BROAD SELLING HITS STOCK MARKET -- FINANCIALS LEAD SECTORS LOWER -- WEAKNESS IN AIRLINES WEIGHS ON TRANSPORTS -- OIL SURGES ON MIDDLE EAST TENSIONS -- GOLD FOLLOWS OIL WITH CHALLENGE TO JUNE HIGHS
BROAD SELLING HITS STOCK MARKET ... Stocks were hit with broad selling pressure on Tuesday as traders worried over possible US involvement in Syria. Combined with tensions in Egypt, turmoil in the Middle East is clearly unnerving the markets. Note that gold and oil are both up. I will have charts on these two later in the commentary. Many of the major index ETFs hit fresh 52-week highs in early August and then went into corrective mode the last few weeks. It is hard to say how long a correction will extend, but we could see above-average uncertainty for the next 1 to 2 months. In addition to the Middle East, we have Fed tapering, the appointment of a new Fed chairperson, the debt-ceiling deadline (mid October) and the end of the bearish six month cycle (31-Oct). Economic reports have also turned mixed with the sharp decline in new home sales last week and the worse-than-expected durable goods report on Monday. Admittedly, these are fundamentals and the markets often look past the fundamentals, which is why we focus mostly on the charts.
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Chart 1
Chart 1 (above) shows the Russell 2000 ETF (IWM) breaking short-term support with a gap in mid August, bouncing with a rising wedge and then breaking wedge support with a sharp decline today. This signals a continuation of the short-term downtrend and targets a move to next support in the 99 area. Broken resistance and the 50-61.80% retracement zone mark support. The indicator window shows MACD(5,35,5) turning down today and moving below its signal line. Chart 2 shows IWM over the last 11 months for a long-term perspective. The bigger trend is still up with the Raff Regression Channel marking long-term support in the 95-96 area. MACD(12,26,9) is hovering near the zero line. An upturn and break above the signal line is needed to signal a resumption of the bigger uptrend.
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Chart 2
FINANCIALS LEAD SECTORS LOWER... All sectors were down around midday with the Finance SPDR (XLF) leading the way lower. The financial services sector is the largest sector in the Russell 2000, which explains relative weakness in IWM today. Chart 3 shows XLF peaking before the S&P 500 by hitting its high in late July. XLF has since declined over 5% in the last five weeks. The ETF gapped down on the open today and held this gap. Chartists can now mark first resistance at this week's high. The indicator window shows the price relative moving lower to confirm relative weakness.
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Chart 3
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Chart 4
Chart 4 shows the Regional Bank SPDR (KRE) getting hit even harder with a 2+ percent decline. On the price chart, the ETF formed a falling channel for the third time in six months. The first two resulted in upside breakouts. This one resulted in a downside break with a gap. Chartists can now mark resistance at last week's high. The indicator window shows Aroon Down surging above Aroon Up and hitting 100. This suggests that a new downtrend is emerging.
WEAKNESS IN AIRLINES WEIGHS ON TRANSPORTS... The Dow Transports extended their current downswing with a sharp decline. Perhaps rising oil prices are to blame. Chart 5 shows the Average zigzagging higher with a series of swings since April. The blue dotted lines mark support and resistance for these swings. The Average broke support with the early August decline and formed a lower high with this week's plunge. We can now draw the downswing trend line connecting the August peaks. The overall trend remains up because the Dow Transports hit a new high in early August. However, the Average has not kept pace with the S&P 500 since mid March. The indicator window shows the price relative ($TRAN:$SPX ratio) peaking in mid March and remaining well below this high in August. This relative weakness means the Dow Transports may be set for a support test in the 59-60 area. Chart 6 shows the DJ US Airline Index ($DJUSAR) breaking the November trend line, consolidating and breaking consolidation support with a sharp decline today.
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Chart 5
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Chart 6
OIL SURGES ON MIDDLE EAST TENSIONS ... Oil surged as the Middle East took center stage again. There is a clear correlation here because the Egyptian army removed President Morsi on July 3rd and Spot Light Crude ($WTIC) surged above $100 in early July. As chart 7 shows, this move confirmed an inverse head-and-shoulders pattern. $WTIC surged to the 108 area and then consolidated for a few weeks. Although not shown, oil is trading near 109 today, which means $WTIC broke pennant resistance. This break signals a continuation of the existing uptrend and chartists can now mark support with the August lows (102). Chart 8 shows the US Oil Fund (USO) for reference.
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Chart 7
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Chart 8
GOLD FOLLOWS OIL WITH CHALLENGE TO JUNE HIGHS ... Middle East tensions and other uncertainties are pushing money into gold as a safe haven alternative. Chart 9 shows Spot Gold ($GOLD) bottoming at the end of June and moving higher the last two months. This $200+ advance is the biggest since 2011. While I still think the long-term trend is down, the medium-term trend is clearly up as gold challenges its June highs. This is an end-of-day (EOD) chart so today's advance is not shown. Gold is up around $20 and trading in the $1424 area. The pink trend line extending up from the late June low marks first support. Chartists can also watch the Aroon indicators for signs of a trend change. Aroon Up surged above Aroon Down and hit 100 on July 22nd to signal the start of the uptrend. This indicator remains in bull mode until Aroon Down surges above Aroon Up and hits 100. Chart 10 shows the Gold SPDR (GLD) for reference.
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Chart 9
