KEY BREADTH INDICATOR STILL BULLISH -- REVISITING THE 2007 TOP -- NO MAJOR TOPPING PATTERN FOR IWV -- HOME CONSTRUCTION ISHARES FAILS TO HOLD SUPPORT -- REGIONAL BANK ETF BREAKS DOWN -- AROON SIGNAL TRIGGERS IN BIOTECH ISHARES
KEY BREADTH INDICATOR STILL BULLISH ... Link for today's video. While there are certainly a few negatives regarding the stock market, the bulk of the evidence remains bullish. Among the negatives, the Russell 2000 iShares is down around 7% from its early July high and shows relative weakness since late March. The Home Construction iShares (ITB) and Regional Bank SPDR (KRE) broke important support levels this week and continue to show relative weakness. Also note that seasonal patterns indicate that July and August are the weakest months for the stock market. These negatives are countered by a spate of new highs in early July. Several major index ETFs hit new highs and the S&P 1500 AD Line ($SUPADP) hit a new high (chart 1). A major top would likely be preceded by some sort of bearish divergence or break down in this key breadth indicator. The AD Line did decline over the last few weeks, but after hitting a new high and in the absence of a bearish divergence.
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Chart 1
REVISITING THE 2007 TOP... Further more, I do not see major topping patterns in the S&P 500, Russell 1000 or Russell 3000 at this point. Tops usually evolve and form as large consolidations that mark a distribution process. Chart 2 shows the 2007 top taking around nine months to form. Also note that the S&P 500 AD Line (!ADLINESPX) formed a large bearish divergence during this topping process. The Russell 3000 ETF (IWV) then broke down with a sharp decline in January 2008 and the AD Line confirmed this breakdown with one of its own.
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Chart 2
IWV HAS YET TO FORM A MAJOR TOPPING PATTERN... Chart 3 shows IWV hitting a new high in early July and in a clear uptrend. An overextended condition is the only negative and this is medium-term at worst. It is not a long-term problem and indicative of a long-term top. The index may be vulnerable to a correction and I would mark first support in the 112-114 area. Broken resistance and the September trend line confirm support here. The April low marks long-term support for now. I will raise this level if/when a higher reaction low forms. The indicator window shows the S&P 500 AD Line hitting a new high in early July and then edging lower the last two weeks. Some ebb and flow is perfectly normal and this decline does not detract from the recent high. In the absence of a major topping pattern in IWV and bearish divergence in the AD Line, my worst-case scenario is for a correction within the long-term uptrend.
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Chart 3
HOME CONSTRUCTION ISHARES FAILS TO HOLD SUPPORT... With that out of the way, the next charts will focus on some of the problem children within the stock market. It has been a rough month for homebuilders with the Home Construction iShares (ITB) falling over 6% from its early July high. Chart 4 shows ITB with a rising wedge from mid May to early July. The ETF broke the wedge trend line last week and broke its support zone this week. With this reversal, a lower high formed and a continuation of the prior decline is expected. This projects further weakness below the May lows. The trend line break and gap mark the first resistance zone to watch in the 24-24.50 area. The indicator window shows the price relative moving to a new low as ITB underperforms the broader market.
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Chart 4
REGIONAL BANK ETF BREAKS DOWN... Chart 5 shows the Regional Bank SPDR (KRE) failing to hold its flag breakout and then breaking support with a sharp decline. Note that KRE ultimately formed a rising wedge and peaked below the January high. The wedge break, therefore, signals a continuation of the prior decline and projects a move below the May low. I am using this week's high and the wedge trend line break to mark a resistance zone in the 40-40.5 area. With the upswing fully reversed, chartist can also consider a larger bearish pattern taking shape. Combined with a relatively equal high in January, a large head-and-shoulders reversal pattern could be taking shape with neckline support in the 36.5 area. The indicator window shows the KRE:SPY ratio sinking to a new low as KRE underperforms SPY.
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Chart 5
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Chart 6
Chart 6 shows the Yield Curve (10YR - 2YR) hitting 2 for the first time since June 2013. This means the 10-year Treasury bond yields 2% more than the 2-year Treasury note. More importantly, it means the spread between the two continues to narrow and this is negative of banks, which make money by borrowing at short-term rates and lending at long-term rates.
AROON SIGNAL TRIGGERS IN BIOTECH ISHARES ... Chart 7 shows the Biotech iShares (IBB) breaking wedge support with a sharp decline the last two weeks. Also notice that a lower high formed in early July. This week's high and a buffer mark a resistance zone in the 255-260 area. I would consider this break down valid as long as resistance holds. The indicator window shows Aroon Down turning bearish with a surge above Aroon Up and a move to 100. While the past does not guarantee the future, the Aroon signals have worked pretty good over the last nine months.
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Chart 7
NETWORKING ETFS JOIN THE BREAK DOWN PARADE... Chart 8 shows the Networking PowerShares ETF (PXQ) forming a lower high in early July and breaking support with a sharp decline below 32.50 this month. Based on a measured move, the downside target is in the 29.2 area. The first decline was 12.4% and a similar decline from the July high would project a move to this area. Also notice that the November-December lows mark support here. Broken support turns first resistance in the 32.5 area. The indicator window shows the Networking Intellidex Index ($DZN), which is the benchmark for this ETF. Notice that $DZN broke wedge support to signal a continuation of the prior decline.
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Chart 8
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Chart 9
Chart 9 shows the Networking iShares (IGN) failing to hold its breakout and moving below the mid June lows. Notice that a small pennant formed over the last several days and a break below pennant support would signal a continuation of the early July decline. The indicator window shows the IGN:SPY ratio breaking down as IGN underperforms the broader market. Before leaving these two ETFs, notice the different makeup. IGN has 24 stocks and the top ten account for 65.3%. PZQ has 30 stocks and the top ten account for 46.17%. The weightings in PZQ are more evenly distributed and I think this ETF gives us a better idea of the group as a whole.
INTELLIDEX AND POWERSHARES... Even though some ETFs are thinly traded and perhaps unsuitable for trading, they can still offer valuable insight into a particular group (relative strength/weakness, trend etc...). The Intellidex indices are based on certain styles, sectors and industry groups. For example, there is the Dynamic Small-Cap Value Intellidex Index ($ILZ), the Dynamic Utilities Intellidex Index ($DWU) and the Dynamic Retail Intellidex Index ($DWR). Without going into too much detail, NYSE Arca developed and maintains these indices. They are dynamic because components are chosen based on a variety of factors and the exchange re-evaluates these factors quarterly. The first image shows the Intellidex indices covered here at StockCharts. The second image shows the PowerShares Dynamic ETFs based on these indices.
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Chart 10
