FINANCE SPDR STARTS SHOWING RELATIVE WEAKNESS -- JP MORGAN FORMS BEARISH REVERSAL PATTERN -- SEMICONDUCTOR SPDR TESTS KEY SUPPORT LEVEL WITH SHARP DECLINE -- BROADCOM, TEXAS INSTRUMENTS AND ANALOG DEVICES LEAD SEMIS LOWER
FINANCE SPDR STARTS SHOWING RELATIVE WEAKNESS... Link for todays video. The three defensive sectors have been leading the market in 2013 and over the past four weeks. This means the Healthcare SPDR (XLV), Consumer Staples SPDR (XLP) and Utilities SPDR (XLU) are up more than the offensive sectors and the market as a whole. This preference for relative safety (defense) was a potential negative for the market, but we had yet to see any signs of sustained selling pressure. Things could be changing as stocks moved sharply lower with a broad-based decline on Wednesday. This means the stock market may well be entering a corrective period that could last several weeks.
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Chart 1
Chart 1 shows the Finance SPDR (XLF) failing to hold its last breakout and moving sharply lower this week. XLF broke flag resistance and closed above 18.50 last week. This breakout was bullish until the ETF moved back to 18 over the last few days and negated the breakout. Notice that the early January and early March breakouts held as XLF simply continued higher. XLF is getting cold feet this time and poised to break the November trend line. After a 25% advance from mid November to mid April, the index is entitled to a corrective period. Corrections can form as pullbacks or consolidations. I would mark first support in the 17.25 area. The late February low and 38.2% retracement mark potential support here. The indicator window shows the price relative (XLF:SPY ratio) forming a lower high in mid April and turning down. The downturn is young, but it is the first sign of relative weakness since November. Chart 2 shows the Regional Bank SPDR (KRE) breaking the November trend line this month and the price relative moving sharply lower. Chart 3 shows fortress JP Morgan (JPM) forming a bearish head-and-shoulders pattern over the last two months. Notice that On Balance Volume (OBV) broke down as selling pressure increased during the pattern.
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Chart 2
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Chart 3
SEMICONDUCTOR SPDR TESTS KEY SUPPORT LEVEL WITH SHARP DECLINE... Selling pressure spread through the technology sector as the Semiconductor SPDR (XSD) and the Market Vectors Semiconductor ETF (SMH) led the market lower on Wednesday. Chart 4 shows XSD forming a series of lower highs since mid February and testing support with a sharp decline this week. These lower highs reflect selling pressure at lower prices. In other words, buying pressure was strong enough to push prices off support last week, but not strong enough to push prices past the March highs. A correction has been underway since mid February and a support break would argue for further weakness towards the 43-44 area. The late December low, broken resistance and the 50-61.80% retracement zone mark potential support here. The indicator window shows the price relative (XSD:SPY ratio) zigzagging lower since mid February. This means XSD has been underperforming SPY since then.
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Chart 4
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Chart 5
Chart 5 shows the Market Vectors Semiconductor ETF with the directional movement and the vortex indicators. On the price chart, SMH broke support in early April, surged back to 35.5 and ultimately formed a lower high as it turned sharply lower this week. The indicators are in bear mode because DI exceeded +DI AND moved above 30 to confirm. VI exceeded +VI AND moved above 1.1 to confirm.
BROADCOM, TEXAS INSTRUMENTS AND ANALOG DEVICES LEAD SEMIS LOWER... Intel (INTC) is down today, but holding up fairly well with just a 1.16% loss so far. Chart 6 shows the stock battling resistance at 22 since early March. This is the second failed breakout attempt at 22 since January. Chart 7 shows Broadcom (BRCM) breaking down with its second move below 33 this month. Notice that the price relative broke support the first week of April and hit a new low today.
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Chart 6
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Chart 7
Chart 8 shows Analog Devices (ADI) breaking support at 43.50 for the second time this month. The stock is down over 4% on Wednesday and showing relative weakness. The indicator window shows the price relative trending lower since mid February. Chart 9 shows Texas Instruments (TXN) falling over 3% and breaking the October trend line for the second time. Admittedly, this is a steep trend line that was unlikely to hold. TXN is now, however, testing an important support level marked by the early April low.
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Chart 8
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Chart 9
TRACKING RELATIVE PERFORMANCE IN SMALL AND MID-CAPS ... Relative weakness in small-caps and mid-caps shows risk-aversion in the stock market and this is negative overall. Small and mid caps are less diversified, more dependent on the domestic economy and more vulnerable to changes in the economy. This is why they are considered the canaries in the economic coalmine. As high-beta stocks, these stocks are considered riskier than large-caps.
Small and mid-caps outperform when the appetite for risk is strong and underperform when the appetite for risk is weak. Small-caps and mid-caps have been relatively weak since mid March and their respective indices are on the verge of support breaks. Chartists can measure relative performance three ways. First, we can simply compare both price charts in the same window. Second, we can create a price relative by dividing one security by the other. Third, we can analyze the StockCharts Technical Rank (SCTR).
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Chart 10
Chart 10 shows the Russell 2000 ETF (IWM) and the S&P 500 ETF (SPY) in the main window. Notice how IWM peaked a month ahead of SPY and then formed a lower high in April. IWM did not confirm the higher high in SPY. Second, notice that the price relative (IWM:SPY ratio) broke below its late February low in early April. The price relative is now in a downtrend, which means IWM is underperforming SPY. Third, the StockCharts Technical Rank (SCTR) broke its late January low and reached a low for 2013. The SCTR bounced off 50 on Tuesday, but IWM still shows relative weakness and an SCTR score below 50 would put it in the bottom half of the performance basket. You can read more about SCTR in our ChartSchool. Chart 11 shows the S&P MidCap 400 SPDR (MDY) with similar characteristics.
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Chart 11
KEY BREADTH INDICATOR TURNS BEARISH FOR S&P 500 ... After tracing out a bearish divergence the last few months, the S&P 500 %Above 50-day SMA ($SPXA50R) broke below its February low to trigger a bearish signal. Chart 12 shows the indicator peaking in late January, forming a series of lower highs and then breaking support this month. Notice that the S&P 500 forged higher highs from late January to mid April, but the indicator formed lower highs. These lower highs indicated that fewer stocks were partaking in the rally. In other words, breadth was not confirming market strength. 93% of S&P 500 stocks were above their 50-day moving averages in late January, but only 82% made it above in mid April. 80 plus percent is still respectable and plenty strong, but this number proved quite fragile as the indicator plunged below 60% on Monday. With a lower high and lower low, the indicator is trending lower and should be considered bearish. Prior bottoms in the index occurred AFTER the indicator moved below 30%, which means this could be just the beginning of the correction. The indicator window shows MACD applied to the S&P 500 %Above 50-day SMA ($SPXA50R). A move into positive territory and above the mid March high would provide the first sign of material strength in the indicator. Chart 13 shows the Nasdaq 100 %Above 50-day SMA ($NDXA50R) turning bearish with the support break in early April.
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Chart 12
