TREASURIES BOUNCE AS IEF CONFIRMS OUTSIDE REVERSAL -- UTILITIES AND REIT ETFS HIT KEY RETRACEMENT ZONE -- FALLING FLAGS TAKE SHAPE IN FOUR OF NINE SECTOR SPDRS -- USING SECTOR BREADTH TO AUGMENT ANALYSIS -- AD LINES TREND LOWER FOR OFFENSIVE SECTORS
TREASURIES BOUNCE AS IEF CONFIRMS OUTSIDE REVERSAL... Link for today's video. Treasury bonds are bouncing and yields are rising on Friday. This is interesting because Treasuries appeared to break down on Monday, but recovered and rebounded with a strong bounce the last two days. Chart 1 shows the 7-10 year T-Bond ETF (IEF) breaking below support at 105 and then surging back above this level with a bounce the last four days. Notice that a bullish engulfing pattern or outside reversal formed on Tuesday. The quite move back above broken support means a bear trap may be forming. At the very least, Treasuries were oversold after a sharp decline from early May to mid June and are due for an oversold bounce, which could weigh on stocks. At best, IEF is re-claiming long-term support in the 105 area and the demise of Treasuries may be greatly exaggerated. The indicator window shows the Commodity Channel Index (CCI) turning negative in early May and remaining so the last six weeks. A move above zero would turn this momentum indicator bullish again. Chart 2 shows the 20+ Year T-Bond ETF (TLT) with similar characteristics.
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Chart 1
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Chart 2
UTILITIES AND REIT ETFS HIT KEY RETRACEMENT ZONE... Interest rate sensitive shares were hit hard from mid May to mid June as talk of "tapering" reached its peak. Treasuries bonds also declined during this period, while emerging market bonds were crushed. Perhaps the markets overreacted. Chart 3 shows the Utilities SPDR (XLU) falling almost 10% and RSI becoming oversold for the first time since mid November. The yellow shading marks a support zone marked by broken resistance and the 50-61.80% retracements. Notice that XLU firmed this month and got a bounce off support the last two days. We have yet to see even a short-term breakout, but XLU does look ripe for at least an oversold bounce, if not a continuation of the long-term uptrend. Chart 4 shows the Real Estate iShares (IYR) with a similar setup. The ETF plunged over 10% and then found support from broken resistance and the 61.80% retracement.
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Chart 3
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Chart 4
FALLING FLAGS TAKE SHAPE IN FOUR OF THE NINE SECTOR SPDRS... Chart 5 shows the nine sector SPDRs in Candleglance format. This unique format gives chartists a good overview and makes it easy to compare the charts. The Finance SPDR (XLF), Technology SPDR (XLK), Basic Materials SPDR (XLB) and Energy SPDR (XLE) formed falling flags over the last four weeks. These flags represent short-term corrections within a larger uptrend. A break above this week's high is needed to reverse the flag, and signal a continuation of the bigger uptrend. The Consumer Discretionary SPDR (XLY) and Industrials SPDR (XLI) have patterns similar to the falling flag, but the lows do not match up for parallel lines. XLI and XLY could be forming higher lows this week and a follow through break above this week's high would be bullish.
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Chart 5
The defensive sectors are shown at the bottom of this chart. The Utilities SPDR (XLU) remains the weakest of the lot, but shows some signs of firming in the 38 area. A break above the late May high is needed to reverse the seven week slide. The Healthcare SPDR (XLV) and the Consumer Staples SPDR (XLP) held up the best with relatively small declines and decent bounces the last two weeks. Note: This image is from a screen shot and the trend lines were drawn using a third party app.
USING SECTOR BREADTH TO AUGMENT ANALYSIS... Chartists can use breadth indicators to augment sector analysis. StockCharts.com provides breadth data for the nine sector SPDRs. This data includes AD Percent (advances less declines divided by total issues), AD Volume Percent (advancing volume less declining volume divided by total volume) and High-Low Percent (new highs less new lows divided by total issues). Chartists can view these charts using the link for "Sector Breadth Indexes" on the Free Charts Page. Alternatively, chartists can use the individual symbols to create SharpCharts with these indicators. Simply search the symbol catalog for "percent and indx and SPDR" or click here for a list of symbols.
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Chart 6
AD LINES TREND LOWER FOR OFFENSIVE SECTORS... Chart 7 shows the AD Lines and AD Volume Lines for the four offensive sectors. These are short-term charts that only cover two months, but we can see clear downtrends over the last few weeks. The AD Lines (left side) peaked on May 20th and have been working their way lower for four weeks. The first three AD Volume Lines (right) also peaked in mid May and moved lower. The red lines mark short-term resistance and a break above this level is needed to signal an end to the correction and resumption of the bigger uptrend. The AD Volume Line for the Finance SPDR (bottom-right) peaked in late May and held up the best of the indicators. Also notice that the AD Line and AD Volume Line for XLF could be forming higher lows this week. This shows some relative strength for finance sector breadth.
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Chart 7
BREADTH INDICATORS TURN UP FOR HEALTHCARE AND CONSUMER STAPLES ... Chart 8 shows the AD Lines and AD Volume Lines for the defensive sectors. The Utilities SPDR remains the weakest as the AD Line and AD Volume Line peaked in late April and hit new lows this week. The lines for the Consumer Staples SPDR and Healthcare SPDR, however, are showing some strength with surges the last five days. The AD Line for XLP broke above resistance this week. The AD Line and AD Volume Line for XLV broke above resistance last week. These two show the most strength of the nine sector SPDRs.
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Chart 8
AD VOLUME LINES TREND LOWER FOR XLE AND XLB... Chart 9 shows the AD Lines and AD Volume Lines for the Basic Materials SPDR and the Energy SPDR. All four of these indicators are trending lower. The red lines mark resistance from last week's high. A break above these levels is needed to reverse the four week downtrends.
