STOCKS FRONT RUN THE FED AS IWM CHALLENGES FLAG TREND LINE -- OIL BREAKS TRIANGLE CONSOLIDATION -- XLE FINDS SUPPORT NEAR BROKEN RESISTANCE -- NATURAL GAS SURGES OFF KEY RETRACEMENT ZONE -- S&P 1500 BREADTH INDICATORS EXTEND CORRECTION
STOCKS FRONT RUN THE FED AS IWM CHALLENGES FLAG TREND LINE... Link for today's video. Stocks got off to a strong start on Monday with the major index ETFs surging over 1% in early trading. Note that the Fed meets on Wednesday and will make its policy statement at 2PM ET. Stocks have corrected the last few weeks as talk of tapering hit the tape. Now, however, there is chatter that the Fed will "temper" its tapering talk to calm the markets. Today's early buying could be bargain hunters looking to front run a potential Fed adjustment. Overall, trading the last four-five weeks has been rather choppy as the major index ETFs zigzag lower. After a big advance from November to May, these zigzag declines looks like falling flags on the price charts. In fact, dozens of ETFs and stocks have falling flag type patterns working the last 4-5 weeks. Chart 1 shows the Russell 2000 ETF (IWM) trying to break above the flag trend line with a move above 98.5 on Monday. The ETF established support at 96 with two bounces the last two weeks. The bulls clearly have the medium-term edge with an uptrend. A flag breakout would reverse the short-term downtrend and signal a continuation of this medium-term uptrend. Chart 2 shows the Nasdaq 100 ETF (QQQ) hitting the flag trend line with a 1.5% advance early Monday. Notice that RSI is getting a bounce off the 40-50 zone.
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Chart 1
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Chart 2
OIL BREAKS TRIANGLE CONSOLIDATION ... After a five week consolidation, Spot Light Crude ($WTIC) made a break for it with a surge above 97.5 the last two days. Oil futures were trading a few cents higher in early trading on Monday. Recent buying can be attributed to a potential escalation of the conflict in Syria and expectations that the Fed will continue its quantitative easing program. Chart 3 shows weekly prices for Spot Light Crude ($WTIC). With this surge above 97.5, oil broke the five week consolidation and the triangle trend line. This positive development ends the consolidation period and opens the door to $100 plus oil. I would now set first support at the early June low. Failure to hold this breakout and a move below the early June low would be quite negative. The first indicator window shows the Correlation Coefficient for oil and stocks. Correlation dipped into negative territory in late May, but turned back up the last two weeks. A weak Dollar is also helping oil as the correlation between oil and the US Dollar Index remains negative. Chart 4 shows a six month chart with an inverse head-and-shoulders forming from February to June. Chart 5 shows the US Oil Fund (USO) breaking flag resistance and exceeding its May highs.
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Chart 3
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Chart 4
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Chart 5
XLE FINDS SUPPORT NEAR BROKEN RESISTANCE... Chart 6 shows the Energy SPDR (XLE) surging in April-May and then falling back to broken resistance in the 79-80 area. Notice that a falling flag formed as the ETF retraced around 50% of the prior advance. Broken resistance and the retracement act as support, and the ETF firmed here over the last two weeks. XLE edged above the flag trend line in early trading on Friday. Last week's high marks first resistance, a break of which is needed to reverse the downswing. The indicator window shows the Commodity Channel Index (CCI) turning negative at the end of May and remaining negative during the correction. Look for a break above zero to turn this momentum indicator bullish. Chart 7 shows the Oil & Gas Equipment/Services SPDR (XES) breaking channel resistance in early May and then retracing 50% of the advance with a move back to the 39 area. XES broke the wedge trend line today and a follow through break above 39.5 would fully reverse the five week downtrend.
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Chart 6
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Chart 7
NATURAL GAS FIRMS SURGES KEY RETRACEMENT ZONE... Spot Natural Gas ($NATGAS) is on the move today as the futures contract soared over 2% in early trading. This big move comes at an interesting juncture on the price chart. Chart 8 shows $NATGAS moving above 4 with a strong advance in February-March-April. A correction then ensued as its fell back below 4 and retraced 50-61.80% of the prior advance. Notice that this area marks support from broken resistance. A basic Elliott Wave count suggests that a five wave advance is underway and the May-June decline is a wave 4 correction. Notice that that an abc zigzag pattern formed. The 3.7 area is as good as any for this correction to end and the advance to resume. The indicator window shows RSI trending lower with trend line resistance in the mid 50s. Chart 9 shows August Natural Gas Futures (^NGQ13) and chart 10 shows the US Natural Gas Fund (UNG) for reference.
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Chart 8
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Chart 9
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Chart 10
S&P 1500 BREADTH INDICATORS EXTEND CORRECTION... In Friday's Market Message, I showed the AD Lines and AD Volume Lines for the nine sector SPDRs. These indicators peaked in May and worked their way lower the last few weeks. As with the sector SPDRs, these declines look like corrections within a bigger uptrend. A break above last week's high would end this correction and signal a continuation higher. I am seeing similar chart action for the AD Line and AD Volume Line of the S&P 1500. Chart 11 shows the S&P 1500 AD Volume Line ($SUPUDP) hitting a new high in May and then zigzagging lower the last four weeks. The indicator window shows the 20-day SMA of AD Percent moving into negative territory and staying negative. Prior dips to the zero line marked corrections in December, February and April. The key is timing the end of the correction, which would require an upturn and break back into positive territory.
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Chart 11
Chart 12 shows the S&P 1500 AD Line ($SUPADP) correcting to the November trend line for the third time since the rally began. The 20-day SMA for AD Percent moved into negative territory in early June and bounced back above zero, but this bounce did not hold. A second bounce into positive territory is needed to signal an end to the correction. Notice that the April low required two bounces as well.
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Chart 12
NEW HIGHS CONTINUE TO OUTPACE NEW LOWS... Chart 13 shows the S&P 1500 High-Low Line ($SUPHLP) and Net New Highs percent, which is new highs less new lows divided by total issues. The High-Low Line is a cumulative indicator based on Net New Highs percent. The High-Low Line has been rising since it broke above its 10-day EMA in late November. Except for short dips in late February and mid April, Net New Highs percent has been positive since November. Even though there are fewer Net New Highs now than in mid May, the bulls have a medium-term edge as long as there are more new highs than new lows.
