REGIONAL BANKS AND RUSSELL 2000 LEAD -- HOME CONSTRUCTION ISHARES FORMS A HIGH-TIGHT FLAG -- TOLL BROTHERS AND USG GO FOR BREAKOUTS -- GOLD HOLDS LONG-TERM BEARISH PATTERN -- YEN FOLLOWS EURO WITH A BREAK DOWN
REGIONAL BANKS AND RUSSELL 2000 LEAD... Link for today's video. September trading has started with a bang for the Russell 2000 iShares (IWM) and the Regional Bank SPDR (KRE). I am mentioning these two in the same sentence because financial services accounts for 24.19% of IWM and regional banks are a big part of this small-cap sector. Chart 1 shows IWM within a rather steep rising channel since August. Even though IWM is underperforming SPY, it is still positive year-to-date (+2%) and in a clear upswing the last five weeks. The early August trend line and mid August low mark first support in the 114-115 area. The early August low marks long-term support in the 110-111 area. As noted last week, keep in mind that IWM hit a 52-week high in early July and formed a higher low in early August. This suggests that the bigger trend is up and new highs are expected because a trend in motion stays in motion.
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Chart 1
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Chart 2
Chart 2 shows the Regional Bank SPDR opening strong and moving above the late July high. This move is a continuation of the breakout I showed on August 19th. The blue dotted lines show when CCI breaks into positive territory after becoming oversold (below -100). Also notice that KRE broke the early July trend line at the time. With today's move above the late July high, the upswing is in full gear and regional banks may be poised to join the big banks. Note that the Finance SPDR (XLF) and the Insurance SPDR (KIE) hit 52-week highs today already.
HOME CONSTRUCTION ISHARES FORMS A HIGH-TIGHT FLAG... The Home Construction iShares (ITB) surged in August and then consolidated over the last two weeks to form a high-and-tight flag. Before looking at the short-term, let's review the long-term chart. Chart 3 shows ITB with a big surge from October 2011 to May 2013 and then a less steep advance over the last 12-15 months. Note that ITB recorded a new high in February this year and remained above the 2013 low. Overall, the long-term trend remains up. The trend since late February is down with the red trend line marking first resistance just above 24. A breakout here would be quite bullish and project a move to new highs.
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Chart 3
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Chart 4
Now let's look at the medium to short-term picture. Chart 4 shows ITB breaking the July trend line with a 10.8% surge. The ETF then consolidated in the 24 area with a rather tight range that looks like a flat flag. A break above the flag high would signal a continuation higher and project a move to the 26.30 area. The percentage surge is added to the flag low for an upside target. A break below the flag lows would negate this setup and could lead to a test of the August lows. The indicator window shows the RRG indicators, which measure relative strength. Notice that both moved above 100 and to their highest levels in months. It is early going still, but ITB is starting to show some relative strength.
TOLL BROTHERS AND USG GO FOR BREAKOUTS... Unsurprisingly, a number of stocks within the ETF also formed flag patterns over the last two weeks. Chart 5 shows six CandleGlance charts with flag patterns. KB Home (KBH) is the strongest of the six because it formed a higher low in August. USG Corp (USG) broke flag resistance on the heels of a positive article in Barron's this weekend. Here is a symbol list of the components for ITB: DHI,LEN,PHM,TOL,NVR,HD,LOW,RYL,KBH,MTH,SHW,SPF,MDC,MHK,MAS,
FBHS,EXP,LEG,LII,OC,USG,MHO,TMHC,WSO,HOV,LPX,BZH,TREX,CVCO,SSD,
DOOR,BECN,UFPI,LL,ETH,NX
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Chart 5
GOLD HOLDS LONG-TERM BEARISH PATTERN... Spot Gold ($GOLD) fell to around 1270 on Monday and extended the decline that began in early July. Before looking at the medium-term picture, let's review the weekly chart for a long-term perspective. Chart 6 shows gold peaking around 1900 in September 2011 and quickly falling to the 1550 area. The metal then embarked on a long consolidation and broke support with a sharp decline in April 2013. Gold then moved into another consolidation that looks like a descending triangle, which is a bearish continuation pattern. The lower highs reflect weakening demand and increasing selling pressure at lower price levels. The equal lows represent an area of demand that holds the to the pattern. A break below this demand area (support) would confirm the pattern and project further weakness towards the 1000 area. The indicator window shows the Correlation Coefficient ($USD,$GOLD) spending most of its time in negative territory over the last three years. This means gold tends to move opposite the Dollar Index, which is in an uptrend now.
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Chart 6
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Chart 7
Chart 7 shows daily prices for a medium term outlook. Gold broke out in mid June with a surge above 1310, but could not hold this breakout and fell back below 1300 in mid July. A series of lower highs and lower lows has taken shape since this failed breakout. Even though the pattern looks like a falling wedge, the immediate trend is down as long as it falls. Look for a break above 1325 to reverse this downtrend. Until reversed, I would expect the trend to remain in motion and target a move to the 1240 area or lower.
YEN FOLLOWS EURO WITH A BREAK DOWN... As noted above, gold is negatively correlated with the Dollar Index. The Euro (~57%) is the largest component of the index and Yen (~13.6%) is the second largest. Together, these two account for around 70% of the index. Further more, the Euro's weight is even more when we consider that the Swiss Franc accounts for around 3.6% of the Dollar Index and the Franc has a very strong positive correlation to the Euro (>.70 the last three years). Chart 8 shows the Euro Index ($XEU) breaking wedge support to signal a continuation of the prior decline (149 to 121). This is a major break down that could boost the Dollar Index for some time. The 2013 lows mark first support in the 127.5 area and the 2012 lows mark long-term support in the 121 area. The indicator window shows the Aroon Oscillator moving below -50 to signal the start of a long-term downtrend. Chart 9 shows the Yen ETF (FXY) breaking triangle support with a sharp decline last week.
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Chart 8
