REVIEWING THE VOLATILITY OF AUGUST 2011 -- MARKING MOMENTUM SUPPORT FOR THE S&P 500 AND RUSSELL 2000 -- THESE THREE INDUSTRY GROUP ETFS HOLD THE KEY -- OIL BREAKS AUGUST LOWS -- VOLATILITY CONTRACTS ON THE YEN INDEX
REVIEWING THE VOLATILITY OF AUGUST 2011... Link for today's video. The possible government shutdown is dominating the headlines today, but gridlock could dominate for several weeks because the debt ceiling is next on the agenda. Even though the market is well aware of the situation in Washington, there is still some uncertainty until a deal is actually done and trading could turn volatile, just as it did in August 2011. Chart 1 shows the S&P 500 ETF (SPY) in August 2011. Notice how the index forged a new high in early May 2011, stalled for a couple months and then broke support with a sharp decline in early August. It then took two months of volatile trading to digest this trauma. I am not calling for the same situation now, but anything is possible as long as uncertainly rules because the government is a big influence on the US economy.
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Chart 1
MARKING MOMENTUM SUPPORT FOR THE S&P 500 AND RUSSELL 2000... The major stock indices remain in long-term uptrends as the S&P 500 and Russell 2000 recorded fresh 52-week highs in mid September. Despite a new high recently, chart 1 shows the S&P 500 struggling with the 1700 area over the last few months. The index closed above 1700 in August and September, but moved back below this level the very next week. Despite this struggle, there is no evidence of a downtrend as we have yet to see a significant increase in selling pressure. Medium-term, I will be watching the Commodity Channel Index (CCI) for the first signs of a momentum shift. Notice how CCI has been above zero the entire year. A break into negative territory would signal an increase in downside momentum and we could then see an extended correction in the S&P 500. Long-term, I will be watching support in the 1550-1570 area. The lower trend line of the rising channel and summer lows mark support here. Chart 3 shows the Russell 2000 with CCI in positive territory since November 2012 and long-term support in the 950 area.
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Chart 2
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Chart 3
THESE THREE INDUSTRY GROUP ETFS HOLD THE KEY... If I had to choose three industry-group ETFs to guide my market analysis, I would pick the Home Construction iShares (ITB), the Retail SPDR (XRT) and the Regional Bank SPDR (KRE). ITB holds the key to housing, XRT is a proxy for retail spending and KRE represents domestic banking. Chart 4 shows the Home Construction iShares breaking resistance at 22 and falling back to this breakout area. A return to broken resistance is called a "throwback" and this pullback sometimes offers a second chance to partake in the breakout. Broken resistance in the 22 area turns support and a strong breakout should hold. A move below 21.5 would negate the breakout and call for a reassessment.
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Chart 4
Chart 5 shows the Retail SPDR surging to its summer high this month and forming a bull flag the last two weeks. Bull flags form after advances and slope down. A move above 83 would end the flag and signal a continuation higher. The indicator window shows the price relative turning up in September and challenging its summer high as well.
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Chart 5
The Regional Bank SPDR is the weakest of the three because it peaked in early August and the price relative declined the last five weeks. Chart 6 shows the August trend line marking first resistance as the ETF firms in the 35-35.5 area. A move above 36 would break resistance and reverse the two month slide.
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Chart 6
OIL BREAKS AUGUST LOWS ... Spot Light Crude ($WTIC) extended its decline this week and broke below the August lows. Chart 7 shows $WTIC failing to hold the late August breakout and moving below 102 on Monday. This is an end-of-day (EOD) chart so I manually added today's bar to show the current price around 101.50. This failed breakout was the first sign of trouble, especially with the stock market moving higher in September. Oil was positively correlated with the stock market from November to mid August. This dynamic changed at the end of August as oil weakened over the last 4-5 weeks. Fundamentally, it appears that easing tensions with Iran, Syrian cooperation on inspections, increased production from Libya and gridlock in the US are all weighing on the price of crude. Broken resistance marks the next support zone in the 97.5-98 area. Chart 8 shows the US Oil Fund (USO) with broken resistance turning into support in the 34.5-35 area. Also notice that Aroon Down surged to 100 for the first time since April.
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Chart 7
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Chart 8
VOLATILITY CONTRACTS ON THE YEN INDEX... John Murphy covered the long-term downtrend in the Yen and the long-term uptrend in the Nikkei 225 with monthly charts on Saturday. The daily charts below cover the short-to-intermediate trends. Chart 9 shows the Yen Index ($XJY) consolidating the last four months with a triangle. The Bollinger Bands narrowed as this consolidation extended and BandWidth moved to its lowest level in months. Contracting bands indicate a volatility contraction, which can lead to a volatility expansion. The Yen Index is challenging the triangle and upper Bollinger Band and a breakout would be short-term bullish. Before getting too bullish, notice that the Yen sold off after a surge above 102 today and remains short of a breakout. A move below the lower trend line and lower Bollinger Band would be bearish and signal a continuation of the long-term downtrend.
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Chart 9
BROKEN RESISTANCE MARKS FIRST SUPPORT FOR NIKKEI... Chart 10 shows the Nikkei 225 ($NIKK) breaking triangle resistance and moving above 14500 this month. The breakout is bullish and signals a continuation of the long-term uptrend. Early strength in the Yen weighed on the Nikkei as it dropped 2% on Monday and closed at 14455. Even so, the breakout remains in play with broken resistance turning first support in the 14000-14200 area. The indicator window shows the Correlation Coefficient for the Nikkei and Yen. Notice that these two have a strong negative correlation, which means they move in opposite directions.
