STOCKS STALL, BUT SELLING PRESSURE REMAINS SUBDUED -- SMALL DIVERGENCES APPEAR IN AD LINES -- GLOBAL AUTO ETF HITS A NEW HIGH -- FORD, GM AND TESLA POWER CARZ -- AUTO PARTS INDEX BREAKS TO NEW HIGH -- AMERICAN AXLE BOUNCES OF SUPPORT ZONE
STOCKS STALL, BUT SELLING PRESSURE REMAINS SUBDUED... Link for today's video. After hitting a new high last week, the Russell 1000 iShares (IWB) was hit with sudden selling pressure on Tuesday afternoon. This reversal day certainly looked negative on an intraday or candlestick chart, but it was not enough to affect the immediate uptrend. The candlesticks inset shows the last six days of trading because chartists must look hard to see Tuesday's reversal on an eleven month chart. There was no downside follow through as IWB held above 109 the whole week. While the stock market may be vulnerable to a correction, selling pressure has been rather limited since mid April. At the very least, we need to see some follow through to Tuesday's reversal for proof that selling pressure is actually increasing. Should a correction unfold, I would mark support in the 106 area. Broken resistance and the trend line zone mark support here.
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Chart 1
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Chart 2
Chart 2 shows the Russell 2000 iShares (IWM) breaking wedge resistance in late May and moving above 118 late last week. The ETF surged to 119 on Tuesday and then closed below 117, but there was no follow thru to this afternoon reversal. Notice how IWM dipped to 116 on Wednesday and closed at the high-of-the-day near 118. Buying pressure came in pretty quick and selling pressure is still quite weak. In fact, IWM was above Wednesday's high at midday on Friday and small-caps are showing resilience.
SMALL DIVERGENCES APPEAR IN AD LINES... In addition to some follow thru to Tuesday's intraday reversal, I will be watching a pair of AD Lines for signs that selling pressure is ticking up. The S&P MidCap 400 and the S&P Small-Cap 600 moved to new highs last week, but their AD Lines did not confirm with new highs and small bearish divergences are taking shape. At this point, I consider the bearish divergence a concern, but not an actual bearish development. Chart 3 shows the S&P SmallCap AD Line ($SMLADP) breaking out in late May and moving higher into early June. The indicator window shows the S&P Small-Cap 600 breaking out in early May and exceeding its early June high last week (green line). The AD Line did not move to a new high last week and instead formed a lower high (red line). This bearish divergence indicates that fewer stocks partook in last week's advance, which could undermine the bounce. While the lower high and bearish divergence are concerns, this indicator would not turn outright bearish until a break below the mid June low. Just to be safe, I am adding buffers and creating support zones for both the indicator and the index. Breaks below these support zones would be short-term bearish and argue for lower prices. Chart 4 shows the S&P 400 Mid-Cap AD Line ($MIDADP) with similar characteristics. Chart 5 shows the S&P 500 AD Line ($SPXADP) hitting a new high last week, which means it did not form a bearish divergence. Large-caps remain the strongest of the three groups.
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Chart 3
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Chart 4
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Chart 5
HOW THE AD LINE WORKS... The AD Line is a cumulative breadth indicator based on net advance percent, which is advancing issues less declining issues divided by total issues. An advance counts at +1, a decline counts as -1 and unchanged counts as 0. This indicator ignores market cap and treats each component equally. The AD Line tells us what is happening within an index or group and measures the degree of participation for a price move. The AD Line rises when more components advance and falls when more decline.
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Chart 6
FINDING BREADTH INDICATORS IN THE SYMBOL CATALOG... StockCharts calculates and maintains advance-decline data for over a dozen key indices. This includes the Dow averages, six major indices, ten sectors and an industry group. You can find these by searching for "advance and decline and percent -volume" in the symbol catalog (without the quotation marks). The "and" insures that the term is required. The minus sign (-) excludes the term. A search including volume would include the advancing volume-declining volume indicators.
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Chart 7
GLOBAL AUTO ETF HITS A NEW HIGH... Some of the more cyclical groups are showing strength and this is positive for the overall market. In particular, chart 8 shows the Global Auto ETF (CARZ) moving to new highs this month with a surge above 40.50. The ETF can trade rather choppy at times, but the overall trajectory is up and the new high is bullish. CARZ hit a new high with the surge above 40 in late March and then fell over 7%. The ETF found support near the March lows, broke wedge resistance and surged to another new high. The indicator window shows CARZ relative to the S&P 500 SPDR using the price relative (CARZ:SPY ratio). CARZ shows strength on the price chart with the new high, but is still underperforming SPY on a percentage basis.
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Chart 8
FORD, GM AND TESLA POWER CARZ... Ford (F) and General Motors (GM) are the two biggest components in the Global Auto ETF. Throw in Tesla (TSLA) and the three US-based auto makers account for around 21% of the ETF. Chart 9 show Ford with a breakout in early April, a consolidation and another breakout in late May. The trend here is clearly up and the stock looks poised to challenge its 2013 highs.
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Chart 9
Chart 10 shows GM breaking out with a surge in early June. Despite its recall issues, the stock held the breakout as broken resistance turned first support in the 35 area.
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Chart 10
Chart 11 shows Tesla hitting a new high in February and then correcting with a 50-62% retracement to the 180 area. The stock broke resistance at 220 with a surge in mid June and I would mark first support in the 200-210 area.
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Chart 11
AUTO PARTS INDEX BREAKS TO NEW HIGH... Strength in auto stocks could give way to strength in auto parts, especially original auto part suppliers. Chart 12 shows the DJ US Auto Parts Index ($DJUSAT) breaking triangle resistance and hitting new highs in late May and early June. The overall trend here is clearly up with broken resistance turning first support in the 410 area. The March-May lows mark a key support zone in the 390 area.
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Chart 12
AMERICAN AXLE BOUNCES OF SUPPORT ZONE... Chart 13 shows American Axle and Manufacturing (AXL) finding support in the 17-17.25 area from mid April to mid May. Note that this support zone extends back to the November low. Also note that the stock has traded between 17 and 21.5 since July 2013. This amounts to one big trading range. AXL caught my eye because it bounced off support and broke the resistance in early June. I ignored the spike high in early May because it occurred intraday and did not hold long at all. Since the early June breakout, AXL pulled back with a small falling wedge and a break above the late June high would signal a continuation of the prior advance. A breakout at 19.75 would complete the reversal and argue for a challenge to resistance in the 21.50 area.
