SPY EXTENDS LONG-TERM UPTREND -- SMALL-CAPS ARE DOWN, BUT NOT OUT -- XLF, XLK AND XLY STALL AFTER NEW HIGHS -- XLI FORMS BULLISH CONTINUATION PATTERN -- KEY BREADTH INDICATORS HIT NEW HIGHS -- ECONOMIC INDICATORS SHOW SERIOUS STRENGTH
SPY CONTINUES TO LEAD AND TREND HIGHER... Link for today's video. Stocks stalled over the last two weeks, but the overall trends are up for the major index ETFs. Keep in mind that stocks were short-term overbought at the end of August because the S&P 500 SPDR (SPY), S&P MidCap SPDR (MDY) and S&P SmallCap iShares (IJR) surged around 4% for the month. A rest after a big month is perfectly normal. Today I am going to show monthly charts for these three so we can filter out the noise and focus on the trend. These charts are basic candlestick charts with a 12-month moving average and a six month TRIX oscillator. A 6-month TRIX measures the 1-period ROC of a 6-month triple exponentially smoothed moving average. This indicator moves like a super tanker: slow and steady. The TRIX is positive when the moving average is rising (uptrend) and negative when the moving average is falling (downtrend).
Chart 1 shows SPY in a long-term uptrend and near a new high. The ETF is above the rising 12-month moving average and the 6-month TRIX is positive. Notice that SPY has not had back-to-back down months since April-May 2012. At this point, I would use the summer lows, the 12-month SMA and a small buffer to mark first support at 187.
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Chart 1
Chart 2 shows MDY in a clear uptrend as well. MDY did form a monthly outside reversal in July, but rebounded in August and did not confirm this pattern. Chartist can use the rising 12-month moving average, the summer lows and a small buffer to mark first support at 240. So far, two of three major index ETFs are in uptrends. The trouble starts when two of the three break their 12-month moving averages and support zones.
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Chart 2
SMALL-CAPS ARE DOWN, BUT NOT OUT... Chart 3 shows IJR stalling in the 105-115 area over the last eight months (2014). IJR and small-caps are clearly the weakest of the three (SPY, MDY, IJR). However, stalling just means buying and selling pressure are at equilibrium. We have yet to see a significant increase in selling pressure. Notice that IJR also traded flat for nine months in 2012 and then broke out at the end of the year. Under the assumption that a trend in motion stays in motion, I would expect an upside breakout and this could lead to an acceleration higher, which we saw in early 2013. Failure to break out and a move below support (call it 102) would call for a reassessment.
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Chart 3
XLF, XLK AND XLY STALL AFTER NEW HIGHS... Three of the four offensive sectors surged to new highs in August and then stalled the last one to two weeks. First and foremost, these new highs are long-term bullish because they affirm the long-term uptrends. Second, it is very positive to see new highs in these three sectors. Buying at new highs is always challenging because there is risk of a pullback. Chartists waiting for a pullback can use the Fibonacci Retracements Tool to identify potential support or reversal zones should a pullback unfold.
Chart 4 shows the Consumer Discretionary SPDR (XLY) hitting a new high and then stalling in the 68.3-69.3 area. A break below the late August low would be short-term negative, but it would just signal a pullback within a bigger uptrend. A pullback, therefore, could create an opportunity. For example, a 50-62% retracement of the latest advance could create an opportunity to partake on the long side with a better reward-to-risk ratio.
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Chart 4
Chart 5 shows the Technology SPDR (XLK) hitting a new high in late August and then stalling. Chartists can watch support at 39.9 for the first signs of a pullback.
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Chart 5
Chart 6 shows the Finance SPDR (XLF) hitting a new high after a 4% surge in August. Notice that choppy ranges followed the prior surges. I am not sure if this surge will play out the same way, but I am marking my key Fibonacci zone around 22.75. A pullback to this area could create a short-term opportunity.
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Chart 6
XLI FORMS BULLISH CONTINUATION PATTERN... There is also a chance that a pullback fails to materialize and the rally simply continues. After all, the market just had a pullback in June-July. In the absence of a pullback, chartists can consider bullish continuation patterns. Chart 7 shows the Industrials SPDR (XLI) surging in August and then forming a flat consolidation the last two weeks. This pattern looks like a bull flag and a break above the flag highs would project a move above the June high. John Murphy noted strength in the Dow Transports on Wednesday and many stocks in this Average are also part of the industrials sector. These include UNP, UPS, FDX, NSC, LUV, DAL, CSX, KSU, CHRW and R. The indicator window shows Net New Highs for XLI above +10%.
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Chart 7
KEY BREADTH INDICATORS HIT NEW HIGHS... The S&P 1500 AD Line ($SUPADP) and the S&P 1500 AD Volume Line ($SUPUDP) hit new highs to confirm the overall uptrend. Chart 8 shows the AD Line forming a higher low in early August and edging above its early July high on Monday. This new high shows internal strength and suggests that the majority of stocks are participating in the advance. While the S&P Small-Cap 600 may be lagging, strength in the S&P MidCap 400 and S&P 500 is propelling the AD Line higher.
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Chart 8
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Chart 9
Chart 9 shows the AD Volume Line also hitting a new high to affirm the long-term uptrend. In fact, notice that this uptrend is steeper and the indicator hit a new high the third week of August. The AD Volume Line is like a money flow indicator because it measures net advancing volume (advancing volume less declining volume). Large-caps have higher volume than small and mid caps, and this makes the AD Volume Line a large-cap indicator.
ECONOMIC INDICATORS SHOW SERIOUS STRENGTH ... The employment report came in below expectations on Friday, but this years average remains above 200,000 and the trend is still positive. Before reading too much into the 142,000 print, keep in mind that non-farm payrolls are subject to revisions and volatility. The average monthly gain this year is 220,000 and the labor market is improving, not deteriorating. In addition, this week's other economic reports were strong, very strong. ISM Manufacturing and Services were above 55 for the fourth straight month, light vehicle sales exceeded an annual rate of 17 million and ADP reported a 204,000 increase in private sector payrolls. In short, the economy is doing just fine and this supports a long-term uptrend in stocks.
Chart 10
