USING FIBONACCI RETRACEMENTS AND BROKEN RESISTANCE FOR SUPPORT FOR $SPX AND $INDU -- US STEEL LEADS STEEL ETF HIGHER -- SHANGHAI COMPOSITE JOINS THE OVERBOUGHT PARADE -- BOLLINGER BAND WIDTH HITS HISTORIC LOW FOR QQQ -- WATCHING THE TOP TEN STOCKS IN QQQ
USING FIBONACCI RETRACEMENTS AND BROKEN RESISTANCE TO SET SUPPORT... Link for todays video. With the S&P 500 trading near a 52-week high and in a clear uptrend, trend followers would prefer long positions over short positions. However, the S&P 500 is up over 7% since December 31st and up over 11% since mid November. The advance since December 31st is pretty much straight up. Since moving above 1500 on January 25th, the index stalled for a few days and volatility picked up over the last three days. Notice that the index moved 1% or more on Friday (up), Monday (down) and Tuesday (up). It is certainly possible that this uptrend extends, but the reward-to-risk ratio is questionable because the index is ripe for a pullback or a consolidation. The prudent play would be the wait for a pullback or a bullish continuation pattern to evolve. Bullish continuation patterns include falling flags, falling wedges, flat flags, rectangles or triangles. Traders looking to mark support zones can use the Fibonacci Retracements Tool and broken resistance levels.
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Chart 1
Chart 1 shows the S&P 500 with broken resistance turning into a support zone in the 1450-1470 area. There are two advances on this chart: one from mid November and one from December 31st. Chartists can apply the Fibonacci Retracements Tool to both advances and look for a Fibonacci cluster to mark potential support. A 38.2% retracement of the November-February advance would extend to the 1450 area. A 50% retracement of the December-February advance would extend to the 1457 area. This means the Fibonacci support zone is in the 1450-1457 area, which is at the low end of the yellow support zone. The indicator window shows RSI becoming overbought in late January and turning lower the past week. The 40-50 zone marks RSI support in an uptrend and a pullback to this area should put traders on alert for a bounce. Chart 2 shows the Dow Industrials with two potential support zones.
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Chart 2
US STEEL LEADS STEEL ETF HIGHER... Strength in US Steel (X) is helping the Steel ETF (SLX) to a modest bounce on Wednesday. Chart 3 shows SLX moving lower the first half of January and then firming the last few weeks. Todays bounce, while promising, is not enough to reverse the 2013 slide though. It is possible that a pennant is taking shape the last two weeks and a break below pennant support would signal a continuation lower. This would target a move to broken resistance in the 46 area. Should the ETF hold support just above 48, I would look for a break above 50 to signal renewed strength. The indicator window shows the price relative moving lower since early January. A break above .33 is needed to signal relative strength in SLX again.
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Chart 3
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Chart 4
Chart 4 shows US Steel surging around 2%. The stock broke resistance in mid December and then pulled back to this breakout zone in late January. Also notice that the stock retraced 61.80% of the prior advance. After an indecisive doji on Tuesday, US Steel surged above 23 on Wednesday, but fell back below 23 as selling pressure hit. A short-term resistance level resides at 23.5 now and a move above this level is needed to produce a breakout.
SHANGHAI COMPOSITE JOINS THE OVERBOUGHT PARADE... There are two areas to watch when it comes to steel demand: China and automobiles. Chart 5 shows the Shanghai Composite ($SSEC) surging over 20% since early December. The index broke resistance at 2150 in mid December and never looked back. RSI broke above 60 for the first time since May. This move could signal a rebound in the Chinese economy, which in turn could spur demand for steel. Note that the index is short-term overbought and ripe for some sort of pullback. The yellow zone marks first support in the 2300 area and RSI support is set in the 40-50 zone.
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Chart 5
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Chart 6
Chart 6 shows the DJ US Automobiles Index ($DJUSAU) making a massive move from mid November to mid January. In fact, the move really started with the early August low. Led by Ford and GM, this index represents one of the best performing groups over the last six months. Such strength would suggest that auto demand is strong and this could influence demand for steel. You can find a list of stocks in this index by using the Sector Summary(S&P Sectors Consumer Discretionary Sector Automobiles).
BOLLINGER BAND WIDTH HITS HISTORIC LOW FOR QQQ... The Nasdaq 100 ETF (QQQ) was on the verge of an upside breakout on Friday, but failed and moved sharply lower on Monday. Chart 7 shows QQQ recovering on Tuesday and bouncing off the 66.50 area. This move further affirms support in the 66-66.50 area. The analysis is pretty much unchanged since mid January. The trend since mid November is up and QQQ is stuck in a extended consolidation pattern, which is a rare event. In fact, Bandwidth is at its lowest level since QQQ started trading (late 1998). The BandWidth indicator measures the percentage difference between the upper and lower Bollinger bands ((upper band lower band)/middle band). This difference is now less than 2%. This volatility contraction suggests that we may be on the verge of a volatility expansion. The narrowing bands, however, do not provide us with a directional bias. At this point, traders need to watch the consolidation boundaries for the first directional clue. A break above the January high would be bullish and signal a continuation of the bigger uptrend. Conversely, a break below 66 would be short-term bearish and reverse the medium-term utprend as well.
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Chart 7
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Chart 8
WATCHING THE TOP TEN STOCKS IN QQQ - AAPL, GOOG, ORCL, MSFT, INTC... The CandleGlance feature at StockCharts.com is a great way to monitor a small group of stocks. As shown in the QQQ chart above, the top ten stocks account for over 50% of the ETF. Chartists can follow all ten CandleGlance charts on one page by entering the symbols in the CandleGlance box on the FreeCharts page. (AAPL,MSFT,GOOG,ORCL,AMZN,QCOM,CSCO,INTC,CMCSA,EBAY). Looking at the top four may even give one an edge on the Qs. Notice that Apple is trying to breakout in the low 460s. Microsoft is moving lower the last six days and needs to break 28.1 to reverse this slide. Google is strong and remains near its all time high. Oracle was hit on Monday and did not bounce much on Tuesday. A break below 35 would be short-term bearish for this stocks. Also of note, Intel looks quite weak because it never recovered after its mid January gap. A bear flag may be forming the last few weeks and a breakdown here could weigh on QQQ.
