-- CHANNEL DEFINES SPY TREND, ITB, XHB AND FLAGS, REGIONAL BANK ETF, BIG TREND FOR TREASURIES, TLT HITS INFLECTION POINT, XLU FIRMS AT FIB LEVEL, CURRENCY ADJUSTMENTS FOR ETFS --
CHANNELS RULE FOR SPY, MDY AND IJR... Upside momentum has slowed since the October-November surge, but the major index ETFs remain in clear uptrends defined by rising channels over the last few months. Chart 1 shows the S&P 500 SPDR (SPY) with a surge from mid October to late November, and a rising channel since December. The surge is like a rocket lifting off because it provides a powerful boost. The rising channel signifies a more controlled, and sustainable, advance or uptrend. The lower trend line marks the first support area to watch. The January lows mark key support in the 197.5-200 area. The indicator window shows SPY relative to the 20+ YR T-Bond ETF using the price relative (SPY:TLT ratio). SPY has underperformed TLT since July, but SPY continues to forge higher highs (November, December, February). It appears that SPY can advance and underperform TLT at the same time.
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Chart 1
Chart 2 shows the S&P MidCap SPDR (MDY) with a similar surge and rising channel. The indicator window shows MDY outperforming SPY as the price relative (MDY:SPY ratio) rises. Chart 3 shows the S&P SmallCap iShares (IJR) with the same setup and a clear uptrend. The indicator window shows IJR relative to MDY. Notice that IJR is NOT outperforming MDY, or underperforming, because this ratio (IJR:MDY) has been flat the last nine months. Small-caps and mid-caps, however, are both outperforming large-caps.
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Chart 2
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Chart 3
HOME CONSTRUCTION ETFS FORM CONTINUATION PATTERNS... Chart 4 shows the Home Construction iShares (ITB) with a breakout in early November and new highs in January-February. This is clearly an uptrend and I prefer bullish setups in an uptrend. The decline over the last few weeks looks like a falling flag of sorts. Falling flags are bullish continuation patterns that represent a rest within the uptrend. The ETF broke above the upper trend line last week, but fell back on Friday and stalled the last few days. A follow through break above 27.5 would signal an end to the flag and a resumption of the uptrend. Chart 5 shows the Home Builders SPDR (XHB) with a similar setup.
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Chart 4
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Chart 5
REGIONAL BANK SPDR SHOWS RELATIVE STRENGTH... Chart 6 shows the Regional Bank SPDR (KRE) challenging the highs from an eleven month range. The surge from mid January to mid March is impressive, and the ETF is on the verge of a major breakout. KRE is still quite volatile so I am watching the upswing quite closely. The Raff Regression Channel and March lows combine to mark support in the 39.5-40 area. I will remain positive on this ETF as long as this support zone holds. The indicator window shows the KRE:SPY ratio turning up in mid January and breaking a long trend line. KRE has outperformed SPY the last two months and this is also a positive. Chart 7 shows weekly prices for more perspective on KRE.
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Chart 6
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Chart 7
Chart 8 shows the SmallCap Financials ETF (PSCF) breaking the triangle trend line last week and moving above the February highs this week. The big trend was already up because of the new highs and this breakout is bullish until proven otherwise. Key support is set in the 40-40.5 area. Financials are very important to the Russell 2000 iShares and S&P SmallCap iShares because this sector accounts for 23-24% of each and is the biggest small-cap sector.
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Chart 8
THE BIG TREND FOR TREASURY YIELDS... It is another big week for Treasury bonds. I say "another" because we get at least two big news weeks per month on average. The first week of the month is chock-full of economic reports, and includes the employment report. We also get a Fed meeting on most months and there are other reports to deal with. The point is this: there is ALWAYS something to be concerned with. These reporting periods will certainly increase volatility, but as technicians we should watch the charts first and keep the news in the background, way in the background.
I wrote about the breakout in the 10-YR Treasury Yield ($TNX) in early March as it surged above 22 (which is equivalent to a 2.2% yield). Well, chart 9 shows that most of this surge was wiped out with a decline back to the 20.5 area (2.05%). The move was sharp and a pullback is certainly normal, but I decided to take another look at the chart. First, notice that the big trend on this weekly chart appears to be down. The yield plunged below 17 in late January and the move back above 22 appears to be a rebound. In other words, a reaction to an overreaction created a "V" reversal that may not be a reversal at all.
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Chart 9
Taking a step back, we can see a downtrend since the peak in late December 2013. Yields moved to new lows in January 2015 and the February rebound, while sharp, did not come close to the prior peak around 26 (September 2014). Also notice that the rebound retraced 62% of the prior decline and there is a big resistance zone in the 23-24 area (2.3% to 2.4%). This is a normal retracement for a bounce within a downtrend. Thus, the big trend for Treasury yields appears to be down and this means the big trend for Treasury bonds remains up.
The big trend may be down, but the smaller trend on the daily chart is up. Before we can expect a continuation of the bigger downtrend, we need to see a reversal on the daily chart. Chart 10 shows the 10-YR Treasury Yield between the falling 200-day SMA and the falling 50-day SMA. The Raff Regression Channel, late February low and a buffer mark support in the 19-20 area. A break below this zone would reverse the upswing on the daily chart and signal a continuation of the bigger downtrend on the weekly chart. Chartists can also watch the Aroon oscillators for confirmation. The uptrend would reverse if Aroon Down moves above Aroon Up and hits 100.
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Chart 10
TLT HITS INFLECTION AREA... So what about the 20+ YR T-Bond ETF (TLT)? Chart 11 shows TLT in an uptrend on the weekly chart and an 18% advance from early November to late January. The ETF was clearly overbought and ripe for a pullback after an 18% surge. The current decline overshot the 62% retracement with a move below 125, but immediately firmed and stabilized in this area. Again, a 62% retracement is normal for a pullback within an uptrend. We now need to look at the daily chart to analyze the seven week pullback, which is the immediate downtrend. Before hitting the next chart, note that the indicator window shows the TLT:IEF ratio, which compares the 20+ YR T-Bond ETF to the 7-10 YR T-Bond ETF. TLT is more sensitive to changes in interest rates and, therefore, outperforms on the way up and underperforms on the way down.
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Chart 11
Chart 12 shows TLT within a clear downtrend since early February. I am using the Raff Regression Channel and late February high to define this downtrend. The ETF is near the upper line of the Raff Regression Channel and nearing the resistance zone, which puts it in an inflection zone. A surge through 130 would reverse this downtrend and be bullish for TLT (bearish for yields). The green Raff Regression Channel defines the six day upswing. I know we are getting granular and short-term, but this is the week to watch for a move. A move below 126 would break support and argue for a continuation of the downtrend on the daily chart.
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Chart 12
UTILITIES SPDR FIRMS AT FIBONACCI LEVEL... What happens to Treasury yields is obviously important to utilities. Chart 13 shows the Utilities SPDR (XLU) with weekly bars over the last three years. XLU fell sharply as yields surged in February, but the big trend appears to be up and XLU is trading at an interesting juncture. Broken resistance, the 62% retracement and November 2012 trend line converge to mark support in the 43-44 area. The eight week trend is down and chartists should use a daily chart to monitor this trend. The indicator window shows the StockCharts Technical Rank (SCTR) moving below 40 in February. Prior to this, notice that the SCTR held the green zone (relative strength) from late January 2014 to late February 2014. That was a great run. A move back above 60 would suggest relative strength again.
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Chart 13
Chart 14 shows daily bars to focus on the decline since late January. The Raff Regression Channel and early March high mark resistance at 45. This is the first level to watch for an upside breakout. The indicator window shows the 10-year Treasury Yield ($UST10Y) for comparison. Notice how XLU rose as the yield fell from August to January. Yields moved sharply higher in February and XLU fell sharply. This suggests a negative correlation between XLU and the 10-YR Treasury Yield.
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Chart 14
ADDING A CURRENCY ADJUSTMENT TO ETF'S WITH FOREIGN SHARES... ETFs in the US are traded in US Dollars. This does not affect ETFs with US stocks, but it can affect ETFs with foreign stocks, such as the iShares Germany ETF (EWG) and the iShares Japan ETF (EWJ). The Germany ETF holds shares of German companies and these shares are priced in Euros. The Japan ETF holds shares priced in Yen. The value of these holdings must be converted to US Dollars to show the value of the ETF, which is in US Dollars. This means a weak Euro or weak Yen will have a negative impact on the value of these ETFs.
The Dollar has been exceptionally strong the last few months and this has negatively affected ETFs with stocks from the EU, Japan and other countries. Chartists can measure this affect by dividing the ETF by the currency cross for that country. For example, chart 15 shows the German DAX Index ($DAX) up over 40% and at a new high, but EWG is up around 17% and not even close to a new high. This is because of the strong Dollar. The bottom window shows EWG adjusted for the currency using a ratio chart (EWG:$XEU). This is simply the ETF divided by the currency cross, Euro-Dollar in this case. Chart 16 shows an example using the Nikkei 225 ($NIKK), the Japan iShares (EWJ) and the Yen ($XJY). WisdomTree has some currency-hedged ETFs, which John Murphy pointed out in a February Market Message.
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Chart 15
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Chart 16
STOCKS, Q&A AND WEBINAR LINK... In addition to the charts above, the symbols below show other charts covered in today's Webinar. Click here for the recording
The following stocks were featured with interesting setups: APD, AKAM, AWI, BRCD, CA, CSTE, EQIX, JAZZ, TJX, ESRX, RH, ZTS
The following symbols were covered in the Q&A: CVX, FB, INTC, IYT, RTRX, XBI, XLE, XOM. I also showed how to use the inspector to measure percentage change on a chart.
