RUSSELL 2000 PLUNGES FROM RANGE RESISTANCE -- INTERNET ETF REVERSES AT KEY RETRACEMENT -- AMAZON TESTS SUPPORT AS FACEBOOK AND LINKEDIN BREAK DOWN -- DOG DAYS OF SUMMER REFLECTED IN SEASONALITY CHART -- FIRST SUPPORTS TO WATCH FOR S&P 500
RUSSELL 2000 PLUNGES FROM RANGE RESISTANCE... Link for today's video. Small-caps are leading the market lower with sharp declines the last two days. Chart 1 shows the Russell 2000 surging to its March high last week, stalling for a couple days and felling over 3% the last few days. This sharp decline reinforces resistance in the 1210 area. The index is now testing first support in the 1170 area, a break of which would reverse the short-term upswing, which began in mid May. Longer-term, the index is caught within a trading range with support in the 1080-1100 area and resistance in the 1210 area. Trading could remain volatile within the range, but I would not turn long-term bearish on this index unless is breaks range support.
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Chart 1
INTERNET ETF REVERSES AT KEY RETRACEMENT ... Momentum stocks are also getting hammered on Tuesday. Chart 2 shows the Internet ETF (FDN) falling below 59 with a sharp decline. It is hard to say what caused this decline, but it could be preparation for July and August (see below). On the price chart, FDN reversed at the 62% retracement mark and fell to the May trend line. Also notice that the advance formed a rising wedge. Both the retracement and pattern are typical for counter trend rallies. In other words, a break down here could signal a continuation of the March-April decline, and this would be quite negative for momentum stocks in general. The indicator window shows the price relative (FDN:SPY ratio) breaking the May trend line as it turns down. This break down in relative performance is also negative.
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Chart 2
AMAZON TESTS SUPPORT AS FACEBOOK AND LINKEDIN BREAK DOWN... Chart 3 shows Amazon (AMZN) peaking the second week of June and trading in a range the last few weeks. AMZN did not join SPY and QQQ with a new high in July. Notice that the stock hit resistance in the 50-62% retracement zone and established support at 320. A break below this level would signal a continuation of the bigger downtrend and set up a test of the May lows.
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Chart 3
Chart 4 shows LinkedIn (LNKD) working its way higher from early May to early July and then giving back most of the June advance with a sharp decline the last two days. Also notice that the stock broke support to signal a continuation of the prior downtrend.
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Chart 4
Chart 5 shows Facebook (FB) breaking support with a sharp decline below 63. The indicator window shows the price relative breaking down over the last few days.
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Chart 5
DOG DAYS OF SUMMER REFLECTED IN SEASONALITY CHART... Chart 6 shows the seasonal tendencies for the S&P 500 over the last twenty years. The numbers at the top of each column show the percentage of months that the S&P 500 closed up. The numbers at the bottom show the average gain or loss for these months. As with sentiment, seasonality is a curious beast that does not always act as expected. Chartists, therefore, should use it in conjunction with other technical tools. With that out of the way, the chart below shows that July and August are the weakest months of the year - but for different reasons. July is the weakest because the S&P 500 advanced only 45% of the time. The average gain/loss, however, is zero percent. Even though the index lost ground 55% of the time, the percentage gains equaled the percentage losses. August has a negative bias because it shows the largest percentage loss of the twelve months. The S&P 500 closed up 53% of the time in August, but the percentage losses far outweighed the percentage gain. The net gain was minus 1.2%. Based on the seasonal tendencies, the S&P 500 could be in for a rough patch the next six to eight weeks.
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Chart 6
FIRST SUPPORTS TO WATCH FOR S&P 500 ... Chart 7 shows the S&P 500 with forty extra bars added to the chart. Chartists can add "Extra Bars" in the first row of the "Chart Attributes" section. While I am not turning bearish on the S&P 500 and I do expect this advance to continue at some point, the dog days of summer could usher in a correction first. Full Disclosure: I do not have a crystal ball and I do not KNOW where the market is going. Nobody really KNOWS. We can, however, use technical analysis to identify the trend and mark support zones to watch in the coming weeks.
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Chart 7
New highs indicate that the long-term, medium-term and short-term trends are up. Under this assumption, declines are viewed as corrections within the bigger uptrend. The first support zone is marked in the 1920-1930 area. A 38% retracement of the April-July advance and the mid June low mark support here. The second support zone is in the 1880-1900 area. Broken resistance and the Fibonacci cluster mark support here. Notice that I also drew the Fibonacci Retracements Tool from the February low. The 1880-1990 area marks a 38% retracement of the February-July advance and a 50-62% retracement of the April-July advance. This is the Fibonacci cluster.
VIX SEASONALITY CONFIRMS S&P 500 SEASONALITY ... Chart 8 shows twenty year seasonality for the S&P 500 Volatility Index ($VIX). Notice that the VIX was up 80% of the time in July and the average gain was 12.7%. This confirms what we are seeing on the S&P 500 chart because of the negative correlation between the VIX and stocks. The most interesting thing about this seasonality is just how strong the positive bias is in July. 80% is an extremely high number.
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Chart 8
IS THE VIX REALLY LOW?... Chart 9 shows monthly VIX over the last 20 years. The pink like is a 12-month EMA and the green line is a 20-month EMA. The VIX is a tricky indicator because it is hard to define extreme highs and lows. These extremes are moving targets that change over time. Working from left to right, the S&P 500 bottomed in 1994 and began a major advance in 1995. This advance continued even as the VIX moved into a higher range (20-30). The VIX then fell as the S&P 500 advanced from 2003 until 2007. Another 10-15 range occurred in 2005 and 2006. The VIX touched 10 in July 2005, but the S&P 500 continued higher for another two years. The VIX then surged in 2008 as the financial crisis hit and S&P 500 plunged. After peaking near 90 in 2008, the VIX worked its way lower the next few years. The 12-month EMA moved below 15 and the VIX almost hit 10. This is near the low end of the 20 year range, but it does not mean we a major top in near.
