SELLING PRESSURE HITS THE AEROSPACE-DEFENSE ETF -- LOCKHEED MARTIN AND RAYTHEON TEST 50-DAY MOVING AVERAGES -- RUSSELL 2000 AND NASDAQ LEAD STOCK MARKET -- UPSIDE MOMENTUM WANES FOR THE DOW INDUSTRIALS -- MARKING DOWNSWING RESISTANCE FOR THE DOW
SELLING PRESSURE HITS THE AEROSPACE-DEFENSE ETF ... Link for today's video. Defense stocks are feeling a little heat today as the government shutdown extends and the debt ceiling looms. Chart 1 shows the Aerospace-Defense ETF (PPA) falling over 1% and testing broken resistance in the 27.27.4 area. The big trend is clearly up here, but the ETF is quite extended over the last 11 months and ripe for a correction or consolidation. Note that PPA is up some 35% from its November low. The August lows mark key support at 26. The indicator window shows the price relative (PPA:SPY ratio) in an uptrend since April, which is when PPA started outperforming the market. The late August and early September lows mark relative strength support for PPA.
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Chart 1
LOCKHEED MARTIN AND RAYTHEON TEST 50-DAY MOVING AVERAGES... Chart 2 shows Lockheed Martin (LMT) leading the group lower with a 2+ percent decline on heavy volume. This decline puts the stock near its rising 50-day moving average for the first time since late June. A little further down, the August lows and late February trend line mark key support in the 120-121 area. Chart 3 shows Raytheon (RTN) also falling over 2% and testing its 50-day for the first time since early July.
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Chart 2
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Chart 3
RUSSELL 2000 AND NASDAQ LEAD STOCK MARKET... Shut down or no shut down, the Russell 2000 ($RUT) and the Nasdaq ($COMPQ) continue to lead the market higher and this remains a positive influence. The Russell 2000 represents small-caps and the Nasdaq represents the technology sector. As noted last week, these two are important to the overall health of the market because they represent, among other things, the appetite for risk. New highs in these indices and their price relatives suggest that the appetite for risk remains strong, even if the shut down and debt ceiling loom. Perhaps Wall Street is looking ahead and expecting a resolution at some point. Chart 4 shows the Russell 2000/S&P 100 ratio surging to another new high this week. This means the Russell 2000 is handily outperforming the S&P 100 and small-caps are outperforming large-caps. Chart 5 shows the $COMPQ:$NYA ratio hitting another new high this week.
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Chart 4
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Chart 5
UPSIDE MOMENTUM WANES FOR THE DOW INDUSTRIALS ... The Dow Industrials is lagging the Russell 2000 and Nasdaq because it has yet to exceed its September high. In fact, the Senior Average is trading over 500 points below its September high. Nevertheless, chart 6 shows the Dow in a long-term uptrend and a medium-term trading range with a slight upward tilt. The September 2011 trend line and summer lows combine to mark a support zone in the 14500-14600 area. Medium-term, the Dow has oscillated around the 15000 level since May, around five months.
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Chart 6
The indicator window shows the Commodity Channel Index (CCI) moving into negative territory in August and failing to exceed 100 in September. This confirms that upside momentum is waning, but we have yet to see an actual bearish signal because CCI held above -100 in August. Donald Lambert, creator of CCI, used +100 and -100 to identify the start of new trends. A surge above +100 signals enough upside momentum to suggest the start of a new uptrend, while a plunge below -100 signals enough downside momentum to signal the start of a new downtrend. Keep in mind that these signals are not fool proof, but chartists can use them to confirm other signals or technical analysis. You can learn more about CCI signals in our ChartSchool
MARKING DOWNSWING RESISTANCE FOR THE DOW... Chart 7 shows daily candlesticks to highlight the price swings over the last five months. The current swing is clearly down, but the Dow may find support from broken resistance in the 15050 area (yellow area). Admittedly, marking support and resistance levels based on past price action is tricky because the Dow was a different beast prior to September 20th, which is when Goldman Sachs (GS), Nike (NKE) and Visa (V) replaced Alcoa (AA), Bank of America (BAC) and H-P (HWP). I would, therefore, be more inclined to use a momentum oscillator to identify an upturn at this stage. The indicator window shows StochRSI set at 20 periods. In general, a surge above the midpoint (.50) is bullish for momentum and signals an upturn in prices, while a plunge below .50 is bearish. StochRSI is now getting oversold, but this is not necessarily positive because securities can become oversold and remain oversold, just as the Dow did from early August to late August.
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Chart 7
GOLDMAN, VISA AND IBM WEIGH ON THE DOW INDUSTRIALS... Even though there are thirty stocks in the Dow, the Dow is a price-weighted average and the stocks with the highest price carry the most weight. The five highest priced stocks are Visa (V), Goldman Sachs (GS), IBM (IBM), Chevron (CVX) and 3M (MMM). PerfChart 8 shows the performance for these five stocks, the Dow Industrials and the Russell 2000 over the last nine days. Notice that the Russell 2000 is up, but the top five Dow stocks are down. Goldman pretty much peaked the day it became a Dow component and fell over 5% since then. While the Dow is a widely quoted barometer for "the market", keep in mind that it is driven by a handful of stocks and there are better market barometers out there. Chart 9 shows CandleGlance charts for these five stocks. Visa and 3M are holding up the best because they did not break their 20-day and 50-day moving averages. The other three did. Based on relative strength during this decline, I would expect MMM and V to lead on any rebound.
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Chart 8
