STOCKS REMAIN STRONG, BUT SPY IS STILL RIPE FOR A CORRECTION -- S&P 1500 BREADTH NEARS SHORT-TERM OVERSOLD TERRITORY -- TREASURY ETF FIRMS AT SUPPORT AS 10-YEAR YIELD HITS RESISTANCE -- CONSOLIDATION ENDS AS GOLD CONTINUES IN DIRECTION OF BIGGER TREND
STOCKS REMAIN STRONG, BUT STILL RIPE FOR A CORRECTION... Link for today's video. Tapering or no tapering, the S&P 500 ETF (SPY) remains in a long-term uptrend and shows no serious signs of selling pressure. The ETF dipped to the 160 area during the week and rallied back above the 164 level on Friday. Nevertheless, the ETF has come a long way the last 6-7 months and still looks vulnerable to a corrective period. Chart 1 shows the ETF within a rising channel since the summer of 2011. With a 25% move from mid November to mid May, the ETF almost hit the upper trend line of this channel. Even though it fell short, SPY was clearly overbought and ripe for some sort of correction, which can involve a pullback or just a sideways trading range. Timing a correction is a challenge, but I am going to go ahead an mark long-term support in the 152-155 area. Support here stems from the April lows, the Fibonacci retracement zone and the lower trend line of the rising channel. Also notice that RSI support is set in the 40-50 zone, which held in May and November. Chart 2 shows the Russell 2000 ETF (IWM) with summer support marked in the 88-90 area.
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Chart 1
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Chart 2
S&P 1500 BREADTH NEARS SHORT-TERM OVERSOLD TERRITORY... The S&P 1500 AD Percent ($SUPADP) and S&P 1500 AD Volume Percent ($SUPUDP) are breadth indicators that can be used to identify the trend and monitor market conditions. The AD Line and AD Volume Line are best for trend identification because they are cumulative indicators. Chartists can apply a moving average to AD Percent and AD Volume Percent to create an oscillator to identify short-term overbought and oversold conditions. Chart 3 shows the S&P 1500 AD Line in a clear uptrend since mid November, just like the overall market. With the pullback over the last three weeks, the AD Line is nearing the November trend line, but has yet to break this first line of support.
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Chart 3
The bottom window shows the 20-day SMA for S&P 1500 AD Percent ($SUPADP). This simple moving average creates a natural oscillator that fluctuates above/below the zero line. Notice how the indicator broke above 10% in early December to begin a period with a bullish bias. Subsequent pullbacks then stabilized near the zero line in late December and mid April. Despite a false start in mid April, the subsequent moves into positive territory signaled a resumption of the uptrend. This indicator is again in negative territory and a break back above zero would be short-term positive for the market. At what point does this indicator flip to a bearish bias? I would suggest that a move below -10% would flip it to bearish and chartists could then look for short-term oversold conditions when above zero. Chart 4 shows similar indicators using S&P 1500 AD Volume Percent ($SUPUDP). You can read more on these indicators in our ChartSchool.
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Chart 4
TREASURY ETF FIRMS AT SUPPORT AS 10-YEAR YIELD HITS RESISTANCE... The labor department reported an increase of 175,000 non-farm payrolls, which was just above expectations. Treasury bonds were modestly lower on the news, while Treasury yields were up. Chart 5 shows the 7-10 year T-Bond ETF (IEF) peaking just before last month's report and hitting support just ahead of this month's report. IEF has essentially moved from resistance to support in six weeks. This week's price action reflects a lot of indecision as the ETF traded in a wide range and closed in the middle of this range. Indecision can sometimes foreshadow a reversal and the ETF is at support. A break above this week's high would be bullish here, but a clean support break would be very bearish. Chart 6 shows the 10-year Treasury Yield ($TNX), which moves opposite Treasury bonds. $TNX is hitting the upper trend line of a rising channel with this week's low marks upswing support at 2%. A break below this level would signal a downturn in treasury yields.
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Chart 5
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Chart 6
CONSOLIDATION ENDS AS GOLD CONTINUES IN DIRECTION OF BIGGER TREND... Gold is taking it on the chin with a move back below $1400 on Friday. Chart 7 shows Spot Gold ($GOLD) breaking a big support zone in early April and then holding below 1500 the last eight weeks. The long-term trend is clearly down as long as 1500 holds. The indicator window shows the Commodity Channel Index (CCI) spending most of its time below -100 this year. Chart 8 shows the Gold SPDR (GLD) getting a feeble bounce the last few weeks as a rising wedge took shape. The ETF hit resistance in the 137.5 area the last two weeks and broke wedge support with a sharp decline on Friday. This move not only reinforces resistance at 137.5, but it also signals a continuation of the May decline. This foreshadows a move to new lows.
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Chart 7
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Chart 8
OIL BOUNCES TO KEEP CONSOLIDATION ALIVE... Even though gold and other metals are getting hit on Friday, Spot Light Crude ($WTIC) is showing resilience as it extends its consolidation near resistance. I have shown this weekly chart for, well, weeks, and nothing much has changed. While the stock market moved higher in early May, oil extended its stall near resistance and did not breakout. Normally oil would breakout with the stock market moving higher. In any case, chart 9 shows oil moving on either wide of 95 the last five weeks. Oil is up around 85 cents at midday and back above 95. Resistance remains at 97.5, a break of which would be very bullish and target a move above 100. Chart 10 shows the US Oil Fund (USO) to give us an idea of today's price action. USO surged to 34, but remains within a volatile falling flag type pattern. Falling flags are normally bullish and a breakout would signal a continuation higher. The indicator window shows MACD turning up. This momentum indicator is on the verge of breaking its signal line.
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Chart 9
