$SPX MOVES HORIZONTAL FOR TWO WEEKS -- THE AIRLINES AND RAILS ENJOY LOWER FUEL COSTS -- THE ENERGY SECTOR IS THINNING IN BREADTH -- NATURAL GAS AND COAL ALSO PLUMMET -- $COPPER IS AT A PIVOT POINT
$SPX MOVES HORIZONTAL FOR TWO WEEKS ... Looking at the intraday on Chart 1 of the $SPX with 1 hour candles, the market has been unable to make any real process since the surge after the Fed meeting. The $INDU Chart looks a little weaker as we are trying to find support at the lows. The $COMPQ (not shown) looks a little stronger as it made a new high this week. These consolidation areas are important focus areas on the chart. Breakouts from these consolidation areas can be a significant entry point. Contrarily, intermediate market highs usually have a chart pattern that shows a struggle to make new highs for weeks (2 or 3 or 4 weeks in duration). This chart pattern can show indecision and we'll watch closely to make sure the uptrend can continue. We are heading into a new earnings season so that could change market sentiment quickly. Chart 2 shows the Spring high of 2010 on a 1 hour chart just to show how the market tests and retests the highs.
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Chart 1
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Chart 2
THE AIRLINES AND RAILS ENJOY LOWER FUEL COSTS ... The $TRAN index is an interesting mix of railroads, trucking and airlines. While the transportation index continues to climb, it is not the trucking sector that is pushing it higher. Only the railroads and the airlines are moving higher as shown in Chart 3. While all three of them have fuel as one of their major variable costs, it does not seem to be enough to lift the trucking stocks.
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Chart 3
THE ENERGY SECTOR IS THINNING IN BREADTH ... The XLE shown in Chart 4 continues to find narrower trading ranges as it moves higher. It seems to be swept up with the general moves in the market. Even though oil is trading below the 200 DMA, energy stocks continue to rise. However, fewer stocks are participating. The $BPENER is the Energy Bullish Percent Index. Typically a market will start to break down when less than 50% of the stocks are on a buy signal. In terms of relative strength compared to the $SPX, it is accelerating to the downside.
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Chart 4
NATURAL GAS AND COAL ALSO PLUMMET... XLE looks particularly susceptible to breakdown with Natural Gas, Oil and Coal all pulling back as shown in Chart 5. With the clear breakdown of these major components to the energy sector, this may imply broader problems for the $SPX index but it is too early to make that call. The conditions are obviously different with the global QE programs at work, but it was in 2011 when all the commodities lost their 200 DMA that confirmed a long drought for the commodities. A look at Chart 6 shows the drop in the commodities below the 200 DMA back in 2011 and we all now how prescient that signal has been. Only $NATGAS remains above the 200 DMA .
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Chart 5
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Chart 6
$COPPER IS AT A PIVOT POINT ... Dr. Copper is usually associated as an early economic indicator. We will need to keep watching this closely as it has been unable to break through and hold above resistance for the last 2 weeks. Chart 7 shows the third test of the resistance level. This happened once before at a higher level on the chart shown, so this is a particularly acute pivot point. The MACD is also just at the zero line and this has been a level where $COPPER loses strength as I have marked with the red arrows. The bulls will need to pick up some copper if this chart pattern is to make and hold higher highs.
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Chart 7
THIS WEEK FEELS PARTICULARLY WEAK FOR EMERGING MARKET/COMMODITY CURRENCIES... The CEW chart is hovering just above a neckline as shown on Chart 8. This represents a basket of emerging market currencies. John Murphy mentioned at the SCU 101 presentation in NYC 2012 that this is an excellent proxy for commodities. I have displayed the $CRB in grey to show the correlation. The Canadian Dollar has fallen to new lows today. The $XAD is testing recent lows. Are these new macro trends or just a blip? The commodities seem to breaking down as a group so they will need to stop this trend soon or the associated stocks will probably move lower again. ($GOLD, $SILVER, $COPPER, $WTIC, $NATGAS, KOL) The currencies mentioned above are confirming this commodity sector weakness.
