STEEL ETF STARTS UNDERPERFORMING AS WEDGE TAKES SHAPE -- RSI HITS MAKE-OR-BREAK LEVEL FOR METALS & MINING SPDR -- SEMICONDUCTOR SPDR PERKS UP WITH WEDGE BREAKOUT -- NETWORKING ISHARES BOUNCES WITHIN LARGER DOWNTREND
STEEL ETF STARTS UNDERPERFORMING... Even though the stock market is strong overall, there are pockets of weakness in various industry groups over the last one to three months. Today's commentary will look at some of the underperforming industry group ETFs and show what it would take to reverse their downtrends. With the major stock indices in uptrends, the odds favor a bullish resolution to these patterns at some point. Picking that point is, of course, the million Dollar question.
Despite weakness in copper miners and gold miners, the Metals & Mining SPDR (XME) is holding up relatively well because of strength in steel. Note that at least five of the top twenty components come from the steel group. Together, these five stocks account for around 18% of the ETF (AKS, X, STLD, NUE, WOR). Chart 1 shows the Steel ETF (SLX) in an uptrend over the last six months, but starting to show relative weakness the last four weeks. On the price chart, the November decline could be just a wedge or pennant, which represents a mild correction. A move above the upper trend line would end this corrective pattern and signal a continuation higher. As long as the correction remains in force, we could see a decline to the 44-45 area. Support here stems from broken resistance, the early October low and the 38% retracement. The indicator window shows the price relative (SLX:SPY ratio) breaking support as SLX starts to underperform the broader market. Chart 2 shows Nucor (NUE) hitting a potential support zone that is marked by the 50-62% retracement zone and broken resistance.
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Chart 1
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Chart 2
RSI HITS MAKE-OR-BREAK LEVEL FOR METALS & MINING SPDR... Chart 3 shows the Metals & Mining SPDR (XME) peaking in early November and falling to the late June trend line over the last four weeks. Note that the S&P 500 moved higher the last four weeks and this means XME is underperforming. Not only is XME underperforming, but it is also down on an absolute basis. Even though this decline could be just a correction, I would be concerned with relative weakness and recent selling pressure. Failure to advance when the broader market advances indicates that something may be amiss in this group. A move above 40 is needed to break flag resistance and put the bulls back in charge here. The indicator window shows RSI hitting the 40-50 zone for the third time since the rally began. With this zone acting as support in early August and early October, the moment-of-truth is here for momentum. A break below 40 would turn momentum bearish and likely coincide with a trend line break on the price chart. Chart 4 shows Freeport McMoran (FCX) trying to firm near the 62% retracement and broken resistance in the 34-34.5 area.
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Chart 3
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Chart 4
SEMICONDUCTOR SPDR PERKS UP WITH WEDGE BREAKOUT... The Semiconductor SPDR (XSD) underperformed the broader market again in November, but the ETF is trying to change this with wedge breakout. Chart 5 shows XSD breaking above the wedge trend line last week and challenging resistance from the mid October gap. The wedge breakout is holding for now, but this gap zone marked resistance as the ETF pulled back on Friday-Monday. The green lines mark a short-term Raff Regression Channel with support at 57.5. A move back below this level would reverse the upswing and jeopardize this wedge breakout. The indicator window shows the price relative breaking down in mid October and remaining down as XSD continues to underperform the broader market. A break above the November highs is needed for XSD to start showing relative strength again. Chart 6 shows SanDisk (SNDK) breaking out in mid October and then establishing support in the 65-66 area. Notice that the stock gapped above 67 last week and held this little gap the last four days.
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Chart 5
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Chart 6
NETWORKING ISHARES BOUNCES WITHIN LARGER DOWNTREND... Chart 7 shows the Networking iShares (IGN) peaking in mid September and zigzagging lower the last eleven weeks. The mid September trend line marks the first resistance level to watch for a medium-term trend reversal. The swing within this downtrend is up as the ETF bounces with a rising wedge. Last week's low marks wedge support and a break below this level would signal a continuation lower. The indicator window shows the real problem: relative weakness. The price relative broke down in mid October and moved to new lows in November. IGN remains out of favor and an upside breakout in the price relative is needed to put IGN back in favor.
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Chart 7
BROADCOM BASES AS F5 NETWORKS TESTS RETRACEMENT ZONES ... Within the networking group, BroadCom (BRCM) shows signs of basing with a big reversal day in mid August and extended consolidation. Chart X8 shows the stock plunging below 24 on August 12th and then closing above 25.5. The stock was hit again with a weak open on October 23rd, but again recovered with a strong close to form a long white candle. Overall, the ETF has been consolidating the last four months and this consolidation is even narrowing. A move above 27.5 would break consolidation resistance and provide the first sign of significant buying pressure. The indicator window shows the MACD Histogram within a tight range as well. This confirms that momentum is basically neutral and chartists should watch these boundaries for the next momentum signal.
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Chart 8
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Chart 9
Chart 9 shows F5 Networks (FFIV) bouncing off the 50-62% retracement zone in early November and pulling back to test this area again. Overall, the stock surged from mid July to early August and then corrected from mid September to late October. The blue trend lines define the four month downtrend and correction. While a break above the upper trend line is needed to reverse this downtrend, chartists can watch resistance from the late November high for an earlier signal. Notice how the stock is trying to firm after retracing 62% of the early November advance. A move above 84 would break resistance and signal a continuation of the early November advance. This in turn would argue for a challenge to the wedge trend line.
