DIRECTIONAL MOVEMENT INDICATORS TRIGGER NEW SIGNAL FOR SPY -- QQQ PLUNGES INTO SUPPORT ZONE -- CHINESE STOCKS GET HAMMERED AS SHORT-TERM RATES SURGE -- EUROPEAN TOP 100 INDEX TURNS RED YEAR-TO-DATE
DIRECTIONAL MOVEMENT INDICATORS TRIGGER NEW SIGNAL FOR SPY... Link for today's video. According to the Directional Movement Indicators and the Vortex Indicator, the S&P 500 ETF (SPY) was in an uptrend from mid December until last week. After falling 2% last week and over 4% the last five weeks, these two indicators triggered bearish signals that suggest the start of a downtrend. First, note that the Directional Movement Indicators are part of the Average Directional Index (ADX), which was developed by Wells Wilder. Plus Directional Movement (+DI) captures upside movements and is green. Minus Directional Movement (-DM) captures downside movements and is red. The Vortex Indicator works in a similar fashion because it captures positive trend movements with +VI and negative trend movements with -VI. Despite their similarity, I like to use both to confirm signals and reduce whipsaws. Keep in mind, however, that it is impossible to totally eliminate whipsaws (bad signals).
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Chart 1
Chart 1 shows the S&P 500 ETF (SPY) with these indicators in the lower windows. First, notice that SPY broke below the lower trend line of a rising channel. Second, notice that Minus Directional Movement (-DM) broke above Plus Directional Movement (+DM) AND exceeded 30. It is important to qualify indicator crosses with a subsequent move above 30 for confirmation. This will greatly reduce whipsaws. Third, notice that VI moved above +VI and crossed above 1.1, twice in the last two weeks. Again, simple indicator crosses are ignored unless there is follow through above the 1.1 level. Chartists can even add a third red/green pair by using Aroon Up and Aroon Down. A bull signals triggers when Aroon Up moves above Aroon Down and hits 100. The bear signal is the opposite. As this chart now stands, all three indicators triggered bearish signals over the last two weeks. These signals reverse the bullish signals that were triggered in early December. Chart 2 shows the Russell 2000 ETF (IWM) with the same indicators. Aroon and the Vortex Indicators trigger bearish signal, but the Directional Movement Indicators did not. DI crossed below +DI, but DI has yet to exceed 30 for confirmation.
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Chart 2
QQQ PLUNGES INTO SUPPORT ZONE ... Even though a medium-term bearish signal triggered for SPY, stocks are already getting short-term oversold and ripe for a bounce or consolidation. Chart 3 shows the Nasdaq 100 ETF (QQQ) breaking down with a sharp decline the last four days. QQQ is down over 6% from its mid May high and down over 5% the last four days. We do not need a momentum oscillator to figure out that QQQ is short-term oversold. Also notice that QQQ is trading in a support zone. The 61.80% retracement cluster and late December trend line combine to mark support in the 69-70 area. This means we could see an oversold bounce, perhaps back to the 71.50 area.
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Chart 3
The indicator window shows RSI breaking below its bull zone (40-80) with a move below 40. RSI is below 40 for the first time since mid November, and has shifted from bullish to bearish. This means the 20 to 60 zone now holds the key to a downtrend and a break above 60 is needed to put RSI back on the bullish track. Apple is weighing on QQQ today with a decline below 410. Chart 4 shows Apple (AAPL) breaking wedge support in early June and triangle support in mid June. The April lows mark the next support area. Chart 5 shows Google (GOOG) also showing some weakness with a wedge break the last three days. In contrast to Apple, Google is in a long-term uptrend and this is a correction within that uptrend. First support resides in the 820-840 area.
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Chart 4
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Chart 5
CHINESE STOCKS GET HAMMERED AS SHORT-TERM RATES SURGE... Asian stocks were hit hard on Monday as the Shanghai Composite ($SSEC) fell over 5% and the Hang Seng Index ($HSI) declined over 2%. A surge in short-term rates got the blame as the interbank lending rate and seven-day interest rate moved sharply higher. The seven-day borrowing rate moved above 10%, its highest level in over a year. Such a move in very short rates shows strong demand for cash as banks get squeezed trying to fund their short-term liabilities. In addition to the fundamentals, chart 6 shows the Shanghai Composite falling below 2000 for the first time this year and testing its December low. Notice that the index peaked near 2450 in early February and is now down over 20% from its 2013 high. A break below the December low would forge a fresh 52-week low. The indicator window shows the price relative ($SSEC:$SPX ratio) moving lower the last few years as China continues to underperform the US. Chart 7 shows the Hang Seng Index falling below 20,000 and hitting its lowest level since September. Chart 8 shows the Guggenheim China Small-Cap ETF (HAO) hitting resistance at broken support and the 61.80% retracement. The ETF peaked in January, formed a lower high and broke support with a sharp decline the last few weeks.
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Chart 6
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Chart 7
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Chart 8
EUROPEAN TOP 100 INDEX TURNS RED YEAR-TO-DATE ... European stocks are also under pressure and continued to underperform the US. Chart 9 shows the European Top 100 Index ($EUR) giving up its prior surge with a decline below the 2013 lows last week. This broad European index is now down year-to-date. Moreover, the support break is bearish and points to a new downtrend. The indicator window shows $EUR relative to the S&P 500. This ratio broke to new lows recently and European stocks remain relatively weak. Chart 10 shows the French CAC Index ($CAC) falling around 10% the last 5-6 weeks and testing its 2013 lows. A move below 3584 would put this index at its lowest point of the year. Next support resides in the 3350-3400 area. Chart 11 shows the German DAX Index ($DAX) falling back below 8000, but remaining in an uptrend overall. There is a lot of support in the 7500 area, a break of which would be quite negative for Europe and the world because the DAX is locomotive for European equities.
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Chart 9
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Chart 10
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Chart 11
WEAKNESS IN ASIAN AND EMERGING MARKETS PUNISHES MATERIALS ETFS... China is the world's second largest economy and any changes in its economic outlook will no doubt affect the world. While it is hard to get a reading based on official statistics, chartists can get an idea based on stock market performance. As we saw with the charts above, the Shanghai Composite is not performing well and this is negative for the Chinese economy. While nobody expects contraction, the recent decline in the Shanghai Composite indicates that growth could be slower than expected, which is impacting the materials sector. It should also be noted that weakness in emerging market equities is also negative for the global economy, especially companies involved with raw materials, such copper, steel and metals. Chart 12 shows Metals & Mining SPDR (XME) breaking to a fresh 52-week low over the last few days. The ETF is down over 5% in early trading on Monday. XME may be oversold, but it is in a clear downtrend and shows relative weakness. Chart 13 shows the Copper Miners ETF (COPX) breaking below its April low last week and forging another 52-week low with a 5 plus percent decline today. Chart 14 shows the Steel ETF (SLX) hitting a 52-week low today. Chart 15 shows the MSCI BRIC ETF (BKF) falling around 20% in the last four weeks and hitting a 52-week low. Ouch.
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Chart 12
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Chart 13
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Chart 14
