DOW RECAPTURES 14000 WITH TWO-DAY SURGE -- MDY AND IWM AFFIRM MEDIUM-TERM SUPPORT LEVELS -- ITB AND XLY LEAD REBOUND BY ERASING MONDAYS PLUNGE -- TREASURIES RETREAT, BUT BREAKOUT HOLDS
DOW RECAPTURES 14000 WITH TWO-DAY SURGE... Link for todays video. After breaking below 13800 with a plunge on Monday, the Dow surged back above 14000 with a surge over the last two days. It has been a wild ride the last six trading days with the Dow moving over 100 points on five of these six days (two down and three up). Chart 1 shows the two day bounce reinforcing the support zone around 13800 and keeps the February consolidation alive, really alive. The dotted trend lines show a rising channel that I drew backwards. The upper trend line was drawn first and the lower trend line was then placed parallel from the November low. This lower trend line affirms support and defines the rate of ascent with its steepness.
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Chart 1
So much for Monday support break. Keep in mind that the Dow is a price-weighted average of 30 stocks. This means there are 30 stocks pushing and pulling the average in various directions. Exact support and resistance levels a little hard to pin down with some many variables. In other words, chartists should consider using zones. In addition, I would suggest using an indicator or two to confirm a trend change. This example shows RSI with the 40-50 zone acting as support in an uptrend. Notice how RSI bounced off this zone over the last two days. I would consider the medium-term uptrend reversed when the Dow breaks 13800 AND RSI breaks below 40. Chart 2 shows the Nasdaq 100 ETF (QQQ) getting yet another bounce off the 66-66.50 support zone. QQQ has been a dog in 2013, but support from the 2013 lows has yet to fold.
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Chart 2
MDY AND IWM AFFIRM MEDIUM-TERM SUPPORT LEVELS... The Dow has just 30 stocks, but the S&P Midcap SPDR (MDY) has 400 and the Russell 2000 ETF (IWM) has 2000. The same guidelines apply to support and resistance. Chartists should consider zones when dealing with averages, indices or ETFs with many components (stocks). In addition, chartists can use an indicator or two to confirm a trend change. Chart 2 shows IWM with the Raff Regression Channel extending from the mid November low to the mid February high. The lower trend line ends around 89 and support in this area is confirmed by the late January low. IWM plunged to this area on Monday, formed a doji on Tuesday and bounced on Wednesday. Even though this bounce is young, it reinforces support in the 89 area. The indicator window shows Aroon Up remaining above Aroon Down, which is also indicative of an uptrend. Look for IWM to break support and Aroon Down to cross above Aroon Up for a medium-term trend reversal. Chart 3 shows MDY bouncing off support in the 197.50 area.
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Chart 3
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Chart 4
ITB AND XLY LEAD REBOUND BY ERASING MONDAYS PLUNGE... The Home Construction iShares (ITB) and the Consumer Discretionary SPDR (XLY) got hit hard on Monday, but both led the recovery over the last two days and moved above Mondays highs. Housing is part of the consumer discretionary, as are retailers. Chart 4 shows ITB breaking below support on Monday and then surging back above 22.50 on Wednesday. Despite this strong recovery, I am not quite ready to put ITB back in the bullish camp. First, note that the broken support zone in the 22.5-22.7 area turns into a resistance zone. Second, notice that RSI broke below 40 last week and momentum turned bearish as well. I would like to see follow through above 23 in ITB and above 60 in RSI before turning bullish again.
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Chart 5
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Chart 6
Chart 5 shows XLY breaking below its February low with a close below 49.5 on Monday and then surging above 50.5 on Wednesday. The indicator window shows RSI bouncing off the 40-50 zone to keep momentum bullish. Based on a successful test for RSI, I would mark a support zone in the 49.3-49.8 area. A break below 49.3 in XLY and 40 in RSI would fully reverse the medium-term uptrend. An uptrend in XLY puts the Home Construction iShares at odds with the Consumer Discretionary SPDR. Time for a tiebreaker with the Retail SPDR (XRT). Chart 6 shows XRT breaking down on Monday and then surging back above 67 on Wednesday. The indicator window shows RSI bouncing off the 40-50 zone to keep momentum in the bullish camp. It looks like the medium-term uptrend remains intact with a support zone in the 65.5-66.2 area. RSI support is at 40.
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Chart 7
TREASURIES RETREAT, BUT BREAKOUT HOLDS... There are several parts to the risk-off trade. In general, the risk-off trade favors the Dollar and Treasury bonds, while the risk-on trade favors stocks, industrial commodities and the Euro. February saw a move towards risk off as industrial commodities, oil and the Euro broke down over the last two weeks. I am still concerned with these breakdowns. Treasuries and stocks had yet to confirm this move towards risk-off, but that changed as the 20+ Year T-Bond ETF (TLT) broke resistance and stocks plunged on Monday. Chart 7 shows TLT firming in the 116 area and then surging above 118 with a big move on Monday. This advance broke the December trend line and exceeded the early February highs. In short, an uptrend has started in TLT and this is negative for stocks, even though stocks are ignoring the Treasury market right now.
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Chart 8
The indicator window shows the Correlation Coefficient (TLT,SPY) in negative territory since late July. This means stocks and Treasuries move in opposite directions, like a seesaw. Notice how TLT advanced from mid September to mid November, a period that marked weakness in stocks. Also notice how TLT declined from mid November to early February, a period that marked strength in stocks. This weeks upside breakout in TLT should be considered bullish until proven otherwise. There was a resistance zone in the 117118 area and this turns into the first support zone to watch. A plunge back below 117 would negate the breakout in TLT and this would be positive for stocks. Chart 8 shows the 10-year Treasury Yield ($TNX) breaking back below 19 (1.9%) on Monday-Tuesday, but moving back above this level on Wednesday.
