SPY MAINTAINS UPTREND, BREADTH WANES, SMALL AND MID-CAP ETFS BREAK SUPPORT, QQQ IS STILL THE LEADER, A BIG WEEK FOR MATERIALS, TECH AND CONSUMER DISCRETIONARY HOLD STRONG, NOOSE TIGHTENS FOR FINANCE AND INDUSTRIALS
SPY MAINTAINS UPTREND, BUT BREADTH WANES ... Link for today's video. There are clearly some signs of underlying weakness in the stock market and this could foreshadow a correction over the coming weeks. Today's market message will start with four major index ETFs. We will look at the overall trends, some weakening breadth indicators and the potential correction targets. Keep in mind that these targets are still potential because SPY and QQQ have yet to reverse even their short-term uptrends.
Chart 1 shows the S&P 500 SPDR (SPY) hitting a new high in late April and then falling below 209. The ETF is still within 2% of this high and in a clear uptrend overall. The breadth indicators, however, suggest that participation in the advance is narrowing. Notice that S&P 500 High-Low% ($SPXHLP) exceeded +10% each month from November to March. Even though the SPY and the S&P 500 hit new highs in April, High-Low Percent did not exceed +8%. Fewer stocks are hitting new highs and confirming the new high in the underlying index. The S&P 500 AD Line ($SPXADP) did not confirm the new high in SPY either. Even though this bearish divergence is slight, it is a bearish divergence and it does suggest that fewer stocks are partaking in the advance. At this point, I would call these breadth indicators "less strong" and this narrowing could foreshadow a correction. I would not call these indicators bearish because they have yet to actually break down.
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Chart 1
SPY advanced around 14.7% from the mid October low to the late April high. At this stage, we do not even have a short-term downtrend on our hands. I used a Raff Regression Channel to define the short-term uptrend on Tuesday, but today I will simply use a trend line and the late April low. A close below 208 would reverse the short-term uptrend and argue for a correction. A correction at this stage is certainly not farfetched and a mere 5% decline from the April high would carry SPY back to the 201 area. There is also evidence for future support in this area. The green shaded area marks the 38-50% retracement zone in the 198-201 area. The January lows mark support in the 198-199 area.
SMALL AND MID-CAP ETFS BREAK SHORT-TERM SUPPORT... The S&P MidCap SPDR (MDY) and the S&P SmallCap iShares (IJR) led the market lower this week and broke short-term support levels. The bigger trend, however, is clearly up and the breadth indicators for these two are split. Chart 2 shows MDY breaking the mid April low and I am marking a potential correction target in the 257-262 area. S&P 400 High-Low% ($MIDHLP) was strong from November to March, but "less strong" in April because it did not exceed +8%. The indicator window shows the S&P MidCap AD Line ($MIDADP) hitting a new high and confirming the new high in MDY. No signs of weakness on this one.
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Chart 2
Chart 3 shows IJR with the most weakness of the three. First, IJR did not hit a new high in late April, whereas SPY and MDY did. Thus, IJR did not confirm the new highs in the other two. Second, S&P 600 HighLow% ($SMLHLP) did not exceed +6% in April and was the "least strong" of the three. High-Low Percent actually turned negative on Thursday as new lows outnumbered new highs. A break below -5% would be bearish for this indicator. Third, the S&P SmallCap AD Line ($SMLADP) broke below its late March low. This is a minor support break that confirms the short-term support break in IJR. A modest 6.5% pullback in IJR would extend to the 112 area.
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Chart 3
QQQ IS STILL A LEADER... Chart 4 shows the Nasdaq 100 ETF (QQQ) hitting a new high in late April and falling back this week. I would not call this a failed breakout because the ETF is entitled to a pullback after a ~5% advance. In addition, QQQ did not even break the April trend line and we cannot even call this a short-term downtrend yet. First support is marked at 107. A break here would argue for a deeper pullback, but this would still be deemed a correction within an uptrend. The March lows and 38% retracement mark first support in the 103-104 area. The December-January lows and 50% retracement mark support in the 100 area.
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Chart 4
The first indicator window shows Nasdaq 100 HiLo% ($NDXHLP) exceeding +20% on a regular basis from late October to March. High-Low Percent was clearly "less strong" in April because it did not exceed +10%. We have yet, however, to see a serious uptick in new lows and I would not turn bearish on this indicator until it breaks below -5%. The Nasdaq 100 AD Line ($NDXADP) hit a new high in late April and the March lows mark first support.
A BIG WEEK FOR MATERIALS ... Chart 5 shows a MarketCarpet with the nine sector SPDRs and the nine equal-weight Sector ETFs. This carpet shows performance over the last ten days and two sectors stand out: materials and technology. The Materials SPDR (XLB) and the Equal-weight Materials ETF (RTM) are the best performing sectors over the last two weeks. The Equal-weight Energy ETF (RYE) is the fourth best performing sector. Despite a decline this past week, the Technology SPDR (XLK) is the third best performing sector and the Equal-weight Technology ETF (RYT) is the fifth. Although not stand outs, note that the Finance SPDR (XLF) and Equal-weight Finance ETF (RYF) held up quite well over the last two weeks. Both are virtually unchanged. Note that I created a ChartList with these 18 sector ETFs and then choose to view as a Market Carpet. Today's video shows a live demo.
Chart 5
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Chart 6
TECH AND CONSUMER DISCRETIONARY HOLD STRONG... When it comes to the S&P 500, chartists should watch the price action in the four big offensive sectors closely. These include the Consumer Discretionary SPDR (XLY), the Finance SPDR (XLF), the Technology SPDR (XLK) and the Industrials SPDR (XLI). Together, these four sectors account for around 59% of the S&P 500 SPDR (SPY). They are also cap-weighted ETFs, which means the stocks with the largest market caps account for the most weight.
As the charts now stand, all four remain above their March lows and have yet to break support. Support breaks from three of the four would tilt the balance in favor of the bears for the broader market. Chart 6 shows XLY hitting a new high Monday and then falling back into the trading range. The March lows mark first support in the 74 area. A break here would argue for a bigger retracement of the October-April advance and possibly a move to the 70 area. Chart 7 shows XLK hitting a new high and falling back the last few days. The ETF is not even close to its first support zone.
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Chart 7
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Chart 8
THE NOOSE TIGHTENS FOR FINANCE AND INDUSTRIALS ... Chart 8 shows XLF with an ever-tightening trading range the last five weeks. The overall trend is up because the ETF hit a new high in late December and broke out in early February. Even though XLF has gone nowhere since mid February, the breakout is holding and this is just a long consolidation. First levels to watch are 24.5 up and 24 down. Chart 9 shows XLI within a rising channel since December. Trading has flattened since late March with a narrowing range. Watch 57.1 up and 55 down.
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Chart 9
