S&P 500 TRIGGERS A MACD SELL SIGNAL, SETTING A CORRECTION TARGET FOR THE DOW, BREADTH LINES FAIL TO CONFIRM FOR KEY SECTORS, REGIONAL BANK ETFS SHOW RELATIVE STRENGTH, RETAIL SPDR TESTS KEY TREND LINE AFTER GAP
S&P 500 TRIGGERS A MACD SELL SIGNAL ... Link for today's video. Remember "sell in May and go away"? This phrase is based on the six month cycle in the stock market. According to the Stock Trader's Almanac, the period from May to October is the weakest six month period for the Dow with an average gain that is less than 1%. The six month period from November to April is the strongest with an average gain that exceeds 7%. As noted before, chartists need to combine a timing mechanism with cycles because cycles are sometimes early, sometimes late and sometimes no shows. Chart 1 shows weekly bars for the S&P 500 with May marked in yellow. The indicator window shows the MACD-Histogram with the red dotted lines marking bearish signals. Note that the MACD-Histogram turns negative when MACD moves below its signal line. This is the timing mechanism for the six month strategy. Even though this bearish signal trigger in June, it is still within the bearish six month period and could signal the start of at least a correction. The green horizontal supports mark a support zone in the 1480-1530 area. The lower trend line of the rising channel extends to the 1500 area in August. A move back to the 1500 area would represent a 10% correction, which is still normal considering the extent of the prior advance.
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Chart 1
SETTING A CORRECTION TARGET FOR THE DOW... Chart 2 shows the Dow Industrials with a correction target to the 14000 area. The pink lines mark a pair of 23 to 25% advances on this chart. After the first advance, the Dow retraced around 50% with a correction back to the 12000 area. The current advance is similar in both time and distance to the prior advance. A 50% retracement of this move would target a correction to the 14000 area. Admittedly, predicting the end of a correction or decline is a challenge. In fact, it is an estimate based on past price action. The green lines show two more possible support levels, while the blue trend line marks another. There is, however, some clustering in the 14000 area this summer (250). Remember, technical analysis is part art and part science.
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Chart 2
BREADTH LINES FAIL TO CONFIRM FOR KEY SECTORS... There were bull flags all over the place last week and several ETFs broke flag resistance levels with surges early this week. These breakouts failed to hold as the market moved lower on Wednesday afternoon and plunged on Thursday. Why did these breakouts fail? Perhaps because key sector breadth indicators failed to confirm. Last week I showed CandleGlance breadth charts for the nine sector SPDRs. The AD Line and AD Volume Lines for the four offensive sectors were trending lower and I marked short-term resistance levels to watch. Chart 3 shows these indicators for the Consumer Discretionary SPDR (XLY), Technology SPDR (XLK), Industrials SPDR (XLI) and Finance SPDR (XLF). Notice that only two of eight broke above their red resistance lines: the AD Line for XLY and the AD Volume Line for XLK. The other six did not breakout and confirm the flag breakout we saw in the S&P 500 ETF on Tuesday. These four sectors remain in corrective mode, which means the broader market is in corrective mode. This correction will end when the majority of these breadth indicators break resistance.
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Chart 3
REGIONAL BANK ETFS SHOW RELATIVE STRENGTH... The S&P 500 plunged over 2% on Thursday with most stocks and ETFs getting hit hard as well. A few, however, held up better than the overall market and actually closed above their opening levels. There are two ways to show relative strength during a broad decline: decline less than the market or advance when the market declines. The Regional Bank SPDR (KRE) and the KBW Bank Index SPDR (KBE) showed relative strength because both declined much less than the broader market. One day of relative strength is not enough to base a strategy, but it should alert chartists to keep a close eye on this group for future developments. Chart 4 shows KRE peaking along with the rest of the market on May 22nd and falling the last five weeks. A falling flag could be taking shape as broken resistance turns support. A break above 33 would end the flag and signal a continuation higher. The indicator window shows the price relative (KRE:SPY ratio) breaking above its late May high with a surge this past week. This means KRE is showing relative strength. Chart 5 shows KRE with a triangle forming and first resistance at 28.40.
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Chart 4
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Chart 5
RETAIL SPDR TESTS KEY TREND LINE AFTER GAP... Retail stocks hold the key to the consumer discretionary sector and the consumer discretionary sector holds an important key to the broader market. Also note that retail spending drives some 2/3 of GDP. As such, I will be watching the Retail SPDR (XRT) closely over the next few days and weeks. Chart 6 shows XRT hitting resistance in the 79 area over the last five weeks. After a gap and sharp decline on Thursday, the ETF is testing the late December trend line and support from the early June low. (Note: XRT was trading below this trend line early Friday). Also notice that RSI is testing the 40-50 zone for the fourth time since the rally began. A trend line break and RSI break below 40 would be negative and suggest that an extended correction is taking shape. The 38.2% retracement and early May low mark first support in the 72 area. The 50% retracement and April lows mark next support in the 69 area.
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Chart 6
DOLLAR HOLDS UPTREND WITH SURGE OFF KEY TREND LINE... The US Dollar Index ($USD) was hit hard in May and early June, but recovered just in time to maintain its long-term uptrend. The Dollar is attracting buying interest because the Fed affirmed its intention to wind down its current quantitative easing program. A resumption of Dollar strength could further weigh on commodities, such as gold and oil. Chart 7 shows the index zigzagging higher since May 2011. After hitting a new high above 84, the index plunged below 81 and appeared to negate the triangle breakout. The US Dollar Index, however, is prone to overshoots and ultimately found support just above the 2011 trend line. This week's surge back to the 82 area affirms support here and bodes well for the long-term uptrend. Failure to hold this surge and a break below the June low would be bearish. Chart 8 shows the US Dollar Fund (UUP) overshooting its support zone in the 22.10 area and recovering with a surge above 22.
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Chart 7
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Chart 8
OIL BREAKOUT FAILS AS MAJOR RESISTANCE LEVEL HOLDS... A rebound in the Dollar and plunge in the stock market proved too much for oil as Spot Light Crude ($WTIC) fell back below its breakout. While unrest in the Middle East remains a wild card, an uptrend in the Dollar and correction in the stock market could prevail and weigh on crude in the coming weeks. Chart 9 shows $WTIC breaking above 98 last week and then falling back towards 95 this week. With this fall back, chartists can mark a massive resistance zone in the 98-100 area that extends back to August 2012. Chart 10 shows the US Oil Fund (USO) breaking out at 34.50 and failing to hold this breakout with a plunge below 34. Despite this failed breakout, the trend is still up as USO remains above the mid April trend line and MACD remains above its signal line. Watch these two technical features for signs of a trend reversal on the daily chart. (Note: MACD was below its signal line early Friday).
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Chart 9
