USING RAFF AND AROON TO DEFINE THE UPTRENDS IN MDY AND IWM -- XLI, XLY AND XLF RECORD FRESH NEW HIGHS -- BASIC MATERIALS SPDR STILL SHOWS RELATIVE WEAKNESS -- NOOSE TIGHTENS FOR CONSOLIDATION IN THE STEEL ETF
USING RAFF AND AROON TO DEFINE THE UPTRENDS IN MDY AND IWM... Link for todays video. The trend is your friend until the end. While I cannot tell you when these uptrends will end, I can offer a technical approach to define the trend and marking key support. It is sometimes a challenge to mark key support in persistent uptrends, such as the current uptrend that started in mid November. Without a key low for support, I often using the Raff Regression Channel to mark key support and the Aroon indicators to confirm a trend change. Keep in mind that the signals are not perfect and there will be whipsaws (bad signals). Also note that trend identification systems are usually lagging in nature. This means the signals will occur after a move. The success of failure of the signals depends on the length and duration of the subsequent move (new trend).
Chart 1 shows the Russell 2000 ETF (IWM) with this indicator pair. In a downtrend, the Raff Regression Channel extends from the high at the beginning to the lowest point of the move. This was the case from mid September to mid November. The upper line and the early November high combined to mark resistance in the 82 area. IWM broke this resistance zone in mid December. Also notice that Aroon up crossed above Aroon down in early December. Currently, the Raff Regression Channel extends from the mid November low to todays high and marks support in the 88-89 area (lower line and late January low). Aroon up is well above Aroon down and nowhere near a cross. A pullback to the 88-89 zone may offer support and a chance to partake in the uptrend. A break below 88 and a bearish Aroon cross would suggest that the uptrend has reversed. Chart 2 shows the S&P MidCap 400 SPDR (MDY) with similar characteristics.
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Chart 1
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Chart 2
XLI, XLY AND XLF RECORD FRESH NEW HIGHS... It is hard to argue with fresh 52-week highs in three of the four offensive sectors. The Industrials SPDR (XLI), Consumer Discretionary SPDR (XLY) and Finance SPDR (XLF) all recorded new 52-week highs on this week. Weakness in a few large-cap tech stocks held the Technology SPDR (XLK) back over the last few months, but the Nasdaq 100 Equal-Weight ETF (QQEW) did hit a new high recently. Even though these new highs and extended moves point to overbought conditions, dont forget that new highs occur in uptrends and new highs are a sign of strength, not weakness. There will be a pullback or correction at some point, but any weakness would be deemed a correction within a bigger uptrend. Chart 3 shows XLY holding support around 50 and moving above its late January high this week. The price relative is also starting to turn up. Chart 4 shows XLF gapping above 16.6 on January 2nd and consistently working its way higher the last six weeks. The price relative hit a new high this week as XLF continues to lead the market. Chart 5 shows XLI bouncing off the 40 area and moving above 41 this week.
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Chart 3
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Chart 4
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Chart 5
BASIC MATERIALS SPDR STILL SHOWS RELATIVE WEAKNESS ... Comparing relative highs is one way to measure relative performance. The five ETFs shown above represent the leaders because they exceeded their late January highs. In contrast, ETFs and stocks still trading below their late January highs show relative weakness. Chart 6 shows the Basic Materials SPDR (XLB) remaining below its late January high and showing relative weakness the last few weeks. Nevertheless, the overall trend since mid November is still up with the early February lows marking key support. XLB bounced of the 39 area twice to establish support. A break below this early February lower would reverse the three month uptrend and call for a retracement of the current advance. The indicator window shows the MACD-Histogram turning negative in late January and remaining negative. This means that MACD is below its signal line and moving lower.
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Chart 6
NOOSE TIGHTENS FOR CONSOLIDATION IN THE STEEL ETF ... Recent relative weakness in the materials can be attributed to several industry groups within the sector: coal, copper miners, mining & metals, gold miners and steel. In particular, my eyes remain on the Metals & Mining SPDR (XME) and Steel ETF (SLX). Chart 7 shows XME breaking down in late January and then hitting resistance near 45 over the last three weeks. A break above this level is needed to put XME back on the bullish track. The indicator window shows the price relative moving lower since early January.
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Chart 7
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Chart 8
Chart 8 shows the Steel ETF (SLX) with a narrowing consolidation that started in mid January. The ETF filled the 2-Jan gap with a decline below 49 and then formed a triangle. The noose is clearly tightening and traders should watch for the directional break. A move above the February high would be bullish, while a move below the January low would be bearish. The indicator window shows the price relative moving lower in January and then flattening. A break above .33 is needed to signal a return to relative strength.
DOWNTREND IN TREASURIES REMAINS BULLISH FOR STOCKS... Treasury bonds moved lower on Wednesday and this pushed Treasury yields higher. Todays retail sales report was rather subdued so I do not think the bond market was reacting to this number. Perhaps bond traders are looking ahead to the day when the Fed ends its asset purchase program. Whatever the reason, chart 9 shows the 20+ Year T-Bond ETF (TLT) moving below 116 and testing the early February low. The trend has been down since the rising wedge break in mid December. The December trend line and February highs mark resistance at 118. The downtrend is clearly in force as long as this level holds. Weakness in TLT is bullish for stocks because these two are negatively correlated. Notice that the Correlation Coefficient (TLT, SPY) spent most of the last eight months in negative territory. Money moving out of safe-haven Treasuries is finding its way into riskier assets, like stocks.
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Chart 9
10-YEAR TREASURY YIELD EXCEEDS 2%... Treasury bonds and Treasury yields move in opposite directions. Even though rising interest rates could ultimately hurt the economy and stock market, the S&P 500 and the 10-year Treasury Yield ($TNX) are positively correlated at this time. Chart 10 shows $TNX breaking above the April 2011 trend line and then moving above its August 2012 highs. These bullish breakouts target a move to the next resistance in the 24 area (2.4% yield). Needless to say, a rise to 2.4% in the 10-year Treasury Yield means Treasury prices would move significantly lower. I would set support at 18 (1.80%). $TNX remains in an uptrend until there is a break below this level.
