EXTENDING THE RAFF REGRESSION CHANNELS FOR MDY AND IWM -- XLB BREAKS SUPPORT AND SHOWS RELATIVE WEAKNESS -- XME, COPX AND SLX WEIGH ON MATERIALS SECTOR -- COPPER ETN BREAKS WEDGE SUPPORT -- ITB FAILS TO CONFIRM NEW HIGH IN SPY
EXTENDING THE RAFF REGRESSION CHANNELS FOR MDY AND IWM... Link for todays video. Last week I featured the Russell 2000 ETF (IWM) and the S&P Midcap SPDR (MDY) with Raff Regression Channels. Both ETFs moved to new highs on Tuesday and this means the Raff Regression Channels need to be extended. I realize that this uptrend is getting boring because there has been nothing new to report in over a month. Moreover, some pundits are voicing frustration with the rally and its resilience (Art Cashin). A trend in motion stays in motion and nobody really knows how long or high it will extend. The best I can do is define key support and make adjustments if/when key support is broken. Turning back to the charts, the channels start at the November low and end at the highest close of the move, which was Tuesday (so far). A close above Tuesdays high would require another extension of the Raff Regression Channel. The middle line is a linear regression and the furthest high or low sets the channel width. Chart 1 shows the lower trend line marking support just below 89 for IWM. Also notice that the consolidation from late January to early February confirms support here. A break below this support level would argue for a reversal of the medium-term uptrend. The indicator window shows Aroon Up remaining at 100 and firmly bullish. A downtrend is pretty much impossible as long as Aroon Up (green) is above Aroon Down (red).
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Chart 1
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Chart 2
XLB BREAKS SUPPORT AND SHOWS RELATIVE WEAKNESS... Despite strong uptrends in the major index ETFs, there are some pockets of weakness within the stock market. First, note that the Retail SPDR (XRT), the FirstTrust Internet ETF (FDN) and the MarketVectors Semiconductor ETF (SMH) all recorded new 52-week highs this week. It is clearly positive to see these three groups showing upside leadership. On the other side of the table, the Materials SPDR (XLB) is showing relative weakness and broke support this week. Chart 3 shows XLB falling in late January, consolidating the first two weeks of February and then breaking support on Wednesday. This breakdown targets a move to the next support zone in the 37.5 area. The pink line is the price relative, which measures relative performing by plotting a ratio chart (XLB:SPY). This ratio peaked in early January and plunged over the last few days. XLB shows some serious relative weakness. The indicator window shows the MACD-Histogram turning negative in late January and remaining negative.
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Chart 3
METALS-MINERS, COPPER MINERS AND STEEL ETFS WEIGH ON MATERIALS SECTOR... Weakness in the materials sector can be traced back to several industry groups within the sector. Chart 4 shows the Copper Miners ETF (COPX) consolidating into early February and then breaking down the last few days. COPX broke flag support and the two trend lines. The price relative has been moving lower since the second week of January. Chart 5 shows the Metals and Mining ETF (XME) breaking flag support with a sharp decline the last two days. Also notice that the price relative broke to a new low for the year. Chart 6 shows the Steel ETF (SLX) breaking triangle support with a move below 48 today. The price relative has been trending lower since the first week of January.
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Chart 4
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Chart 5
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Chart 6
COPPER ETN BREAKS WEDGE SUPPORT... Weakness in the materials sector can also be tied to the recent decline in industrial metals, namely copper. Chart 7 shows the Copper ETF (JJC) rising from mid November to early February. Stocks also rose during this period. Even though the S&P 500 exceeded its September high, JJC and Spot Copper ($COPPER) did not make it back to their September highs. JJC formed a lower high with a rising wedge and broke wedge support with a sharp decline the last two days. Copper is a volatile commodity that has been driven by news the last few days. In particular, weak demand out of China is getting the blame this week. While we can never know the exact reason for selling pressure, keep in mind that copper and the S&P 500 are positively correlated for the most part. This means they tend to move in the same direction. Weakness in copper could foreshadow a much needed correction in the stock market. Chart 8 shows the Base Metals Fund (DBB) also falling sharply the last two days.
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Chart 7
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Chart 8
ITB FAILS TO CONFIRM NEW HIGH IN SPY... The Home Construction iShares (ITB) is getting slammed today after a report showed a decline in housing starts for January. Housing stocks have been on fire since October 2011. Chart 9 shows ITB advancing from 9 to 24 over the last 17 months. There were a few consolidations and some minor pullbacks along the way, but the ETF did not experience a serious correction. There is a big consolidation around 20 that marks the first support zone to watch on a pullback. Chart 10 shows candlesticks over the last six months for some detail. Notice that ITB failed to take out its late January high and moved sharply lower the last two days. A break below the early February high would set the corrective wheels in motion. The price relative formed a lower high as well over the last few weeks and ITB is starting to show some relative weakness.
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Chart 9
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Chart 10
SURGING DOLLAR COULD WEIGH ON STOCKS... The Dollar Bullish ETF (UUP) has been on a tear this month and strength in the greenback could weigh on an overbought stock market. Chart 11 shows the Dollar Bullish ETF failing to hold its support break at the end of January and then surging above 22 this month. The bear trap, strong surge and breakout at 21.90 are bullish. The indicator window shows that SPY and UUP were positively correlated until late January. Notice how both rose and fell together from September to January. Things are changing because both have been rising this month and something may need to give. Either stocks correct or the Dollar gives up its gains.
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Chart 11
COMMODITIES UNDER PRESSURE FROM SURGING DOLLAR... A surging greenback could also be taking its toll on commodities, which are usually negatively correlated with the Dollar. Gold plunged this month, copper broke down this week and oil is also breaking support. Chart 12 shows the US Oil Fund (USO) advancing from mid December to late January and then stalling for a few weeks. USO established a clear support level with the early February lows and broke this support level with a sharp decline on Wednesday. It looks like a lower high formed in the 35.50 area and this breakdown could signal a continuation of the September-November decline. Broken resistance in the 33 area marks the first support zone to watch. With oil breaking down, the Energy SPDR (XLE) and the Oil & Gas Equipment & Services SPDR (XES) could be vulnerable to corrections. Both are up sharply since mid November and in need of a correction or consolidation.
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Chart 12
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Chart 13
