IWM AND QQQ LEAD, BUT BECOME SHORT-TERM OVERBOUGHT -- CONSUMER DISCRETIONARY AND FINANCE SECTORS OUTPERFORM -- SETTING FIRST SUPPORTS FOR XLF AND XLY -- IBM TESTS SUPPORT AHEAD OF EARNINGS REPORT -- INTEL BREAKS WEDGE RESISTANCE WITH GAP
IWM AND QQQ LEAD, BUT BECOME SHORT-TERM OVERBOUGHT ... Link for today's video. Stocks went on a tear the last three weeks with the Russell 2000 ETF (IWM) and the Nasdaq 100 ETF (QQQ) leading the major index ETFs. It is quite positive to see these two groups leading the market, but both are short-term overbought after big moves and ripe for a rest. Chart 1 shows IWM breaking resistance in route to a 7+ percent surge since late June. The ETF broke resistance from the May-June highs and forged fresh 52-week highs last week. As with the early May breakout, note that broken resistance turns first support in the 99 area (plus or minus a point). Keep in mind that IWM is based on the Russell 2000 ($RUT), which has some 2000 stocks. With so many moving parts, support and resistance levels for indices are less precise than support and resistance levels for individual stocks. This is why I prefer to use zones for indices and ETFs. In addition to broken resistance levels, also notice that the 38-50% retracement zone validates support in the 98-99 area. The indicator window shows the price relative (IWM:SPY ratio) bottoming at the beginning of May and moving to a new high as well. This confirms that IWM is outperforming SPY or small-caps are outperforming large-caps. Relative strength in small-caps is a positive for the market overall because smaller companies are more sensitive to changes in the economy. Chart 2 shows QQQ with similar characteristics.
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Chart 1
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Chart 2
CONSUMER DISCRETIONARY AND FINANCE SECTORS OUTPERFORM... The Consumer Discretionary SPDR (XLY) and Finance SPDR (XLF) were by far the strongest sectors over the last three weeks. Relative strength in the finance and consumer discretionary sectors is very positive for the market overall. The consumer discretionary sector is the most economically sensitive sector and has the highest correlation to the S&P 500. The finance sector is the second largest sector in the S&P 500 and represents the health of the banking system. PerfChart 3 shows the absolute performance for the nine sector SPDRs since June 24th, which is when the S&P 500 bottomed. Notice that all nine sectors, and the S&P 500, are up over this timeframe. The black dotted line marks the performance of the S&P 500, which is considered the benchmark. The Consumer Discretionary SPDR and the Finance SPDR are both solidly outperforming the S&P 500 because they are up more than the benchmark. Sectors up less than the S&P 500 are underperforming.
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Chart 3
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Chart 4
Chartists can also separate the leaders from the laggards by clicking the S&P 500 tab to make it the baseline. This means the percentage gain/loss is now relative to the S&P 500. Chart 4 shows the nine sectors relative to the S&P 500. Notice that relative performance for the S&P 500 is 0% because it is being compared to itself. Sectors showing positive relative performance, such as finance and consumer discretionary, are outperforming the S&P 500. Sectors showing negative relative performance, such as materials and consumer staples, are underperforming the market.
SETTING FIRST SUPPORTS FOR XLF AND XLY... The charts for the Consumer Discretionary SPDR (XLY) and the Finance SPDR (XLF) are similar to the first two charts in this commentary (IWM and QQQ). XLF and XLY also broke out with big surges and broken resistance levels turn first support. Chart 5 shows XLY breaking flag/wedge resistance with a big surge the last three weeks. Chartists do not need a momentum oscillator to understand that XLY is short-term overbought because the ETF is up over 9% since June 24th. The flag/wedge breakout ended a six week pullback and signaled a continuation of the larger uptrend. Broken resistance in the 57 area turns first support. Chart 6 shows the Finance SPDR (XLF) breaking out in early July and broken resistance turning first support in the 19.5 area.
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Chart 5
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Chart 6
IBM TESTS LONG TERM SUPPORT AHEAD OF EARNINGS REPORT... The Dow Industrials is challenging its May highs after a big surge the last three weeks, but its most influential component did not participate in the rally and remains near support. The Dow is a price weighted average of 30 stocks. This means the stocks with the highest price carry the most weight and the stocks with the lowest price carry the least weight. IBM is by far the most influential component because it trades above $190 per share. Chevron (124) is a distant second. Chart 7 shows IBM peaking in March, forming a lower high in May and testing its April low with a small triangle the last few weeks. IBM reports earnings on Wednesday and the subsequent reaction could resolve this consolidation. But which way? An upside breakout would reinforce long-term support and be positive for the Dow. A downside break would signal a continuation lower and argue for a break below the April low, which would be negative for the Dow and the broader market. The indicator window shows the price relative moving to a new low this month as IBM underperforms the broader market.
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Chart 7
INTEL BREAKS WEDGE RESISTANCE WITH GAP... Intel (INTC) also reports on Wednesday and did not partake in the rally over the last three weeks. Chart 8 shows INTC peaking in early June and forming a falling wedge the last four weeks. With a hammer and gap last week, the stock broke wedge resistance and then consolidated the last two days. Traders are obviously on hold ahead of earnings. Technically, the gap and breakout are bullish until proven otherwise, which would take a move below the gap zone. Intel is a key player in the Nasdaq, Nasdaq 100 and semiconductor group. John Murphy noted that Microsoft hit a new high last week. It will be interesting to see if Intel can follow suit by holding its wedge breakout.
