CONSUMER DISCRETIONARY SPDR BREAKS SUPPORT -- FINANCE SPDR FORMS HARAMI -- HOME CONSTRUCTION AND RETAIL SPDRS WEIGH ON CONSUMER DISCRETIONARY -- RELATIVE WEAKNESS IN LARGE CAP TECHS REFLECTS RISK AVERSION -- AD LINE MOMENTUM REMAINS BEARISH
CONSUMER DISCRETIONARY SPDR BREAKS SUPPORT ... Link for today's video. Stocks are trading off their lows on Wednesday afternoon, but sharp declines on Tuesday did some technical damage and this damage has yet to be undone. It is still a tricky time for trading because any kind of breakthrough in Washington could trigger a big rally in stocks. Right now only the short-term trends are down. The long-term trends remain up and could pull trump at any time. Last week I wrote that the Finance SPDR (XLF) showed relative weakness, but the Consumer Discretionary SPDR (XLY) was holding support and had yet to break down. Something needed to give between these two and XLY gave with a support break. Chart 1 shows XLY breaking below 60 with a sharp decline over the last three days. Keep in mind that this is a short-term breakdown and the long-term trend remains up. Broken resistance and the August low mark long-term support in the 57 area.
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Chart 1
The indicator window shows the price relative breaking below the August trend line and XLY starting to show relative weakness. Even though relative weakness is just short-term for now, chartists should keep an eye on relative performance because the consumer discretionary sector is the most economically sensitive sector. Retail, restaurant, media and auto stocks feature prominently in XLY. Chart 2 shows XLF breaking down in late September and moving lower in October. The ETF has a bullish harami working over the last two days, but needs a follow through break above 20 to reverse the short-term downtrend.
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Chart 2
HOME CONSTRUCTION AND RETAIL SPDRS WEIGH ON CONSUMER DISCRETIONARY ... Chart 3 shows the Home Construction iShares (ITB) giving up its September breakout with a sharp decline back below broken resistance. Even though the ETF remains above the August low, a strong breakout should hold and this breakout did not. ITB managed an intraday reversal on Wednesday and this is potentially promising, but follow though is needed to suggest this is more than just a one-day wonder. The mid September trend line now marks first resistance. The indicator window shows the price relative moving below its mid September lows.
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Chart 3
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Chart 4
Chart 4 shows the Retail SPDR (XRT) getting hammered with a sharp decline the last five days. With this decline, XRT failed at resistance from the early August high and broke support from the mid September lows. Combining the current peak with the early August peak, it is possible that a double top is taking shape. However, note that the double top is far from confirmed because it would take a break below the August low for confirmation.
RELATIVE WEAKNESS IN LARGE CAP TECHS REFLECTS RISK AVERSION... The market moved swiftly to risk aversion as Chinese internet stocks, US biotechs, solar stocks and Web 2.0 stocks got hammered the last five to six days. Note that the Web 2.0 stocks include LinkedIn (LNKD), Zillow (Z), Facebook (FB), Pandora (P) and Yelp (Yelp). Even though all of these are not part of the Nasdaq 100, the 100 stocks in this tech heavy index provide a good proxy for the risk appetite in the stock market. Chart 5 shows the Nasdaq 100 Equal-Weight ETF (QQEW) falling sharply the last five days as risk appetite suddenly soured. The ETF broke short-term support from the late September lows and the August lows mark the next support area. Chart 6 shows the Nasdaq 100 ETF (QQQ) also breaking support with a sharp decline this week. Last week I wrote that something needs to give. Either QQQ and IWM follow SPY and DIA lower with breakdowns or SPY and DIA reverse their short-term downtrends. It looks like the latter.
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Chart 5
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Chart 6
AD LINE MOMENTUM REMAINS BEARISH... The AD Line and AD Volume Line for the S&P 500 continued their short-term downtrends with sharp declines this week. Chart 7 shows the S&P 500 AD Line ($SUPADP) with MACD of the AD Line in the indicator window. Using MACD, chartists can measure AD Line momentum to identify upturns and downturns in this key breadth indicator. The green arrows mark the upturns, while the red arrows mark the downturns. Most recently, MACD crossed below its signal line in late September to signal a downturn in momentum for the AD Line. This indicator remains short-term bearish until MACD moves above its signal line. Chart 8 shows the S&P 500 AD Volume Line ($SUPUDP) with similar characteristics.
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Chart 7
