BREAKOUTS ABOUND, BUT STOCKS ARE GETTING OVERBOUGHT -- RIM RESISTANCE TURNS SUPPORT FOR S&P MIDCAP 400 -- BREAKOUTS HOLD FOR XLY, XLI AND XLF -- DOLLAR TESTS LONG-TERM SUPPORT AS EURO SURGES -- GOLD AND SILVER EXTEND THEIR STALL
BREAKOUTS ABOUND, BUT STOCKS ARE GETTING OVERBOUGHT ... Link for todays video. There is not a lot to be bearish about right now. Small-caps and mid-caps are leading the market higher. The S&P MidCap 400 ($MID) and Russell 2000 ($RUT) both broke resistance and recorded 52-week highs this year. Three of the four offensive sectors are showing relative strength. The Industrials SPDR (XLI), Finance SPDR (XLF) and Consumer Discretionary SPDR (XLY) also broke their 2011 highs and recorded fresh 52-week highs this week. The Technology SPDR (XLK) continues to underperform because of weakness in a few big tech names.
(click to view a live version of this chart)
Chart 1
PerfChart 1 shows the S&P 500 with the indices and SPDRs listed above. The Finance SPDR and Russell 2000 are both up over 10% since mid November. All but the Technology SPDR are outperforming the S&P 500 since mid November. Despite new highs and fresh breakouts, these securities are overbought after big runs and the risk of a pullback is increasing. Timing such a pullback can be rather tricky, especially with earnings season around the corner. Stocks are priced to perfection right now and a disappointment could trigger a correction. Earning beats, on the other hand, could keep this rally going for a few more weeks.
RIM RESISTANCE TURNS SUPPORT FOR S&P MIDCAP 400 ... Chart 2 shows the S&P MidCap 400 ($MID) breaking resistance with a big move to start the year. $MID surged above 140 on 2-Jan and held above this level the last seven days. The ability to hold gains is positive because it suggests continued buying pressure. Note, however, that the index is up around 10% from its November lows and this move is pretty much straight up (10% in two months). This creates an overbought situation that makes the index vulnerable to a pullback or consolidation. Also notice that the Commodity Channel Index (CCI) exceeded +200 in early January. The yellow zone marks prior resistance and this zone turns into support on any pullback.
(click to view a live version of this chart)
Chart 2
(click to view a live version of this chart)
Chart 3
Chart 3 shows weekly prices over the last 2 1/2 years. Notice that a large cup-with-handle pattern formed and the index broke rim resistance with the surge above 1050. These bullish continuation patterns were popularized by William ONiel of IBD. Rim resistance extends back to the 2011 highs and turns into the first support zone to watch on any pullback. Chart 4 shows the Russell 2000 breaking its 2011 and 2012 highs with a surge to 880. The broken resistance zone turns into the first support zone to watch on any pullback.
(click to view a live version of this chart)
Chart 4
BREAKOUTS HOLD FOR XLY, XLI AND XLF... There are nine sector SPDRs and I would consider four of these as offensive sectors, which are the opposite of defensive sectors. Think of offensive sectors as part of the risk-on trade and defensive sectors as part of the risk-off trade. The consumer discretionary sector is the most economically sensitive. The industrials sector represents the capital equipment needed for production and industry. The finance sector represents the banking system. The technology sector represents the appetite for risk because its stocks have the highest betas. At the very least, two of these four offensive sectors should show relative strength during a broad market advance. Currently, three of the four are showing upside leadership and this is bullish for the market. As noted above, XLI, XLY and XLF broke resistance and recorded 52-week highs this week. All three are up more than the S&P 500 and showing upside leadership. Even though these SPDRs are short-term overbought, the bulls are clearly in good shape as long as these breakouts hold. We could see a throwback to the breakouts zones and these zones would then mark the first support test.
Chart 5 shows XLY breaking out around 47.5 and then stalling the last eight days. Notice that the candlesticks have small bodies (open-close range). These eight days have been incredibly indecisive. Nevertheless, the breakout is holding and broken resistance turns first support. Key support remains at 46 and RSI marks momentum support at 40.
(click to view a live version of this chart)
Chart 5
Chart 6 shows XLF breaking above its September-October highs with a sharp advance the last two months. Broken resistance and the late December low combine to mark first support in the 16.25 area. Chart 7 shows the Industrials SPDR with broken resistance turning into support in the 37 area.
(click to view a live version of this chart)
Chart 6
(click to view a live version of this chart)
Chart 7
DOLLAR TESTS LONG-TERM SUPPORT AS EURO SURGES... In its policy statement on Thursday, the European Central Bank (ECB) showed some optimism for the EU economy in 2013. This was further echoed the EU Commissioner on Friday. These two news bites sent the Euro sharply higher. In fact, chart 8 shows the Euro Currency Trust (FXE) erasing last weeks loss and moving above 132. This move keeps the uptrend in place and sets first support at this weeks low (call it 129). The mid November low marks key support at 126. The indicator window shows StochRSI moving back above .80 to keep momentum bullish. Momentum support is set at .40 for now. Chart 9 shows the US Dollar Fund (UUP) breaking the August 2011 trend line this summer and then forming a triangle. A triangle break would signal a continuation lower and target a move to the 2011 lows.
(click to view a live version of this chart)
Chart 8
(click to view a live version of this chart)
Chart 9
GOLD AND SILVER EXTEND THEIR STALL... AS weak Dollar is normally bullish for gold, but gold and other commodities are not taking advantage of Dollar weakness today. Gold, oil, silver and copper are all down. Chart 10 shows the Gold SPDR (GLD) stalling in the 160 area for the third week straight. Overall, GLD has been range bound since September 2011. Range support is around 148 and range resistance is around 175. GLD is currently in the middle of this range with a falling flag or channel taking shape. As noted last week, there are plenty of reasons for support around 160, but we have yet to see a breakout to reverse the three month slide. Support around 160 stems from broken resistance and the 50-61.80% retracement zone. A close above 165 is needed to break resistance and end this downtrend. Chart 11 shows the Silver Trust (SLV) in a downtrend the last three months.
(click to view a live version of this chart)
Chart 10
