FINANCE SPDR TESTS THE MAY BREAKOUT -- MORGAN STANLEY AND JP MORGAN TESTS KEY SUPPORTS -- THREE IMPROVING INDUSTRY GROUPS ON RRG -- REGIONAL BANK SPDR HEADS FOR MAJOR SUPPORT TEST -- METALS & MINERS SPDR FORMS BIG BULLISH CONTINUATION PATTERN
FINANCE SPDR TESTS THE MAY BREAKOUT... Link for today's video. The Finance SPDR (XLF) got slammed last week and broke first support in the 22.50 area. Will it continue lower and drag the market down? Or, will XLF firm and resume the bigger uptrend. Here's what to look for. Chart 1 shows XLF breaking triangle resistance in late May and hitting new highs in early July. This suggests that the long-term trend is still up. After stalling throughout July, the ETF broke below the lows from late June and early July with a sharp decline. This is short-term negative, but it is not enough to affect the bigger uptrend. The ETF firmed on Monday with an inside day that closed near the high of the day. Also notice that there is potential support from broken resistance and the 50% retracement. Yes, there is always a potential support level if you look hard enough! A close back above 22.6 is needed to negate this short-term break down. The indicator window shows High-Low Percent for XLF. New lows out paced new highs for the first time since mid May as High-Low Percent dipped into negative territory. Look for a move back above +5% to signal a rebound in High-Low Percent.
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Chart 1
MORGAN STANLEY AND JP MORGAN TESTS KEY SUPPORTS... Chart 2 shows JP Morgan (JPM) gapping up in mid July, stalling around 59 and plunging below 57. This gap failed to hold and it looks like JPM is putting in a lower high. The trend since mid May, which represents the immediate trend, is still up with the mid May trend line and July low marking key support. This is basically the make-of-break support level. The trend remains up as long as it holds. A break down would reverse the uptrend and raise the possibility of a bigger downtrend unfolding.
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Chart 2
The indicator window shows the TRIX oscillator moving below its signal line, but still in positive territory. TRIX is the 1-period Rate-of-Change for a triple smoothed exponential moving average, which is the 15-period EMA of the 15-period EMA of the 15-period EMA. By measuring the 1-period Rate-of-Change, the TRIX tells us when this triple smoothed EMA turns up or down. A positive TRIX means the triple smoothed EMA is rising and a negative TRIX means the triple smoothed EMA is falling. Returning to the JPM chart, a TRIX break below the mid July low would foreshadow a move into negative territory. Chart 3 shows Morgan Stanley (MS) with support in the 31-31.5 area.
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Chart 3
THREE IMPROVING INDUSTRY GROUPS ON RRG... Chart 4 shows the Relative Rotation Graph (RRG) for ten key industry group ETFs. Relative Rotation Graphs, which will be featured at ChartCon, show relative strength and relative momentum. This chart is especially interesting because RRG shows five improving ETFs, four weakening and one lagging. None of the ten are actually leading. The Home Construction iShares (ITB) is by far the weakest of the ten and shows some serious relative weakness. Three recently improving ETFs make this chart this chart interesting: biotech, internet, regional banks, metals & mining and retail. Notice that KRE, XRT and XME recently crossed into the improving quadrant. This means they have the potential to move into the leading quadrant and outperform. A downturn and move back into the lagging quadrant would be detrimental.
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Chart 4
REGIONAL BANK SPDR HEADS FOR MAJOR SUPPORT TEST... While RRG shows potential promise for the Regional Bank SPDR (KRE), the ETF is in an immediate downtrend and a large bearish reversal pattern could be taking shape. Chart 5 shows KRE with a large head-and-shoulders pattern taking shape with neckline support in the 36.5 area. While a break below the 2014 lows would confirm the pattern, my focus is on the immediate downtrend over the last five weeks. There are two things to watch for a potential reversal here. First, a reversal at or above the support zone and a bullish MACD crossover would be positive. Second, follow through breaks above the July trend line and late July high would fully negate the mid July break down and put regional banks back on the bullish track.
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Chart 5
METALS & MINERS SPDR FORMS BIG BULLISH CONTINUATION PATTERN... Chart 6 shows the Metals & Miners SPDR (XME) with a large cup-with-handle taking shape the last four months. William O'Neil of Investors Business Daily popularized these bullish continuation patterns. The overall trend is up and this pattern represents a large consolidation within that uptrend. The July consolidation forms the handle and a break above rim resistance confirms the pattern. Also notice that the July consolidation looks like a falling wedge or flag, which is a bullish continuation pattern. XME surged off support today and a follow through break above last week's high would reverse the falling wedge. The indicator window shows MACD edging lower the last few weeks. Look for a signal line cross to signal an upturn in price momentum. Note that there are a lot of steel stocks in the top ten for XME.
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Chart 6
RETAIL SPDR BOUNCES AT FIBONACCI RETRACEMENT... The Retail SPDR (XRT) was one of the stronger ETFs on Monday with a 1+ percent gain. As noted last week, XRT is at an interesting juncture because it is firming near the 62% retracement mark. XRT broke out in early June and hit a new high in early July. A 62% retracement to the July trend line could be just a pullback within this uptrend. I am therefore watching for some sort of upside catalyst that would signal an end to the pullback and a resumption of the uptrend. A break above the late July high would clearly reverse the short-term downtrend. Chartists can also look for MACD to turn up and break above its signal line.
