DIA AND QQQ HOLD UP THE BEST -- RUSSELL 2000 VALUE UNDERPERFORMS GROWTH -- BIG BANKS LEAD, BUT REGIONAL BANKS LAG -- BIOTECHS REFUSE TO BUCKLE
DIA AND QQQ HOLD UP THE BEST... Link for today's video. Most of the major index ETFs broke below their mid September lows with sharp declines last week, but the Dow Diamonds (DIA) and the Nasdaq 100 ETF (QQQ) held these lows and show relative strength. The Dow is a mixed bag of large-cap stocks, while the Nasdaq 100 represent large-cap tech stocks. These two groups represent the last bastions of strength in September. Breakdowns in both would suggest that selling pressure is expanding and this would be negative for the broader market. Chart 1 shows QQQ plunging below 98 with a long black (filled) candlestick on Thursday and then bouncing on Friday with a smaller white (hollow) candlestick. Together, these form a harami and an inside day, which signals indecision. QQQ is once again trying to hold support with an open below 98 and a move above 98.5 intraday. A close below the September lows would break short-term support and suggest that selling pressure is spreading to large-cap techs. Chart 2 shows DIA testing support in the 169 area and the DIA:ITOT ratio turning up the last few weeks.
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Chart 1
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Chart 2
RUSSELL 2000 VALUE UNDERPERFORMS GROWTH... John Murphy and I have been talking about relative weakness in small-caps using the Russell 2000 iShares and the S&P SmallCap iShares. The Russell 2000 iShares can be broken down into growth and value components. According to the iShares website, there are 1313 stocks in the Russell 2000 Value iShares (IWN) and 578 stocks in the Russell 2000 Growth iShares (IWO), which means the value part contains more stocks and probably more weight. Chart 3 shows IWN with a big head-and-shoulders pattern over the last seven months. With a decline to the neckline support zone, the ETF is testing a major support level that holds the key to this pattern. A break would confirm the reversal and target a move to the 84-85 area, which marks a 10% decline from neckline support. Keep in mind that it ain't broken until it's broken. A sharp move back above 96 would suggest a successful test of support.
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Chart 3
A bearish head-and-shoulders pattern should show some signs of distribution because this is what happens when a top forms. Distribution occurs when the so-called smart money quietly sells shares to the not-so-smart money. Chartists can measure distribution by using the various volume indicators and I have chosen On Balance Volume (OBV). This indicator adds volume on up days and subtracts volume on down days. The theory is that volume precedes price and a break down in OBV would suggest distribution. The first indicator window shows OBV breaking support in late July, holding this break in August and moving lower in September. The seven month low in OBV suggest distribution and this is negative.
Chart 4 shows the Russell 2000 Growth iShares battle the lower trend line of a large triangle. Even though the Russell 2000 Growth is outperforming the Russell 2000, a triangle breakout would be negative and could target a test of the May lows.
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Chart 4
BIG BANKS LEAD, BUT REGIONAL BANKS LAG... Why is small-cap value so much weaker than growth? I suspect that relative weakness in regional banks and small-cap financials is the cause. Of the 1313 stocks in the Russell 2000 Value iShares, 413 stocks (31%) come from the financial services sector. Furthermore, these 413 stocks account for around 39.5% of the ETF, which makes financial services the single biggest sector by bar. Chart 5 shows the Regional Bank SPDR (KRE) reversing at the March trend line and falling to the May trend line. The ETF broke the support zone and this zone turns first resistance. Even though KRE is at the triangle trend line and just above the August low, the bulk of the evidence remains bearish. I would like to see a surge back above 39 to negate last week's break down.
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Chart 5
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Chart 6
Chart 6 shows the Finance SPDR (XLF) with a completely different picture. First, notice that XLF hit new highs in early July and mid September. Second, notice that the trend is clearly up since early February. Third, the indicator window shows the XLF:KRE ratio in an uptrend since early April. This means XLF, which is dominated by big banks, is outperforming KRE, which is a broad-based regional bank ETF. On the price chart, XLF fell back to the early September lows and is testing support. Like DIA and QQQ above, XLF is holding relatively well this month and a support break would suggest that selling pressure is expanding.
BIOTECHS REFUSE TO BUCKLE... It is been a rough September for much of the stock market, but the Biotech SPDR (XBI) and the Biotech iShares (IBB) have held up relatively well. Chart 7 shows IBB with breakouts in late May, mid August and mid September. A falling flag/wedge formed the first half of September and the ETF broke out with the move above 270. This breakout zone turns into the first support zone. The indicator window shows IBB relative to the S&P Total Market iShares (ITOT) using the price relative (IBB:ITOT ratio). The ratio is at a new high and this indicates relative strength. Chart 8 shows XBI with a falling flag over the last four weeks and a breakout would signal a continuation of the bigger uptrend.
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Chart 7
