3 GAPS DOMINATE SPY, IWM HOLDS SUPPORT, ITB BOUNCES OFF CHANNEL, 6 HOMEBUILDER STOCKS, RETAIL SHOWS RELATIVE STRENGTH, RCD GETS A BAND SQUEEZE, SMALL AND MID CAP BREADTH STRENGTHENS, LARGE-CAP BREADTH WEAKENS
THREE GAPS DOMINATE THE SHORT-TERM TREND FOR SPY... It is currently a tale of two markets. The S&P 500 SPDR (SPY) has been trending lower since late May, but the Russell 2000 iShares (IWM) has been trending higher over this same timeframe. The broader market is likely to remain mixed as long as these two diverge. We could see a decent directional move if one joins the other and both trend in the same direction. Chart 1 shows three down gaps defining the short-term downtrend in SPY. Notice that lower highs formed with the second and third gaps, and there was a lower low on June 9th. Lower lows and lower highs define this downtrend with resistance marked in the 211.5-212 area. A move above this level would fill last week's gap and trigger a break above the prior high, thus reversing the short-term downtrend. Note that the fourth gap, today, totally erased last week's surge.
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Chart 1
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Chart 2
Even though SPY is clearly in a short-term downtrend, chart 2 shows IWM in as short-term uptrend with a support test looming. IWM gapped up on 10-June and surged above its early June high for a higher high, but this gap was filled on Monday with a sharp decline in early trading. As this trend stands, the **early June lows mark key support in the 123.5-124 area. A break down in IWM would put it on the same page as SPY and this would be quite negative for stocks overall.
HOME CONSTRUCTION ETF BOUNCES OFF CHANNEL LINE... Chart 3 shows the Home Construction iShares (ITB) with a long-term bullish chart. The ETF started hitting new 52-week highs in early 2012 and continued hitting new highs into 2013. A large consolidation then unfolded and the ETF broke out to new highs again in early 2015. The ETF fell back to the breakout zone in April and then firmed over the last five weeks. This puts ITB at a most interesting juncture. The long-term trend is up and the ETF is firming at support from broken resistance.
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Chart 3
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Chart 4
Chart 4 shows ITB within a rising channel since December. Even though trading seems flat since early December, the higher highs and higher lows of this channel point to an uptrend. ITB is currently bouncing off the lower trend line and a break above the mid May high would target a move to the upper line. The indicator window shows relative performance improving as the SCTR moved above 60 in mid May and held above 60. The SCTR is currently above 80 and this means ITB is in the top 20% of ETFs for relative strength.
SIX HOMEBUILDER STOCKS ON THE MOVE... The next six charts show six homebuilder stocks to watch for breakouts that would lift ITB. Note that all six formed higher lows from early May to early June and first resistance is set with the mid May high. Chart 9 shows Ryland (RYL) making a breakout bid with a gap and surge above resistance today. Note that Lennar (LEN), DR Horton (DHI) and Toll Brothers (TOL) have the highest SCTRs (above 70). KB Home (KBH) is the weakest of the group with the lowest SCTR.
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Chart 5
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Chart 6
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Chart 7
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Chart 8
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Chart 9
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Chart 10
RETAIL SHOWS RELATIVE STRENGTH ... Retail is an important industry group in the consumer discretionary sector and the consumer discretionary sector acts as a litmus test for the US economy. Signs of weakness in the US economy would likely show up in the Retail SPDR (XRT) and the Equal-Weight Consumer Discretionary ETF (RCD) so chartists can watch these two for early clues. Chart 11 shows the Retail SPDR falling in April, but firming in early May and moving higher the last six weeks. This is actually a show of relative strength because SPY has been working its way lower since early May. Notice that the SCTR is above 80 and XRT is one of the strongest ETFs in our universe. Returning to the chart, the rising channel and early June lows mark short-term support in the 97-98 area. A break here would reverse the short-term uptrend and this would weigh on the broader market.
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Chart 11
BOLLINGER BAND SQUEEZE FOR RCD... Chart 12 shows the Equal-Weight Consumer Discretionary ETF (RCD) with its second Bollinger Band contraction in as many months. BandWidth fell below 2.5% in late April and the ETF broke below the lower band with a sharp decline. This was a bearish development, but the ETF quickly firmed and worked its way higher the last six weeks. Another squeeze play is unfolding as BandWidth dips below 2.5% again. Chartists should watch 90 for a bearish break and 92 for a bullish break.
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Chart 12
SMALL AND MID-CAP BREADTH STRENGTHENS AS LARGE-CAP BREADTH WEAKENS... The next four charts show the stock index in the top window, High-Low Percent in the middle window and the AD Line in the lower window. We are covering the S&P 500, S&P MidCap 400, S&P Small-Cap 600 and Nasdaq 100. These close-only charts feature a Raff Regression Channel extending up from the early December low to the most recent high. The lower line and March-April lows mark key support zones to watch for trend reversals. As the charts stand, all four are in uptrends with the S&P SmallCap iShares (IJR) hitting a new closing high just last week. The S&P MidCap SPDR (MDY) is close to its high and these two are the strongest of the four.
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Chart 13
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Chart 14
We can also see relative strength in small-caps and mid-caps when looking at the breadth indicators. S&P 400 HiLo% ($MIDHLP) exceeded +10% three times since mid May and S&P 600 HiLo% ($SMLHLP) hit +10% once last week. Nasdaq 100 HiLo% ($NDXHLP) and S&P 500 HiLo% ($SPXHLP), on the other hand, did not hit +10% and remain less strong. I would not call them weak just yet and would not turn bearish on this indicator until it exceeds -5%.
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Chart 15
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Chart 16
The S&P SmallCap AD Line ($SMLADP) and S&P MidCap AD Line ($MIDADP) are also holding up better. Notice that the S&P 500 AD Line ($SPXADP) and Nasdaq 100 AD Line ($NDXADP) broke their March lows in June. Even though the Mid-cap AD Line and Small-cap AD Line have been flat since April, they have yet to break down and held up the best. Based on trend and breadth, mid-caps and small-caps are the place to be right now. Even though Nasdaq 100 and S&P 500 breadth has weakened, I still think the bulk of the evidence remains bullish for stocks. The S&P SmallCap iShares and S&P MidCap SPDR represent 1000 stocks, which is the majority, and their indicators are holding up just fine.
VIDEO DETAILS... Link for today's video.
