SPY STALLS BELOW SEPTEMBER HIGH -- EASE OF MOVEMENT INDICATOR IS UNUSUALLY WEAK FOR IWM -- TECHNOLOGY SPDR COULD HOLD THE KEY TO 2013 -- TREASURIES ALSO HOLD AN IMPORTANT CLUE
SPY STALLS BELOW SEPTEMBER HIGH... Link for todays video. Stocks surged the last two weeks of November and then stalled the last four weeks. The overall trend remains up, but the S&P 500 ETF (SPY) is in danger of forming a lower high. Chartists should watch this carefully because a lower high is the first step to a downtrend. Chart 1 shows SPY moving above 140 at the end of November and then stalling just above this level for four weeks. Notice that SPY is stalling below the September high. A clear peak as yet to form because SPY remains above 140. I am marking support at 139 on this chart, which is based on the early December low and a small buffer. A break below this level would reverse the 5-6 week uptrend. More importantly, this would also forge a lower peak and signal a continuation of the September-October decline. The next support zone resides in the 125-126 area. Broken resistance, the June low and the 50% retracement mark support.
(click to view a live version of this chart)
Chart 1
The indicator window shows the Histogram for MACD(5,35,5). This histogram measures the difference between MACD and its signal line. MACD reflects momentum. The histogram is measuring the momentum of momentum, which could be considered acceleration. Notice that the histogram turned bearish with the move below -1 in October. A move above +1 is needed to counter this bearish signal. The current advance lacks acceleration because the histogram is well below this level.
EASE OF MOVEMENT IS UNUSUALLY WEAK FOR IWM... Before getting to the Ease of Movement Indicator, lets look at the price chart for the Russell 2000 ETF (IWM). Chart 2shows IWM forming an inside week as long as todays price remains between 82 and 84, which seems likely. Notice that IWM formed an inside week at the September peak. Inside weeks signal indecision that can sometimes foreshadow a reversal. However, a reversal needs to be confirmed with some price movement in the other direction. A close below 81 would confirm the inside week and argue for a reversal of the 5-6 week uptrend.
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Chart 2
The indicator window shows Ease of Movement (EMV), which is a volume-based indicator developed by Richard Arms, creator of the ARMS Index (TRIN) and Equivolume. EMV combines price and volume to measure the ease of price movement. It works like an oscillator by fluctuating above/below the zero line. Chartists can look for crosses above/below zero to generate signals or even apply basic chart analysis to identify for trend changes. You can read more on EMV in our ChartSchool. EMV is currently trending lower and in negative territory. This is a bit surprising because IWM bounced the last 5-6 weeks and is near its September high. Weak EMV suggests that this advance has not been easy and EMV needs to break above .20 to reverse this downtrend.
TECHNOLOGY SPDR COULD HOLD THE KEY TO 2013... The Finance SPDR (XLF) and the Industrials SPDR (XLI) led the market over the last five-six weeks and forged 52-week highs in mid December. The Consumer Discretionary SPDR (XLY) also forged a 52-week high, but fell back rather sharply over the last seven days. The Technology SPDR (XLK) remains the big laggard and holds an important key for the market in 2013. Keep in mind that the technology remains the biggest sector in the S&P 500. Information Technology accounts for 18.96% of the ETF, finance weighs in at 15.65% and healthcare accounts for 12.07%. Chart 3 shows XLK breaking down in October, bouncing at the end of November and stalling this month. XLK tried to break above the late October highs, but failed and fell back over the last two weeks. The bulls are sitting on a three-legged chair as long as XLK remains below resistance. A breakdown from here would target further weakness towards the 26 area. Support here stems from broken resistance and the 50-61.80% retracement zone. The indicator window shows the price relative breaking down in October and remaining down the last two months. A break above the November high is needed for XLK to start showing relative strength again. Chart 4 shows the Nasdaq 100 ETF (QQQ) with similar characteristics.
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Chart 3
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Chart 4
TREASURIES ALSO HOLD AN IMPORTANT CLUE FOR NEXT YEAR... US Treasury Bonds and the Dollar are the go-to assets when the markets are risk-averse. Stocks decline when the markets shun risk and rise when the markets embrace risk. Chartists should watch the 20+ Year T-Bond ETF (TLT) and the 10-year Treasury Yield ($TNX) for clues on the appetite for stocks. Chart 5 shows TLT breaking above 120 in May and then trading flat with a large triangle. The big trend is up and the medium trend is flat. A break above triangle resistance would signal a continuation higher and this would be bearish for stocks. The Fed, of course, does not want this. Fed Chairman Bernanke is doing everything possible to push money out of treasuries and into stocks (quantitative easing). Will the Chairman gets his way? Watch TLT for clues. TLT established support at 119 in October and December. A break below this level would be bearish for treasuries and bullish for stocks.
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Chart 5
The indicator window shows the Percent Price Oscillator (PPO) peaking in October and moving lower for over a year. Some may see a large bearish divergence. I would not read too much into this because TLT has been flat since October 2011. Notice that TLT surged to 120 in September 2011 and this level turned into resistance for several months. After the breakout, this level turned into support and TLT bounced near 120 several times the last few months. The PPO fell from 6% to .60% because price momentum was essentially flat. It would take a move into negative territory to turn momentum bearish. Chart 6 shows the 10-year Treasury Yield ($TNX) for reference.
