SECTORS FOR FOCUS, EW S&P 500 CORRECTS, PPO AS A TREND INDICATOR, AMAZON EFFECT DISSIPATES IN RCD, RETAIL WEAKENS AS HOUSING HOLDS, HEALTHCARE-STAPLES LEAD, TWO INTERNATIONAL ETFS TO WATCH, WEBINAR EXTRAS
FOUR SECTORS FOR FOCUS ... Click here for the webinar recording. The materials and energy sectors are weighing on the broader market with outsized losses, but the broader market is still holding up relatively well. PerfChart 1 shows the performance for RSP and the nine equal-weight sectors since the beginning of May. I picked this timeframe because the equal-weight (EW) energy, materials and industrials sectors peaked in May. Even with double-digit declines in the EW Energy ETF (RYE) and EW Materials ETF (RTM), the EW S&P 500 ETF (RSP) is down just 3.7% since early May and down around 5% from its May high. That's not much.
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Chart 1
In the meantime, notice that RYE is down over 20% and RTM is down over 10%. We have also seen selling pressure in the EW Technology ETF (RYT), EW Industrials ETF (RGI) and EW Utilities ETF (RYU) because these are down 4-7%. This leave just four sector still holding up since early May. The EW Finance ETF (RYF), EW Healthcare ETF (RYH) and EW Consumer Staples ETF (RHS) are holding up the best because they show modest gains. The EW Consumer Discretionary ETF (RCD) is down fractionally, but showing relative strength because it is down much less than the EW S&P 500 ETF. These are the sectors where chartists should focus for potential longs. These are also the sectors to watch to see if selling pressure spreads.
EQUAL-WEIGHT S&P 500 ETF EXTENDS CORRECTION... Let's review the Equal-Weight S&P 500 ETF and the S&P 500 SPDR for a picture of the broader market. Chart 2 shows RSP with a ~5% pullback over the last two months. The ETF peaked with a new high in May and then fell with lower highs in June and July. The two month trend is down and I consider this a correction right now. A 10% decline would extend to the 74.5 area, which marks a 62% retracement. A 50% retracement would reach 76. There is also support in the 76 area from the December-January lows.
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Chart 2
The first bearish evidence appeared when RSP broke support and the Percentage Price Oscillator (60,10,1) turned negative on June 29th. This means the 10-day EMA moved below the 60-day EMA. There is evidence that a bigger downtrend may be evolving because the PPO (20,120,1) just moved into negative territory. Thus, the evidence at this stage is negative or bearish. RSP needs to exceed 81.5 to reverse the two month decline on the price chart and the PPO's need to turn positive to turn the evidence bullish again. Chart 3 shows SPY breaking one support level, but then surging to a new high. SPY is still in an uptrend with key support in the 203 area.
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Chart 3
PPO PRIMER... The PPO is the percentage difference between two exponential moving averages. Even though it is generally considered a momentum oscillator like MACD, I use it for trend identification by looking for crosses above or below the zero line. The PPO is positive when the shorter EMA is above the longer EMA and negative otherwise. Thus, the PPO is just a moving average crossover system when used in this regard. Using the PPO allows me to keep the EMAs off the price chart so I can also analyze the price action. The PPO (10,60,1) covers the medium-term timeframe (~3 months). The PPO (20,120,1) covers a long-term timeframe (~6 months). Long-term is relative and six months is plenty long enough for me.
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Chart 4
AMAZON EFFECT DISSIPATES IN EW CONSUMER DISCRETIONARY ETF... Chart 5 shows the Consumer Discretionary SPDR (XLY) in a clear uptrend right now. The ETF surged in February, worked its way higher from March to June and surged again in July (thanks to Amazon). Nevertheless, it is what it is. An uptrend. Support is set in the 75-76 area.
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Chart 5
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Chart 6
We can see the "amazon" effect dissipating when we look at chart 6 and the EW Consumer Discretionary ETF (RCD), which has the same stocks as XLY. RCD surged to new highs in February and then traded flat the last five months. The ETF did, however, manage to notch new highs in June and July. A support test is now at hand as the ETF fell back the last few days. A break below the March-May lows would be a bearish development for this key sector.
RETAIL WEAKENS AS HOUSING HOLDS... The next two charts focus on retail and housing, two important groups in the consumer discretionary sector. Chart 7 shows the Retail SPDR (XRT) breaking below its June-July lows with a sharp decline. The indicator window shows the PPO (10,60,1) moving into negative territory (green). These are negative developments medium-term. In addition, the SCTR moved from 90 to 60 in less than two weeks. A break below 40 would be negative for relative performance. The PPO (20,120,1) is still positive, but XRT needs to hold here and now. Chart 8 shows the Home Construction iShares (ITB) holding above support in the 26-26.5 area and the PPOs holding positive. A break down in ITB would be negative for the consumer discretionary sector.
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Chart 7
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Chart 8
HEALTHCARE AND CONSUMER STAPLES LEAD... Chart 9 shows the EW Healthcare ETF (RYH) hitting new highs in mid July and falling back the last few days. A pullback is allowed within an uptrend. The first supports are marked on the price chart and both PPOs are positive. Chart 10 shows the EW Consumer Staples ETF (RHS) still in an uptrend after a new high last week. The May-June lows mark key support. The SCTR is above 90 and both PPO's are positive.
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Chart 9
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Chart 10
TWO EMERGING INTERNATIONAL ETFS TO WATCH ... Chartist looking for diversification should keep international ETFs in mind. Chart 11 shows the Tel Aviv 100 ($TA100) surging from February to April and then consolidating. The index is near resistance and a breakout would signal a continuation of the uptrend. Chart 12 shows the MSCI Israel ETF (EIS) surging to a 52-week high. Notice that the SCTR is above 90 and both PPOs are positive. It may be short-term overbought, but the bigger trend is up and this means pullbacks provide opportunities.
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Chart 11
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Chart 12
Chart 13 shows the Vietnam ETF (VNM) with a double bottom breakout in late June and early July. The ETF fell back over the last two weeks and this may be a classic throwback. The two broken resistance zones combine for a support to watch for a bounce. The SCTR indicates that relative performance is net positive because it broke above 60 in late June. The PPOs are both positive, indicating an uptrend on these two timeframes.
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Chart 13
TOPICS FOR WEBINAR ... Click here for the webinar recording.
