SMALL AND MID CAP ETFS BOUNCE WITHIN CORRECTIONS, UPTREND TRUMPS FLAG BREAK IN XLF, INSURANCE HITS NEW HIGH AS REGIONAL BANKS RECOVER, FINANCE BREADTH IMPRESSES, FINDING BREADTH SYMBOLS, COMMODITY ETF BECOMES VERY OVERSOLD, OIL REMAINS IN STEEP DOWNTREND
SMALL AND MID CAP ETFS BOUNCE WITHIN CORRECTIONS... Link for today's video. Small-caps have been the Achilles heel of the stock market by showing both relative and absolute weakness the last two months. Even with this poor performance, the decline in the Russell 2000 iShares (IWM) over the last two months still looks like a correction within an uptrend. Chart 1 shows IWM peaking in late June and falling over the last two months with a series of lower lows and lower highs. While SPY is still less than 2% from its high and up around 3% year-to-date, IWM is down around 6% from its high and up around 2% year-to-date. A 6% decline from a 52-week high is not much in the grand scheme of things. Nevertheless, IWM is still in correction mode and a breakout is needed to reverse this slide. I am marking resistance in the 123-124 area. A close above 124 would trigger a breakout and signal an end to the current correction. The indicator window shows IWM relative to SPY using the price relative. This ratio turned down in late June and broke below its May low in early August. IWM is underperforming SPY and this means small-caps show relative weakness. Chart 2 shows the S&P MidCap SPDR (MDY) with resistance marked at 276.
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Chart 1
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Chart 2
UPTREND TRUMPS FLAG BREAK IN FINANCE SPDR ... Last week I wrote about the flag break in the Finance SPDR (XLF), but noted that the bigger trend was still up. This highlights perhaps the most important aspect of trading and investing: the bigger trend. It is possible to have a short-term breakdown within a bigger uptrend. It is important to remember that the bigger trend is the dominant force at work and the short-term fluctuations are secondary to this bigger trend. Chart 3 shows XLF breaking flag support and then surging back to the 25.25 area. This shows resilience, but XLF remains in a short-term downtrend over the last few weeks (red trend line). The 52-week highs and blue trend lines define a long-term uptrend since at least March. Also note that the SCTR is near 90 and XLF has one of the strong sector SPDRs right now.
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Chart 3
Chart 4 shows the Equal-weight Finance ETF (RYF) hitting a 52-week high in mid July and within an uptrend since March. The March trend line and June-July low combine to mark long-term support in the 43.75 area. As with XLF, the EW Finance ETF is in a short-term downtrend that is defined by the red trend lines. This decline looks like a flag of sorts and a break above the early August high would reverse this short-term downtrend.
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Chart 4
INSURANCE ETF HITS NEW HIGH AS REGIONAL BANKS SPDR RECOVERS... Within the finance sector, chart 5 shows the Insurance SPDR (KIE) hitting yet another new high today. Chart 6 shows the Regional Bank SPDR (KRE) breaking below its July low and quickly recovering with a move back above 43. The decline over the last two months is looking like a big falling flag or correction within a bigger uptrend.
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Chart 5
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Chart 6
FINANCE SECTOR BREADTH IMPRESSES... Chart 7 shows the Finance SPDR (XLF) with the 50-day moving average above the 200-day moving average and both moving averages rising. This is clearly a long-term uptrend. Also note that XLF hit a 52-week high in mid July. In addition to this uptrend, the indicator window shows the XLF AD Line ($XLFADP) hitting a new high last week and this means breadth within the finance sector is strong. The other indicator window shows XLF High-Low Percent ($XLFHLP) remaining bullish overall. There were a few dips into negative territory over the last few weeks, but the indicator did not exceed -5% and there are still more new highs than new lows within the sector.
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Chart 7
FINDING BREADTH INDICATOR SYMBOLS... StockCharts calculates and publishes breadth indicators for the nine sector SPDRs and several major index ETFs. You can find these by going to the symbol catalog and searching for "advance and decline and percent" (without quotation marks). AD Percent is advances less declines divided by total issues. These indicators start with a Dollar sign ($) and then the symbol of the underlying index or ETF (i.e. XLF, XLK, SPX). The breadth indicator is defined with the last three letters (ADP = AD Percent, UDP = AD Volume Percent and HLP = High-Low Percent). With these base indicators, chartists can create AD Lines, AD Volume Lines, High-Low Lines or breadth oscillators. Check out this ChartSchool article for more details. Chart 9 shows XLK with some breadth indicator examples. Remember, you can click on any chart to see the settings and save it to one of your favorites lists.
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Chart 8
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Chart 9
COMMODITY TRACKING ETF BECOMES OVERSOLD ... Selling pressure continued for most major commodities as the Commodity Tracking ETF (DBC) sank to yet another new low. Weakness in commodities is keeping the bid in bonds as Treasuries bounced again on Monday. Chart 10 shows the ETF breaking down in early July and falling sharply the rest of the month. The ETF is oversold after a 15% decline, but remains in a clear downtrend - both short-term and long-term. The most I would expect from here is an oversold bounce and a break above 16 could trigger such a bounce. The indicator window shows the SCTR wallowing below 10 this month. This means DBC is in the bottom 10% for performance in our ETF universe, which excludes inverse and leveraged ETFs. Before leaving this chart, notice that over 40% of the ETF is from the oil complex (heating oil, gasoline, Light crude and Brent crude). It is, therefore, a big bet on oil.
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Chart 10
OIL REMAINS IN STEEP DOWNTREND ... Chart 11 shows the USO Oil Fund (USO) in the top window and September Crude Futures (^CLU15) in the lower window. Even though this contract is updated after the close, I like to use the futures contract for analysis and apply the findings to the ETF. The futures contract broke support in early July and moved to new lows in the second half of July. The big trend is clearly down and the ETF is oversold after falling over 30%. There are, however, no signs of a base and the ETF remains in a steep downtrend. First resistance is marked at 45 and a breakout here could trigger an oversold bounce to the low 50s. Keep in mind that any bounce from here would be considered just an oversold bounce within a bigger downtrend.
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Chart 11
NAT GAS FORMS BEARISH CONTINUATION PATTERN... Chart 12 shows the Natural Gas ETF (UNG) in the top window and September Nat Gas Futures (^NGU15) in the lower window. Nat gas is down over 2% in early trading on Monday. The futures contract hit new lows in April and then consolidated with a triangle. This is a consolidation within a downtrend, which makes it a bearish continuation pattern. A break blow support at 2.7 would signal a continuation lower. There is also a chance for an upside breakout. Nat gas did, after all, hold up quite well over the last six weeks. Look for the futures contract to break above 3 for a bullish signal.
