IWM AND IJR FLY THE FLAG AT HALF MAST -- SMALL-CAP SECTORS TAKE THE LEAD -- SMALLCAP FINANCIALS ETF BREAKS FLAG TREND LINE -- INTERNET LEADERS AND LAGGARDS -- INTERNET ETF STALLS OUT -- FACEBOOK FORMS A BIG CONSOLIDATION
IWM AND IJR FLY THE FLAG AT HALF MAST ... Programming Note: I will be doing a Webinar tomorrow at 1PM ET in place of the Market Message and video. You can register here. With a little help from financial services, the Russell 2000 iShares (IWM) had its best week since late October and continued higher on Monday. Keep in mind that the financial services sector represents 24.6% of IWM and is the biggest sector by far. Despite a big week, chart 1 shows IWM still stuck in a consolidation the last five weeks. I am showing a weekly chart to emphasize the indecisive price action since early November. The ETF closed between 116 and 117 for four weeks and then closed above 117 last week. This is the first sign that small-caps are gearing up for a bigger breakout. The prior four weeks featured doji-type candlesticks with relatively long upper/lower shadows. This means prices changed little from Monday's open to Friday's close, but there was price movement between Monday's open and Friday's close. Overall, the pattern over the last eight weeks looks like a sharp surge and flat consolidation (flag). Flags are continuation patterns and a break above 119 would signal a continuation of the prior advance. The indicator window shows the IWM:SPY ratio breaking the March trend line and trying to form a higher low in late November. A break above the October high would signal a return to relative strength for small-caps. Chart 2 shows the S&P SmallCap iShares (IJR) with similar characteristics.
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Chart 1
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Chart 2
SMALL-CAP SECTORS TAKE THE LEAD... Chart 3 shows a Relative Rotation Graph (RRG) with eight small-cap sector ETFs and the S&P 500 as the benchmark. I left off the SmallCap Energy ETF (PSCE) because its strong underperformance skews the scaling. Notice that six small-caps sectors are green, which means they are leading the S&P 500, which hit a new high this month. Relative strength in six of the nine small-caps sector is surely positive for small-caps overall. Of the six small-cap leaders, the SmallCap Utilities ETF (PSCU) is the strongest because its line is in the upper right hand corner of the chart.
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Chart 3
SMALLCAP FINANCIALS ETF BREAKS FLAG TREND LINE... Chart 4 shows the SmallCap Financials ETF (PSCF) breaking out to new highs in late October and then consolidating with a falling flag/wedge. The ETF surged above last week's high today and broke flag resistance. This breakout ends the correction and signals a continuation higher. Chartists can mark support in the 40-40.50 area. Note that I first featured this ETF in Market Message on October 13th the when its was firming and showing relative strength in mid October.
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Chart 4
INTERNET LEADERS AND LAGGARDS... The internet group has been quite mixed lately and this has kept the Internet ETF (FDN) in check over the last five weeks. PerfChart 5 shows performance for the top ten FDN components over the last five weeks. Four are up and six are down. Yahoo!, of all stocks, is leading with the biggest gain. Note that Yahoo! is outperforming Google, Facebook, LinkedIn and Twitter. Of the top ten, the four gainers show relative strength and can be considered the leaders. The six losers show relative weakness and can be considered the laggards. There is no tide lifting all boats here and it appears to be a stock pickers market for the internet group.
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Chart 5
INTERNET ETF STALLS OUT... Chart 6 shows the Internet ETF (FDN) with a pair of gaps and a breakout in late October. After a surge from 55 to 61, the ETF consolidated with a flat range the last four weeks and the overall pattern looks like a flag. A break above flag resistance would signal a continuation higher. A break below flag support would be negative and even forge a lower high (below the September high). The indicator window shows the FDN:SPY ratio falling since mid September as the ETF underperforms SPY. At this point, it looks like the six lagging stocks are exerting more force than the four leading stocks.
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Chart 6
FACEBOOK FORMS A BIG CONSOLIDATION... Chart 7 shows Facebook (FB) with a bullish consolidation forming over the last four months. The stock surged some 40% and then consolidated with a Diamond. Wait a minute! I thought Diamonds were bearish patterns? A Diamond is simply a consolidation and this means its bias depends on the direction of the prior move. Also note that FB recorded a 52-week high in late October and the right half of the Diamond is a symmetrical triangle. A move above the late November high would break Diamond resistance and open the door to new highs. The indicator window shows FB relative to SPY. FB has been underperforming since the ratio broke down in late October. A break above the late November high (red line) would signal a return to relative strength.
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Chart 7
EBAY BREAKS FROM SMALL CONSOLIDATION... Chart 8 shows Ebay (EBAY) getting a pennant breakout with a surge above 55 today. EBAY turned quite volatile in September-October with four 10+ percent swings. I am ignoring this volatility and focusing on the last two months, which show EBAY surging from 47 to 55 and then consolidating with a pennant. The pennant breakout signals a continuation higher and EBAY could be poised to challenge its 2014 highs. Chartists can mark support at 54, a break of which would negate this setup. The indicator window shows EBAY relative to SPY using the price relative (EBAY:SPY ratio). EBAY has slightly outperformed since mid June because this ratio is above its June low. Look for a break above the November high to signal a return to relative strength.
