SPY GETS STUCK BETWEEN A GAP AND A HARD PLACE -- FALLING YIELD CURVE WEIGHS ON REGIONAL BANKS -- RETAILER SPDR STRUGGLES TO STAY POSITIVE -- TWO DISCOUNTERS SHOW RELATIVE STRENGTH -- WATCHING MACY'S AND NORDSTROM FOR CLUES
SPY GETS STUCK BETWEEN A GAP AND A HARD PLACE... Link for today's video. Chart 1 shows the S&P 500 SPDR (SPY) forging a short-term reversal last week. Notice how the ETF gapped below 187 on Wednesday, stalled for two days and then gapped above 187 on Friday. With the ETF back above 189, it is challenging the 200-day moving average and broken support, which turns first resistance. To follow through or not to follow through? That is the question right now. At this point, the gap is holding and the reversal is valid. A move below 186 would clearly fill the gap and negate the reversal. A follow through above 190 would reclaim the 200-day moving average and this would be quite positive. The indicator window shows the Commodity Channel Index (CCI) wallowing in negative territory. A break into positive territory is needed to turn momentum bullish. Chart 2 shows the Nasdaq 100 ETF (QQQ) hitting the 200-day moving average and gapping up on Friday. This gap is also holding and should be considered short-term bullish as long as it does.
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Chart 1
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Chart 2
FALLING YIELD CURVE WEIGHS ON REGIONAL BANKS... Chart 3 shows the Regional Bank SPDR (KRE) with a head-and-shoulders pattern evolving into a descending triangle. Regardless of the pattern, this year's lows mark key support and the ETF is testing support in October. A close below 36 would break support and confirm the descending triangle. Based on traditional technical analysis, this would target a decline to the 31 area. The finance services sector is the biggest sector in the Russell 2000 and a break down in KRE would weigh. Look for a move above 38.5 to suggest a successful support test and trigger a breakout.
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Chart 3
The indicator window shows the Yield Curve (10YR - 2YR) moving from the 2.65 to 1.84 over the last 10 months. This means the spread between the 10-year Treasury yield and 2-year Treasury yield narrowed. The yield curve is still positively sloped, but less so than in December 2013. The second window shows the Correlation Coefficient ($YC2YR, KRE). Notice that KRE is positively correlated to the direction of the yield curve. A falling yield curve is negative and a rising yield curve is positive. The yield curve is definitely falling and this is negative for KRE right now.
RETAILER SPDR STRUGGLES TO STAY POSITIVE... The Commerce Department reported at .3% decline in September retail sales last week and this disappointment is reflected in the Retail SPDR (XRT). Chart 4 shows XRT failing to hold its prior breakouts and turning negative year-to-date. Also notice that XRT moved below the February trend line and exceeded its summer low. The developments are negative for the consumer discretionary sector and the market overall because retail spending drives some two thirds of GDP. Look for a move above 87.5 to put the uptrend back in play. The indicator window shows XRT relative to the S&P Total Market iShares (ITOT) using the price relative (XRT:ITOT ratio). XRT started underperforming in late December and has yet to reverse the downtrend in the price relative. Look for a break above the June-September highs to reverse this downtrend.
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Chart 4
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Chart 5
Chart 5 shows the MarketVectors Retail ETF (RTH) breaking triangle resistance and hitting a new high in August. The ETF fell back in October and is now testing the triangle breakout as broken resistance turns into support. A close below 60 would negate this breakout. The indicator window shows the price relative (RTH:ITOT ratio) breaking out in August and moving higher the last few months. Relative strength in RTH can be attributed to Home Depot, Lowes, Costco, CVS and TJX Cos because these stocks held up quite well this month.
TWO DISCOUNTERS SHOW RELATIVE STRENGTH... Ross Stores (ROST) and TJX Companies (TJX) held up better than the market and better than the retail group this month. Chart 6 shows ROST breaking out to a new high with a huge advance in July-August. The stock consolidated in September and then worked its way higher this month. Talk about relative strength. The broader market is down month-to-date and ROST is up a couple percent.
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Chart 6
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Chart 7
Chart 7 shows TJX breaking out with a surge in August and then consolidating in September. The stock formed a triangle and broke triangle resistance at the beginning of the month. Even though the S&P 500 turned south in October, TJX held support and the price relative continued higher.
WATCHING MACY'S AND NORDSTROM FOR CLUES... If I had to pick one retailer as a barometer for the upcoming holiday season, it would be Macy's (M). The stock is up year-to-date, but has struggled since failing to hold the August surge and breakout. Chart 8 shows Macy's testing support in the 54-56 area this month. The swing since early September is down and I am marking resistance at 58. A break above 58 is needed to suggest a successful support test and uptrend resumption. Such a move would be bullish for the stock, the retail group and the consumer discretionary sector. The indicator window shows the price relative stalling the last few weeks. Look for a break above the October highs to signal relative strength again. Chart 9 shows Nordstrom (JWN), another department store stock, bouncing off support and holding up rather well in October.
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Chart 8
