SLIGHT BULLISH DIVERGENCE FORMS IN AD LINE FOR XLY -- HOME CONSTRUCTION AND RETAIL HOLD THE KEY TO XLY -- BOLLINGER BAND CONTRACTION HITS COAL ETF -- BTU, CNX AND JOYG LEAD COAL INDUSTRY -- METALS & MINERS SPDR FORMS BULLISH CONTINUATION PATTERN
SLIGHT BULLISH DIVERGENCE FORMS IN AD LINE FOR XLY... Link for today's video. The Consumer Discretionary SPDR (XLY) led the way lower from early March to mid April and underperformed the broader market during this timeframe. Relative weakness in the most economically sensitive sector is negative overall, but the ETF is trying to firm and chartists should watch the late April high for a breakout that would reverse this negative. Chart 1 shows XLY hitting a new high in early March and then falling all the way to the support zone in mid April. The November-February lows mark support in the 61-62 area. The new high means XLY is in a long-term uptrend. Under this assumption, the March-April decline, though quite deep, is considered a correction within the bigger uptrend. A break below the support zone would forge a lower low and chartists can then entertain thoughts of a long-term downtrend. Until such a development, I am watching resistance in the 64.5-65 area for a breakout that would end this correction and signal a continuation of the bigger uptrend.
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Chart 1
The indicator window shows the AD Line for XLY. Note that StockCharts calculates and publishes breadth indicators for the nine sector SPDRs and several indices. The AD Line is a cumulative indicator based on AD Percent, which is advances less declines divided by total issues. Notice that XLY recorded a lower (closing) low in mid April, but the AD Line formed a slightly higher low. This small bullish divergence suggests that downside participation is decreasing, although ever so slightly. A breakout in the AD Line would be bullish for breadth and support a breakout in XLY. Chart 2 shows the Equal-Weight Consumer Discretionary ETF (RCD) bouncing near the 62% retracement and rising 200-day moving average. A break above resistance would end the March-April correction. Click here for a current list of breadth indicators.
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Chart 2
HOME CONSTRUCTION AND RETAIL HOLD THE KEY TO XLY... The Home Construction iShares (ITB) and the Retail SPDR (XRT) have also underperformed the market over the last two months. Weakness in these two groups weighed on the consumer discretionary sector and strength in these two is needed to trigger a breakout in XLY. Chart 3 shows ITB consolidating around 23.5 with a rather tight range the last twelve trading days (blue area). This could be a flat flag of sorts and a break below 23 would signal a continuation of the two month downtrend. Overall, the two month decline still looks like a falling wedge and the ETF is near a support zone marked by broken resistance and the 50-62% retracements. A move above 24.5 is needed to reverse the falling wedge and signal a resumption of the prior advance (September to February).
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Chart 3
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Chart 4
Chart 4 shows the Retail SPDR firming near the 62% retracement and edging higher the last two weeks. Notice that the ETF first exceeded 82 way back in August 2013 and then traded flat the last nine months. The Fibonacci Retracements Tool in the middle of the chart extends from the November high to the February low. 82.65 marks the center (50%) of this range and the ETF is currently just above the centerline. On the positive side, I am impressed with the ability to bounce off the 62% retracement. I would not, however, give this bounce much wiggle room because it could evolve into a small rising wedge (blue lines). A move below 82 would break support and argue for a continuation of the April decline.
BOLLINGER BAND CONTRACTION HITS COAL ETF... Greg Schnell featured the Coal ETF (KOL) in the market message on April 14th and the ETF could be gearing up for its next move. Before looking at the daily chart for the Coal ETF, keep in mind that the long-term trend is down. Chart 5 shows KOL hitting a new low in June 2013 and then trading flat for the last ten months. KOL did manage to hold above its June low this year and this could be a base, but the ETF has yet to break resistance at 20 and actually reverse the long-term downtrend.
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Chart 5
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Chart 6
BTU, CNX AND JOYG LEAD COAL INDUSTRY... The Coal ETF is an international ETF with thirty-four stocks from several countries, including the US (13), Australia (4), Canada (2) and China (3). Among the US holdings, Joy Global weighs in at 7.08%, Consol Energy accounts for 6.56% and Peabody Energy is 6.5% of the ETF. Chart 7 shows Peabody Energy (BTU) breaking neckline resistance from an inverse head-and-shoulders pattern. Notice that the surge off the head low and the breakout surge occurred on high volume, which validates the moves. Broken resistance in the 18 area turns first support to watch on a throwback. Chart 8 shows Consol Energy in a slow and steady uptrend with support in the 39-40 area. Chart 9 shows Joy Global (JOY) breaking resistance from an inverse head-and-shoulders pattern and neckline resistance turning first support. Note that this head-and-shoulders is a continuation type, whereas the head-and-shoulders in BTU is a reversal pattern.
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Chart 7
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Chart 8
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Chart 9
METALS & MINERS SPDR FORMS BULLISH CONTINUATION PATTERN... Martin Pring featured the Metals & Miners SPDR (XME) in his debut column on April 23rd (here). In his market roundup, Pring noted that commodities were breaking out relative to stocks and the Metals & Miners SPDR was close to a major upside breakout. I too have been watching XME closely as it consolidates near resistance. Overall, chart 10 shows the ETF with a pattern that looks like a cup-with-handle, which is a bullish continuation pattern. The overall trend is up over the last nine months. After hitting resistance near 43 in early January, the ETF moved into a consolidation and bumped against this resistance zone several times in March and April. A breakout would signal an increase in demand and project a move to the upper 40s. The indicator window shows MACD near the zero line, an area that marked inflection points in early October and December. A move above the MACD signal line would provide the first clue of an upturn in momentum.
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Chart 10
STEEL ETF TESTS WEDGE BREAK AND VALE HITS KEY RETRACEMENT... In the Market Message on March 21st, I featured the Steel ETF (SLX) as it surged off support in the 43 area. The ETF did indeed break wedge resistance with a pretty good move and then corrected in April. Chart 11 shows a smaller wedge forming as the ETF returned to broken resistance, which turns into the first support zone to watch. A move above 47 would break wedge resistance and keep the bigger breakout alive. This in turn would target a move above 50 because the bigger wedge breakout signaled a continuation of the June-December advance. The indicator window shows RSI with the bull zones in green (40-80) and the bear zones in red (20-60). RSI is currently in the 40-50 zone, which is the lowered end of the bull range. This area could also act as momentum support. Chart 12 shows Vale do Rio Doce (VALE) firming near the 62% retracement with a falling wedge taking a shape. A break above 14.10 would forge a higher low and signal a continuation of the March-April advance. Note that VALE is the top component in SLX and accounts for almost 14%. RIO is the second largest and weighs in at 13.44%.
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Chart 11
