DOW INDUSTRIALS REMAINS A SWINGERS PARADISE -- SMALL-CAPS AND FINANCIALS CONTINUE TO UNDERPERFORM -- TECHS AND STAPLES LEAD MIXED MARKET -- BASE METALS FUND BREAKS DOWN -- COPPER ETN TESTS KEY SUPPORT ZONE -- METALS NOT GETTING ANY HELP FROM CHINA
DOW INDUSTRIALS REMAINS A SWINGERS PARADISE... Link for today's video. There is no shortage of big moves in the Dow Industrials over the last several months. Chart 1 shows the Dow with five swings of at least 800 points since June (three up and two down). It is sometimes possible to draw trend lines to define these swings or base reversals on support/resistance breaks. More often than not though the swings are quite steep and hard to define. Enter the Raff Regression Channel. The green lines show rising channels, while the red lines mark falling channels. The middle lines are linear regressions from the swing low to the swing high. The outer lines are parallel and equidistant from the furthest high or low. Chartists can use the upper trend line to mark resistance in a downtrend and the lower trend line to mark support in an uptrend. I usually look for a confirming high or low and add a little buffer. Case in point, the rising Raff channel defines the current upswing. Combined with Tuesday's low and a small buffer, I am marking upswing support at 15500. The Dow Industrials hit a new high today and may be short-term overbought, but the trend is clearly up as long as 15500 holds. The indicator window shows StochRSI, which is the Stochastic Oscillator applied to RSI. In short, it is RSI on steroids. A surge above .80 shows a bullish momentum upthrust, while a plunge below .20 shows a bearish move. You can read more about StochRSI and the Raff Regression Channel in our ChartSchool.
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Chart 1
SMALL-CAPS AND FINANCIALS CONTINUE TO SHOW RELATIVE WEAKNESS... Even though the Dow Industrials hit a new high and surged over 100 points, there are still areas of concern in the stock market. First, note that the Dow Industrials is up sharply today, but the Russell 2000 ($RUT) is down around 1/2 percent. Chart 3 shows $RUT falling sharply last week, bouncing on Monday and then moving back towards 1100 today. Short-term, it looks like broken support turned resistance and held. Broken resistance and Friday's low still mark first support in the 1080 area. Broken resistance and the October low mark second support in the 1050 area. The indicator window shows the real concern because the $RUT:$SPX ratio moved lower the last five weeks. The Russell 2000 (small-caps) is underperforming the S&P 500 (large-caps).
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Chart 2
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Chart 3
The Finance SPDR (XLF) is the second area of concern. Chart 3 shows XLF breaking out in mid October and starting to outperform as the price relative turned up. This did not last long as the ETF moved back below the breakout zone and the price relative moved to new lows. XLF is now showing some serious relative weakness, which is negative for the market because this is the second biggest sector. On the price chart, XLF declined over the last three weeks and a falling flag could be taking shape. This pattern is, however, far from confirmed. A move above 20.9 is needed to break flag resistance.
TECHS AND STAPLES LEAD MIXED MARKET... It is not every day that one sees the Consumer Staples SPDR (XLP) and the Technology SPDR (XLK) leading the market higher because these two sectors could not be any different. The technology sector represents the high beta end of the market and the appetite for risk, while the consumer staples represent the low beta end of the market and the appetite for safety. Tech stocks have higher growth rates with more ups and downs. Consumer staples stocks have slow growth rates, but their growth is usually steady, regardless of the economy. John Murphy wrote about leadership in XLP on Thursday, October 24th. Chart 4 shows XLP breaking above a major resistance zone in mid October and hitting a new high again today. The indicator window shows the price relative turning up the last five weeks as XLP begins to outperform the S&P 500 ETF. While this is positive for XLP, it could be negative for the broader market because relative strength in staples points to a defensive market. Chart 5 shows XLK with a couple of bull flags en route to new highs in October and November. The broken resistance zone turns into the first support zone to watch on a pullback. The indicator window shows the price relative finally turning up the last few weeks.
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Chart 4
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Chart 5
BASE METALS FUND BREAKS DOWN ... The Base Metals Fund (DBB) broke wedge support with a sharp decline the last six days and this breakdown signals a continuation of the prior decline. Chart 6 shows DBB falling from the 17.6 area in mid August to the 16.2 area in mid September. The wedge break signals a continuation of this decline and projects a move below the summer lows. The downside target of 15.6 is found by using the measured move methodology. The length of the prior move is subtracted from the high of the wedge for a target. Chartists can now mark key resistance at 17. The indicator window confirms weakness as MACD moved back into negative territory.
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Chart 6
COPPER ETN TESTS KEY SUPPORT ZONE... Chart 7 shows the Copper ETN (JJC) within a triangle consolidation the last two to three months. It looked like JJC was going to break resistance with a move above 41 in late October, but this move did not hold long as the ETN dipped back to the 39.50 area. I will leave resistance at 41 and make JJC break this level to turn bullish. With a failure at resistance, the bears have the edge on this chart and a break below the October lows would affirm this stance. The indicator window shows MACD within a tight range since late September. Watch these boundaries for a momentum signal.
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Chart 7
METALS NOT GETTING ANY HELP FROM CHINA... Copper and base metals are not getting any help from China because the Shanghai Composite ($SSEC) remains with a breakdown in late October. Chart 8 shows the index hitting resistance in the 2200 area for several weeks and then breaking down with a move below 2150. The red lines mark a falling channel over the last seven weeks. A move above 2220 is needed to break channel resistance and reverse the seven week downtrend. The indicator window shows the price relative ($SSEC:$SPX ratio) moving lower since early October as the Shanghai Composite underperforms the US benchmark.
