SELLING PRESSURE IS STILL QUITE LIMITED -- RUSSELL 2000 ISHARES NEARS FIRST SUPPORT ZONE -- FINANCE SPDR BOUNCES OFF SUPPORT -- REGIONAL BANK SPDR FAILS AT FLAG, BUT HOLDS SUPPORT -- YIELD SPREAD CONTINUES TO NARROW
SELLING PRESSURE IS STILL QUITE LIMITED... Link for today's video. Last week was rough for small-caps and micro-caps as they bore the brunt of selling pressure. There are concerns with relative weakness in small-caps and July-August seasonal patterns, but recent selling pressure was lopsided and confined to a relatively small portion of the stock market. PerfChart 1 shows the Russell 2000 iShares (IWM) loosing 3.94% and the Russell Micro-Cap iShares (IWC) losing 4.92%. These two were the big losers. The Russell MicCap iShares (IWR) held up much better than the Russell 2000 iShares with a 1.62% loss and the Russell 1000 iShares (IWB) lost just .94%. As noted before, the Russell 2000 Small-Cap Index accounts for a little less than 8% of the US equity market, while The Russell 1000 Large-Cap Index accounts for a little less than 92% of the US equity market. The vast majority of the US equity market is still holding up rather well because the Russell 1000 was down just 1% last week. A 1% decline after a new high is not indicative of strong selling pressure. Chart 2 shows IWB moving back above 110 today.
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Chart 1
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Chart 2
IWM AND IJR NEAR FIRST SUPPORT ZONES... Chart 3 shows the Russell 2000 iShares (IWM) hitting a new high in early July and then pulling back rather sharply. First and foremost, the new highs in early March and early July indicate that the long-term trend is up. Also notice that IWM is above its rising 200-day moving average and the 50-day is above the 200-day. With the long-term trend up, support levels are expected to hold and the first support zone is at hand. Broken resistance, the rising 200-day and the 50-62% retracement zone mark support in the 112-113 area. Failure to hold this zone and a close below 112 would warrant a reassessment of the overall uptrend. Chart 4 shows the S&P SmallCap iShares (IJR) with similar characteristics.
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Chart 3
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Chart 4
XLF BOUNCES OFF SUPPORT... The Finance SPDR (XLF) was the second weakest sector last week (behind XLE), but the ETF is still in an uptrend and support is at hand. Chart 5 shows XLF breaking out in late May, hitting a new high in early June and turning choppy the last five weeks. As you may have guessed, the new highs tell us that the long-term trend is clearly up. Furthermore, notice how the lows since mid June form a support zone in the 22.25-22.50 area. This support zone is holding and XLF is bouncing off this zone once again today. The bulls are clearly in control as long as XLF holds 22.25 on a closing basis. The indicator window shows the XLF AD Line ($XLFADP) in an uptrend as it hit a new high in early June. Chart 6 shows Citigroup (C) leading the finance sector higher with a gap off support.
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Chart 5
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Chart 6
FLAG BREAKOUT FAILS, BUT SUPPORT HOLDS FOR KRE... I featured the Regional Bank SPDR (KRE) in the Market Message on June 30th as the ETF traded within a flat flag. KRE subsequently broke flag resistance with a big surge above 40.5, but fell back below this breakout zone last week. Even though the failed breakout is negative, chart 7 shows KRE testing support from the flag lows and getting a bounce on Monday. Adding a little buffer, I would mark support at 39 and maintain a bullish bias as long as KRE holds this level on a closing basis.
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Chart 7
YIELD SPREAD CONTINUES TO NARROW... Chartists should keep an eye on the yield curve for clues on the banks. Chart 8 shows the Yield Curve 10YR-2YR ($YC2YR) rising from May to December and falling from January to July. This is the difference between the 10-year Treasury Yield ($TNX) and the 2-year Treasury Yield ($UST2Y). Notice that the yield curve is still very positive because the 10-YR yield is over 2% higher than the 2-YR Yield. This spread, however, has narrowed significantly over the last six months. Notice that KRE advanced as this spread widened and traded flat when this spread narrowed. This is because banks earn more money when the spread widens. An upturn in the Yield Curve (10YR - 2YR) would, therefore, be positive for banks.
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Chart 8
COMERICA, FIFTH THIRD AND HUNTINGTON FORM BULLISH PATTERNS... Chart 9 shows Comerica (CMA) with a flat flag since mid June. This is a bullish continuation pattern and a break above flag resistance would be bullish. Chart 10 shows Fifth Third Bancorp (FITB) with a small ascending triangle over the last few weeks. This is also a bullish continuation pattern and breakout would extend the uptrend.
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Chart 9
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Chart 10
Chart 11 shows Huntington Bancshares (HBAN) recording a new high in early April, forming a higher low in mid May and breaking out in early June. A consolidation formed the last six weeks and it looks like an ascending triangle, which is a bullish continuation pattern. Either way, a break above the June highs would signal a continuation higher and target a challenge to the early April high.
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Chart 11
GE LEADS XLI HIGHER AHEAD OF EARNINGS... Chart 12 shows the Industrials SPDR (XLI) advancing and challenging the upper trend line of a falling flag. XLI broke out in May and surged to a new high again in early June. After becoming overbought with a 6+ percent surge in three weeks, the stock worked off these conditions with a pullback to the breakout zone. The pattern looks like a falling flag, which is a bullish continuation pattern. XLI surged to resistance and a breakout would signal a continuation of the bigger uptrend. Chart 13 shows General Electric (GE) with similar characteristics. Note that GE is the biggest component in XLI and the stock reports on Friday.
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Chart 12
