STOCKS DESERVE A CORRECTION AFTER BIG MOVES -- THROWBACK LEVELS TO WATCH FOR SPY AND RSP -- STEEL ETF UNDERPERFORMS AFTER WEDGE BREAKOUT -- WTI, BRENT AND GASOLINE BREAK TO NEW HIGHS -- RETAIL SALES STAGNATE AS XRT BACKS OFF KEY TREND LINE
STOCKS DESERVE A CORRECTION AFTER BIG MOVES... Link for today's video. Stocks went on a tear with big gains from mid April to mid June. PerfChart 1 shows the percentage gains for the major index ETFs from April 11th to June 12th. The Nasdaq 100 ETF and Nasdaq 100 Equal-Weight ETF led the way with 9.44% and 8.18% gains, respectively. The S&P 500 SPDR, Equal-Weight S&P 500 ETF and S&P MidCap SPDR were up over 6%. Not bad for a mere two months. Note that these gains would be slightly higher if calculated from the close on April 10th to the close on June 6th, which is basically the low to the high of the move. As noted last week, most of the major index ETFs recorded new highs in early June and remain in clear uptrends. The Russell 2000 ETF and the Nasdaq 100 Equal-Weight ETF were the exceptions because they did not exceed their spring highs. After big gains the last two months, stocks were, and are, entitled to a rest or a correction. Selling pressure over the last few days may signal the start of this corrective period, but I do not think it signals the start of a major top or a bearish reversal.
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Chart 1
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Chart 2
PerfChart 2 shows the sector performance over the last two months. The Energy SPDR and Technology SPDR led the way higher. XLE is the only sector with a double digit gain. Strength in semiconductors powered the technology sector. The Consumer Staples SPDR and Utilities SPDR lagged the broader market with smaller gains. XLU was up a paltry 1.42% over the last two months and is by far the weakest (least strong) sector over this period.
THROWBACK LEVELS TO WATCH FOR SPY AND RSP... Chart 3 shows the S&P 500 SPDR (SPY) breaking out to new highs in May and surging over 8% from its mid April low to last week's high. The indicator window shows the AD Line confirming strength with a new high of its own. SPY can be considered overbought after an 8+ percent advance and this could give way to a correction. Chartists can use broken resistance levels and Fibonacci retracements to estimate the next support zone, which I am marking in the 187-190 area. SPY hit resistance in this area from early March to late May. Broken resistance turns into support and a pullback to this level would be called a "throwback". The Fibonacci cluster also marks potential support in the 187-190 area. Notice that I drew Fibonacci retracements from the February and April lows. A 38% retracement of the February-June advance would extend to 187.25, while a 50-62% retracement of the April-June advance would extend to the 187-188.5 area. Together, they form a Fibonacci cluster to watch.
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Chart 3
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Chart 4
Chart 4 shows the Equal-Weight S&P 500 ETF (RSP) with a Fibonacci cluster zone in the 73-74.5 area. The indicator window shows the S&P 500 Percent above 200-day EMA (!GT200SPX) holding above 65% for over a year now. The indicator is currently at 88.60% and this suggests that the vast majority of stocks in the S&P 500 are in long-term uptrends (above their 200-day EMA). I would not become concerned with this indicator unless it dips below 60%.
STEEL ETF UNDERPERFORMS AFTER WEDGE BREAKOUT... The Steel ETF (SLX) is looking increasingly vulnerable as it underperforms the broader market. Chart 5 shows SLX breaking out of a big wedge in late March and then breaking out of a smaller wedge in early May. With the S&P 500 moving to new highs in May and June, I expected the Steel ETF to follow suit and move higher. But it didn't. SLX could not break through the 47-48 zone and underperformed the market over the last two months. The ETF is currently at support and has yet to break down, but relative weakness could be an omen here. The rising 200-day moving average and May lows mark a support zone in the 45.5-46 area. A break below this zone would be bearish for steel. Should SLX hold, look for a break above 47.5 to show buying pressure.
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Chart 5
WTI, BRENT AND GASOLINE BREAK TO NEW HIGHS... The energy complex surged this week with Spot Light Crude ($WTIC), Brent Crude ($BRENT) and Unleaded Gasoline ($GASO) breaking to new highs for the year (2014). All three formed ascending triangle patterns from March to May and these pattern breakouts are bullish until proven otherwise. Note that the breakout zones turn first support and a strong breakout should hold. Quick moves back below the breakout zones would be negative.
Chart 6 shows $WTIC breaking a trend line with a surge in January-February and consolidating the next three months with the ascending triangle. This bullish continuation pattern was confirmed with the break above 105 and the upside target is to around 112. The height of the pattern is added to the breakout for an upside target. Broken resistance in the 104-105 area turns into the first support area to watch on a throwback. A throwback is a small pullback that returns to the resistance area and holds support there. Throwbacks offer a second chance to partake in the breakout. The indicator window shows the USO Oil Fund (USO) hitting a new high for 2014.
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Chart 6
Chart 7 shows Brent Crude ($BRENT) breaking out near 111 and the indicator window shows the US Brent Oil ETF (BNO) hitting a 52-week high. Brent crude is sourced from the North Sea and this is the benchmark price for European oil.
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Chart 7
Chart 8 shows Unleaded Gasoline ($GASO) breaking resistance in the 3.05 area and hitting a new high for 2014. $GASO is up around 20% from its November 2013 lows and the current breakout argues for further strength towards the 3.30 area. Such a move could weigh on consumer spending and hit retail stocks.
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Chart 8
RETAIL SALES SLOW... After a slew of economic reports last week, there were only a few important reports this week and retail sales was the biggie. Even though retail sales increased, the increase was minuscule and retail sales as a whole remain tepid. Chart 9 shows Retail/Food Sales ex-Motor Vehicles (FSFSXMV) increasing a mere .07% for the month. The six month average remains positive, but the May number is disappointing. Note that next week will be important for housing stocks because housing starts and building permits will be reported on the 17th.
Chart 9
Chart 10
RETAIL SPDR BACKS OFF KEY TREND LINE... Chart 11 shows the Retail SPDR (XRT) locked within a narrowing range over the last six months (blue trend lines). The resolution of this range could provide a glimpse into the future of retail spending. The ETF bounced off the 62% retracement three times from mid April to mid May, and the most recent bounce carried XRT above its May high. This breakout is positive, but the November trend line came into play and XRT turned back with a sharp decline the last few days. I still think the cup is half full and will mark key support in the 81-82 area. The indicator window shows the price relative near its low as XRT continues to show relative weakness.
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Chart 11
CLAIMS FALL AS 10-YR YIELD CHALLENGES RESISTANCE... Chart 12 shows the 4-week average for initial jobless claims hitting a multi-year low and in a clear downtrend. Initial claims came in at 317,000 on Thursday and the four week average is around 315,000. This is positive for the labor market and could put upward pressure on Treasury yields. Chart 13 shows the 10-YR Treasury Yield ($TNX) challenging resistance in the 26.5 area (2.65%). A break above this resistance zone would signal a new uptrend in yields and this would be bearish for Treasury bonds.
Chart 12
