IWM AND QQQ STALL AFTER MARKET LEADING SURGES -- AUTOS AND AIRLINES LEAD INDUSTRY GROUPS -- NASDAQ AND SMALL-CAPS SHOW RELATIVE STRENGTH -- BEARISH DIVERGENCES FORM IN BREADTH INDICATORS FOR XLE -- AD LINE FOR GOLD MINERS EXTENDS DOWNTREND
IWM AND QQQ STALL AFTER MARKET LEADING SURGES... Link for today's video. While there could be some short-term headwinds for the stock market, the long-term picture remains positive with new highs in the major index ETFs this month and leadership from key groups. New highs occur in uptrends, not downtrends. A stock or ETF can be overbought after a new high, but it cannot be in a downtrend. Overbought is also quite hard to define because stocks can become overbought and remain overbought for extended periods. Chart 1 shows the Russell 2000 ETF (IWM) breaking wedge resistance in early September and hitting a new high in mid September. CCI become overbought on 10-Sept and hovered near overbought levels the last three weeks. Also note that IWM is up around 7% since late August, which also qualifies as short-term overbought. Throw in some government shutdown drama and we have the recipe for a pullback. Broken resistance and the April trend line mark the first support area to watch on any weakness (~103). Chart 2 shows the Nasdaq 100 ETF (QQQ) with broken resistance turning first support in the 77 area and key support in the 74 area.
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Chart 1
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Chart 2
AUTOS AND AIRLINES LEAD INDUSTRY GROUPS... Things can't be that bad if autos and airlines are leading the market. These two industry groups are very cyclical in nature and dependent on the economy. New highs and relative strength in both suggest that the economy is chugging along at a decent rate. Chart 3 shows the Global Auto ETF (CARZ) breaking resistance in early September and hitting a fresh 52-week high this month. There is nothing but uptrend on this chart. Broken resistance turns first support in the 37.5-38 area. The August lows mark key support at 36. The indicator window shows the StockCharts Technical Rank (SCTR) moving above 90 in late April and holding above 90 the last five months. How's that for relative strength! Chart 4 shows the DJ US Airline Index ($DJUSAR) zigzagging its way to a new high in September. The index may be overbought after a 20% surge since late August, but it is in a clear uptrend and shows upside leadership.
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Chart 3
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Chart 4
NASDAQ AND SMALL-CAPS SHOW RELATIVE STRENGTH... Chartists can measure relative performance by creating a ratio chart in SharpCharts. In this example, we are going to measure the performance of the Russell 2000 ($RUT) relative to the S&P 100 ($OEX) using the $RUT:$OEX ratio, which is also known as the price relative. This ratio rises when the numerator ($RUT) increases more than the denominator ($OEX), and falls when the denominator increases more than the numerator. In other words, the Russell 2000 outperforms when the price relative rises and underperforms when the price relative falls. Chart 5 shows this ratio surging to a new high this month. Small-caps are clearly leading large-caps and this is positive for the market overall. Why? Because small-caps have higher betas and carry more risk than large-caps. Investor appetite for risk is strong when small-caps lead. Also note that small-cap companies are more domestically oriented and less diversified than large-caps. Relative strength in small-caps, therefore, generally, bodes well for US economic prospects. Chartists can set support at the August low for now. Chart 6 shows the Nasdaq relative to the NY Compsite using the $COMPQ:$NYA ratio. This price relative hit a new high in September and the Nasdaq is clearly outperforming the NY Composite.
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Chart 5
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Chart 6
BEARISH DIVERGENCES FORM IN BREADTH INDICATORS FOR XLE... StockCharts provides unique data sets that allow chartists to plot the AD Line and AD Volume Line for the nine sector SPDRs. I check these indicators on a regular basis to look for divergences that may foreshadow a trend change. A bullish divergence forms when the SPDR moves to a new low, but the AD Line holds above its prior low and shows relative strength. A bearish divergence forms when the SPDR moves to a new high, but the AD Volume Line fails to exceed its prior high and shows relative weakness. Chart 7 shows the AD Line and the AD Volume Line failing to confirm a new high in the Energy SPDR (XLE). Breadth is clearly not as strong as XLE and this bearish divergence could foreshadow weakness in the underlying. On the price chart, XLE pulled back below 84 late last week and then formed a small pennant consolidation, which are short-term continuation patterns. A break below consolidation support would signal a continuation lower and argue for a deeper pullback. Click here for a list of breadth symbols available. This potentially bearish setup would be negated if the breadth indicators break above the July trend lines and XLE break above 84.10. Chart 8 shows the Oil & Gas Equipment & Services SPDR (XES) with first support at 41.50.
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Chart 7
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Chart 8
AD LINE FOR GOLD MINERS EXTENDS DOWNTREND... A bounce in gold is putting a bid in the Gold Miners ETF (GDX) on Friday. Even though I am bearish on gold and gold miners, I am always looking for evidence that would prove this stance wrong. Chart 9 shows the Gold Miners ETF (GDX) along with the AD Line and AD Volume Line for the ETF. The red lines mark resistance levels that held throughout the downtrend since April. Even though GDX surged above its July high in August, the AD Line and AD Volume Line did not break resistance and held their downtrends. Last week's high marks current resistance for these breadth indicators. Both need breakouts to turn breadth bullish for the Gold Miners ETF and validate a wedge breakout in the ETF. Chart 10 shows the Gold Miners Junior ETF (GDXJ) with a similar pattern on the price chart. Also notice that the junior miners are outperforming the "senior" miners, which is potentially positive because the junior miners are more risky.
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Chart 9
