SPY FIRMS AT SUPPORT AS DI TRIGGERS -- QQQ TRACES OUT A FAMILIAR PATTERN -- XLI FIRMS AT SUPPORT WITH INDECISIVE CANDLESTICK -- TREASURY BOND ETFS CHALLENGE RESISTANCE -- JOBLESS CLAIMS REMAIN IN DOWNTREND
SPY FIRMS AT SUPPORT AS DI TRIGGERS... Link for todays video. It was a rough week for stocks as the S&P 500 ETF (SPY) and the Nasdaq 100 ETF (QQQ) declined to support from their mid March lows. Chart 1 shows SPY surging off the mid March lows with a move above 158 last week and then plunging back to 154 this week. Even though last week's buying pressure was completely negated with this week's selling pressure, support has yet to fold and the overall uptrend remains. It would not, however, take much to break the bull's back here. The Raff Regression Channel and recent lows mark support in the 153-154 area. A break would be medium-term bearish and argue for a deeper retracement of the November-April advance. It is also possible that a small head-and-shoulders is evolving. Notice how the early April peak looks like the head and a consolidation over the new few weeks would form a right shoulder. Neckline support remains the same.
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Chart 1
The indicator windows show the Vortex and Directional Movement pairs. Trend changes often occur in stages. In other words, one indicator turns bearish, another indicators turns bearish and then the index breaks support for final confirmation. At this stage, DI has turned bearish because it crossed above +DI and above 30 for confirmation. VI crossed above +VI, but has yet to cross above 1.1 for confirmation. This means there are two more steps needed to confirm a trend reversal in SPY. A DI cross above 30 and a break below 153 on the price chart.
QQQ TRACES OUT A FAMILIAR PATTERN... For the third time since the November low, the Nasdaq 100 ETF (QQQ) is tracing out a broadening pattern that features a consolidation, a failed breakout and a failed support break. Chart 2 shows QQQ surging in November, consolidating in December, breaking out on 18-Dec, suddenly reversing and then breaking support. This pattern repeated from January to late February and again from early March to mid April. The green arrows mark the failed breakouts. It is a wild pattern that can only be expected from a tech heavy index with 100 stocks. Should this pattern continue, we could expect a surge and gap above last week's high. Boy, wouldn't that be surprise. Also notice that QQQ formed an inside day or harami. These patterns signal indecision that can sometimes foreshadow a short-term reversal.
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Chart 2
Keep in mind that the six month trend is still up, but, as with SPY, it would not take much to break the bull's back here. Just draw a line from the close on the far left to the last price on the far right. The trend is up when this line slopes up. The indicators also confirm the overall uptrend. Even though MACD and RSI are considered momentum indicators, they can also be used to define the general trend. Notice how RSI fluctuated between 40 and 80 since late November and MACD has been largely positive. A break below 40 in RSI and a break into negative territory by MACD would suggest that the trend is indeed changing. So, the trend is up and QQQ is firming at a support with a familiar pattern. Familiar patterns have a habit of stopping once we discover them. This is what keeps us on our toes.
XLI FIRMS AT SUPPORT WITH INDECISIVE CANDLESTICK ... The Industrials SPDR (XLI) fell sharply this week, but showed signs of firmness on Friday with a harami candlestick. Harami form when the current candlestick body is inside the prior candlestick body. Chart 3 shows a small white candle today and a larger black candle on Thursday. These patterns signal indecision that may give way to a bounce. Careful though. XLI is underperforming SPY and a break below support would have medium-term consequences.
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Chart 3
TREASURY BOND ETFS CHALLENGE RESISTANCE... Equity traders need to watch Treasury bonds because there is a strong negative correlation between stocks and Treasuries. This means one rises as the other falls. Chart 4 shows the 7-10 year T-Bond ETF (IEF) moving to the top of a trading range that extends back to June 2012. The ETF moved sharply higher from February 2011 to June 2012 and then traced out a flat trading range. Technically, a flat range after an advance is a bullish continuation pattern. A breakout here would signal a continuation higher and this would be negative for stocks. The indicator window shows MACD turning up, breaking its signal line and moving into positive territory. Momentum is bullish. Chart5 shows the 20+ Year T-Bond ETF (TLT) breaking above the upper trend line of a falling wedge. This surge and breakout signal a continuation of the bigger uptrend. It would take a quick move below 120 to negate this breakout.
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Chart 4
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Chart 5
JOBLESS CLAIMS REMAIN IN DOWNTREND... Treasury bonds move higher because of deflationary pressures, signs of economic weakness or both. We could be getting a little of both recently. Gold, oil and copper fell sharply in April and this is more deflationary than inflationary. The economic reports have been soft over the last few weeks and first quarter earnings have largely disappointed. After earnings season, our next big batch of economic reports will hit in early May. The most recent employment report showed non-farm payroll increasing by just 88,000, which was well below expectations. Is this just a one off or can be expect another weak report in May? Chartists should watch weekly jobless claims for clues. Chart 6 shows the 4-week moving average edging higher the last three weeks. This is still just an uptick within a bigger downtrend. Weekly readings in excess of 375,000 would be cause for concern. This in turn would be positive for Treasuries and negative for equities.
