summer lows.
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Chart 7
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Chart 8
HOUSING STOCKS LEAD CONSUMER DISCRETIONARY SECTOR LOWER... Housing stocks were hit hard on Wednesday as the Home Construction iShares (ITB) and the Homebuilders SPDR (XHB) fell around 2%. I featured these two ETFs on Monday with broadening formations taking shape. These are typically bearish reversal patterns, but I was waiting for a reversal of the short-term upswing before taking them serious. Well, support is under threat as chart 9 shows ITB testing last weeks low. ITB also formed a lower high because it peaked below the early November peak. Chart 10 shows XHB testing support at 25.50 with a black candlestick on Wednesday.
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Chart 9
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Chart 10
Chart 11 shows the Consumer Discretionary SPDR (XLY) hitting resistance from the autumn highs in the 48 area. The SPDR broke channel resistance with a strong move in mid November and then formed a bearish engulfing at resistance on Monday. With further weakness on Tuesday-Wednesday, XLY affirmed resistance and is now poised to test the channel breakout as broken resistance in the 46-46.50 area turns into support. A move below 46 would fully negate the channel breakout and argue for a deeper decline, which would be negative for the broader market.
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Chart 11
TLT CHALLENGES WEDGE RESISTANCE ... Chart 12 shows the 20+ Year T-Bond ETF (TLT) challenging the falling wedge trend line, a break of which would be negative for stocks. The ETF broke a bigger resistance level with a surge above 125 in early November and became short-term overbought in mid November. This falling wedge alleviated overbought conditions and set the stage for a continuation higher. Todays trend line break is a start and TLT now needs to follow through with a close above the late November high (126). Such a close would clearly signal a continuation higher and be negative for stocks. Chartists can now mark key support at 123.50 (Mondays low). The indicator window shows the Correlation Coefficient (TLT,SPY) in black and the Correlation Coefficient (TLT,FXE) in red. Treasuries are negatively correlated to both SPY and FXE. This makes sense because stocks and the Euro are positively correlated. Chart 13 shows the 7-10 year T-Bond ETF (IEF) breaking triangle resistance and the mid November low marking key support at 108.
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Chart 12
