AROON INDICATORS TURN BEARISH FOR IWM AND MDY -- HOME CONSTRUCTION ETF BATTLES KEY RETRACEMENTS -- RETAIL SPDR FORMS WEDGE AFTER SUPPORT BOUNCE -- SHANGHAI COMPOSITE TUMBLES OVER 3.5% -- STEEL, COPPER MINERS AND COAL ETFS GET SLAMMED AGAIN
AROON INDICATORS TURN BEARISH FOR IWM AND MDY... Link for todays video. Despite concerns that stocks are ripe for a correction, we have yet to see medium-term support breaks that would signal the start of these corrections. We are, however, starting to see some momentum indicators turn and short-term bearish continuation patterns are taking shape in some key ETFs. I noted in Fridays commentary that the Commodity Channel Index (CCI) for the S&P 500 ETF (SPY) triggered a bearish signal. Today we are seeing bearish signals from the Aroon indicators for the Russell 2000 ETF (IWM) and S&P Midcap SPDR (MDY). Standard disclaimers apply (i.e. bad signals are always possible). Chart 1 shows IWM within an uptrend and key support marked in the 89 area. The lower trend line of the Raff Regression Channel and the late February low confirm support here. After a sharp decline toward the end of February, IWM bounced over the last five days. This small advance could be a rising flag, which is a bearish continuation pattern. A break below Fridays low would signal a continuation lower and increase the chances of a break below the late February low, which would be medium-term bearish. We cannot fully discount the bulls as long as medium-term supports hold. A break above Fridays high could trigger an acceleration higher as we head into the employment report.
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Chart 1
The indicator window shows Aroon (Down) moving above Aroon (Up) for the first time since November. Aroon means dawns early light in Sanskrit. Tushar Chande, creator of the indicator, used Aroon to signal the beginning of a new trend in three stages. A downtrend emerges when Aroon (Down) crosses above Aroon (Up), exceeds 50 and then hits 100, which is the maximum. Two of the three stages are now complete. You can read more about Aroon in our ChartSchool. Chart 2 shows the S&P Midcap SPDR (MDY) with a pennant forming and Aroon Down surging to 100.
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Chart 2
HOME CONSTRUCTION ETF BATTLES KEY RETRACEMENTS... Even though the major index ETFs are ripe for a correction and there are several pockets of concern in the market, it is hard to imagine a correction as long as housing and retail stocks remain strong. Chart 2 shows the Home Construction iShares (ITB) breaking down on 20-Feb and then bouncing back above 22.5. The resilience of housing is impressive, but there is a resistance zone in the 22.5-22.8 area. Notice that this zone marks a 50-62% retracement of the prior decline. Also notice that RSI broke down on 20-Feb and rebounded to its resistance zone (50-60). If the mid February breakout was indeed bearish, then I would expect ITB to fail in this zone. How will we know? Notice that ITB established support with two lows at 22.10 over the last four days. I suggest that a move below 22 would end the oversold bounce and signal a continuation of the February decline. Such a move would be negative for the broader market. Careful, it hasnt happened yet.
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Chart 3
RETAIL SPDR FORMS WEDGE AFTER SUPPORT BOUNCE... Chart 4 shows the Retail SPDR (XRT) bouncing off a support zone with the move above 67.5 the last four days. XRT is trading above last Mondays high and a small rising wedge may be taking shape. The bulls have the edge as long as this wedge rises. The lower trend line and Fridays low mark wedge support. A move below these levels would reverse the wedge and signal a continuation of the prior decline. Next support resides in the 63.50 area. Needless to say, a short-term breakdown in XRT would be negative for the market overall. I think these two ETF hold the key for the broader market right now. Both are moving higher again and this is positive. Breakdowns in both, however, would be negative.
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Chart 4
SHANGHAI COMPOSITE TUMBLES OVER 3.5%... Chinese stocks were hit hard for the second time in two months as the Shanghai Composite ($SSEC) fell to its lowest level since late January. Todays 3.5% decline was attributed to a slow down in the purchasing managers index and recent efforts to curtail rapidly rising property prices. Weakness in China weighed on key industries within the materials sector (steel, metals and mining, copper miners, gold miners). Chart 5 shows the index forming a lower peak near 2375 and extending the downtrend that began with the early February peak. Keep in mind that the index was up sharply from early December to early February and some sort of correction was needed to alleviate overbought conditions. The yellow zone marks support from broken resistance and the 50-62% retracements. This is an end-of-day chart, which means prices and indicators will not be updated until after the close. I drew todays long black candlestick to reflect Mondays close. The indicator window shows the Vortex Indicators crossing bearish towards the end of February and remaining bearish. You can read more on these indicators in our ChartSchool Chart 6 shows weekly bars for some perspective over the last three years.
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Chart 5
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Chart 6
STEEL, COPPER MINERS AND COAL ETFS GET SLAMMED AGAIN... Several key industry group ETFs within the materials sector were hit hard again on Monday. As noted above, weakness in Chinese stocks is to blame. Today we are seeing sharp declines in the Copper Miners ETF (COPX), the Market Vectors Coal ETF (KOL), the Metals and Mining ETF (XME) and the Steel ETF (SLX). All four broke down in February and are down the year-to-date. Todays declines are not included on this PerfChart so you can add at least another 1% to these losses. PerfChart 7 shows XME down around 12%, KOL down over 7%, COPX off almost 10% and SLX down some 8%. There is no need to look at individual charts because these breakdowns were shown in mid February. Relative weakness in these groups is, however, a concern for the broader market, which remains quite ripe for a correction.
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Chart 7
EUROPEAN SHARES STALL, BUT HOLD SUPPORT AND UPTREND... Despite a negative reaction to the Italian election, the Euro Top 100 Index (EUR) has yet to break down and remains positive for the year. This index represents 100 of the biggest companies throughout nine European countries, including the United Kingdom, Germany, France, Italy, Spain and The Netherlands. It provides a good picture of Europe as a whole. Chart 8 shows the index surging above resistance to start the year and broken resistance turning first support in the 234 area. The trend line extending up from the June low confirms support here. A break below 234 would be medium-term bearish and argue for a decline to the next support zone around 220-222. Such a move would suggest weakness throughout Europe and this could be a negative for US stocks, especially with Chinese stocks moving lower. The bulls have the edge as long as support holds. A break above 240 would end the consolidation and argue for a continuation of the bigger uptrend. Chart 9 shows weekly bars for a long-term perspective.
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Chart 8
