IWM LEADS LOWER AS MDY FORMS BROADENING FORMATION -- MATERIALS SECTOR TURNS DOWN FROM RANGE RESISTANCE -- REBOUND STALLS FOR OIL & GAS EQUIPMENT/SERVICES SPDR -- COPPER-STOCK CORRELATION HITS LOWEST LEVEL IN OVER FIVE YEARS
IWM LAGS AS MDY FORMS BROADENING FORMATION... Link for todays video. The Fed has come and gone without much fanfare, and no real change in policy as the Fed reiterated its pledge to continue the bond-buying program ($85 billion per month). The policy statement also noted that the committee would make adjustments to this program as economic circumstances warranted. In other words, the Fed will buy more if the economy deteriorates and less if the economy improves. Stocks were down heading into the announcement and held their losses afterwards. Chart 1 shows the Russell 2000 ETF (IWM) leading the way down with another lower high forming in late April. IWM formed a lower high in mid April and broke support a week later. Despite an impressive recovery after the support break, the ETF fell short of the prior high and continues to underperform SPY, which hit a new high yesterday. The indicators for IWM are in bear mode because DI crossed above +DI and exceeded 30 for confirmation. Also notice that the Aroon Oscillator moved below -50 in mid May. IWM is the first of the five major index ETFs to turn bearish. DIA, MDY, QQQ and SPY remain in bull mode. Relative weakness in small-caps is a concern, but the bulk of the evidence is still bullish for the broader stock market.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
Chart 2 shows the S&P MidCap 400 SPDR (MDY) hitting resistance in the 210 area for the third time in five weeks. MDY is the second weakest of the five major index ETFs. On the price chart, MDY broke support for one day and then rallied back to resistance. With todays decline, it is possible that a broadening formation is taking shape, which means the swings are getting bigger and bigger (more volatile). The two indicators shown have yet to turn bearish. VI just moved above +VI, but needs to cross above 1.1 for bearish confirmation. The Aroon oscillator is stuck in a range since early April and needs to cross below -50 to turn bearish.
MATERIALS SECTOR TURNS DOWN FROM RANGE RESISTANCE... Chart 3 shows the Basic Materials SPDR (XLB) range bound throughout 2013. The S&P 500 has moved steadily higher this year, but XLB hit resistance between 39.5 in late January, mid March and now late April. XLB is underperforming the S&P 500 because it failed to take out its January-March highs. With the ETF range-bound and at resistance, it looks ripe for another support test or perhaps even a support break. XLB is under selling pressure today and the Stochastic Oscillator is flattening out above 80. The Stochastic Oscillator is ideally suited for a price range. The indicator becomes overbought at the top of the range and oversold at the bottom of the range. Downturns from overbought levels signal a move lower, while upturns from oversold levels signal a move higher. These are marked with the green and red lines. The last signal was bullish with the upturn on 22-April. A move below the signal line and below 80 would trigger a short-term bearish signal.
(click to view a live version of this chart)
Chart 3
REBOUND HITS RESISTANCE FOR OIL & GAS EQUIPMENT/SERVICES SPDR... Weakness in oil and the stock market weighed on the Oil & Gas Equipment/Services SPDR (XES) and the Energy SPDR (XLE). Chart 4 shows XES peaking in mid February and zigzagging lower the last few months. XES got a bounce along with oil over the last few weeks, but hit resistance near the 61.80% retracement line this week. The swing within this downtrend is still up though and I am marking first support at 37.50. Longer-term, the 61.80% retracement marks a target in the 35 area. The indicator window shows RSI hitting resistance in the 50-60 zone for the second time this month. The bears control momentum as long as RSI fails to break above 60.
(click to view a live version of this chart)
Chart 4
(click to view a live version of this chart)
Chart 5
Chart 5 shows XLE breaking down in mid April, but recovering with a surge back above 78 in late April. This recovery certainly looks strong because it exceeded the 61.80% retracement and the support break did not last long. Nevertheless, XLE is underperforming the S&P 500 year-to-date and remains well below its March highs. As with XES, the swing over the last two weeks is up and I am marking first support at 76.50. A break would signal a continuation of the prior decline and put the mid April breakdown back in play. The indicator window shows RSI hitting the 50-60 zone, which acts as resistance in a downtrend.
COPPER-STOCK CORRELATION HITS LOWEST LEVEL IN OVER FIVE YEARS... Commodities were hit hard on Wednesday as Chinas PMI data disappointed and US economic reports continued to show slowing in the economy. The Copper ETF (JJC) and Base Metals ETF (DBB) both plunged to 52-week lows and extended their downtrends. Chart 6 shows JJC breaking triangle support in late February and falling over 13% the last seven weeks (44 to 38). There is nothing positive about this chart. Broken supports in the 42 area turn first resistance. The indicator window shows JJC relative to the S&P 500 ETF (SPY). Copper and stocks are positively correlated for the most part, but this positive correlation broke down over the last few weeks. In fact, the correlation between Spot Copper ($COPPER) and the S&P 500 dipped to its most negative level in over five years. The Correlation Coefficient last moved below -.50 in March 2008 and the S&P 500 subsequently peaked in May 2008. Chart 7 shows DBB also breaking down and the Correlation Coefficient (DBB,SPY) also moving to its lowest level in over five years. Something needs to give because the disconnect between stocks and industrial metals is widening.
(click to view a live version of this chart)
Chart 6
(click to view a live version of this chart)
Chart 7
OIL KEEPS TRIANGLE BREAKDOWN ALIVE WITH SHARP DECLINE... Oil is taking a hit on the US economic numbers and high inventories. The Energy Information Administration reported that US oil inventories surged 6.7 million barrels and the overall level reached its highest level since records began (1982). The inventories represent high supply and the weak economic number represents low demand. An increase in supply and decrease in demand is putting some serious downward pressure on prices. Chart 8 shows weekly bars for Spot Light Crude ($WTIC). This is an end-of-day (EOD) chart so todays price ($90.90) is not yet reflected. Nevertheless, we can still see that the long-term bias remains bearish. Oil broke triangle support in mid April, but surged back above 92.50 last week. Even though this move jeopardized the triangle breakdown, oil did not come near its prior highs and failed to exceed 95 this week. Todays decline keeps the triangle break alive and I would expect lower prices until the technical evidence changes. The indicator window shows the Correlation Coefficient for oil and the S&P 500. These two have been positively correlated since May 2009, but the Correlation Coefficient is nearing the zero line and could turn negative if the stock market continues higher. Chart 9 shows the US Oil Fund (USO) hitting resistance near 33.75 and plunging below 32.50 today.
(click to view a live version of this chart)
Chart 8
