TECHNOLOGY SPDR STALLS AT BROKEN RESISTANCE -- IBM AND MICROSOFT WEIGH ON TECH SECTOR -- XLE LAGS BROADER MARKET AND HITS KEY RETRACEMENT -- OIL FORMS HIGHER LOW AND HOLDS BREAKOUT -- DOLLAR ETF SURGES OFF SUPPORT
TECHNOLOGY SPDR STALLS AT BROKEN RESISTANCE... Link for todays video. After surging on 31-Dec and 2-Jan, stocks took a breather over the last few days. Chart 1 shows the Technology SPDR (XLK) breaking above its December highs with a huge move. Broken resistance from these highs turns into the first support zone to watch on any pullback. Well, XLK got the pullback and is starting to firm in the 29.25-29.5 area. A small falling wedge is taking shape and a break above this weeks high would break wedge resistance. The indicator window shows the XLK:SPY ratio in a clear downtrend as XLK underperforms SPY. XLK has underperformed since the September-October decline and never recovered, even though the broader market did. A break above resistance is needed to signal a return to relative strength.
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Chart 1
IBM AND MICROSOFT WEIGH ON TECH SECTOR... Apple is not the only big tech stock weighing on the technology sector. AAPL is by far the single biggest component, but IBM and Microsoft are also weighing heavily on XLK. These three stocks account for over 30% of the ETF. Chart 2 shows IBM plunging below 190 in October-November and then working its way back to the 196-197 area in December-January. This zone marks some serious resistance as IBM turned back twice in the last few weeks. A rising channel is now taking shape and a break below the late December low would signal a continuation of the October-November decline. The indicator window shows the price relative hitting a new low as IBM continues to underperform the broader market. Chart 3 shows Microsoft hitting resistance several times and falling back towards support this week. A break above 27.75 is needed to reverse this downtrend.
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Chart 2
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Chart 3
XLE LAGS BROADER MARKET AND HITS KEY RETRACEMENT... The Energy SPDR (XLE) has been lagging the broader market for some time, but the recent breakout on the price chart is still holding and the bias remains bullish. Chart 4 shows XLE with weekly bars over since July 2010. The trend since the October 2011 low is up with the November low marking key support at 67. A break below this level would reverse the long-term uptrend. The indicator window shows the price relative (XLE:SPY ratio) moving lower over the last two years. Most recently, the price relative peaked in mid September and edged lower the last few months. A break above the November high (red line) is needed to signal a return to relative strength.
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Chart 4
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Chart 5
Chart 5 shows daily candlesticks with the ETF surging above its December high to keep the uptrend alive. The trend is up here, but XLE is trading at an interesting juncture as it hits the 61.80% retracement line. There are two price levels to watch for a trend reversal on this daily chart. First, a move below 71 would fill the 2-Jan gap and negate this big move. Second, a break below key support at 69.5 would forge a lower low. The indicator window shows the Aroon Oscillator in bull mode because it remains positive. A plunge below -50 would signal a bearish momentum thrust that could foreshadow a trend reversal on the price chart. Chart 6 shows the Oil & Gas Equipment/Services SPDR (XES) for reference.
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Chart 6
OIL FORMS HIGHER LOW AND HOLDS BREAKOUT... Energy sector performance is tied to the price of oil. Oil is currently holding its breakout and strength in the stock market is positive because oil is part of the risk-on trade. Chart 7 shows weekly bars for Spot Light Crude ($WTIC) over the last two years. First, notice that oil is nearing the mid point of its two year range (~95). Second, notice that the current swing is up with the breakout at 90. This breakout is holding and should be considered bullish until proven otherwise. A move back below 90 would be negative and call for a reassessment. A break below key support at 85 would be outright bearish and target a test of the 2011-2012 lows. Chart 8 shows the US Oil Fund (USO) breaking out at 33 and nearing the trend line extending down from February 2012.
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Chart 7
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Chart 8
DOLLAR ETF SURGES OFF SUPPORT... While strength in stocks is positive for oil, renewed strength in the Dollar could be negative. Chart 9 shows the US Dollar Fund (UUP) bouncing off support from the September-October lows over the last few weeks. UUP broke first resistance around 21.82 and is currently in the middle of its three month range. Long-term resistance resides in the 22.2-22.30 area. The November high and 200-day moving average mark resistance here. A breakout at 22.30 would be long-term bullish for the greenback. Even though the Dollar and S&P 500 were negatively correlated most of 2012, there are signs that this relationship could be changing in 2013. Notice that the Correlation Coefficient surged to its highest level since June 2011. Currency traders may be betting that the US recovery will be stronger than the EU recovery and this will put pressure on the Fed to curtail quantitative easing. Note that the European Central Bank (ECB) meets on Thursday and the outcome could affect the Euro.
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Chart 9
EURO CURRENCY TRUST HITS RESISTANCE ZONE... Chart 10 shows weekly bars for the Euro Currency Trust (FXE). The trend since August is up, but the ETF is running into resistance from the 2012 consolidation (yellow area). A rising wedge is taking shape with the lower trend line marking first support. The November low marks key support around 126. The indicator window shows StochRSI to identify noticeable shifts in momentum. A surge above .80 signals a bullish momentum surge, while plunge below .20 signals a bearish momentum shift. The signals are not perfect, but there is no such thing as the perfect indicator with perfect settings. In addition, chartists should put indicator signals in context and use other aspects of technical analysis to confirm. StochRSI remains bullish since the August surge above .80. A plunge below .20 would signal a bearish momentum shift that could foreshadow a trend reversal.
