SPY FILLS THE GAP AND TESTS FIRST SUPPORT -- XLY, XLI AND XLK TEST FIRST SUPPORT LEVELS -- XRT IS STILL AN UNDERPERFORMER -- ITB NEARS IMPORTANT SUPPORT ZONE -- XME FORMS CUP-WITH-HANDLE PATTERN -- TLT AND IEF SURGE OFF KEY MOVING AVERAGES
SPY FILLS THE GAP AND TESTS FIRST SUPPORT... Link for today's video. Stocks fell back this week and finally alleviated some of the short-term oversold conditions that built up in early March. The bulk of the evidence remains bullish for stocks, but the list of concerns grew this week (see below). Chart 1 shows the S&P 500 SPDR (SPY) surging to a new high with a gap in early March. With this week's decline, the gap has been filled and SPY is testing support from broken resistance in the 184 area. The inability to hold the gap suggests that the bulls are getting a little exhausted, hence the term exhaustion gap. Long-term, the December-February lows and rising 200-day mark support in the 172-174 area. Chart 2 shows the Equal-Weight S&P 500 ETF (RSP) testing first support in the 72 area.
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Chart 1
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Chart 2
BULLISH EVIDENCE AND BEARISH CONCERNS...
Bullish
- 7-Mar: The S&P 500, S&P LargeCap 100, S&P MidCap 400, S&P SmallCap 600 and S&P 500 Equal-Weight Index hit new highs in early March. These highs support a long-term uptrend in the stock market.
- 7-Mar: The Russell 2000 and the $RUT:$OEX ratio hit new highs in early March. Relative and absolute strength in small-caps is positive overall.
- 7-Mar: The Nasdaq 100 and Nasdaq hit new highs in early March, as did their price relatives. The high-beta and high-risk ends of the market show relative strength.
- 7-Mar: XLY & RCD, XLK & RYT, XLF & RYF and XLI & RGI hit new highs in early March. These ETF pairs represent the offensive sectors and all four confirms the new highs in the broad indices (consumer discretionary, technology, finance and industrials).
- 7-Mar: S&P 1500 AD Line, AD Volume Line and High-Low Line hit new highs in early March. All breadth indicators are strong and support the market advance.
- 7-Mar: ISM Services (51.6) slipped in February, but Manufacturing (53.2) rebounded. Both indices remain above 50 and still favor expansion.
Concerns
- 14-Mar: Treasuries surged this week and look poised to continue bigger uptrends.
- 14-Mar: The early March gaps in SPY, QQQ and MDY did not hold as all three moved lower this week.
- 14-Mar: The Dow Industrials remains below its yearend highs and did not confirm the new high in the Dow Transports.
- 14-Mar: The Retail SPDR (XRT) did not exceed its prior highs and shows relative weakness.
- 14-Mar: February retail sales (ex autos) ticked up, but growth remains anemic.
- 7-Mar: February auto sales ticked up, but remain subdued and just above the 15 million mark.
- 15-Nov: Fed started tapering program in November (less liquidity).
XLY, XLI AND XLK TEST FIRST SUPPORT LEVELS... In addition to SPY and RSP, three of the four offensive sector ETFs are also testing first support. Before looking at this charts, keep in mind that all three hit new highs in early March and the bigger trends are up. Short-term support breaks would be short-term bearish, but not enough to derail the bigger uptrends. Chart 3 shows the Technology SPDR (XLK) failing to hold the early March gap and falling to first support in the 35.65 area. The indicator window shows the price relative falling the last four weeks as XLK underperformed SPY. Chart 4 shows the Consumer Discretionary SPDR (XLY) testing support from the 3-March low and indicator window shows the price relative forming a possible lower high. Chart 5 shows the Industrials SPDR (XLI) testing support from the 3-March low as well. The price relative (XLI:SPY ratio) peaked in late December and edged lower the last few months as XLI slightly underperformed this year.
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Chart 3
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Chart 4
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Chart 5
XRT IS STILL AN UNDERPERFORMER... The Retail SPDR (XRT) broke down in January, came roaring back in February and surged above 86 in early March. The rebound is certainly impressive, but the ETF has yet to exceed its 2013 highs and continues to underperform the broader market. Chart 6 shows XRT bouncing off the trend line zone in early February to establish key support with a reaction low. This bounce has yet to forge a new high and it is possible that a lower high forms, which is the first step towards a new downtrend. Long-term, a break below the trend line zone would be the first negative and a break below the early February low would fully reverse this uptrend. The indicator window shows XRT relative to SPY using the price relative (XRT:SPY ratio). XRT is started underperforming SPY in late November and remains an underperformer over the last three months
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Chart 6
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Chart 7
Chart 7 shows a six month candlestick chart with spinning tops forming last week and a hanging man on Monday. The spinning tops show indecision, while the hanging man is a bearish reversal pattern that requires confirmation. Thursday's sharp decline confirmed the hanging man.
ITB NEARS IMPORTANT SUPPORT ZONE... The Home Construction iShares (ITB) got slammed this month and fell back towards the January consolidation. Chart 8 shows ITB in an uptrend over the last seven months. After hitting a multi-month high in late February, the ETF fell back to the 24.5 area this month. This could be a bullish "throwback". A throwback occurs when there is a breakout and then a pullback to the breakout zone. Also note that there is a lot of support in the 23.5-24 area from the trend line zone, broken resistance and the January lows. This is setting up an important test for ITB. Housing stocks will again be on the hot seat next week because Housing Starts and Building Permits will be reports on the 18th.
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Chart 8
XME FORMS CUP-WITH-HANDLE PATTERN... Considering the carnage in copper and weakness in steel stocks, the Metals & Miners SPDR (XME) held up pretty well over the last two weeks. In fact, chart 9 shows XME with a possible cup-with-handle pattern taking shape this year. The January swoon and February bounce define the cup, while the consolidation of the last four weeks forms the handle. A break above rim resistance would signal a continuation higher. Short-term, XME fell back below 42 on Monday and then formed a small rising pennant the last five days. A break below 41 would be short-term bearish and put the cup-with-handle pattern on hold.
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Chart 9
TLT AND IEF SURGE OFF KEY MOVING AVERAGES... It has been a wild ride for Treasury bonds over the last six weeks. Chart 10 shows the 20+ YR T-Bond ETF (TLT) surging from 101 to 109 in January and then consolidating with a volatile range since early February (105.5 to 109.2). Overall, the surge and consolidation look like a big flag, and a breakout would signal a continuation of the January advance. Such a move would be negative for stocks because stocks and Treasuries are negatively correlated for the most part. Notice that TLT bounced this week as stocks stumbled. Chart 11 shows the 7-10 YR T-Bond ETF (IEF) with similar characteristics.
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Chart 10
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Chart 11
BREADTH INDICATORS BREAK SHORT-TERM SUPPORT... After sharp advances from early February to early March, the S&P 1500 AD Line ($SUPADP) and S&P 1500 AD Volume Line ($SUPUDP) both turned down this week and broke short-term support levels. Chart 12 shows the AD Line breaking its early March low and the dotted red lines show prior support breaks. The early November and early December support breaks did not amount to much, but the August and January support breaks did foreshadow corrective periods that lasted another 1-3 weeks. Again, this is just short-term and the bigger trend remains up because the AD Line hit a new high in early March and did not form a bearish divergence. Chart 13 shows the AD Volume Line with similar characteristics.
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Chart 12
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Chart 13
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Chart 14
Chart 14 shows the S&P 1500 High-Low Line ($SUPHLP) hitting a new high this week as new highs continue to outpace new lows. High-Low Percent, however, fell back to the +3% area as the stock market weakened. This indicator triggers an oversold signal when below zero and a subsequent upturn when it moves back above +2%.
RETAILS SALES FAIL TO IMPRESS... Retail sales ticked up slightly in February, but growth remains quite subdued over the last few months. Chart 15 shows Retail Sales (ex motor vehicles) moving to its highest level in four months. Even so, growth was well below .50% and the overall trend is flat at best. Chart 16 shows total Retail Sales also ticking up after a pretty deep dip in December-January. Again, this uptick did not exceed the .5% level and retail sales growth remains anemic.
Chart 15
Chart 16
JOBLESS CLAIMS FALL TO LOWEST LEVEL OF THE YEAR... Chart 17 shows Initial Jobless Clams falling to 315,000 this week and the four week average moving to its lowest level of the year. Even though the four week average has been flat the last six months, the bigger trend remains down and the decline over the last two months is positive for the employment picture.
Chart 17
Chart 18 shows the March economic score card with this week's reports in yellow. Overall, the reports are more positive than negative so far. The ISM indicators are all well above 50 and last week's employment indicators were positive. Housing indicators will dominate the remainder of the month.
