-- WEBINAR WITH JDK OF RRG, S&P 500 EXTENDS DECLINE, IMPORTANCE OF FINANCE SECTOR, BREAKDOWN IN XLF, TARGET FOR XLY, TWO STRONG GROUPS AND FOUR STOCKS --
WEBINAR WITH RRG ... Today's Webinar features a top-down approach to selecting stocks using Relative Rotation Graphs (RRGs) and some classic chart analysis. Julius de Kempenaer, developer of RRG, kicks off the webinar by analyzing relative performance for the sector SPDRs, the industry groups in the consumer discretionary sector and the stocks in two strong industry groups. Julius also provides us with great tips on using RRGs with a live demo. Following up on Julius' analysis, I then analyze charts for XLF, XLY, two strong industry groups and four strong stocks from these industry groups. Click here for the webinar recording
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Chart 1
S&P 500 EXTENDS DECLINE... Stocks extended last week's declines as the S&P 500 moved to a new low for the month. Before looking at the short-term situation, note that the long-term trend is up and this is still viewed as a correction within that uptrend. Chart 2 shows the index breaking triangle resistance in early February and hitting new highs. The index is well above support from the December-January lows and well above the rising 200-day moving average. I would not even start thinking long-term downtrend as long as the index remains above 1975.
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Chart 2
How far might this correction extend? Truth-be-told, nobody really knows. Please excuse the sarcasm, but the correction or short-term downtrend will extend until it doesn't. Chartists can use broken resistance levels, Fibonacci retracements, moving averages and other tools to estimate support levels, but a short-term trend reversal is what really counts. I marked first support in the 2065 area, but chart 3 shows the index breaking this level today. My next support zone is around 2040, which is marked by the 61.8% retracement and the lows from February 4th and 9th.
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Chart 3
In addition to support, chartists can simply focus on the immediate decline, which is seven days and counting. The red lines mark a Raff Regression Channel and the upper line ends around 2082. Monday's high is 2083.49 and this level also marks resistance. A break above 2085, therefore, would reverse this seven day decline. Chartists looking for a momentum thrust can watch for StochRSI to surge above .80.
HOW IMPORTANT IS THE FINANCE SECTOR?... The answer to that question depends on your index or broad market ETF. The finance sector accounts for 16.18% of the S&P 500 SPDR (SPY), 23.5% of the Russell 2000 iShares (IWM), 23.25% of the S&P MidCap SPDR (MDY) and 23.15% of the S&P SmallCap iShares (IJR). This percentage goes way up when we look at the value portion of IWM because the finance sector accounts for a whopping 40.54% of the Russell 2000 Value iShares (IWN). Chart 4 shows the sector breakdown for SPY on the left and the S&P 500 on the right. Technology is by far the biggest sector. Note that three of the four top sectors are very strong: technology, healthcare and consumer discretionary. The finance sector is the odd one out here and it looks vulnerable.
Chart 4
RS-RATIO TURNS DOWN FOR XLF... Chart 5 shows a three year bar chart for the Finance SPDR (XLF) and there are two Raff Regression Channels. The first is steeper than the second, and the long-term trend is clearly up. Even though a more gradual advance indicates less momentum, there is still more upside momentum than downside momentum. The lower line of the Raff Regression Channel, summer lows and January low mark a support zone in the 21.8-23 area. It is a big support zone, but this is an ETF with dozens of moving parts (stocks) and zones make more sense. A close below 21.8 would break this support zone and reverse the long-term uptrend. The indicator window shows the JdK RS-Ratio moving below 100 in mid February and this means XLF shows relative weakness.
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Chart 5
DAILY XLF CHART BREAKS KEY LEVEL... As noted last week, XLF was an inflection point on the daily chart and it seems to have made its move today. Chart 6 shows the ETF breaking out in early February with a surge above 24 and then stalling from late February to early March. Notice that XLF did not exceed its late December high and the Equal-Weight S&P 500 ETF (RSP) did forge a higher high. The lower high in XLF shows relative "chart" weakness. The pink shaded area shows the Bollinger Bands contracting to their narrowest since early December. The contraction tells us that volatility is contracting and to prepare for a volatility expansion (price move), which is happening today. Notice that XLF broke below support and below the lower Bollinger Band. This is bearish. Chart 7 shows the Equal-weight Finance ETF (RYF) with similar characteristics.
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Chart 6
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Chart 7
RS-RATIO LEADS FOR XLY... Chart 8 shows the Consumer Discretionary SPDR (XLY) over the last three years for a long-term perspective. After stalling in the first nine months of 2014, the ETF took off in October and surged to new highs in November (and again in December, January, February and March). I am using the last Raff Regression Channel to mark support. The lower trend line and December-January lows combine to mark support in the 67.5-69 area. The indicator window shows the JdK RS-Ratio moving above 100 in mid December and surging above 102. This is the second highest RS-Ratio among the sectors. XLV is tops.
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Chart 8
MARKING PULLBACK SUPPORT FOR XLY... Chart 9 shows XLY hitting a new high on March 2nd and falling rather sharply the rest of the month. The new high, the weekly chart and relative strength are bullish, but we could still see a correction unfold and I am looking for potential support zones. The broken resistance levels mark support in the 71-72.5 area, and the Fibonacci cluster marks support in the 71-72 area. The blue Fibonacci Retracements Tool extends from the October low to the March high, and the gray Fibonacci Retracements Tool extends from the December low to the March high. The blue 38.2% retracement overlaps with the gray 61.8% retracement for a Fibonacci cluster, which also falls in the green support zone. Taken together, I would look for support in the 71-72 area.
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Chart 9
TWO LEADING INDUSTRY GROUPS AND FOUR STOCKS... There are two industry groups that stand out in the consumer discretionary sector. Note that chartists can find these industry groups by using the Sector Summary. Today's Webinar has a live demo on accessing and navigating the Sector Summary. Chart 10 shows the DJ US Business Training & Employment Index ($DJUSBE) hitting a new high with a surge above 150 in early February. The trend is clearly up and I am marking first support at broken resistance in the 140-145 area. A throwback to this area could provide a second chance to partake in the uptrend. Chart 11 shows the DJ US Furnishings Index ($DJUSFH) with a steep acceleration since mid October. There is clearly an uptrend here with support marked in the 320-340 area. The webinar features four stock from these two industry group indices. Click here for the webinar recording
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Chart 10
