TECHNOLOGY SPDR BREAKS WEDGE RESISTANCE -- GOOGLE AND IBM SURGE WITH BIG GAPS -- METALS & MINING SPDR AND STEEL ETF REVERSE SHORT-TERM FALLS -- 10-YEAR TREASURY YIELD BACKS OFF RESISTANCE -- RSI MOVES ABOVE 70 FOR THE S&P 500 AND DOW INDUSTRIALS
TECHNOLOGY SPDR BREAKS WEDGE RESISTANCE... Link for todays video. The technology sector is getting a big boost from Google and IBM on Wednesday. Both stocks reported earnings on Tuesday and both reacted positively to these reports. IBM is the second largest component in the Technology SPDR (XLK) and Google is the fifth largest. Dont forget that Apple, which is the biggest component by far, reports after the close today. Chart 1 shows XLK holding support in the 29-29.5 area and breaking resistance with a sharp move higher. This breakout keeps the large rising wedge alive and reinforces support. Keep in mind that the trend is up as long as the big wedge rises. Failure to hold this breakout would be negative. A move below 29 would break wedge support and fully reverse the uptrend.
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Chart 1
GOOGLE AND IBM SURGE WITH BIG GAPS... Chart 2 shows Google (GOOG) holding support in the 700 area and surging to its highest level of the month. This massive gap should be considered bullish as long as it holds. The November trend line and January low mark a key support zone around 700. A break below the January low would reverse the uptrend. Notice that Google was underperforming prior to todays surge. The price relative hit a multi-month low on Tuesday and then surged back to its early January levels. Relative weakness prior to earnings suggests that Wall Street was not expecting this earnings beat. Now lets see if these gains hold.
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Chart 2
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Chart 3
Chart 3 shows IBM turning up last week and breaking resistance on Tuesday. The stock followed through with a big gap and break above the November-December highs. Like Google, IBM is already short-term overbought and the reward-to-risk ratio for new long positions is skewed. Also notice that IBM showed relative weakness as the price relative hit a multi-month low just last week. On a separate, but related note, traders should be careful with earnings-induced moves. Some pattern breaks will hold and some will fail. Chartists should expect extra volatility (risk) during earnings season.
METALS & MINING SPDR AND STEEL ETF REVERSE SHORT-TERM FALLS... The Metals & Mining SPDR (XME) and the Steel ETF (SLX) surged along with the rest of the market on January 2nd, but quickly peaked and fell back to fill their gaps. These two were already up sharply from mid November to late December and the surge on January 2nd simply aggravated overbought conditions. The subsequent pullbacks alleviated overbought conditions and bullish continuation patterns formed. With a bounce over the last few days, both ETFs broke short-term resistance to reverse their short-term downtrend. Note, however, that these breakouts are already under threat with weakness on Wednesday.
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Chart 4
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Chart 5
Chart 4 shows XME firming late last week and breaking flag resistance with Tuesdays surge above 46. A strong breakout should hold and XME is already showing cold feet. A move below 45 would negate this breakout. Last weeks low now marks key support. Chart 5 shows SLX breaking above its September high with a 10 point surge (41-51). Even though the breakout was bullish, SLX was quite overbought after a 25% move and ripe for a pullback or consolidation. A falling flag/wedge formed to alleviate overbought conditions and SLX broke resistance with a surge above 49 the last three days. SLX is also under pressure on Wednesday with 48.8 marking breakout support. A move below this level would negate the flag breakout. The flag/wedge low marks key support at 48.
10-YEAR TREASURY YIELD BACKS OFF RESISTANCE ... Stocks and the 10-year Treasury Yield ($TNX) were positively correlated for most of the last 18 months (since summer 2011). This means value changes tend to be in the same direction, even though the magnitude can vary. Chart 6 shows $TNX surging from the 15.50 area to the 19.50 area (1.55% to 1.95%) from mid November to early January. This move coincided with a strong advance in the S&P 500, which moved from 1350 to 1460 during this period. Most recently, these two started to diverge over the last two weeks. Notice that the 10-year Treasury Yield fell back below 18.50 as the S&P 500 extended its advance with a move above 1490. Something needs to give here. Either the S&P 500 pulls back or the 10-year Treasury Yield breaks out and joins the party. In other words, weakness in treasury yields could foreshadow weakness in the stock market. On the chart, notice that $TNX formed a falling flag for the third time in three months. A break above flag resistance would signal a continuation higher and solidify the bigger breakout at 19. Such a move would be bullish for stocks and bearish for treasuries, which move counter to yields. Chart 7 shows the 20+ Year T-Bond ETF (TLT) becoming oversold below 118 and bouncing back to the 120-121 area. So far this is just an oversold bounce and it would take a break above 121 to suggest otherwise.
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Chart 6
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Chart 7
RSI MOVES ABOVE 70 FOR THE S&P 500 AND DOW... As noted above, the S&P 500 surged on January 2nd and continued its advance the last 14 trading days. Chart 8 shows $SPX breaking above 1460 on January 2nd and closing above 1490 yesterday. It has been one heck of a year already. The indicator window shows RSI moving above 70 for the first time since mid September. Even though overbought RSI marked the mid September peak, there are plenty of prior examples when overbought RSI did not signal a peak. Note that RSI broke its downtrend with a move above the September trend line and above 50 in mid November. The RSI line continues to rise with the green trend line marking first support around 50. Frankly, I would consider momentum bullish as long as RSI holds the 40-50 zone. In fact, a pullback to this zone would alleviate overbought conditions and possibly set up an entry point to partake in the bigger uptrend. Turning back to the price chart, broken resistance and the early January lows combine to mark a support zone around 1460 (10 points). Chart 9 shows the Dow Industrials with similar characteristics.
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Chart 8
