S&P MIDCAP INDEX FORMS BIG CONTINUATION PATTERN -- EQUAL-WEIGHT STARTS OUTPERFORMING CAP-WEIGHT -- SMALL-CAP FINANCE AND TECH SECTORS HIT NEW HIGHS -- SEMICONDUCTOR SPDR EXTENDS STRONG UPTREND -- CAVIUM AND RF MICRO LEAD SEMIS
S&P MIDCAP INDEX FORMS BIG CONTINUATION PATTERN... Link for today's video. Chart 1 shows the S&P MidCap 400 hitting a new high at the beginning of July and then forming a large consolidation the last six months. Actually, the index hit another all time high in late November. All time highs suggest that the long-term trend is up. There are two big consolidation patterns at work, and both are bullish continuation patterns. First, an inverse head-and-shoulders pattern extends from July to December. Second, a cup-with-handle pattern extends from September to December. Either way you slice it, a break above the red resistance zone would signal a continuation higher.
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Chart 1
The first indicator window shows the S&P MidCap 400 AD Line ($MIDADP) hitting new highs in early November and last week. These new highs point to underlying strength and increase the odds of a successful breakout in the index. The indicator window shows $MID relative to the S&P 500. $MID has performed inline for two months and we have yet to see a breakout in the price relative ($MID:$SPX ratio) that would indicate outperformance. A breakout here would be most positive because it would suggest a rotation into mid-caps. You can learn more about the AD Line in our ChartSchool
EQUAL-WEIGHT STARTS OUTPERFORMING CAP-WEIGHT... There are signs of broad market strength because the S&P 500 Equal-Weight Index ($SPXEW) hit a new high last week and started showing relative strength. Chart 2 shows $SPXEW hitting new highs in November, pulling back in mid December and surging right back to new highs. The red areas highlight a pair of overshoots driven by external events (Ebola, Russia and oil). The first indicator window shows the $SPXEW:$SPX ratio turning up over the last two weeks as the equal-weight S&P 500 outperforms the cap-weight S&P 500. This is positive for the market because it shows relative strength for the "average" stock in the S&P 500. The S&P 500 is weighted by market-cap and the top 50 stocks account for around 46% of the index. This leaves just 54% for the other 450 stocks. The second indicator window shows the S&P 500 AD Line ($SPXADP) hitting a new high in late October and new a new high after last week's surge. Breadth looks strong.
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Chart 2
SMALL-CAP FINANCE AND TECH SECTORS HIT NEW HIGHS... John Murphy and I wrote about the resurgence in small-caps last week and two small-cap sectors stand out. Chart 3 shows the SmallCap Financials ETF (PSCF) with a number of resistance breaks in October and a consolidation in the 39.5-41 area. Even though the consolidation turned volatile in December, I think the essence of a bullish consolidation is there because the ETF surged and then traded sideways to digest this surge. A bullish consolidation is just a rest within the uptrend. The break above the November highs suggests that the consolidation is ending and the uptrend is resuming. The indicator window shows PSCF relative to SPY using the price relative (PSCF:SPY ratio). A break above the Oct-Nov highs is needed to show relative strength.
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Chart 3
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Chart 4
Chart 4 shows the SmallCap Technology ETF (PSCT) surging to 48 and hitting new highs in late October. The ETF consolidated the last few weeks with a volatile range, but the breakout zone largely held. Again, this looks like some sort of consolidation after a sharp advance, which is bullish overall. Today's new high affirms the bigger uptrend and chartists can mark support in the 47-47.5 area. The indicator window shows the PSCT:SPY ratio turning up in early October and moving higher the last two months.
SEMICONDUCTOR SPDR EXTENDS STRONG UPTREND... The Semiconductor SPDR (XSD) broke out recently and continues to show relative strength. Chart 5 shows XSD plunging below support the second week of October and moving right back above this break by late October. It is one of the sharpest reversals I have seen and confirms that the markets are NOT efficient. The stock formed a bull flag in November, broke out and hit a new high in December. Most recently, another bull flag formed and the stock broke out with a gap above 78 last week. This gap is bullish as long as it holds. Overall, I am using a Raff Regression Channel to define the current uptrend. The lower trend line, broken resistance and the 1-Dec low combine to mark support in the 73-74 area. The indicator window shows the XSD:SPY ratio rising since 13-Oct. I like to use XSD because it is a broad-based ETF with over 40 semiconductor stocks. It is also relatively equally weighted because the top ten stocks account for around 25% of the ETF.
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Chart 5
CAVIUM AND RF MICRO LEAD SEMIS... Chart 6 shows Cavium (CAVM), one of the leaders in the group, breaking pennant resistance and hitting a new high today. The stock also hit a 52-week high in early December and there is nothing but uptrend on this chart. The early December lows and Raff Regression Channel mark support in the 54-56 area. The indicator window shows the price relative hitting a new high as well. Chart 7 shows RF Micro Devices (RFMD) breaking out to a 52-week high in late October and continuing higher throughout November-December. The stock stalled a bit the first half of December and then broke out with a surge above 16 the last few days. The Raff Regression Channel and December lows mark support in the 14-14.5 area. The indicator window shows the price relative hitting a new high as RFMN continues to show relative strength.
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Chart 6
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Chart 7
NETWORKING ETF SURGES OFF SUPPORT ... Networking stocks are also showing upside leadership as the Networking iShares (IGN) surges to a new high. Chart 8 shows IGN with a sharp "V" reversal in mid October and a surge back to the September highs. After stalling in the mid 30s, the ETF moved to new highs and the mid 30s turned support. IGN is attracting buyers once again with a surge off support last week and new high today. The indicator window shows IGN outperforming SPY as the IGN:SPY ratio rises the last two months.
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Chart 8
BROCADE LEADS NETWORKERS WITH FRESH NEW HIGH... Chart 9 shows Brocade (BRCD) breaking above the April-September highs with a surge in October-November. After hitting a 52-week high, the stock pulled back with a falling flag and broke flag resistance with a surge over the last three days. The stock also hit a new 52-week high again today. The indicator window shows Brocade outperforming SPY since early May.
