SPY CHALLENGES GAP ZONE AND FIRST RESISTANCE -- INTERNET ETF AND SOLAR ETF SHOW RELATIVE STRENGTH -- SEMICONDUCTOR SPDR CHALLENGES WEDGE RESISTANCE -- INTEL LEADS MARKET VECTORS SEMICONDUCTOR ETF -- THREE SECTOR AD LINES SHOW RELATIVE STRENGTH
SPY CHALLENGES GAP ZONE AND FIRST RESISTANCE... Link for today's video. The major index ETFs remain in short-term downtrends since early August and long-term uptrends since mid November. This short-term downtrend is a correction that is entering its fifth week and marks the third correction of the year. The first corrections occurred in April and the second in May-June. Both lasted around five weeks. The next two charts show last week's down-gap marking the first resistance zone to watch for a breakout that could signal an end to this correction. A gap reflects an imbalance between buying pressure and selling pressure. The down gap forms when the balance is tilted towards sellers, while an up gap forms when the balance tilts toward buyers. A move above the gap zone is needed to counter this selling pressure and signal an increase in buying pressure. Chart 1 shows the Russell 2000 ETF (IWM) gapping below 102 last week and the gap zone marking a resistance zone in the 102-103 area. A move above this level would fill the gap and break the early August trend line. The indicator window shows the Commodity Channel Index (CCI) breaking a prior low in early August and becoming oversold in mid August. Momentum favors the downside as long as CCI remains below the late August high. Look for a break into positive territory to signal an upturn in momentum.
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Chart 1
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Chart 2
Chart 2 shows the S&P 500 ETF (SPY) gapping below 165 and the 165-166 zone turning into resistance. SPY opened above 165 on Tuesday, but fell back by the close to reinforce this resistance zone. SPY is at an interesting juncture because it firmed near the top of the 50-61.80% retracement zone. This zone is interesting because a typical correction is expected to retrace 50-61.80% of the prior advance (late June to early August). This is not a hard support zone, but rather a potential reversal zone that bears watching. Again, a break above 166 is needed to actually reverse the five week slide. The indicator window shows StochRSI breaking above .50 for the first time since early August. Momentum indicators sometimes become range bound and establish support/resistance levels. StochRSI clearly broke out and this is the early signal that SPY is trying to put in a low. Careful though: the mid June breakout in StochRSI turned out to be a head-fake.
INTERNET ETF AND SOLAR ETF SHOW RELATIVE STRENGTH... Assuming the five week decline is just a correction, which groups will lead when this correction ends? The short answer: those showing relative strength during the correction. The FirstTrust Internet ETF (FDN) and the Guggenheim Solar ETF (TAN) show relative strength because they held up quite well in August. Chart 3 shows FDN in a long-term uptrend and short-term consolidation. While the broader market corrected in August, FDN traded relatively flat with a falling flag/wedge. A break above wedge resistance would signal a continuation higher. Key support is set in the 48-49 area. The first indicator window shows the price relative (FDN:SPY ratio) moving higher from late July to early September. In fact, this relative strength indicator hit a new high on Tuesday. The second indicator window confirms relative strength with the StockCharts Technical Rank (SCTR) holding above 90 the last five weeks.
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Chart 3
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Chart 4
Chart 4 shows TAN breaking out in July, consolidating for a few weeks and breaking out again this week. The August lows and a small buffer now mark key support in the 25-26 area. The first indicator window shows the price relative (TAN:SPY ratio) hitting a new high on Tuesday. Nothing but uptrend and outperformance here. The bottom window shows the SCTR moving above 99 and remaining there since late April. This means its technical rank is in the top 1% for all ETFs (excluding leveraged and inverse ETFs).
SEMICONDUCTOR SPDR CHALLENGES WEDGE RESISTANCE ... I am also watching the Semiconductor SPDR (XSD) because it formed a falling wedge and showed some relative weakness in August. Chart 5 shows XSD stalling in the 54-55 area over the last few weeks. Trading flat when the market declines shows relative strength. The wedge trend line and last week's high mark resistance just below 56, and a breakout would reverse the five week fall and signal a continuation higher. The indicator window shows the price relative (XSD:SPY ratio) flattening out in July-August. The lower window shows the SCTR turning up the last three weeks as XSD showed some relative strength.
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Chart 5
INTEL LEADS MARKET VECTORS SEMICONDUCTOR ETF... The Semiconductor SPDR (XSD) is a broad-based ETF with around 50 stocks. The largest holding, Cirrus Logic (CRUS), accounts for just 3% of the ETF and the top ten holdings account for less than 30% of the ETF. This means the weightings are fairly evenly distributed. The Market Vectors Semiconductor ETF (SMH), on the other hand, is more concentrated with around 25 stocks. The top six holdings account for over 50% of the ETF with Intel (INTC) weighing 18.08%, Taiwan Semi (TSM) accounting for 12.58% and Texas Instruments coming in at 7.08%. Anyone interested in this ETF better watch Intel quite closely. Chart 6 shows SMH making a move today with a break above the mid July trend line and filling of the mid August gap. This move is significant for two reasons. First, last week's gap down did not hold and the ETF quickly recovered. Second, SMH held above its prior low and could still be in a long-term uptrend. The lower indicator window shows the SCTR breaking above the June trend line as relative strength improves with today's breakout.
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Chart 6
Chart 7 shows Intel (INTC) finding support in the 22 area over the last few weeks. As noted in a prior market message, this is an interesting area because the bigger trend is up and the June-August decline looks like a correction. The ideal correction would retrace 50-61.80% and return to broken resistance. Notice how INTC firmed near the 61.80% retracement and the broken resistance zone. The only thing missing is a catalyst to signal an end to the correction and resumption of the bigger uptrend. Today's move is a start, but volume is lacking and INTC has yet to break first resistance at 23 so a little follow through is needed. The indicator window shows the SCTR turning up in mid July and edging higher the last seven weeks. This is positive action and a break above 50 would put Intel in the top half of the league table (S&P 500). Chart 8 shows Applied Materials (AMAT) getting a bounce off support. Also note that KLA Tencor (KLAC), Lam Research (LRCS) and Xilinx (XLNX) are on the move.
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Chart 7
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Chart 8
THREE SECTOR AD LINES SHOW RELATIVE STRENGTH... StockCharts calculates and publishes breadth indicators for the nine sector SPDRs. Using these indicators, chartists can create their own AD Lines and AD Volume Lines or view short-term versions from the CandleGlance section of the Free Charts page. The next two images show these indicators for the sector SPDRs over the last two months to capture the current correction. Chartists can compare these lines to find the sectors showing the most internal strength and internal weakness. As these indicators now stand, I am seeing some underlying strength in the materials, energy and healthcare breadth indicators. Chart 9 shows the XLE AD Line ($XLEADP) and XLE AD Volume Line ($XLEUDP) forming higher lows over the last two weeks (green dotted lines). The XLV AD Line ($XLVADP) formed an equal low. This is significant because the other AD Lines and AD Volume Line formed lower lows (red dotted lines) The same is true for the XLB AD Line ($XLBADP) and the XLB AD Volume Line ($XLBUDP). The solid red lines mark short-term resistance. The first indicators to break above the late August high will reverse their short-term downtrends.
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Chart 9
