AMGEN LEADS BIOTECH SPDR HIGHER -- EXHAUSTION GAP AND BREAKAWAY GAP DEFINE CURRENT REVERSAL -- DOWNSIDE MOMENTUM INCREASES FOR THE S&P 500 ETF -- SHORT-TERM BREADTH INDICATORS TURN BEARISH -- CHARTING THE PLUNGE IN SINGLE FAMILY HOME SALES
AMGEN LEADS BIOTECH SPDR HIGHER... Link for today's video. Biotechs continue to show relative strength as the Biotech SPDR (XBI) led the market on Monday. Chart 1 shows XBI bottoming in mid November and moving higher the last 10 months. The ETF surged to a new high in July and then pulled back to the broken resistance zone in August. The August reaction low (trough) further affirms support in this area. The indicator window shows the StockCharts Technical Rank (SCTR) moving above 90 in the second half of April and remaining above 70 the last four months. That's some serious relative strength. Chart 2 shows Amgen (AMGN) breaking out in mid July and broken resistance turning support in the 102.50 area in August. The stock gapped up and hit a new high on Monday as the market reacted to news that Amgen made an offer for Onyx Pharma (ONXX). The indicator window shows the SCTR moving above 50 as the stock broke out in early July. You can read more about SCTR in our ChartSchool article.
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Chart 1
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Chart 2
EXHAUSTION GAP AND BREAKAWAY GAP DEFINE CURRENT REVERSAL... After a big advance from late June to early July, the S&P 500 ETF (SPY) began August with a gap up to 170 and a close above 170. Chart 3 shows this gap failing as SPY filled it with a decline the very next week. Basically, we have an extended advance, a gap up at the end of this advance and a decline that filled the gap. This makes the early August gap an exhaustion gap, which is bearish. But that's not all. SPY stalled above 168 in mid August and then broke support with a gap down. This gap remains in play because it has yet to be filled. A gap that breaks support or starts a new trend is considered a breakaway gap. Taken together, we now have an exhaustion gap and breakaway gap, both of which are bearish. Filling this gap is the first step to reversing the short-term downtrend.
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Chart 3
The indicator window shows the Commodity Channel Index (CCI) becoming very oversold with a move below -200 in mid August. This was even more oversold than in late June. Notice that CCI became oversold three times before the June correction ended. A lot of technical damage was done with the mid August decline and breakdown. This leads me to believe that some healing, or further correcting, is needed before we will see a resumption of the long-term uptrend.
DOWNSIDE MOMENTUM INCREASES FOR THE S&P 500 ETF ... Chart 4 shows a 10-month chart for the S&P 500 ETF. The overall trend is clearly up as prices move from the lower left of the chart to the upper right. Based on the gap analysis above, the short-term trend is down and the pink trend line marks one possible support level. The Raff Regression Channel marks another in the 160-162 area. The indicator window shows the Percent Price Oscillator (5,35,5) dipping into negative territory for the second time this year. This is interesting because the indicator dipped below -1% in June, which was the deepest negative dip since November. These negative dips reflect an increase in downside momentum because PPO(5,35,5) was positive from December to early June. In other words, the pullbacks in SPY were not strong enough to push PPO (5,35,5) into negative territory.
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Chart 4
SHORT-TERM BREADTH INDICATOR TURNS BEARISH... The S&P 500 %Above 50-day SMA ($SPXA50R) is a breadth indicator designed to measure the degree of participation. In general, the stock market has a bullish bias when more than 50% of S&P 500 stocks are above the 50-day moving average, and a bearish bias when less than 50% are above. This indicator applies to the medium-term trend because the 50-day SMA is a medium-term indicator. I have taken this indicator one step further by applying MACD, which means I am measuring the momentum of this breadth indicator. Adding a momentum element turns to medium-term indicator into a more short-term indicator. In general, breadth momentum is bullish when MACD is positive and bearish when negative. Instead of absolute levels, however, I am using thresholds to reduce the number of whipsaws. A bullish signal triggers when MACD moves above 1 and this signal remains until the indicator moves below -1, which triggers a bearish signal.
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Chart 5
Chart 5 shows MACD of the S&P 500 %Above 50-day SMA in the main window. Note that the scale is on the left. The red dotted lines mark bearish signals, while the green dotted lines mark bullish signals. MACD is currently on a bear signal because it moved below -1 last week. A move above +1 is needed to reverse this bearish signal. The bottom indicator window shows the actual indicator hitting 50% in mid August. This is a critical area because a decisive move below 50% would have medium-term bearish consequences. Chart 6 shows the Nasdaq 100 %Above 50-day SMA ($NDXA50R) with similar characteristics.
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Chart 6
CHARTING THE PLUNGE IN SINGLE FAMILY HOME SALES... Even though actual buyers and sellers do not drive economic data points, these indicators can trend and chartists can analyze this trend for clues on related financial instruments. Chart 7 was created with a user-defined index on a StockCharts.com Pro account. I uploaded the data from the St. Louis Fed database (FRED). As their name implies, the homebuilders build mostly single-family homes, as opposed to multi-family units like apartment complexes. Chart 6 shows single-family home sales stalling in the 440,000 to 460,000 area and then plunging below 400,000. July's 394,000 is the lowest reading of the year. The trend since early 2011 was up, but this plunge broke the trend line and the rate-of-ascent. This is not a good sign for the housing stocks and stocks in related industries. Housing starts and building permits will provide the next data points for the housing industry.
