MID-CAP SPDR TURNS CHOPPY, BUT MAINTAINS DIRECTIONAL BIAS -- KEY LEVELS TO WATCH FOR THE OFFENSIVE SECTOR ETFS -- DO SECTOR ROTATIONS SUPPORT THE BULLS? (RRG DEMO) -- ECONOMIC INDICATORS SHOW MORE STRENGTH THAN WEAKNESS

MID-CAP SPDR TURNS CHOPPY, BUT MAINTAINS DIRECTIONAL BIAS... Link for today's video. Establishing support and resistance levels for indices and ETFs with dozens of stocks is a challenge because there are so many moving parts (stocks). Instead of exact support-resistance levels based on one chart feature, I prefer to use support and resistance zones based on at least two chart features (peaks, troughs, retracements, trend lines etc..).

In general, the trend bias is up when above support and down when below resistance. Chartists can also apply some basic peak-trough analysis to affirm that bias. No matter how simple or complex the method, there will be whipsaws and bad calls along the way. It is all part of the job. Today I will cover the Equal-Weight S&P 500 ETF (RSP) and S&P MidCap SPDR (MDY). The equal-weight S&P 500 ETF tells us what is happening with the "average" stock in the S&P 500. The S&P MidCap SPDR tells us what is happening in the middle, which is the sweet spot between small-caps and large-caps.

Chart 1 shows the Equal-Weight S&P 500 ETF breaking down in mid October and then surging to new highs. There was a clear support break with the move below the August low, but the ETF did not record a 52-week low and negated this support break with a powerful surge above 74 in late October. RSP went on to fresh 52-week highs in November and December. With two new highs, and no new low, I think it is safe to assume that the big trend is up and the trading bias is still bullish. The two troughs over the last four weeks and a buffer combine to mark support in the 76-77 area. A break below this level would be negative and call for a reassessment of the uptrend.

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Chart 1

Chart 2 shows the S&P MidCap SPDR also breaking down in mid October and then recovering with a powerful surge back above the break. The ETF also went on to new highs in November and December. With two dips over the last few weeks, MDY established a support zone in the 250-252 area. A downtrend is impossible as long as these levels hold.

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Chart 2

KEY LEVELS TO WATCH FOR THE OFFENSIVE SECTOR ETFS ... The next four charts show the sector SPDRs for the consumer discretionary, finance, technology and industrials sectors along with their respective AD Lines. Note that all four sector SPDRs and all four AD Lines hit new highs in late December. This is impressive and shows strong participation in four key sectors. The Consumer Discretionary SPDR (XLY) represents the most economically sensitive sector and features dozens of retail stocks. The Technology SPDR (XLK) represents the high beta end of the market and the appetite for risk. The Finance SPDR (XLF) covers the banks and brokers. The Industrials SPDR (XLI) represents companies that produce the capital goods needed for manufacturing and services. All four are key to a strong economy and strong stock market. With big bounces over the last few days, all four affirmed support zones from the December-January lows. The trend is up and the bias is bullish as long as these support zones hold. As far as the broader market is concerned, support breaks by three of the four would be bearish overall.

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Chart 3

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Chart 4

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Chart 5

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Chart 6

DO SECTOR ROTATIONS SUPPORT THE BULLS? (RRG DEMO)... The next two charts shows the Relative Rotation Graphs (RRG) for eight sector SPDRs and eight equal-weight sectors. I left the Energy SPDR (XLE) and Equal-weight Energy ETF (RYE) out because these two are by far the weakest and they skew the graph. The rotational picture is not picture perfect for the bulls, but both paint a positive picture for the market overall.

Chart 7 shows utilities and staples leading because they are at the top of the table. While it may seem negative to have two defensive sectors leading, note that they are part of the S&P 500 and strength here helps the broader market. The next three sectors come from the offensive group: finance, industrials and consumer discretionary. These three shows relative strength and this is net positive for the market. The Technology SPDR (XLK) is dragging its feet and underperforming. Notice that it is in the weakening quadrant.

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Chart 7

Chart 8 shows eight equal-weight sectors (sans RYE) relative to the Equal-Weight S&P 500 ETF. This picture is even more impressive. The consumer staples sector is the strongest, but the next four sectors stem from the offensive group. The Equal-weight Technology ETF (RYT) and Equal-Weight Consumer Discretionary ETF (RCD), in particular, are showing good relative performance and upside leadership.

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Chart 8

ECONOMIC INDICATORS SHOW MORE STRENGTH THAN WEAKNESS ... Chart 9 shows a screen shot from a table was created in Excel. There are no fancy formulas, just some color coding for visual reference. The data comes from the St Louis Fed database (research.stlouisfed.org), ADP and StockCharts. As the table shows, there are more signs of strength than weakness. The red squares are for negative reports and the green squares are for positive reports. For example, the ISM numbers are positive as long as they remain above 50. The retail sales numbers are positive as long as they show growth. The housing numbers and auto sales are negative when they decline from one month to the next.

Chart 9

As the table shows, the ISM numbers are still very strong and all are above 55. Anything above 50 favors economic expansion and these numbers are not even close to being below 50. Motor vehicle sales fell, but remain near the 17 million mark (annualize) and strong overall. The labor market is strong as non-farm payrolls exceeded 200K each of the last eleven months. The housing numbers fell last month, but remain strong overall because starts and permits remain above the 1 million mark.

I added the yield curve to this table because it is also an economic indicator. A positive yield curve is positive for the economy, while a negative, or inverted yield curve, is negative. The yield curve inverts when the 2-yr yield is higher than the 10-yr yield. We are not even close to an inverted yield curve right now.

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Chart 10

All in all, the economy looks strong and this supports the stock market. Even though the stock market tends to lead the economy, I am not seeing any signs that the economy is even close to turning down at this point. At the very least, I would become concerned if the ISM numbers dip below 52, retail sales turn negative and housing starts move below 950,000.