CONSUMER DISCRETIONARY SPDR STARTS TO UNDERPERFORM -- AUTO INDEX NEARS FIRST RETRACEMENT -- TREASURY YIELDS HOLD THE KEY TO THE STOCK MARKET -- GOLD NEARS SUPPORT FROM LONG-TERM TRADING RANGE -- SOYBEANS INDEX FORMS BULLISH REVERSAL PATTERN
CONSUMER DISCRETIONARY SPDR STARTS TO UNDERPERFORM... Link for todays video. The Consumer Discretionary SPDR (XLY) is perhaps the most important of the nine sectors SPDRs because it is closely tied to the economy. Note that the housing, retail, restaurant and automobile industries are part of the consumer discretionary sector. Chartists should keep close tabs on this sector for clues on the broader market. Chart 1 shows XLY starting to falter with a sharp decline this week and test of the early February low. A break below support would reverse the three month uptrend and call for a retracement of the prior advance. Broken resistance and the 50% retracement mark support in the 47.5-48 area. The indicator window shows the price relative breaking below the trend line extending up from the August low. The price relative measures relative performance with a ratio chart (XLY:SPY). Notice that the ratio peaked in late January and XLY has underperformed the market for around four weeks now. Relative weakness in this key sector increases the chances for a correction in the broader market.
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Chart 1
AUTO INDEX NEARS FIRST RETRACEMENT... As part of the consumer discretionary sector, the DJ Automobile Index ($DJUSAU) represents an industry group that is dependent on the economy and consumer spending. Like housing, this industry can be a leading indicator for the stock market. Chart 2 shows the index holding up quite well from mid October to mid November, which is when the S&P 500 declined. This relative strength foreshadowed a big move from mid November to mid January. Stocks overall also performed well from mid November to mid January. The index then peaked in mid January, a few weeks ahead of the S&P 500, and declined with a falling channel the last six weeks. In the indicator window, also notice that the price relative peaked in mid January and moved lower. These downtrends are negative for the index and undermine the market overall. There may be some support near the lower trend line and 38% retracement, but we have yet to see a decent bounce to confirm support here. Barring a bounce, the next support zone resides in the low 140s. Support here stems from the 50% retracement and broken resistance. Chart 3 shows the FirstTrust Global Auto Fund (CARZ) for reference.
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Chart 2
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Chart 3
TREASURY YIELDS HOLD THE KEY TO THE STOCK MARKET... The markets took a couple steps towards risk-off this week, but have yet to take the final step. A surge in the Dollar and plunge in oil shook up the intermarket picture and suggest that the appetite for risk may be changing. Risk was clearly on in December and January as the Dollar and Treasuries moved lower, while oil, stocks and the 10-year Treasury Yield moved higher. Even though the Dollar and oil have moved to risk-off mode, Treasury bonds have yet to breakout and signal a complete return to risk aversion. As the ultimate risk-aversion asset, chartists should watch Treasuries for clues on the stock market. Before looking at a Treasury bond ETF, lets first look at the chart for the 10-year Treasury Yield ($TNX). Remember, Treasury yields rise when Treasury bonds decline and visa versa. Chart 4 shows the 10-year Treasury Yield forming a higher low in November and breaking out in late December. The trend since July is up and this is positive for stocks. Notice that stocks and Treasury yields are positively correlated, which means than move in the same direction. $TNX broke out at 19 and this breakout held throughout February. No problems so far. A move back below 19 would negate the breakout and point to lower yields, which would be negative for stocks. Chart 5 shows the 7-10 YR Treasury Bond ETF (IEF) consolidating the last four weeks with resistance at 106.50. An upside breakout would signal a successful support test and reverse the downswing that began with the December support break.
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Chart 4
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Chart 5
GOLD NEARS SUPPORT FROM LONG-TERM TRADING RANGE... Gold formed a large trading range the last eighteen months and moved to the low end of this range recently. Chart 6 shows Spot Gold ($GOLD) with weekly bars over the last two years. After hitting a multi-year high in August 2011, gold fell sharply in September 2011 and then embarked on an extended trading range. Support is in the 1530-1550 area and resistance is in the 1800 area. Gold bounced off this zone twice in 2011 and once in 2012. With a low at 1554 this week, the yellow metal is poised for a test in 2013. The indicator window shows 10-week RSI becoming oversold (below 30) for the first time since 2008. Even though this oversold reading may foreshadow a bounce, it does not necessarily mean the end of the downswing. RSI moved below 30 in August 2008 and gold did not bottom until October 2008, which was two months and 100 points later. Gold experienced some serious technical damage over the last few weeks and it will take some time to heal. Chart 7 shows the Gold SDPR (GLD) falling off a cliff the last two weeks and broken support turning into resistance around 158-160.
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Chart 6
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Chart 7
SOYBEANS INDEX FORMS BULLISH REVERSAL PATTERN... Agriculture commodities have been moving lower the last few months, but soybeans firmed and an inverse head-and-shoulders reversal may be forming. The US is the worlds largest producer of soybeans with some 90 million metric tons in 2010. Brazil and Argentina are next and these two countries produced around 120 million metric tons in 2010. Chart 8 shows the Dow Jones-UBS Soybeans Subindex ($DJASY) moving lower from September to early January. After a surge in the second half of January, the index dipped and formed a higher low in February. Overall, it looks like an inverse head-and-shoulders is taking shape with neckline resistance at 238. A breakout would complete the pattern and target a move to the 270 area. The indicator window shows the index relative to the PowerShares Agriculture Fund (DBA). DBA has been quite weak because corn and wheat recorded multi-month lows this week. Soybeans are holding up much better and outperforming DBA. Chart 9 shows the Teucrium Soybean Fund (SOYB) with a similar pattern and MACD turning up over the last few days. Careful, this is a thinly traded ETF.
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Chart 8
