SMALL-CAPS LEAD PULLBACK AFTER FED STATEMENT -- SPY FORMS HARAMI TO SIGNAL INDECISION -- QQQ AND XLK HOLD SUPPORT AFTER APPLE DEBACLE -- RATES AT THE SHORT END ARE ALSO TURNING UP
SMALL-CAPS LEAD PULLBACK AFTER FED STATEMENT... Link for todays video. The Fed has come and gone without much fanfare or policy change. Stocks were treading water leading into the statement and then sold off afterwards. Selling was not that intense and I would not read too much into this sell off because stocks were quite overbought after big runs. Small-caps led the decline with the Russell 2000 ETF (IWM) falling over 1%. Chart 1 shows IWM surging from 82 to 90 in just five weeks (10%). Since mid November (11-12 weeks), IWM is up over 18%. These are huge moves that justify a corrective period. IWM moved to 90 last week and then stalled for three days. The ETF fell back on Wednesday to close below 89. It is a challenge to mark support levels after a sharp advance. Taking an educated guess, I would suggest that the 87 area turns into support. This zone captures the first two weeks of trading this year. Notice how IWM consolidated after the gap. In addition, I think it is important that this gap holds. A move into the gap zone would challenge the validity of this gap.
(click to view a live version of this chart)
Chart 1
SPY FORMS HARAMI TO SIGNAL INDECISION... Chart 2 shows the S&P 500 ETF (SPY) forming a harami over the last two days. These are bearish candlestick reversal patterns that require confirmation with further downside. Notice that the first candlestick is long and hollow. The body of the second candlestick is inside the body of the first. Harami represent indecision, which is the first step to a directional change. Broken resistance and the early January consolidation mark the first support zone in the 145-146 area. RSI support is set in the 40-50 zone. Before getting too bearish, note that we have the employment report on Friday and it is also the first day of the month, which has a positive bias over the last few years. Fund inflows accumulate during the month and fund managers put this money to work the first few days of the new month.
(click to view a live version of this chart)
Chart 2
QQQ AND XLK HOLD SUPPORT AFTER APPLE DEBACLE ... The Nasdaq 100 ETF (QQQ) and the Technology SPDR (XLK) plunged last week after the market reacted negatively to Apples earnings report. Note that Apple accounts for around 13.66% of QQQ and 15% of XLK. It is by far the biggest holding in these ETFs. Despite last weeks plunge, chart 3 show QQQ firming last Wednesday and edging higher the last few days. The January lows are holding and QQQ is on the verge of filling last weeks gap. Not bad considering. Using the January lows and a small buffer, I would mark key support at 66. Even though QQQ is lagging the broader market this year, the trend remains up since mid November. Also note that the mid November trend line marks support around 65.5 today and this support level extends to the 66 area next week. The indicator window shows the Coppock Curve holding in positive territory this year. A move below the late December low would turn this oscillator bearish. The Coppock Curve is a 10-period weighted moving average of the 14-period Rate-of-change plus the 10-period rate-of-change. You can read more on this unique momentum oscillator in our ChartSchool
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
Chart 4 shows XLK with a similar setup at work. The ETF plunged back to support with the Apple reaction last week and then firmed for a few days. XLK is currently trying to get a bounce off support in the 29-29.5 area. The wedge trend line and January lows mark support here. Despite last weeks island reversal, which is short-term bearish, the bulls still have a medium-term edge because the wedge is rising. The indicator window shows the Aroon Oscillator holding in positive territory this year. A move below the late December low would signal a bearish shift in momentum.
RATES AT THE SHORT END ARE ALSO TURNING UP... With big moves over the last few weeks, Treasury yields across the board are breaking resistance levels and reversing long-term downtrends. Last week I wrote about the 10-year Treasury Yield ($TNX) breaking out and this benchmark cleared above 2% for the first time since April 2011. This is positive for stocks because rising yields suggest that bond traders are positioning for a growing economy. Personally, I am taking todays report of a contraction in fourth quarter GDP with a grain of salt because this quarterly report lags more than monthly data and is subject to revisions. Most monthly metrics show an improving economy and job situation. Moreover, notice that Treasury yields also ignored todays GDP report and moved higher. This means Treasury bonds are moving lower (yields and bonds move in opposite directions). In another telling sign, yields at the front end of the curve are starting to breakout as well. Chart 5 shows the 5-year Note Yield ($FVX) breaking above its August-October highs. $GVX hit .90% for the first time since April 2012 and the next resistance zone is around 1.2% (12 on the chart). Chart 6 shows the 2-Year Treasury Yield ($UST2Y) bouncing along the .20% area for over a year and breaking triangle resistance. A rise at the short end of the curve is the clearest indication that a strengthening economy may force the Feds hand. Bond traders will be watching Fridays employment report closely because the Fed tied its policy to the unemployment rate.
(click to view a live version of this chart)
Chart 5
