A BEARISH FAILURE SWING COULD BE FORMING IN THE S&P 500 -- BIG TECHS WEIGH ON THE TECHNOLOGY SPDR -- GOLD SURGES TO RESISTANCE AND STALLS -- DOLLAR ABSORBS VOLATILITY TO MAINTAIN UPTREND -- A MACD SQUEEZE FOR THE EURO INDEX
A BEARISH FAILURE SWING COULD BE FORMING IN THE S&P 500 ... Link for today's video. Chart 1 shows weekly bars for the S&P 500 with RSI in the indicator window. First, note that the overall trend is clearly up with a series of rising peaks and rising troughs since late 2011. The index recently cleared its May high and there is no evidence of a top on this chart right now. Even though all tops are not the same, notice that the index consolidated for seven months to mark the 2011 top. Market tops often involve a process that takes several months. This process usually includes relative weakness in small-caps, narrowing participation and/or weakness in the AD Line. So far small-caps are leading as the Russell 2000 hit a new high this month and the AD Line shows broad participation with a new high as well. Therefore, the worst I would expect at this point is a trading range with support in the 1550 area and resistance in the 1700 area.
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Chart 1
Looking ahead, it is possible that a bearish failure swing is developing in RSI. According the Wells Wilder, creator of RSI, a bearish failure swing forms when RSI moves above 70, pulls back, advances again, fails to clear 70 and then breaks its prior low. Notice that a confirmed bearish failure swing occurred in late May 2011 (red dotted line). Even though RSI is also forming a potential bearish divergence, keep in mind that a divergence is not required for a bearish failure swing. At this point, RSI has yet to break above 70 and a bearish failure swing could be brewing. This signal would be confirmed with a move below the June low (green line). Chart 2 shows the Russell 2000 ($RUT) moving to the upper trend line of a rising channel and RSI moving above 70. This move above 70 makes a bearish failure swing impossible, but I would still consider the index short-term overbought and mark RSI support at the May low.
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Chart 2
BIG TECHS WEIGH ON THE TECHNOLOGY SPDR... It was a great week for big banks, but not for big techs. While Citigroup, Bank of America, Goldman Sachs and JP Morgan moved higher and will finish up for the week, Microsoft, Google and Intel moved lower and will finish down for the week. Weakness in these three is weighing on large-cap tech indices and ETFs. Chart 3 shows the Technology SPDR (XLK) hitting resistance near its May high and falling over 1% in early trade on Friday. Technically, the big trend remains up because prices are still moving from the lower left to the upper right on the chart. Despite an overall uptrend, this gap from resistance is short-term bearish and could lead to a support test in the 30-30.25 area. The indicator window shows the price relative (XLK:SPY ratio) moving to a new low for the year. XLK briefly outperformed in May, but gave it all back over the last seven weeks. We can see that this is largely a large cap issue because chart 4 shows the Equal-weight Technology ETF (RYT) breaking above its May high and its price relative hitting a new high this month.
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Chart 3
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Chart 4
GOLD SURGES TO RESISTANCE AND STALLS... Chart 5 shows weekly Spot Gold ($GOLD) breaking down in April and bouncing off the 1200 area over the last few weeks. Gold fell around 33% from peak to trough over a nine month period (1800 to 1200). Even though gold is up around $100 from its June low, the trend here is clearly down with the highs of the last four weeks marking first resistance at 1300. A break above this level would argue for a bigger bounce, but this would still be considered a counter trend move with next resistance in the 1400 area. The indicator window shows the Commodity Channel Index (CCI) becoming oversold in late December and remaining largely oversold throughout 2013. A break above the red resistance line is needed to signal a notable upturn in momentum and argue for an oversold bounce.
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Chart 5
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Chart 6
Chart 6 shows a daily chart for the Gold SPDR (GLD) and RSI in the indicator window. GLD got an oversold bounce that retraced 38-50% of the June decline. The April trend line marks first resistance at 128. RSI is just below momentum resistance in the 50-60 zone, which has held the entire year. A break above 60 would be bullish for momentum here.
DOLLAR ABSORBS VOLATILITY TO MAINTAIN UPTREND... Tapering or not, chart 7 shows the US Dollar Index ($USD) within a clear uptrend since May 2011. Price action turned volatile recently as the index surged above 84 in May, plunged below 81 in June and then surged back above 84 in July. Even though this volatility can be attributed to the prospects of Fed tapering, the Dollar appears relatively immune to quantitative easing. Note that the Fed has had some sort of quantitative easing in play since November 2008. I will mark long-term support in the 81 area and remain long-term bullish as long as the June low holds (green line).
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Chart 7
The Euro accounts for around 57.6% of the index and the Yen accounts for around 13.6%. Chartists should focus on these two currencies for clues on the US Dollar Index. The indicator window shows the Euro Index ($XEU) and Yen Index ($XJY) facilitating the Dollar uptrend in two stages. First, the Euro Index fell from July 2011 to July 2012. Weakness in the Euro pushed the index from 73 to 84. Second, the Yen Index fell from October 2012 to May 2013. Weakness in the Yen pushed the index from 79 to 84.50. Chart 8 shows the US Dollar Fund (UUP) for reference.
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Chart 8
A MACD SQUEEZE FOR THE EURO INDEX... With the Euro as the big driver for the US Dollar Index, chartists should focus on the Euro Index for clues on the greenback. Chart 9 shows the Euro Index with an extended decline in July 2012, a counter trend bounce into January 2013 and a breakdown in February. Price action turned choppy the last several months with the March-July lows marking key support. A break below these lows would be Euro bearish and Dollar bullish. The indicator window shows MACD within a tight range the last three months. Look for a range break for the next momentum signal. Chart 10 shows the Yen Index for reference.
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Chart 9
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Chart 10
JOBLESS CLAIMS CONTINUE TO TREND LOWER... Chartists looking for clues on tapering and employment, which seem to be related, can turn to weekly Initial Jobless Claims ($$UNEMPCIN). Chairman Bernanke has made it abundantly clear that quantitative easing depends on economic data and the labor market. Chart 11 shows initial claims dropping back below 350K again. The overall trend is down with the 300,000-325,000 area marking the next target. A few readings below 325,000 would likely seal the deal for tapering. This is where initial claims were prior to the financial crisis. Chartists should become concerned if initial claims move above 375,000 for more than one week.
