SMALL-CAPS SHOW RELATIVE WEAKNESS AS IWM BREAKS SUPPORT -- USING THE VORTEX INDICATOR WITH SPY AND MDY -- FINANCIALS LEAD THE SECTORS LOWER -- HOMEBUILDERS LEAD CONSUMER DISCRETIONARY SECTOR LOWER -- FDN TESTS SUPPORT AS IGN AND SMH BREAK SUPPORT
SMALL-CAPS SHOW RELATIVE WEAKNESS AS IWM BREAKS SUPPORT... Link for todays video. Small-caps started lagging large-caps last week and this relative weakness turned into absolute weakness as the Russell 2000 ETF (IWM) moved sharply lower the last few days. Chart 1 shows IWM consolidating the last two weeks of March and then breaking support with this week's plunge. Note that a relatively rare three black crows pattern formed as IWM opened above the prior close twice and formed long black candlesticks three days straight. The consolidation support break is short-term bearish, but it is not enough to reverse the medium-term uptrend. The February lows hold the key to the medium-term uptrend, which began in mid November. The indicator windows show two oscillators turning negative. Minus Directional Movement (-DI) moved above Plus Directional Movement (+DI) last week and exceeded 30 this week. As noted on Monday, 30 is the signal threshold for this indicator. The second window shows the Aroon Oscillator (20), which measures the difference between Aroon Up and Aroon Down. This indicator moved into negative territory for the first time since early March, which means Aroon Down crossed above Aroon Up. As with the directional movement indicators, I look for this crossover to exceed a certain threshold for confirmation. In this case, I would look for the Aroon Oscillator to move below -50. Chart 2 shows the Dow SPDR (DIA) testing its consolidation breakout with a pullback today. The directional movement indicators and the Aroon oscillator remain in bull mode, however.
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Chart 1
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Chart 2
USING THE VORTEX INDICATOR WITH SPY AND MDY... Mid-caps are also under pressure today and the S&P Midcap SPDR (MDY) has been lagging the S&P 500 ETF (SPY) the last three days. With a sharp decline this week, MDY broke below the mid March low and is now testing support from broken resistance. Also notice that the Raff Regression Channel ends in the 202.5 area. A break below this support zone could have medium-term consequences. The indicator window shows the Vortex Indicator, which is actually a pair of indicators. VI just moved above +VI, but VI has yet to clear the signal threshold at 1.1 (blue line). I add this threshold to reduce whipsaws and a confirm crossover signals. The red line marks the bearish signal in mid October and the green line marks the bullish signal in late November. A bearish signal is overdue, but it has not triggered just yet. Chart 4 shows SPY with support at 152. Notice that VI has yet to cross above +VI.
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Chart 3
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Chart 4
FINANCIALS LEAD THE SECTORS LOWER ... All sectors were down on Wednesday with the Finance SPDR (XLF) and the Energy SPDR (XLE) leading the way. Chart 5 shows XLF peaking the second week of March and working its way lower the last few weeks. It is possible that a falling flag is taking shape, but the short-term trend is clearly down as long as the flag falls. With today's sharp decline, XLF reinforced short-term resistance at this week's high. A break above this level is needed to put the flag back in play and signal a continuation of the bigger uptrend. Barring such a breakout, the next support level resides in the 17.25 area. The indicator window shows RSI moving into the 40-50 zone, which acts as a support during an uptrend. This area held in mid February and a break below 40 would turn RSI bearish.
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Chart 5
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Chart 6
Regional banks are also taking a hit. Chart 6 shows the Regional Bank SPDR (KRE) plunging over three percent with three long black candlesticks this week. KRE broke the trend line extending up from the mid November low in the process. The indicator window shows the price relative also breaking a trend line as KRE starts to show relative weakness. Weakness in financials is a big reason for weakness in the Russell 2000 because Russell.com lists financial services as the single largest sector. Note that the consumer discretionary sector is second.
FDN TESTS SUPPORT AS IGN AND SMH BREAK SUPPORT... Selling pressure on Wednesday was quite broad as only a handful of industry groups were higher on the day ($DJUSDN, $DJUSCF, $DJUSCL). Tech stocks were also hit as the FirstTrust Internet ETF (FDN), Networking iShares (IGN) and Market Vectors Semiconductor ETF (SMH) declined sharply. Chart 7 shows FDN breaking flag support and testing its support zone in the 41.5-42 area. FDN has been underperforming SPY the last two months as the price relative peaked in late January. Chart 8 shows the IGN breaking below support and RSI moving below 40 for the first time since October 31st. Chart 9 shows SMH breaking support and RSI moving below 40.
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Chart 7
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Chart 8
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Chart 9
TLT CHALLENGES RESISTANCE AS THE 10-YEAR YIELD BREAKS SUPPORT... Stocks and treasuries were negatively correlated for most of the last eighteen months. This correlation was challenged over the last few weeks as the 20+ Year T-Bond ETF (TLT) surged and SPY remained strong. TLT is up almost 4% the last seventeen days and SPY is up .16%. Of course, SPY was up more before today's decline. Even so, TLT was up significantly more than SPY over the last three weeks. Something had to give to keep the negative correlation alive. In short, one of the two needed to give up its gains and turn lower. Chart 10 shows TLT remaining strong with a surge to resistance on Wednesday. A breakout would reverse the medium-term downtrend and this would be negative for stocks. Money moves into treasuries as a safe-haven or when the economic outlook deteriorates, both of which are negative for stocks. Chart 11 shows the 10-year Treasury Yield ($TNX) breaking below support with a sharp decline.
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Chart 10
