VIX TRIGGERS THIRD SIGNAL OF 2014 -- KRE AND IWM CHALLENGE ANOTHER SUPPORT BREAK -- SOME REFINERS SHOW RELATIVE STRENGTH WITHIN ENERGY SECTOR -- TESORO AND PHILLIPS BOUNCE OFF KEY RETRACEMENTS -- REFINERS ON THE RELATIVE ROTATION GRAPH
VIX TRIGGERS THIRD SIGNAL OF 2014... Link for today's video. The S&P 500 Volatility Index ($VIX) is largely a coincident indicator that rises when the S&P 500 falls and falls when the S&P 500 rises. As with the S&P 500, the VIX also trends for extended periods. Note that the VIX peaked around 48 in August 2012, worked its way lower for almost two years and dipped below 11 in July 2014. I think the VIX is best for identifying periods of extreme fear or panic selling that can provide a bullish signal. Chartists can use a simple VIX chart or normalize the indicator using the Percentage Price Oscillator (PPO).
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Chart 1
Chart 1 shows the VIX with the 5-day EMA and the 65-day EMA (one week and three months). The indicator window shows the Percentage Price Oscillator (5,65,1), which measures the percentage difference between these two EMAs. Recent history suggests that a move above 20% is relatively extreme. This means the 5-day EMA is more than 20% higher than the 65-day EMA. Such a move puts the indicator in setup mode and chartists should then watch for a trigger signal. It is important to wait for a trigger because the VIX can move to extremes and remain at extremes during a strong decline. A move back below 20% indicates that fear is indeed subsiding and this acts as the bullish trigger. Even though these signals worked good in the past, past performance does not guarantee future performance. Caveat Emptor! Chart 2 shows the Nasdaq 100 Volatility Index ($VXN) for reference.
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Chart 2
KRE AND IWM CHALLENGE ANOTHER SUPPORT BREAK... The Regional Bank SPDR (KRE) and the Russell 2000 iShares (IWM) are leading the market on Tuesday with surges above resistance. The financial services sector accounts for 25.32% of the Russell 2000 iShares and this is by far the single biggest sector. Technology, healthcare, consumer discretionary and producer durables (industrials) each account for around 15%. There are plenty of regional banks in the financial services sector and this group is vital to the Russell 2000 iShares. Chart 3 show KRE with a bear trap in mid October, a surge the last two weeks and a break above resistance today. The trend line break and early October highs mark resistance here. Also notice that the 50-62% retracements are here. This breakout negates another support break and puts KRE back in bull mode (provided it holds). Chart 4 shows IWM moving above resistance with a big move today.
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Chart 3
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Chart 4
SOME REFINERS SHOW RELATIVE STRENGTH WITHIN ENERGY SECTOR... The energy sector is by far the weakest of the nine sector SPDRs this year. Year-to-date, the Energy SPDR is down over 2%, the Oil & Gas Equip & Services SPDR is down around 20% and the Oil & Gas E&P SPDR is down over 14%. Within the energy sector, the refiners are holding up better and showing some relative strength. Energy stocks were hit hard again on Monday, but I noticed that several refiners held up relatively well and then moved higher today. Chart 5 shows Tesoro (TSO) breaking above the early September trend line and hitting a new high last week. The indicator window shows the price relative rising since mid April as TSO outperforms SPY. Chart 6 shows Alon USA Energy (ALJ) trading within a range this year and breaking resistance at 15 in mid October.
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Chart 5
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Chart 6
TESORO AND PHILLIPS BOUNCE OFF KEY RETRACEMENTS... Chart 7 shows Valero (VLO) with a big move from October 2013 to May 2014 and a correction from May to October. The advance-pullback scenario looks corrective and long-term readers should know this drill by now. The stock retraced 50-62% of the prior advance with a falling channel. VLO firmed in the 44-46 area in the first half of October and then surged above the early October highs. This little surge is holding and provides the first hint that the correction may be ending. A move back below 46 would negate this little breakout. Chart 8 shows Phillips 66 (PSX) with similar characteristics.
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Chart 7
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Chart 8
REFINERS ON THE RELATIVE ROTATION GRAPH... Chart 9 shows a Relative Rotation Graph (RRG) with nine refiner stocks. Note that this is a daily RRG that uses the S&P 500 SPDR (SPY) as the benchmark. Seven of the nine stocks are in the green, which means they are outperforming over the last 1-2 weeks. The other two are in the blue and just moved into the improving quadrant.
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Chart 9
HANG SENG MOVES FROM KEY RETRACEMENT ZONE... Chart 10 shows the Hang Seng Composite ($HSI) surging off a support zone with a big move on Tuesday. Support in the 23000 area stems from broken resistance and the 50-62% retracement zone. The index fell to this zone in September with the protests and then firmed in October. Today's surge is the first sign that support is going to hold and the bigger uptrend will continue. Note that the index hit a 52-week high in early September, less than two months ago. In a separate, but possibly related move, chart 11 shows the Shanghai Composite ($SSEC) breaking out in July with a surge above 2150. The index hit a 52-week high in September and has outperformed the S&P 500 since mid July.
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Chart 10
