INTERMARKET ENVIRONMENT REMAINS POSITIVE FOR STOCKS -- S&P 500 BECOMES OVERBOUGHT ON DAILY CHART -- S&P 500, HOWEVER, IS NOT YET OVERBOUGHT ON WEEKLY CHART -- MATERIALS SECTOR WEIGHS ON BROADER MARKET -- COPPER FORMS LARGE TRIANGLE AND DECLINES IN JANUARY
INTERMARKET ENVIRONMENT REMAINS POSITIVE FOR STOCKS... Link for todays video. The PerfChart below shows the performance for six intermarket ETFs since mid November, which is when the stock market bottomed. Notice that the S&P 500 ETF (SPY), the US Oil Fund (USO) and the Euro Currency Trust (FXE) are up comfortably, while the US Dollar Fund (UUP), Gold SPDR (GLD) and 20+ Year T-Bond ETF (TLT) are down. Money moved from relative safe havens (Dollar, Treasuries) into riskier assets (Euro, Stocks) over this period. Strength in stocks and weakness in the Dollar buoyed oil as it moved higher the last seven weeks. Gold is the odd asset because it failed to take advantage of Dollar weakness and stopped acting like a risk asset. Even though the uptrend in stocks is looking overextended, the overall environment remains positive and chartists should watch Treasuries for clues. Continued weakness in Treasuries would be bullish for stocks. Money moving out of Treasuries often finds its way into the stock market. On the economic front, rising interest rates would signal more confidence in the economy, which would also be positive for stocks. It will be a big week for stocks, Treasuries and the Dollar because the economic docket is full, the Fed meets on Wednesday, earnings season remains in full swing and the employment report is on Friday.
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Chart 1
S&P 500 BECOMES OVERBOUGHT ON DAILY CHART... Overbought is relative. Many indicators may be overbought on the intraday and daily charts, but these same indicators have yet to reach overbought levels on the weekly and monthly charts. Chart 2 shows S&P 500 up over 10% from its November lows and 14-period RSI on the daily chart above 70 for the first time since September. Also notice that RSI moved from oversold levels in mid November to overbought levels in late January. Everybody knows the market is overbought and ripe for a correction, including yours truly. However, the market is not listening and could become even more overbought. Before looking at a weekly chart, note that broken resistance and the early January consolidation mark a support zone in the 1460 area. This is the first zone to watch should the S&P 500 pullback from current levels. RSI often trades in the 40 to 80 zone during an uptrend. Traders looking for momentum support can wait for RSI to pull back to the 40-50 zone, as it did in late December. While I do not know where there will be a pullback, there will be a pullback at some point and chartists can use these techniques to measure potential support/reversal zones on any chart.
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Chart 2
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Chart 3
Chart 3 shows the Russell 2000 ($RUT) surging over 17% since mid November. The index is leading the S&P 500 in more ways than one. First, the rate-of-change since November is greater. Second, the index recorded a 52-week high on 2-Jan, which was before the S&P 500. As with the S&P 500, the index is also quite overbought. However, notice that RSI moved above 70 on 2-Jan and has been above 70 most of this year. This is a classic case of becoming overbought and remaining overbought. Broken resistances levels can be used to mark the first support zone in the 860 area. RSI support will be set in the 40-50 zone.
S&P 500, HOWEVER, IS NOT YET OVERBOUGHT ON WEEKLY CHART... Chart 4 shows weekly bars for the S&P 500 since October 2009. There is nothing but uptrend on this chart as the index closed above 1500 for the first time since December 2007. There are two items to point out. First, notice that weekly RSI has yet to reach overbought territory. The last overbought readings occurred in January-February 2011 and the index then moved into a trading range from March to July 2011. Second, the index is up around 7% the last four weeks and this January start is one of the best on record. The S&P 500 also got off to a good start in January 2011 and this advance extended another two months. The long awaited pullback did not materialize until April-May. These two items suggest that the advance may have further to go. Upside momentum, however, is unlikely to be as strong as that seen the last four weeks. Chart 5 shows the Russell 2000 with a big breakout to start the year and broken resistance turning into support.
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Chart 4
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Chart 5
MATERIALS SECTOR WEIGHS ON BROADER MARKET... Friday I wrote about relative weakness in a number of industry group ETFs that were related to the materials sector. Many of these ETFs are leading the market lower early Monday. The Metals & Mining SPDR (XME), Silver Miners ETF (SIL) and Steel ETF (SLX) are down over 1%. Weakness in these areas is weighing on the Basic Materials SPDR (XLB), which is the weakest sector on Monday. Chart 6 shows XLB stalling around 39.5 last week and then moving below last weeks low early Monday. There were only four days (candlesticks) last week. Overall, XLB was quite overbought in the 39.5 area and ripe for a correction after a 15% surge since mid November. Broken resistance marks a potential support zone in the 37.5-38 area. The indicator window shows the MACD-Histogram turning negative for the first time since mid November. This means MACD moved below its signal line and momentum is turning down.
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Chart 6
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Chart 7
Chart 7 shows the Coal Vectors ETF (KOL) failing to hold its early January breakout and falling sharply the last four days. KOL is now down for the year (2013) and showing relative weakness since the second week of January. This decline could turn out to be a falling flag, but we have yet to see a bounce to form a second low and a flag breakout is needed to reverse the fall.
COPPER FORMS LARGE TRIANGLE WITH JANUARY WEAKNESS ... Even though the materials performed well in January, copper and base metals did not move higher and this should be a concern for the bulls. Chart 8 shows Spot Copper ($COPPER) forming a triangle since early 2012. Copper surged along with the stock market in November and late December, but did not move higher in January and failed to break out. An upside breakout would be bullish for copper and for the stock market overall. Failure to breakout and a move below support at 3.50 would be bearish.
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Chart 8
The indicator window shows the Correlation Coefficient spending most of its time in positive territory. This means weekly price changes in copper and the S&P 500 are usually in the same direction. The magnitude of the price changes, however, can differ. The magnitude issue explains why copper is severely underperforming the S&P 500, but the Correlation Coefficient remains positive. A positive relationship between these two makes sense. The stock market performs well when the economy grows and demand for copper increases when the economy grows. Chart 9 shows the Copper ETF (JJC) for reference.
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Chart 9
BASE METALS ETF DECLINES WITH FALLING FLAG... Chart 10 shows the Base Metals ETF (DBB) surging in September and then consolidating the last four months. A triangle is also taking shape on the weekly chart. Chartists should watch these boundaries for the next long-term signal. Medium-term, DBB is forming a falling flag on the daily chart. Chart 11 shows DBB working its way lower since mid December. I am ignoring the early January spike because it did not last long and the ETF settled right back into its pattern. A move above 19.30 would break flag resistance and signal a continuation higher. Such a move would be positive for base metals. Note that DBB consists of only three metals: aluminum, copper and zinc. These three also form relatively equal parts (about a 1/3). There is an ETN for aluminum, but it is very thinly traded. We have yet to see any ETNs for zinc.
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Chart 10
