MID-CAP BREADTH LEADS, EQUAL-WEIGHT CONFIRMS CAP-WEIGHT, IWM SIGNAL FOLLOW UP, GE LEADS INDUSTRIALS, HEALTHCARE AND TECH LEAD SCTRS, FOUR TECH STOCKS WITH A 3-STEP SETUP
INTERNAL STRENGTH CONFIRMS EXTERNAL STRENGTH... Link for today's video. The weight of the evidence is still bullish for stocks in general. As detailed below, several key index ETFs hit new highs and we are seeing leadership in three big sectors that account for almost half of the S&P 500. Even though small-caps are lagging and the Russell 2000 iShares has yet to hit a new high, breadth remains strong with new highs in several AD Lines. As noted in Tuesday's webinar, the AD Lines for the S&P 1500, S&P 500 and S&P MidCap 400 hit new highs this week. The mid-cap AD Line is perhaps the strongest of the group. The absence of bearish divergences reflects internal strength and this confirms the external strength in the actual indices.
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Chart 1
EQUAL-WEIGHT S&P 500 UNDERPERFORMING, BUT NOT WEAK... Chart 2 shows the S&P 500 SPDR (SPY) extending its uptrend with a new high this week. Trading has been choppy since December, but there is a clear upward drift because of the new highs. The December trend line and March lows mark support in the 203-205 area. The indicator window shows the price relative (SPY:RSP ratio) turning up in early April as large-caps outperform. Relative strength in large-caps could be in jeopardy because the Dollar surged this week.
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Chart 2
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Chart 3
Chart 3 shows the Equal-Weight S&P 500 ETF (RSP) also hitting a new high this week. This ETF has the same stocks as SPY, but the stocks are equally weighted, as opposed to market cap weighted. This equal weighting makes RSP a good barometer for the stock market as a whole. With a new high this week, the stock market as a whole remains in good shape. As with SPY, RSP surged in October-November and then embarked on a choppy advance the last six months. The Raff Regression Channel and March lows combine to mark key support in the 79-80 area. Using this zone for support gives the uptrend a little wiggle room for a pullback.
MID-CAPS AND LARGE-TECHS CONFIRM NEW HIGHS... In addition to RSP and SPY above, we also have a new high in the S&P MidCap SPDR (MDY) and a new closing high in the Nasdaq 100 ETF (QQQ) this week. All told, we have new highs from large-caps, mid-caps and large-techs. Chart 4 shows MDY with a new high and support in the 267-271 area. Chart 5 shows QQQ with three corrections and a bigger uptrend since December. The bigger uptrend is the most important feature of this chart and support is set in the 104-106 area.
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Chart 4
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Chart 5
IWM SIGNAL FOLLOW UP... Thus far we have four key index ETFs hitting new highs. The Russell 2000 iShares (IWM) has yet to confirm and remains a laggard. I am not concerned with relative weakness in small-caps for two reasons. First, four of the five index ETFs hit new highs and this is a clear majority. Second, IWM is in an uptrend overall and last week's bullish signal remains in play.
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Chart 6
Chart 6 shows IWM with a three step signal triggering on May 14th. First, the Percentage Price Oscillator (25,125,1) must be positive. This condition means the 25-day EMA is above the 125-day EMA and the bigger trend is up. Second, RSI must dip below 40 to trigger a setup. This means the ETF has pulled back or corrected within the uptrend. Third, StochRSI must surge above .95 to signal an up thrust. This signals that the correction is ending and the uptrend is resuming. The last two signals triggered in mid December and mid January. Notice that there were fairly deep pullbacks after each signal, but the low prior to the signal ultimately held (blue lines). As such, I will leave support at 120 and stay bullish until there is proof to the contrary.
INDUSTRIALS SECTOR HOLDS BREAKOUT... The industrials sector is showing some promise this month with a breakout and a few weeks of relative strength. Chart 7 shows the Equal-weight Industrials ETF (RGI) breaking of an extended triangle with a move above 91. Even though the sector is largely flat since late November, the overall trend is up because the ETF did record new highs in late December and late February. Moreover, RGI is within spitting distance of another new high. The indicator window shows the SCTR turning up in May moving back above 50, which puts it back in the top half for relative performance.
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Chart 7
Chart 8 shows General Electric (GE), which accounts for around 10% of the Industrials SPDR (XLI), 1.5% of the EW Industrials ETF, 1.5% for the S&P 500 SPDR and 1% of the Dow SPDR. Its low weighting in the Dow is because the Dow is a price-weighted average and GE is the lowest priced stock in the Dow Industrials. Despite its low ranking in the Dow, the stock shows signs of strength on the price chart. GE clearly changed direction with the gap and big breakout in mid April. The stock fell back to prior resistance and firmed in the middle of the gap zone. The uptrend looks set to resume as the stock bounced in May and broke above the early May high this week.
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Chart 8
HEALTHCARE, CONSUMER DISCRETIONARY AND TECH LEADING... The StockCharts Technical Rank (SCTR) measures relative performance with a score from zero to one hundred. This tool is quite unique because it ranks a symbol universe using various technical indicators, such as the 200-day moving average and RSI. The ETF universe includes all "normal" ETFs, which means it excludes inverse and leveraged ETFs. I created a ChartList with the nine sector SPDRs and the nine equal-weight sector ETFs. The image below shows this ChartList in "summary" format, which includes the SCTR at the top. Note that chartists can click any column heading in this format to sort.
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Chart 9
Three sectors stand out on this table: healthcare, consumer discretionary and technology. This is a strong trio for leadership and it bodes well for the market overall. Together, these three sectors account for around 48% of the S&P 500. Notice that the two healthcare ETFs are at the top of the table and the only two above 90, which means they are in the ninetieth percentile for relative performance (serious relative strength). The two technology ETFs are also in the top group and both have SCTR scores near 80s. The Consumer Discretionary SPDR (XLY) is strong at 88 and the EW Consumer Discretionary ETF (RCD) rounds out the top seven at 77. Moving to the bottom rung, we can see both energy ETFs and both utility ETFs.
BREAKING DOWN THE LEADING SECTORS... Chartists can break down sectors into specific industry groups using the sector summary or ETFs. Image 10 show the key ETFs associated with the technology, consumer discretionary and healthcare sectors. Their SCTR is also listed. Notice that the six tech-related ETFs have SCTRs above 85. Three of the four healthcare-related ETFs have SCTRs above 90. The ETFs associated with the consumer discretionary sector are the weakest on an individual basis, but four of the five are above 70. The SCTR for the Leisure and Entertainment ETF (PEJ) sank to 55 because airlines account for 30% of the ETF.
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Chart 10
Even if you do not trade ETFs, it is good to know which industry groups are strong and where to look for bullish setups. I always have the sector or industry group picture in mind when I am looking at stocks. For example, I am looking for bullish setups in strong sectors or sectors that have recently broken out, such as industrials and finance. Conversely, I am avoiding stocks in weak sectors or sectors that have recently broken down.
ORACLE, CYPRESS, FACEBOOK AND GOOGLE... Just what is a bullish setup anyway? The next four stocks come from the technology sector and from industry group ETFs that are in clear uptrends. Oracle (ORCL) is a big software company. Cypress Semiconductor (CY) is obviously part of the semiconductor industry. Facebook (FB) and Google (GOOGL) need little introduction, but they are both part of the internet group. The stocks themselves might not be as strong as their sector or industry group, but I am looking for stocks that meet a trend condition, have a setup in play and look poised to break out (or just broke out). The condition is a bigger uptrend and the setup is the pullback within this uptrend.
Chart 11 shows Oracle (ORCL) hitting a new high in December and the correcting with a wedge into mid March. Notice that this wedge retraced 50-62% of the prior advance, which is typical for a correction within a bigger uptrend. ORCL broke wedge resistance with a surge in mid March, but then moved into a holding pattern the last two months. With rising lows and equal highs, this looks like a bullish ascending triangle ad a breakout at 45 would open the door to new highs.
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Chart 11
Chart 12 shows Cypress Semi (CY) with a surge to new highs and a correction into early May. The decline retraced 38-50% of the prior advance and with a falling channel. The immediate trend was down as long as the stock remained within the channel. CY broke above the upper trend line and exceeded the early May high today for a breakout. Chartists looking for stop-loss indicator can try the Chandelier Exit, which is currently at 12.62 (red line). The Chandelier Exit (22, 3.0) is a trailing stop set 3 Average True Range values below the 22-day high. It is based on the 22-day ATR.
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Chart 12
Chart 13 shows Facebook (FB) within a long-term uptrend that is defined by a rising channel. Also notice that the stock is above the rising 200-day moving average. FB surged off support last week and then formed a flag/pennant the last six days. I elected to draw through Wednesday's spike to capture the essence of the pattern, which is a surge and tight consolidation. A breakout would signal a continuation higher. The indicator window shows the SCTR moving back above 60 for the second time this month.
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Chart 13
Chart 14 shows Google (GOOGL) with its third bounce off 530 support. First, notice the breakout in February could be a trend changing event. Second, a big consolidation formed from March to May (triangle). The surge off support is the first sign that we will see a challenge to the triangle trend line. A breakout in the 570-580 area would target a move above 600. The indicator windows show upside volume outpacing downside volume and On Balance Volume (OBV) hitting a new high. This suggests that Google is under accumulation. A close below 529 would negate this bullish thesis.
