XLB SHOWS LEADERSHIP WITH FLAG BREAKOUT -- METALS AND COPPER MINING ETFS PACE GAINS -- XLE CHALLENGES HIGHS WITH BULLISH CONTINUATION PATTERN -- SHANGHAI COMPOSITE EXTENDS UPSWING WITH BIG SURGE -- NIKKEI CHALLENGES TRIANGLE TREND LINE
XLB SHOWS LEADERSHIP WITH FLAG BREAKOUT... Link for today's video. Strength in Asia markets, which are covered below, is providing a lift to the materials sector and related industry groups. Chart 1 shows the Basic Materials SPDR (XLB) breaking above flag resistance with a surge the last six days. Also notice that the ETF is on the verge of a 52-week high. The blue trend lines indicate that the bigger trend is up. This flag breakout signals a continuation of the July advance and targets a move to the upper trend line. The flag lows now mark support in the 40 area. The indicator window shows the price relative firming in July and then turning up in August. This ratio chart (XLB:SPY) broke out in early August as XLB started to outperform SPY and show relative strength. Chart 2 shows the Equal-weight Materials ETF (RTM) as a 2-day EMA. I made the actual plot invisible because it is prone to gaps and volatility do to relatively thin trading. Nevertheless, I like to use this equal-weight version to complement analysis of the market-cap weighed XLB.
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Chart 1
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Chart 2
METALS AND COPPER MINING ETFS PACE GAINS... Chart 3 shows the Metals & Mining SPDR (XME) bouncing off support in the 36 area to extend a two month uptrend. The bigger trend remains down with resistance close at hand. Notice that broken support and the May high combine to mark a resistance zone in the 38-40 area. At this point, I would at least respect the two month uptrend as long as the August lows hold (first support). The indicator window shows the StockCharts Technical Rank (SCTR) moving higher the last few weeks. The SCTR is, however, still below 50 and still in the in the weakest half of the ETF universe.
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Chart 3
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Chart 4
Chart 4 shows the Copper Miners ETF (COPX) getting a flag breakout with the surge above 9.50 today. Notice that the ETF broke the late July high and then pulled back with the flag. The flag breakout signals a continuation of the early August surge and targets a move to the 10.20 area. As with XME, the long-term trend remains down and the ETF continues to underperform the rest of the ETF universe with a low SCTR.
XLE CHALLENGES HIGHS WITH BULLISH CONTINUATION PATTERN... Energy-related stocks were also strong with the Energy SPDR (XLE) and the Oil & Gas Equipment/Services SPDR (XES) moving higher on Monday. Strength can be attributed to strength in oil over the last two weeks and bounced in emerging markets over the last seven days. Chart 5 shows XLE breaking the pink trend line and moving towards its May-July highs. Overall, the pattern since May looks like a cup-with-handle, which is a bullish continuation pattern. A break above 84 would confirm the pattern and target further gains. The indicator window shows the SCTR breaking out just before XLE broke resistance. This is a case of relative strength preceding absolute strength. Chart 6 shows XES finding support in the 39.5-40 area and then breaking wedge resistance with a surge the last five days.
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Chart 5
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Chart 6
SHANGHAI COMPOSITE EXTENDS UPSWING WITH BIG SURGE... The Shanghai Composite ($SSEC) surged over 3% on Monday and closed at its highest level since early June. Chinese stocks were boosted by a 7.2% increase in exports and strength in Asia lifted materials-related stocks in the US. Chart 7 shows the Shanghai Composite extending the upswing that began with the late June low. The index is up over 15% from this low and starting to show relative strength. Notice that the price relative ($SSEC:$SPX ratio) bottomed in late July and turned up the last five weeks. Turning back to the price chart, the long-term trend is still down because the index formed a lower low in June and is nearing a potential resistance zone in the 2200 area. The 61.80% retracement and February trend line mark resistance here. The July trend line and August low combine to mark upswing support in the 2030-2070 area. Chart 8 shows a long-term chart for reference.
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Chart 7
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Chart 8
NIKKEI CHALLENGES TRIANGLE TREND LINE... It may be time for a re-think on the Nikkei 225 ($NIKK). A few weeks ago, I suggested that the downtrend from the July high could signal another decline that would break the June low. Well, the Nikkei 225 ($NIKK) found support near the 61.80% retracement in late August and broke the wedge trend line in early September. The breakout is short-term bullish and the index is now challenging the triangle trend line. Yes, it is possible that a bullish triangle is taking shape and a breakout would signal a continuation of the prior advance (8500 t0 16000). Needless to say, this suggests that another big move is in the cards for Japanese stocks. The indicator window shows the Yen Index ($XJY) breaking triangle support to signal a continuation of the bigger downtrend. A weak Yen is bullish for Japanese stocks because it makes Japanese exports more competitive.
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Chart 9
RIP JOSEPH GRANVILLE ... Publisher of the Granville Market Letter and creator of On Balance Volume (OBV), Joe Granville was a pioneer in technical analysis. OBV was one of the first indicators I employed and I used to plot it by hand for the 30 stocks in the Dow Industrials. Granville's newsletter held great sway over the markets in the late 70s and early 80s. He will be missed, but his indicators will always be with us.
Chart 10
