EQUAL-WEIGHT S&P 500 ETF CONSOLIDATES WITHIN UPTREND -- HOME CONSTRUCTION ISHARES BOUNCES WITHIN WEDGE -- DR HORTON, LENNAR AND US GYPSUM LIFT HOMEBUILDER GROUP -- DEFINING THE SECULAR TRENDS FOR THE S&P 500 AND NASDAQ 100
EQUAL-WEIGHT S&P 500 ETF CONSOLIDATES WITHIN UPTREND... Link for today's video. What a boring week. The Fed policy statement came and went. The bulk of earnings have come and gone. A slew of economic reports hit the wires. The employment report has come and gone. We can debate the ramifications of Friday's jobs report until we are blue in the face, but nothing much changed on the charts. Chart 1 shows the Equal-Weight S&P 500 ETF (RSP) trading near its March-April highs. I am not that worried about relative weakness in the Russell 2000 ETF (IWM) and small-caps because the equal-weight version of the S&P 500 is doing just fine. Notice that RSP broke to new highs in mid February and this breakout zone turned into support in the 71 area. The June trend line also confirms support here. At this point, the March-April consolidation looks like a rest within an uptrend. Failure to take out the April highs and a move below the mid April low would call for a reassessment.
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Chart 1
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Chart 2
Chart 2 shows the S&P 500 SPDR (SPY) also nearing its prior highs. SPY declined rather sharply in mid April, but firmed just above 180 and moved right back towards its highs. In fact, ignoring the short April decline, I would say the markets have been rather boring the last two months - and you know that they say about dull markets. The mid April low and June trend line combine the mark the first support level for SPY. The indicator window shows the 10-YR Treasury Yield ($TNX) hitting support from the February-March-Aril lows. Notice that SPY is up substantially from its February low, but the 10-YR Treasury Yield is still near its February low. I would have expected to see yields higher along with stocks. This discrepancy is something chartists may want to watch going forward. Further weakness in yields would suggest strength in Treasuries and this may weigh on stocks.
HOME CONSTRUCTION ISHARES BOUNCES WITHIN WEDGE... The Home Construction iShares (ITB) got a bounce this week, but remains within the falling wedge and two month downtrend. A little more work its needed to get a reversal. Chart 3 shows ITB tracing out this wedge from early March to early May. The falling wedge is typical for corrective patterns within bigger uptrends. Using the upper trend line and the mid April high, I would mark resistance at 24.5, a break of which would bullish. Such a move would also signal a continuation of the prior advance, which extends from August to February. A breakout in this key industry group would also be positive for the market overall.
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Chart 3
DR HORTON, LENNAR AND US GYPSUM LIFT HOMEBUILDER GROUP... The next three charts focus on three components for ITB. Chart 4 shows DR Horton (DHI) holding support in the 21 area and gapping above the trend line last week. After a little pullback, the stock resumed its advance over the last two days and the gap is holding. Chart 5 shows Lennar (LEN) challenging resistance in the 40 area with a bounce the last two days. Notice that this stock also formed a falling wedge the last two months and a breakout would signal a continuation of the prior advance. Chart 6 shows USG Corp (USG) bouncing off the 62% retracement and early February low. This bounce, however, is still within the larger falling channel. USG is interesting because this company supplies sheetrock and other materials to the home builders. This makes it dependent on the group as a whole. As these charts show, more upside is needed to reverse the two-month downtrends in the Home Construction iShares, Lennar and USG Corp.
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Chart 4
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Chart 5
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Chart 6
DEFINING THE SECTOR TRENDS FOR THE S&P 500 AND NASDAQ 100... How far will a market correction extend? That is always the million Dollar question. With that in mind, let's look at two indicator pairs that can help us determine when a correction might end. First, I am working under the assumption that the S&P 500, aka stock market, is in a secular uptrend. This assumption means chartists should be buying the dips and looking for opportunities when the market becomes oversold. Overbought conditions are not of interest because the bigger trend is up. Chart 7 shows the S&P 500 trading near its all time high and in a clear uptrend. This year's low marks long-term support in the 1750 area. Chart 8 shows the Nasdaq 100 hitting a new high in early March and correcting over the last two months. The 2014 lows mark support in the 3400 area.
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Chart 7
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Chart 8
For finding tradable lows within these secular uptrends, I am going to use the percentage of stocks above the 20-day EMA for short-term signals and the percentage of stocks above the 50-day SMA for medium-term signals. The 20-day EMA was used because I am piggybacking on a breadth indicator from Decision Point. The percentage of stocks above the 50-day SMA was already in the StockCharts arsenal. Basically, a dip below 30% signals an oversold condition in the market and a subsequent move above 60% signals a market upturn. This setup-signal sequence is not perfect, but it can help chartists to time corrections and identify trend resumptions. As with all indicators, it should be used in conjunction with other aspects of technical analysis.
TIMING LOWS WITH THE PERCENTAGE OF STOCKS ABOVE THE 20-DAY EMA ... Chart 9 shows the S&P 500 Percent above 20-day EMA (!GT20SPX) and chart 10 shows the Nasdaq 100 Percent above 20-day EMA (!GT20NDX). The vertical blue lines show when the setup-signal sequence occured. The indicator moves below 30 for the setup and then above 60 for the signal. For the S&P 500, there were six signals since November 2012 (eighteen months). The June 2013 signal did not work, but the others were pretty good at calling short-term lows. Notice that the indicator almost dipped below 30 in December 2012, February 2013 and April 2013. These dips almost triggered the setup, but the uptrend was too strong and the dip fell short of breaking 30.
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Chart 9
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Chart 10
The Nasdaq 100 indicator triggered twelve signals over the last eighteen months. The Nasdaq 100 is a much more homogenous index and tends to be more volatile than the more diversified S&P 500. There were three bad signals in the Nasdaq 100 (early November 2012, mid June 2013 and early April 2014). The indicator dipped below 10 in mid April and surged above 60 in late April to trigger a bull signal. Even though the indicator dipped below 30 again last week, I would consider this bull signal valid as long as the Nasdaq 100 remains above 3500 on a closing basis.
NASDAQ 100 GETS THE SETUP, BUT NOT THE SIGNAL... Chart 11 shows the S&P 500 Percent above 50-day SMA ($SPXA50R) and chart 12 shows the Nasdaq 100 Percent above 50-day SMA ($NDXA50R). First, notice that there are far fewer signals because these are medium-term setups. The S&P 500 triggered three signals over the last eighteen months and the Nasdaq 100 triggered just two signals. The S&P 500 triggered a signal in mid February and this signal remains in play. The Nasdaq 100 did not trigger a signal in February and showed relative strength. The opposite is now occurring as the Nasdaq 100 indicator dipped below 30 in April to facilitate the setup. A subsequent move above 60 would trigger a bull signal.
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Chart 11
