RISING PEAKS AFFIRM LONG-TERM UPTREND IN SPY -- SPY SURGES AND THEN STALLS WITH INDECISIVE CANDLESTICK -- HOUSING STARTS EXTEND UPTREND -- RETAIL SALES REFLECT GROWING ECONOMY -- JOBLESS CLAIMS EXTEND DOWNTREND

RISING PEAKS AFFIRM LONG-TERM UPTREND IN SPY... Link for todays video. The long-term trends are clearly up as several major index and sector ETFs recorded 52-week highs this week. Despite these long-term uptrends, short-term conditions are getting quite overbought. The S&P 500 ETF (SPY) is up around 10% from its mid November low and the Russell 2000 ETF (IWM) is up over 15%. These are big moves in a relatively short timeframe (two months). There was a short and sharp correction at the end of December, but stocks quickly recovered to start 2013 with a real bang. Now what? Even though upside momentum is slowing and signs of indecision are starting to appear, there are simply no signs of significant selling pressure and turning long-term bearish now would be a top picking exercise. Furthermore, we have yet to see a major topping or distribution pattern form on the price charts. Chart 1 shows weekly bars for SPY since July 2010. A distribution pattern formed in the first half of 2011 and SPY broke support with a sharp decline in August 2011. Even though the market firmed soon after this breakdown and SPY resumed its uptrend, such a strong support break argued for caution at the time. SPY clearly resumed its uptrend with the higher low in November 2011 and breakout in January 2012. The ETF has since formed a series of higher peaks and higher troughs. We have yet to see a distribution or topping pattern similar to that seen in 2011. Long-term support is based on the November low.

(click to view a live version of this chart)
Chart 1

The indicator window shows 14-week RSI. Notice how RSI also broke down in August 2011 and did not recover until a breakout in January 2012. RSI often oscillates in ranges during an uptrend or downtrend. The 40-80 range captures an uptrend, while the 20-60 range captures a downtrend. RSI was clearly in bull mode throughout 2012. Notice how RSI held the 40-50 zone in May 2012 and November 2012. A break below 40 would signal a bearish shift in long-term momentum. Chart 2 shows IWM hitting a new high with the move above 88 this week. Also notice that the price relative (IWM:SPY ratio) broke out and small-caps are outperforming large-caps. Small-caps have higher betas, which translates into higher risk. Relative strength in small-caps shows a healthy appetite for risk right now.

(click to view a live version of this chart)
Chart 2

SPY SURGES AND THEN STALLS WITH INDECISIVE CANDLESTICK... Even though the long-term trends are up, short-term conditions are overbought and the chances of a pullback or consolidation are increasing. Chart 3 shows SPY surging above 148 on Thursday and forming a spinning top. These candlesticks have small bodies (open-close range) and long upper-lower shadows (high-low range). This candlestick shows SPY opening strong, moving higher and lower throughout the trading session and then finishing near the open. It is as if the ETF was spinning in place on Thursday. These indecisive candlesticks can sometimes foreshadow a short-term reversal. Traders can mark short-term support at 147, a break of which would produce a short-term reversal that could lead to a deeper pullback. Medium-term, the November trend line, broken resistance and the gap zone mark a support zone in the 143-144 area. Chart 4 shows the Russell 2000 ETF (IWM) with a rising channel in 2013.

(click to view a live version of this chart)
Chart 3

(click to view a live version of this chart)
Chart 4

HOUSING STARTS EXTEND UPTREND... There were several economic reports this week, but I am going to focus on three: retail and food services sales, housing starts and initial jobless claims. Note that these charts were created using a PRO account at Stockcharts.com. PRO accounts allow users to upload data and create up to 10 custom securities. Unfortunately, this chart is a static image and cannot be shared. Despite this drawback, I think the chart and analysis add value to the market message. This data is available for free at the St Louis Fed website(https://research.stlouisfed.org/fred2/).

Chart 5

Even though economic stats are lagging, we can apply basic technical analysis to an economic data series and discern a trend. These trends are good for confirming long-term trends in the stock market. An uptrend in housing starts indicates growth in the housing sector and this is bullish for the economy. Chart 5 shows housing starts surging above 900 (900,000) for the first time since September 2008. Housing starts are still nowhere near their 2004-2005 levels, but the trend is clearly in the right direction with the blue trend line marking support at 800.

RETAIL SALES REFLECT GROWING ECONOMY... Retail sales were also reported this week and the December number showed a gain of .51%. Chart 6 shows the monthly percentage change in retail sales in the main window. The indicator window shows cumulative retail sales along with the S&P 500. The monthly change could have been stronger and it was well below the 1+ percent gains seen in August and September, but it was not negative. The trouble starts when/if retail sales turn negative. This indicator has been in positive territory for most of the last three years. There was a scare in April-May-June of 2012 as retail sales turned negative for three months. Retail sales rebounded afterwards and remain positive for now.

Chart 6

JOBLESS CLAIMS EXTEND DOWNTREND... After a spike with hurricane Sandy, initial jobless claims plunged to their lowest level since early 2008. The absolute level (335,000) and the trend are important here. Chart 7 shows weekly readings as individual dots. The blue line is a four week average that is used to smooth the volatile data. Initial claims were flat for most of 2012 and the Sandy surge was clearly an anomaly. With a multi-year low in the data, the downtrend is affirmed and this supports the long-term uptrend in stocks. This is positive for employment and non-farm payrolls, which will be reported in early February.

Chart 7