MDY AND QQQ EXTEND CONSOLIDATIONS -- INDUSTRIALS AND CONSUMER DISCRETIONARY SECTORS LEAD -- EXPECTATIONS SHIFT AS DOLLAR SURGES AND EURO PLUNGES -- BRENT CRUDE AND NATURAL GAS BREAK DOWN -- PALLADIUM CONSOLIDATES WITH BULLISH PATTERN
MDY AND QQQ EXTEND CONSOLIDATIONS... Link for today's video. The S&P Midcap SPDR (MDY) and the Nasdaq 100 ETF (QQQ) hit new 52-week highs in late October and then moved into tight consolidations the last seven to ten trading days. The new highs affirm the overall uptrends, while the consolidations represent a rest within the short-term uptrend. Both were due for a rest because they surged from early to mid October. MDY was up over 6% in three weeks and QQQ advanced around 9%. After a period of strong buying pressure, these consolidations simply signal that buying pressure and selling pressure have equalized. Upside momentum has also slowed, but we have yet to see any downside momentum or an uptick in selling pressure. Chart 1 shows QQQ with first support marked at 82. Even though a break here would be short-term bearish, I would not expect too much weakness because the bigger trends remains up. I will, therefore, mark next support in the 80 area. Chart 2 shows MDY with first support at 232.5 and second support in the 228-230 area.
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Chart 1
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Chart 2
INDUSTRIALS AND CONSUMER DISCRETIONARY SECTORS LEAD ... There are at least three ways to gauge relative performance, and hence determine relative strength and relative weakness. Chartists can compare the price charts, the price relatives (e.g. XLI:SPY ratio) or the StockCharts Technical Ranks (SCTR). The Industrials SPDR (XLI) has excelled on all three fronts and is clearly the strongest of the nine sector SPDRs. Chart 3 shows XLI with the SCTR and the price relative. First, XLI was the only sector to record a 52-week high this morning. To be fair, a few other sectors hit 52-week highs last week, but XLI was the only one to hit another new high today. Chart-wise, XLI is the strongest sector by virtue of this new high. Second, the StockCharts Technical Rank (SCTR) for XLI is the highest of the nine sectors (~96). The Consumer Discretionary SPDR is a respectable second at 92.5. Third, the price relative (XLI:$SPX ratio) moved to a new high on Friday. Again, the price relative for the Consumer Discretionary SPDR (XLY:$SPX ratio) was the second strongest because it challenged its early October high last week. Chart 4 shows XLY with the same indicators.
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Chart 3
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Chart 4
Long-term, new highs on the price chart and for the price relative are bullish. In fact, it is positive to see these two sectors leading the overall market. The consumer discretionary is the most economically sensitive sectors and the industrials sector is at the heart of manufacturing. General Electric, Boeing and 3M represent three of the top four components and all three hit new highs last week. Short-term, chartists can argue that XLI and XLY are overbought after sharp runs the last 18 trading days. Both are up around 8% and quite extended. Broken resistance levels mark the first support zones to watch on a pullback.
EXPECTATIONS SHIFT AS DOLLAR SURGES AND EURO PLUNGES... Expectations suddenly shifted in the forex market as traders sold Euros ahead of this week's European Central Bank meeting on Thursday. First, note that positive economic data (ISM Manufacturing) pushed Treasury bonds lower and interest rates higher in the US last week. This move means the bond market is expecting a less dovish Fed. Note that I did not say a hawkish fed. Rising yields in the US are positive for the Dollar. The hit to the Euro came as Eurozone inflation dipped to .7% in October, which is well below the 2% target and indicative of disinflation. With this news, the forex markets are now expecting a more dovish ECB on Thursday. The combination of a less dovish Fed and more dovish ECB put a strong bid in the Dollar. This could signal a major change because the ECB has been one of the most hawkish of the central banks. Chart 5 shows the Dollar Bullish ETF (UUP) breaking support at 21.8 and surging back to the support break, which turns first resistance. UUP failed near this level in early October and a follow thru breakout is needed to prove last week's rally more than just a one-week wonder rally.
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Chart 5
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Chart 6
Chart 6 shows the Euro Trust (FXE) hitting resistance in the 50-62% retracement zone for the second time this year. Also notice that a big rising wedge is taking shape. Rising wedges are typical for corrective patterns. A move below the lower trend line would break support and argue for a continuation of the prior decline (148-120). The indicator window shows the Commodity Channel Index (CCI) surging above +100 and remaining positive the last three months. A move below -100 would turn long-term momentum bearish.
BRENT CRUDE AND NATURAL GAS BREAK DOWN... Spot Light Crude ($WTIC) and the US Oil Fund (USO) broke down in early October and we are now seeing breakdowns in Brent crude and natural gas. Oil prices are under pressure from increasing supply and relative calm in the Middle East. Natural gas prices are under pressure from increased supply as new pipelines open for Marcellus Shale. Lower energy prices benefit manufacturing and the consumer, which in turn could be positive for stocks. Chart 7 shows the Brent Oil Fund (BNO) falling sharply in September, forming a triangle consolidation in October and breaking triangle support this month. Brent crude is the benchmark for European oil. Broken resistance and the early August lows mark a target zone in the 40-40.5 area. The indicator window shows MACD moving into negative territory as momentum turns bearish. Chart 8 shows the US Gasoline Fund (UGA) nearing its spring-summer lows as unleaded gasoline moves below $2.60 per gallon. Chart 9 shows the US Natural Gas Fund (UNG) breaking below support with a sharp decline the last few weeks. The indicator window shows Spot Natural Gas ($NATGAS) breaking wedge support.
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Chart 7
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Chart 8
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Chart 9
PALLADIUM CONSOLIDATES WITH BULLISH PATTERN... While copper and base metals remain relatively weak, palladium is holding rather strong and on the verge of a breakout. Palladium is a key component for catalytic converters and is also used in fuel cells. Chart 10 shows the Palladium ETF (PALL) with a series of lower highs extending back to March 2013. Despite this negative pattern, notice how the ETF surged in July-August and then consolidated with a large triangle. Within the triangle, the ETF surged in mid October and then formed a falling flag, which is a bullish continuation pattern. A break above flag resistance would signal a continuation higher and argue for a challenge to the 2013 highs. Also notice that such a break would also trigger a triangle breakout. In a related development, the Commerce Department reported on Friday that sales of light-weight vehicles exceeded 15 million units in September. The trend has been up since 2009 and the sales number is approaching pre-crisis levels. Also note that the Global Auto ETF (CARZ) has been in a clear uptrend since the summer of 2012. The November 2012 trend line and October low mark first support at 38.
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Chart 10
