CONSUMER DISCRETIONARY SPDR CORRECTS WITH BIGGER UPTREND -- MARKING LONG-TERM SUPPORT FOR XLK, XLF AND XLI -- HOME CONSTRUCTION ISHARES HITS RESISTANCE AT NECKLINE BREAK -- A ROUGH MONTH FOR THREE KEY INDUSTRY GROUP ETFS
CONSUMER DISCRETIONARY SPDR CORRECTS WITH BIGGER UPTREND... Link for today's video. The current uptrend in the stock market began in mid November. Since this low, the major index ETFs and most sector SPDRs have zigzagged higher with a series of rising peaks and rising troughs. With last week's decline, we can make the case for a short-term downtrend, but not a medium-term or long-term downtrend. These declines are simply too short to affect the larger uptrends. Chart 1 shows the Consumer Discretionary SPDR (XLY) advancing some 35% since the November low. Since peaking in early August, the ETF gapped below short-term support to start a short-term downtrend. This gap/break is holding (red arrow) with broken support turning first resistance at 59. The short-term trend is clearly down as long as this resistance level holds.
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Chart 1
How far can this correction extend before chartists should become concerned with the larger uptrend? We could mark key support at the June low, but I think this is a bit far away and too obvious. Instead of an obvious low, chartists can apply the Raff Regression Channel or a trend line to mark support. The November trend line marks support near 57, while the Raff Regression Channel marks support around 56. Note that the Raff Regression Channel extends from the November closing low to the August closing high. These two points mark the closing low and high of the move. The lower trend line ends just above 56 and this is where I am marking support. The Fibonacci Retracements Tool is also shown marking retracement support in the 56.50 area. Using all three of these technical tools, I would mark a support zone in the 56-57 area. A break below this level would suggest that the correction has overstayed its welcome and the larger uptrend is in jeopardy.
Note that I am giving the Raff Regression Channel the most importance. In addition, I added a little buffer to this support level and created a support zone. The major index ETFs and sector SPDRs have dozens of stocks pushing them higher and pulling them down. It is hard to expect exact support and resistance levels from securities with so many moving parts. This is why I use zones for indices and ETFs.
MARKING LONG-TERM SUPPORT FOR XLK, XLF AND XLI... While the consumer discretionary sector is the most economically sensitive sector, and perhaps the most important sector, the three other offensive sectors also bear watching. The finance sector represents the banking system, the technology sector represents the high-beta end of the market and the industrials sector represents the capital goods portion of the economy. The stock market is in good shape when at least three of these four are trending up. Currently, all four are in medium-to-long term uptrends, and short-term downtrends. As with XLY, these short-term downtrends are still considered corrections.
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Chart 2
Chart 3 shows the Finance SPDR (XLF) with support in the 19-19.5 area. The red lines mark a smaller Raff Regression Channel extending down from the late July high. The upper trend line ends just below 20.5 and I am marking short-term resistance here. Chart 4 shows the Technology SPDR (XLK) with a gap down marking the short-term downtrend. Long-term support is set in the 30.5-31 area. Chart 5 shows the Industrials SPDR (XLI) with long-term support in the 42-43 area.
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Chart 3
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Chart 4
HOME CONSTRUCTION ISHARES HITS RESISTANCE AT NECKLINE BREAK... The Home Construction iShares (ITB) broke neckline support last week and this break confirms the bearish head-and-shoulders pattern. The bulls, however, are not going quietly as ITB firmed and challenged the support break this week. Chart 5 shows ITB breaking below the 2013 lows and then forming a large bullish engulfing on 15-Aug. The ETF bounced on Tuesday-Thursday this week, but fell back with a sharp decline on Friday. Today's weakness is attributed to a sharp drop in new home sales for July. The break was certainly challenged, but ITB clearly did not reverse the three month downtrend. The May trend line and August highs mark resistance at 22. A follow through break above this level would question the validity of the support break. In other words, a quick move back above 22 could mean that the support break was a bear trap.
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Chart 5
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Chart 6
Chart 6 shows weekly candlesticks to put the patterns into perspective. When first taking about the head-and-shoulders pattern, I noted that the right half of a head-and-shoulders pattern can sometimes evolve into a falling wedge, which could be the case right now. The falling wedge is typical for a corrective pattern within a larger downtrend. For now, the wedge is still falling and we have yet to see a breakout that would suggest otherwise. Stay tuned....
A ROUGH MONTH FOR THREE KEY INDUSTRY GROUP ETFS... PerfChart 7 shows one-month performance for the S&P 500 ETF (SPY) and seven industry group ETFs. SPY is down around 2%. The Retail SPDR (XRT), Home Construction iShares (ITB) and Semiconductor SPDR (XSD) show relative weakness with bigger declines. This PerfChart does not include Friday's data. ITB is down around 2% on Friday and XRT is down around .75%. Admittedly, I am concerned with relative weakness in these three key groups. Homebuilding is clearly an important part of the economy. Semiconductors are a very cyclical group that is important to the technology sector. Retail spending accounts for 2/3 of GDP and this group is vital to the overall economy. ITB is the only one of the three in a downtrend overall, but relative weakness in semis and retail is a big concern going forward.
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Chart 7
SEMICONDUCTOR AND RETAIL SPDRS START UNDERPERFORMING... Chart 8 shows the Retail SPDR (XRT) within a long-term uptrend since mid November and a short-term downtrend since early August. Sound familiar? Long-term, XRT remains above support from the Raff Regression Channel (76-77). Short-term, the support break and early August trend line mark resistance just above 80. My concern is with the price relative, which is the XRT:SPY ratio. This ratio stalled the last few weeks and broke below the July low this week. This means the relative performance line is breaking down and XRT is starting to underperform. Relative weakness in this key group is negative for the market overall.
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Chart 8
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Chart 9
Chart 9 shows the Semiconductor SPDR (XSD) in a long-term uptrend and short-term downtrend. The four week decline looks like a falling flag, which is a bullish continuation pattern. However, it is short-term bearish as long as it falls. A move above 56 would break resistance, reverse the four week slide and signal a resumption of the bigger uptrend. The indicator window shows the price relative (XSD:SPY ratio) peaking in mid July and edging lower the last few weeks. We have yet to see a breakdown, but I will be watching this relative performance line closely.
NET NEW HIGHS REBOUND FOR THE S&P 1500 ... As noted above, I am working on the assumption that the August decline is a correction within a bigger uptrend. The million-dollar question is: when does this decline become more than just a correction? Support levels for sector SPDRs are key price levels to watch. I am also watching High-Low Percent on the S&P 1500. High-Low Percent equals new highs less new lows divided by total issues. Chart 10 shows the S&P 1500 High-Low Line ($SUPHLP) with its 10-day EMA. This line has been rising (above its 10-day EMA) since mid November. The line flattened the last two weeks as High-Low Percent dipped briefly into negative territory. The red arrows mark the dips into negative territory that did not exceed -2%. High-Low Percent rebounded back into positive territory after last week's dip and exceeded +2%. -2% remains the bearish line in the sand because High-Low Percent has not exceeded this level since mid November. An expansion of new lows that pushes High-Low Percent below -2% would signal a significant increase in selling pressure. This would likely be enough to push the High-Low Line below its 10-day EMA. Chart 11 shows the Nasdaq 100 High-Low Line ($NDXHLP) with similar characteristics.
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Chart 10
