FINANCE SPDR BECOMES MOST OVERSOLD SINCE 2011 -- JP MORGAN, MORGAN STANLEY AND WELLS HOLD SUPPORT -- HOME CONSTRUCTION ISHARES BOUNCES OFF BREAKOUT ZONE -- LENNAR, PULTE AND RYLAND FORM BULL FLAGS -- THE DOLLAR IS ACTUALLY A PRETTY STRONG CURRENCY
FINANCE SPDR BECOMES MOST OVERSOLD SINCE 2011... Link for today's video. The Finance SPDR (XLF) is getting an oversold bounce after a very sharp decline. XLF led the market lower over the prior three days with a plunge from 22 to 21. Even though this is just one Dollar, it is around 5% and represents a very sharp fall. In fact, this decline was enough to push the Commodity Channel Index (CCI) below -300, which is an extreme oversold reading. To put this into perspective, note that CCI last dipped below -300 in July 2011, which is when the European debt crisis was in full swing. The big international banks that dominate XLF are inexorably tied to the global financial system and are the first to suffer at the hint of systematic risk, such as a currency crisis. Chart 1 shows XLF plunging and hitting its first support zone in the 20.75-21 area, which was put forth in Friday's Market Message. XLF is now getting an oversold bounce as the crisis fades from its peak.
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Chart 1
JP MORGAN, MORGAN STANLEY AND WELLS HOLD SUPPORT... Several key stocks within XLF also hit support on Monday and got a bounce on Tuesday. Chart 2 shows JP Morgan (JPM) falling over 6%, forming a big doji at support and getting a bounce today. Doji are indecisive candlesticks that look like plus signs (+) or crosses. The open and close are pretty much equal, and form the small horizontal line in the middle. The upper and lower shadows represent the high-low range. Doji signal indecision that can sometimes foreshadow a short-term reversal. Chart 3 shows Morgan Stanley (MS) falling around 10% and finding support near the December lows. The decline triggered an overshoot and oversold conditions, but was still not enough to reverse the long-term uptrend. Chart 4 shows Wells Fargo (WFC) in an uptrend with a new high just last week. The stock fell back to the November trend line, formed a doji and bounced on Tuesday. Note that Wells has the least international exposure of these three.
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Chart 2
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Chart 3
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Chart 4
HOME CONSTRUCTION ISHARES BOUNCES OFF BREAKOUT ZONE... The Home Construction iShares (ITB) came alive on Tuesday with a surge off broken resistance. Chart 5 shows ITB breaking resistance with a big surge in mid December and then pulling back the last few weeks. A classic tenet of technical analysis is that broken resistance turns into support. This means the resistance zone in the 23.5 area is now a support zone. Monday was quite volatile as a big spinning top candlestick formed with a low in the support zone. Spinning tops feature long upper and lower shadows that mark the high-low range. The body of the candlestick is relatively small and in the middle. These candlesticks signal indecision that affirms support in the 23.50 area. In addition to support, the decline over the last few weeks looks like a falling flag, which is a bullish continuation pattern. A surge off support and break above 24.5 would end the flag and signal a continuation of the current uptrend. The indicator window shows the StockCharts Technical Rank (SCTR) breaking above 50 for the first time since July and holding this breakout in January.
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Chart 5
LENNAR, PULTE AND RYLAND FORM BULL FLAGS... Unsurprisingly, several homebuilder stocks also feature flag-like patterns in January. Chartists should watch these patterns for breakouts that would signal a continuation of the homebuilder rally. Chart 6 shows Lennar (LEN) breaking out with a surge above 38 and then correcting with a flag the last four weeks. Today's breakout ends this flag and reverses the short-term downtrend. Chart 7 shows Ryland (RYL) finding support near broken resistance and the 38% retracement. Flag resistance is set at 43 and the stock is trading above this level at midday. Chart 8 shows Pulte (PHM) within an uptrend since August. After a surge above 20 at yearend, the stock pulled back this year with a flag and resistance is set at 19.7.
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Chart 6
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Chart 7
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Chart 8
THE DOLLAR IS ACTUALLY A PRETTY STRONG CURRENCY... The Dollar Index ($USD) and the US Dollar ETF (UUP) do not tell the complete story for the Dollar. First, note that the Euro accounts for around 57% of the index and ETF. Second, the British Pound, Swiss Franc and Swedish Krona account for another 20% of the ETF and these three currencies are highly correlated (positively) to the Euro. This means the Euro really accounts for some 77% of the Dollar Index and ETF. Outside of the Euro sphere, the greenback is performing better, much better. Chart 9 shows a PerfChart with UUP and nine currency ETFs. Notice that the Euro ETF (FXE), Pound ETF (FXB) and Yuan ETF (CYB) are up. The Chinese Yuan, however, is a not free floating currency so it doesn't count much here. On the downside, notice that the Yen ETF (FXY), Aussie Dollar ETF (FXA), Canadian Dollar ETF (FXC), Indian Rupee ETF (ICN) and Brazilian Real ETF (BZF) are down. This means the Dollar is up against these currencies and performing quite well in the grand scheme of things.
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Chart 9
GOLD HITS FIRST RESISTANCE ZONE AS FED LOOMS... The Fed will issue its policy statement on Wednesday afternoon and the consensus is for continued tapering of its quantitative easing program. Even though the markets deviated from their 2013 trends in January, I would not expect the Fed to back track on its plans. Regardless of what happens, the Dollar, Treasuries and Gold will be on the hot seat tomorrow. Further tapering would be positive for the Dollar and negative for gold. A delay in tapering would be negative for the Dollar and positive for gold. Chart 10 shows the Gold SPDR (GLD) hitting the lower end of its resistance zone in the 122 area. With the bigger trend down, the rally over the last five weeks is considered a bear market rally. The blue lines define this advance as a rising wedge and I would mark first support at 119, a break of which would signal a continuation lower.
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Chart 10
SIZING UP KEY BREADTH INDICATORS FOR THE GOLD MINERS ETF... Chart 11 shows the Gold Miners ETF (GDX) advancing almost 20% from the December low to the recent high. This is an impressive advance in percentage terms, but it pales relative to the prior decline (31 to 20 or 35%). It would take a 55% advance to completely recover from this decline (20 x .55 = 11). GDX remains in a five week uptrend with a rising channel taking shape. Chartists can watch gold for clues because GDX will follow bullion. The indicator window shows the AD Line, AD Volume Line and Bullish Percent Index for the Gold Miners ETF. Notice that the AD Line and AD Volume Line hit new lows in December and remain in downtrends overall. What would it take to turn bullish on this group? I would like to see all three indicators break above their late October highs (red lines).
