APPLYING THE CONFIRMATION PRINCIPLE TO $SPX AND OTHER INDICES -- DOW TRANSPORTS AND INDUSTRIALS LAG -- GOLDMAN, 3M, FEDEX AND UPS WEIGH -- SHOOTING STARS TAKE SHAPE IN SPY AND MDY -- XLY, XLI AND XLF PLAY CATCH UP TO CONFIRM

APPLYING THE CONFIRMATION PRINCIPLE TO $SPX AND OTHER INDICES ... Link for today's video. The long-term trends are clearly up for the major stock indices, but some non-confirmations could be taking shape because not all indices hit new highs. The term "non-confirmation" comes from Dow Theory. Charles Dow theorized that the Dow Industrials and Dow Transports should confirm each other within a reasonable timeframe, though no specific timeframe was put forth. During an uptrend, the Dow Industrials ($INDU) and the Dow Transports ($TRAN) should both exceed their prior highs to confirm the uptrend. Failure by one would be a non-confirmation and suggest underlying weakness in the market.

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Chart 1

Chart 1 applies the confirmation theory to the S&P 500 and five other indices. As the count stands, three recorded new (closing) highs this month and three have yet to confirm. The S&P 500 hit a new high intraday on Monday, but did not close at a new closing high, which would require a close above 1848.38 (15-Jan closing high). Nevertheless, the index is very close to a new high and in an uptrend overall. The November-February lows can be used to mark a long-term support zone. Moving down the list, we can see that the Nasdaq, Nasdaq 100 and S&P MidCap 400 hit new highs and are leading the major indices. This means three of the six have hit new highs. The S&P SmallCap 600 and NY Composite are closing in on their prior highs with advances today. More confirmations would reinforce the uptrend in stocks.

DOW TRANSPORTS AND DOW INDUSTRIALS LAG ... The Dow Industrials and Dow Transports are both lagging the other indices because they remain well below their yearend highs. I am not too concerned with this because each Average contains a limited number of stocks and they are price-weighted averages. On the bull side, both hit new highs in January to affirm their long-term uptrends. On the negative bear side, both remain below these January highs and have yet to confirm the other indices. The short-term trends, however, are still up and we have yet to see a reversal that would forge a lower peak. Chart 2 shows the Dow Industrials moving back above 16200 and the Commodity Channel Index (CCI) becoming short-term overbought. I would mark short-term support at 16000 and CCI support at zero. A move below these levels would reverse the short-term uptrend and put in a peak.

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Chart 2

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Chart 3

Chart 3 shows the Dow Transports bouncing off support in the 7000 area with a rising flag, which defines the short-term uptrend. A break below flag support would reverse the February upswing. The indicator window shows the Commodity Channel Index (CCI) with a suggested band from +30 to -30 to reduce whipsaws. A move below -30 would turn momentum bearish.

GOLDMAN, 3M, FEDEX AND UPS WEIGH ON INDUSTRIALS AND TRANSPORTS... The Dow Industrials and Dow Transports are price-weighted averages in which the stocks with the highest prices carry the most weight. Relative weakness in the Dow can be blamed on Goldman Sachs (GS), Chevron (CVX), IBM (IBM), 3M (MMM) and Visa (V). All five stocks are above $100 per share and all five are trading well below their prior peaks. Relative weakness in the Dow Transports can be blamed on CH Robinson (CHRW), FedEx (FDX), JB Hunt (JBHT), Kansas City Southern (KSU) and UPS (UPS). All five stocks are above $50 per share and trading well below their prior peaks. Even though the airline group is strong, Alaska Air (ALK) is the only high priced stock (>80) among them.

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Chart 4

SHOOTING STARS TAKE SHAPE IN SPY AND MDY... While I am not looking for a major top at this stage, stocks are short-term overbought after big runs this month and ripe for a corrective period, which could lead to a trading range or pullback over the next few days or weeks. Some selling pressure surfaced on Monday afternoon as the S&P 500 SPDR (SPY) and S&P MidCap SPDR (MDY) formed shooting star candlesticks. A shooting start is a potentially bearish candlestick pattern that forms with a long upper shadow and small body, which can be hollow (white) or filled (black). The long upper shadow reflects an intraday rally that failed. The small body means the open was near the close. As one day patterns, chartists should not read too much into a few hours of weakness and should wait for confirmation with further downside. Keep in mind that this is a short-term pattern and the long-term is uptrend. Even if confirmed, the bulls still have the wind at their backs and the bigger uptrend could pull trump at anytime. Chart 5 shows SPY forming a shooting star with the failed surge above 186 on Monday. Last week's low marks upswing support at 182. The indicator window shows StochRSI, which is the Stochastic Oscillator applied to RSI, which makes it RSI on steroids. Instead of using .50 (the centerline) for bullish and bearish signals, I added suggested buffers to reduce whipsaws. A surge above .70 is bullish, while a move below .30 is bearish. Chartists can watch these levels for signs of a short-term momentum shift. Chart 6 shows the S&P MidCap SPDR with a shooting star.

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Chart 5

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Chart 6

XLY, XLI AND XLF PLAY CATCH UP TO CONFIRM... Chartists can apply the non-confirmation theory to the offensive sector SPDRs. The healthcare, utilities and consumer staples sectors represent the defensive end of the market. The finance, technology, industrials and consumer discretionary sectors represent the offensive side of the market. These are the most important sectors during an advance. Materials and energy occupy the gray zone. It is clear that the HealthCare SPDR (XLV) and the Technology SPDR (XLK) are the strong sectors and these two are responsible for most of the strength in the S&P 500 SPDR. The Utilities SPDR (XLU) is also strong, but utilities account for a relatively small portion of SPY. As the table below shows, utilities account for around 3%. Telecom accounts for 2.2%, but the big telcos (VZ,T) are part of XLK, which is by far the biggest sector.

Chart 7

Chart 8 shows the HealthCare SPDR (XLV) hitting a new high this week and chart 9 shows the Technology SPDR (XLK) hitting a new high. XLV continued higher the last six days and hit a new closing high on Monday. The ETF is getting overextended and I will mark first support near broken resistance (57-57.5). XLK hit a new closing high last Monday (18-Feb) and then stalled the last five days. Stalling just means buying pressure and selling pressure have equalized. It is not necessarily a sign of weakness because we have yet to see an increase in selling pressure. Watch support from last week's low for signs of selling pressure. A break would be short-term negative and argue for a pullback.

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Chart 8

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Chart 9

The Industrials SPDR (XLI), Consumer Discretionary SPDR (XLY) and Finance SPDR (XLF) are lagging because they have yet to confirm the new high seen in XLK, which is the other offensive sector. Even so, I would not characterize these three as weak because they are reasonably close to their yearend highs**. Moreover, all three remain in short-term uptrends and have yet to break short-term support levels. Lower peaks are not possible until these short-term trends reverse with support breaks.

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Chart 10

Chart 10 shows XLY perking up with a nice bounce the last four days. The January decline was indeed steep, but the February rebound is looking more and more impressive. Upswing support is set in the 64-64.5 area. The indicator window show the price relative (XLY:$SPX ratio) turning up over the last few weeks. Chart 11 shows XLI with a shooting star on Monday, but no confirmation yet and support in the 50.5-51 area has yet to be tested. Chart 12 shows XLF stalling in the 21.5 area over the last two weeks. Even though the ETF is underperforming the S&P 500, the short-term trend is up as long as support at 21.25 holds.

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Chart 11

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Chart 12

RETAILERS LIFT CONSUMER DISCRETIONARY SECTOR... The Retail SPDR (XRT) has been the main drag on the consumer discretionary in 2014. Chart 13 shows the ETF falling over 10% with a decline from ~88 to ~77 in six weeks. This created a severely oversold condition and the ETF firmed with a hammer in early February. The short-term reversal completed with the gap and long white candlestick the very next day. With a move above 82 today, the ETF is now up over 7% in three weeks. It is an impressive advance, but XRT is now getting short-term overbought and nearing a Fibonaccci cluster zone in the 84 area. Also note that broken support turns resistance in the 85 area. Chart 14 shows a MarketCarpet with the components for XRT. There is a lot of green with big gains coming from the department stores (M, DDS, JCP, SHLD).

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Chart 13

Chart 14