RETAIL ETFS TEST IMPORTANT SUPPORT LEVELS -- COAL AND STRATEGIC METALS FOLLOW CHINESE STOCKS HIGHER -- MAJORITY OF SMALL AND MID CAPS ARE BELOW THEIR 50-DAY EMAS -- BUT THE MAJORITY OF LARGE CAPS ARE ABOVE THEIR 50-EMAS
RETAIL ETFS TEST IMPORTANT SUPPORT LEVELS... Link for today's video. The Retail SPDR (XRT) and the MarketVectors Retail ETF (RTH) are still in uptrends, but both are testing important support levels that hold the key to these uptrends. Chartists should watch these two closely because breakdowns would be negative for the retail industry, the consumer discretionary sector and the market as a whole. Chart 1 shows XRT breaking out in early June and hitting a new high in early July. The ETF then declined to its support zone in mid July. The breakout zone, 50-62% retracement and a buffer mark support in the 83-84 area. A normal correction within an uptrend should stop and reverse in this area. Look for a break above last week's high to signal an end to the correction and a resumption of the uptrend. Failure to bounce and a move below 83 would suggest that this is more than just a correction. Relative weakness remains a concern for retail. The indicator window shows the XRT:SPY ratio hitting a new low this month as retail continues to underperform the SPY.
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Chart 1
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Chart 2
Chart 2 shows the MarketVectors Retail ETF (RTH) falling back towards support over the last two days. Friday's weakness stems from a big decline in Amazon, which is the second largest holding. On the price chart, the rising 200-day moving average, broken resistance and the June lows combine to mark support in the 59 area. A break below the June lows would be bearish here and argue for further weakness. The indicator window shows MACD turning positive at the end of May and hovering in positive territory the last two months. Momentum is still bullish right now. A move into negative territory would turn momentum bearish.
COAL AND STRATEGIC METALS FOLLOW CHINESE STOCKS HIGHER... Martin Pring and John Murphy wrote about strength in Chinese stocks over the weekend. Note that the Shanghai Composite was up another 2% on Monday and the Nikkei 225 is at its highest level since January. Strength in Asia could be helping coal and strategic metal stocks as both caught strong bids recently. Chart 3 show shows the Coal ETF (KOL) ultimately holding two key moving averages and breaking above its June highs with a surge the last five days. The indicator window shows MACD moving back into positive territory as momentum turns bullish again.
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Chart 3
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Chart 4
Chart 4 shows the MarketVectors Rare Earth and Strategic Metals ETF (REMX) bouncing off support in mid June and challenging its April high here in late July. Also notice that REMX broke its 200-day moving average and the StockCharts Technical Rank (SCTR) moved above 50 for the first time since summer 2011. The ETF is getting a little overbought after a ~10% advance in five weeks. I would mark first support in the 36 area.
MAJORITY OF SMALL AND MID CAPS ARE BELOW THEIR 50-DAY EMAS... Over the weekend, John Murphy wrote that relative weakness in small-caps was the worst in three years and that this was troubling for the overall market. Relative weakness in small-caps can be seen on the actual price charts and in the breadth indicators. Will small-caps drag down the rest of the market or will small-caps rebound?
For an answer to that question, I am turning to some medium-term breadth indicators. Namely, we are going to look at the percentage of stocks above their 50-day EMAs for the S&P 500, S&P MidCap 400 and S&P Small-Cap 600. This indicator oscillates above and below the 50 percent level. On the face of it, the indicator favors the bulls when more than 50% of the components are above their 50-day EMA and the bears when less than 50% are above. Using the 50% level as the bull-bear threshold, however, results in whipsaws so I added a buffer for signals. A move above 60% is bullish until countered with a move below 40%. A move below 40% is bearish until countered with a move above 60%.
Chart 5 shows the Small-cap Stocks Above 50-day EMA (!GT50SML) in the main window and the S&P Small-Cap 600 in the lower window. There have been six crosses of the 40 and 60 levels in the last eleven months. That is about one signal every two months. Because it is based on a moving average, which is a lagging indicator, this indicator will have some lag and be prone to whipsaws. Despite these drawbacks, the indicator does provide a good internal snapshot for the underlying index. Currently, less than 40% of the 600 stocks in the S&P Small-Cap 600 are above their 50-day EMAs. In addition, the indicator turned bearish on July 17th and has yet to reverse this signal. A move above 60% is needed to turn this indicator bullish and suggest that small-caps will rebound.
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Chart 5
Chart 6 shows the MidCap Stocks Above 50-day EMA (!GT50MID) and the S&P MidCap 400. The indicator turned bullish on May 12th and stayed bullish until July 17th, when it moved below 40%. Currently, less than 50% of the stocks in the index are above their 50-day EMAs and this indicator favors the bears. Keep in mind that this is a short to medium term indicator. In addition, the S&P MidCap 400 is in a long-term uptrend, which means that the bearish signal points to a correction, not a major trend reversal. Mid-caps are in between small-caps and large-caps. Chartists can therefore look for this indicator to dip the balance. A break above 60% put mid-caps in bull mode and this would be positive for the market overall.
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Chart 6
BUT THE MAJORITY OF LARGE CAPS ARE ABOVE THEIR 50-EMAS... Chart 7 shows the S&P 500 500 Stocks Above 50-day EMA (!GT50SPX) and the S&P 500. In contrast to the prior two, this indicator remains in bull mode. The indicator crossed above 60% on April 22nd and has yet to negate this signal. Currently, over 60% of stocks in the S&P 500 are above their 50-day EMAs. If small-caps are to drag down large-caps, then look for this indicator to break below 50% first and then 40%.
