SETTING CORRECTION TARGETS FOR IWM AND SPY -- NETWORKING ISHARES REVERSES AT RESISTANCE -- DB COMMODITIES TRADING FUND CHALLENGES RESISTANCE -- HINDENBURG OMEN TRIGGERS AS NEW LOWS EXPAND -- BPI DIVERGENCES TAKE SHAPE FOR THREE KEY SECTORS
SETTING CORRECTION TARGETS FOR IWM AND SPY... Link for today's video. Based on this week's price action and short-term downtrends in a number of breadth indicators, the market appears to have entered into a corrective period. This is hardly surprising given the run up from mid November to early August. The Russell 2000 ETF (IWM) surged some 40% from the November low to August high, while the S&P 500 ETF (SPY) and Nasdaq 100 ETF (QQQ) advanced over 25%. These are huge moves that deserve a rest, which is what a correction implies. Chart 1 shows IWM within a rising channel the last two years. The ETF hit the upper trend line in late July, stalled for a few weeks and fell back below 103 this week. Broken resistance in the 99-100 area turns first support. Broken resistance, the June lows and the lower trend line mark key support in the 93-95 area. Note that the lower trend line does not reach this area until November. Chartists can also use RSI to set a support zone because it usually trades between 40 and 80 during an uptrend. Notice how this momentum oscillator bounced off the 40-50 zone in May and November 2012. RSI has yet to breach 50 in 2013, which is testament to the strength of the current uptrend. Chartists can mark RSI support in the 40-50 zone and look for IWM to firm if/when RSI reaches this zone.
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Chart 1
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Chart 2
NETWORKING ISHARES REVERSES AT RESISTANCE... The Networking iShares (IGN) surged to a new high this week, but reversed course after Cisco's earnings report and affirmed resistance. Chart 3 shows IGN moving above 31.5 during the week, and then falling back below 31 by the end of the week. Resistance in the 31 area looks formidable because it extends back to the 2012 highs. Also note that this advance formed a five wave sequence. At this point, resistance and the intraweek reversal are not enough to reverse the four month upswing (wave 5). The April trend line and July low can be used to mark upswing support at 29.50. A break below this level would be bearish. The indicator window shows the StockCharts Technical Rank (SCTR) with support (green) and resistance (red) levels. Chartists can use these levels to identify upturns and downturns in relative strength (SCTR). I am marking support with the July low. A break would signal a return to relative weakness and this would be negative for IGN. You can read more about SCTR in our ChartSchool
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Chart 3
DB COMMODITIES TRADING FUND CHALLENGES RESISTANCE... I am not quite ready to turn bullish on commodities in general, but it is worth noting that the DB Commodities Trading Fund (DBC) is making a go at resistance with a big surge this week. It was a good week for commodities with oil advancing over 1% this week, gold rising over 4%, copper adding over 1% and natural gas surging over 4%. Rising commodity prices could be weighing on bonds because Treasuries do not like inflationary pressure. In any case, chart 4 shows the DB Commodities Trading Fund surging around 3% this week. It is possible that a higher low is forming, but we have yet to see a breakout and trend reversal to confirm this low. Follow through above the May-June highs is needed to produce a breakout and reverse the 10 month downtrend in DBC. I am also watching "naked MACD", which is MACD without a signal line. A move above the red trend line and into positive territory would turn momentum bullish.
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Chart 4
HINDENBURG OMEN TRIGGERS AS NEW LOWS EXPAND... The financial media has been abuzz about another Hindenburg omen over the last few weeks. Zerohedge reports six omens this month, while Jason Goepfert of Sentimenttrader.com notes eleven omens in the last 50 days. While I am not sure about the quantity of signals, it does appear that a signal triggered this month. What exactly is this indicator anyway? Created by James Miekka, the Hindenburg Omen warns of potential weakness in the stock market. There are three criteria to activate the omen. First, NYSE new highs and new lows must both be more than 2.8% of advances plus declines. Second, the NY Composite is above the level it was 50 days ago. Third, the number of new highs cannot be more than double the number of new lows. The activation period is good for 30 days. Once active, a sell signal triggers when the McClellan Oscillator moves below zero and negated when the McClellan Oscillator moves back above zero.
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Chart 5
Chart 5 shows NYSE breadth and Hindenburg Omens in April, late May and early August. The April signal did not amount to much, but the May signal foreshadowed the June correction. The early August signal triggered when the S&P 500 was trading near a 52-week high. Before getting too bearish, note that every signal does not work (April). Even good ones sometimes just foreshadow a correction (June). Having said that, there is some important information in the Hindenburg Omen. Namely, it suggests that new lows are expanding when the market is still trading at relatively high levels. One would not expect new lows to expand when the market is trading near new highs. An expansion of new lows shows pockets of weakness within the market and this suggests that stocks are vulnerable to weakness. Chart 6 shows the S&P 1500 High-Low Line ($SUPHLP) above its 10-day EMA, but High-Low Percent dipping into negative territory for the fourth time this year.
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Chart 6
BPI DIVERGENCES TAKE SHAPE FOR THREE KEY SECTORS... The next three charts show a lot of information with four breadth indicators and a bar chart for the given sector SPDR. The top indicator is the AD Line (red). The AD Volume Line is shown in green just below it. Underneath the main window, we have the 21-day EMA of High-Low Percent and the Bullish Percent Index. Note that StockCharts calculates and publishes these breadth indicators for all nine sector SPDRs. See our ChartSchool articles for more on these indicators. Today's focus is on the Consumer Discretionary SPDR (XLY), Industrials SPDR (XLI) and Finance SPDR (XLF). The big trends remain up, but these breadth indicators suggest that a correction or pullback is underway right now.
Chart 7 shows the Consumer Discretionary SPDR falling sharply with a gap below 59. Even though this decline is sharp and sudden, it still looks like a correction within a bigger uptrend. Broken resistance and the 50-62% retracement zone mark first support in the 57 area. The AD Line and AD Volume Line both broke below their 21-day EMAs and are in short-term downtrends. The late July lows mark key support for the bigger uptrend. In the first lower window, the 21-day EMA of High-Low Percent broke below support this week. The lowest window shows the Bullish Percent Index forming a rather large bearish divergence and breaking below its 21-day EMA. Note, however, that the BPI is still at relatively high levels because 83% of stocks in the consumer discretionary sector are still on P&F buy signals.
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Chart 7
Chart 8 shows the Finance SPDR with similar characteristics. On the price chart, XLF is in a short-term downtrend since the late July peak and first support is set at 19.75 (broken resistance and 50% retracement). The AD Line and AD Volume Line broke their 21-day EMAs last week. Both are in short-term downtrends with the July lows marking key support. The 21-day EMA of High-Low Percent broke support with a downturn the last two weeks. The Bullish Percent Index formed a rather larger bearish divergence and broke its 21-day EMA last week. All four breadth indicators, and the price chart, are in short-term downtrends, which means a correction is underway.
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Chart 8
Chart 9 shows the Industrials SPDR with similar characteristics. Also notice that the AD Volume Line formed a small bearish divergence just before this week's decline. The four breadth indicators are in short-term downtrends.
