FINANCIALS LEAD AS XLF AND REM HIT NEW HIGHS -- FOUR FINANCIAL STOCKS TO WATCH -- BASE METALS ETF EXTENDS UPTREND -- ALUMINUM LEADS BASE METALS -- COPPER MINERS ETF CORRECTS WITHIN UPTREND -- 2-YEAR YIELD ENDS PULLBACK AND RESUMES UPTREND
FINANCIALS LEAD AS XLF AND REM HIT NEW HIGHS... Link for today's video. The Finance SPDR (XLF) and the Equal-weight Finance ETF (RYF) moved to new highs this week to affirm their long-term uptrends. Things can't be all that bad when these two sector ETFs record new highs. We are also seeing strength in the industry groups within the finance sector, which suggest that maybe, just maybe, long-term Treasury yields will turn up soon. Chart 1 shows the Mortgage REIT ETF (REM) breaking above its July high and hitting a fresh 52-week high. Chart 2 shows the Broker-Dealer iShares (IAI) forming a higher low in early August and moving above 38.5 this week. Chart 3 shows the Regional Bank SPDR (KRE) breaking the July trend line and CCI moving into positive territory.
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Chart 1
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Chart 2
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Chart 3
FOUR FINANCIAL STOCKS TO WATCH... With the finance sector hitting a new high, I went through the stocks in this sector and found four to highlight. All four have at least one thing in common: they recorded 52-week highs earlier this year. Even though they are off these highs, new highs suggest that the big trend is up and I am assuming that the recent declines are corrections within the uptrend. Good ole Dow Theory asserts that the trend is in force until proven otherwise. With XLF hitting a new high, I am trying the find stocks that could hit new highs again later this year. That is the method behind the madness.
Chart 4 shows American Express (AXP) hitting a 52-week high in June and then pulling back sharply in July. The stock held above the April low though and broke out this week.
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Chart 4
Chart 5 shows Bank of America (BAC) hitting a new high in March and then falling sharply in April-May. After meandering around the 15.25 area for a few months, the stock broke out with a gapand strong advance. MACD also turned up and moved into positive territory.
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Chart 5
Chart 6 shows ETrade Financial (ETFC) hitting a new high in March and then falling sharply in April. The stock established support in the 19.5-20 area in May-June and then started working its way higher. ETFC broke out this week and MACD continued to move higher.
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Chart 6
Chart 7 shows Keycorp (KEY) falling to support in the 12.8-13 area and bouncing over the last two weeks. Perhaps a big double top is forming, but it is unconfirmed because support held. A break below 12.8 would confirm the double top and warrant a bearish stance. Until then, the uptrend is in place and this means chartists should look for bullish setups, not bearish setups.
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Chart 7
BASE METALS ETF EXTENDS UPTREND... While precious metals and oil fell again this week, the Base Metals ETF (DBB) caught a bid and held its breakout. Chart 8 shows weekly bars for DBB over the last three and a half years. The ETF broke the 2011 trend line and exceeded resistance with a move above 17 this summer. DBB then pulled back the prior three weeks and bounced this week. This amounts to a successful test of the breakout and keeps the uptrend alive. The indicator window shows the Shanghai Composite ($SSEC) consolidating for over two years and forming a Wyckoff type base. Notice how the 2000 level has held since November 2012. SSEC is on the verge of a breakout that would make this pattern a large base. Such a move would also be quite positive for base metals.
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Chart 8
ALUMINUM LEADS BASE METALS... The Base Metals ETF consists of aluminum, copper and zinc, in relatively equal parts. Strength in two of the three is all it takes to move this ETF higher. Zinc and Aluminum are in clear uptrends. Spot Zinc hit a 52-week high in July and corrected over the last few weeks. Spot Aluminum hit a 52-week high this week and remains the strongest of the three. Chart 9 shows the Aluminum ETN (JJU) breaking a trend line and moving above 20 to record a 52-week high this summer. The indicator window shows the DJ US Aluminum Index ($DJUSAL) with a classic Wyckoff pattern (decline, base, accumulation and breakout). Aluminum and relate-stocks are in clear uptrends. This means chartists should put these on their watch lists and look for pullbacks within the uptrend. For example, pullbacks occur when 10-period RSI dips below 40 or 20-period CCI dips below -100. See COPX below for an example.
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Chart 9
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Chart 10
Chart 10 shows the Copper ETN (JJC) within a four year downtrend. The green trend line zones represent counter trend rallies within this downtrend. JJC is currently in the midst of a counter trend rally and at a moment-of-truth. Notice how it failed at the trend line zone and pulled back in July. JJC surged over 2% this week and a break above 40 would provide the first sign that this long-term downtrend is ending. The green trend line extending up from March marks support just below 38. A break below 37.5 would reverse this counter trend advance and signal a continuation of the bigger downtrend.
COPPER MINERS ETF CORRECTS WITHIN UPTREND... As chartists, traders and investors, we have to make an assumption (educated guess) at some point. The key is to limit the assumption and focus on what is actually happening. When the trend is up, I assume that declines are corrective and I look for signs that the correction is ending. A correction offers an entry point with a better reward-to-risk ratio (as opposed to buying at a new high). Chart 11 shows the Copper Miners ETF (COPX) with three indicators: one for trend identification, one for the setup and one for trigger. An uptrend is present when the 150-day EMA is rising. Chartists can also use the TRIX (125,1) or PPO(30,150,1). The trend is up when these two are positive. Once the uptrend is established, I assume that a decline is a correction that will result in a higher low. A correction unfolds when 10-period RSI moves below 40. Because stocks can become oversold and remain oversold, we need a bullish trigger to suggest that the correction is ending. A StochRSI surge to 1 provides such a trigger. The chart below shows COPX with a correction and trigger in mid June (red and green lines). COPX is currently in a correction and I am watching for a trigger from StochRSI. Caution! This strategy is not fool proof and there will be both whipsaws (loosing trades) and winning trades. If nothing else, keep this trend-setup-trigger methodology in mind when looking through the charts.
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Chart 11
2-YEAR YIELD ENDS PULLBACK AND RESUMES UPTREND... Treasuries and Treasury Yields will be in the spotlight today because Fed Chair Janet Yellen is speaking from Jackson Hole. Even though the 10-YR Treasury Yield ($TNX) fell to new lows this month, the 2-year Treasury Yield ($UST2Y) remains in an uptrend overall and turned up again this week. Chart 12 shows the 2-yr Yield zigzagging higher since late November. It is a clear case of rising peaks and rising troughs, which is an uptrend. An uptrend in short-term yields is a positive sign for the economy and the stock market. Why? Because economic strength puts more pressure on the Fed to tighten monetary policy down the road. While the decline in the 10-YR Yield is perplexing, I would not view it as stock-market negative as long as the 2-YR Yield maintains its uptrend. A break below .40 would signal that money is moving into short-term Treasuries and this would be negative for stocks. Chart 13 shows the 5-year Treasury Yield ($FVX) bouncing off the lower trend line of a rising channel.
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Chart 12
