EW S&P 500 ETF CONFIRMS REVERSAL PATTERN, QUANTIFYING SELLING DISPERSION, SMALL-CAPS LEAD AD LINES LOWER, NASDAQ 100 LEADS NEW LOW EXPANSION, BANKS, BROKERS AND RETAILERS BREAK DOWN, SEVERAL ASIAN INDICES ARE IN BEAR MARKETS

EW S&P 500 ETF CONFIRMS REVERSAL PATTERN... Programming Note: We are having technical difficulties with the screen recording software and there is no video today. I apologize and will get it fixed this weekend. The Equal-Weight S&P 500 ETF (RSP) is a good ETF to use for an idea of what is happening in the S&P 500 as a whole. The S&P 500, in contrast, is weighted by market cap and this means the largest stocks dominate. We all know that large-caps were holding up better than small-caps and mid-caps the last few months. Chartists can differentiate between large-caps and "other" caps by comparing SPY to the EW S&P 500 ETF. Both have the same stocks, but they are weighted differently and have different looking charts. In short, RSP weakened ahead of SPY and broke down. SPY, however, is now confirming with a break down of its own.

Chart 1 shows SPY breaking the March trend line and closing at its lowest (closing) level since early March. The ETF is down again on Friday and the intraday low is below the March low. The ETF closed below the July low and this is an important support break because it forges a lower low.

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Chart 1

The indicator window above shows the Percentage Price Oscillator (PPO) trio, which allows chartists to compare EMA pairs. The PPO is just the percentage difference between two exponential moving averages. The PPO is positive when the shorter EMA is above the longer EMA and negative when the shorter EMA is below the longer EMA. PPO(10,60,1) is pink and measures the medium-term trend. PPO(20,120,1) is black and measures the long-term trend. PPO(5,30,1) is used for short-term movements. Right now, the medium-term and short-term PPOs are negative for SPY. The long-term PPO is still positive and has yet to cross into negative territory. Overall, the big support break on the price chart and negative medium-term PPO are enough to call for a new downtrend.

Chart 2 shows RSP with a head-and-shoulders pattern evolving over the last seven months and two neckline breaks over the last four weeks. The pattern stretches less than 5% from high to low and is not that big. Nevertheless, it looks like a distribution pattern and the neckline break is bearish until proven otherwise. I am now focused on the decline from May to August for trend identification. RSP failed at 81 four times over the last three weeks and this is the level to watch for a trend-reversing breakout. The indicator window shows the medium-term (pink) and long-term (black) PPOs in negative territory since the last week of July.

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Chart 2

QUANTIFYING SELLING DISPERSION WITHIN THE S&P 500... A reader asked if the current decline in RSP was indicative of the "average" stock in the S&P 500. This is a good question that prompted me to put on my quant hat and run some numbers. As of Thursday's close, RSP was down around 5.3% from its high. Keep in mind that RSP data at StockCharts is adjusted for dividends, as is the default stock data. This usually puts a slight upward bias in the numbers because the dividend amounts are added back. Chartists can create charts with unadjusted data by preceding the symbol with an underscore (_RSP).

Based on this dividend-adjusted data, the average decline from the 52-week high is around 15.5% for the stocks in the S&P 500. The mode is 7% and 31 stocks hit this number. The mode is the most commonly occurring number and this is based on rounded numbers. This, however, is not the full story. The chart below shows a histogram breaking down the declines into five groups. Notice that 104 stocks (20.8%) are down just zero to five percent from their 52-week highs and another 125 (25%) stocks are down five to ten percent. Almost half of the stocks in the S&P 500 are down between zero and ten percent from their 52-week highs. The biggest group (147 stocks or 29.4%) is down ten to twenty percent. And finally, 24.8% of the stocks in the S&P 500 are down more than 20% (124 stocks). These numbers will not doubt become more negative if Friday's close is sharply lower. I will run these numbers on mid-caps and small-caps for Tuesday's webinar.

Chart 3

S&P SMALL-CAP 600 LEADS BREADTH LOWER... The AD Line for the S&P 1500 hit a 6-month low with small-cap breadth weighing the most. Chart 4 shows the S&P 1500 AD Line ($SUPADP) in the top window, the S&P 1500 in the second window and the major index AD Lines below. There are two ways to measure these indicators: when they peaked and when they broke their March lows. The Nasdaq 100 AD Line was the first to peak on April 23rd. The AD Lines for the S&P 500, S&P MidCap 400 and S&P 1500 then peaked on May 18th, while the S&P SmallCap AD Line ($SMLADP) was the last to peak on June 23rd. The March lows mark the important "trend" lows for these indicators because a break below this low would forge a lower low and signal the start of a downtrend. The AD Lines for the S&P 500 and Nasdaq 100 broke their March lows in mid June. The AD Lines for the S&P Small-Cap 600 and S&P 1500 followed by breaking their March lows in late July. Note that the S&P MidCap AD Line ($MIDADP) has yet to break its March low and remains flat. This means four of the five AD Lines are in clear downtrends with lower highs and lower lows. The small-cap AD Line is the weakest because it is already back to its late January levels.

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Chart 4

NASDAQ 100 LEADS NEW LOW EXPANSION... New lows expanded for the major stock indices with the S&P Small-Cap 600 and Nasdaq 100 leading the way. Chart 5 shows the S&P 1500 in the main window and High-Low Percent for four major stock indices. High-Low Percent is the number of new highs less the number of new lows divided by total issues. The blue lines are at +5% and -5%. High-Low Percent for all four indices dipped below -5% for the first time since October 2014. Notice that this is the second dip for the S&P 500, S&P MidCap 400 and S&P Small-Cap 600. S&P 600 HiLo% ($SMLHLP) is the weakest overall because it has not been above +5% since the second week of July. Also notice that Nasdaq 100 HiLo% ($NDXHLP) hit -9%, which is its lowest reading since October. All told, this indicator grouping turned bearish this week and will remain bearish until the majority move back above +5%.

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Chart 5

BANKS, BROKERS AND RETAILERS LEAD BREAK DOWN... There were a few sectors and several industry group ETFs in downtrends before the selling bout of the last five weeks. Most of these just extended their downtrends. In fact, the industry groups with the biggest declines over the last five weeks were those that already showed relative weakness (Copper Miners ETF (COPX), Oil & Gas Equip & Services SPDR (XES), Metals & Mining SPDR (XME), Steel ETF (SLX) and Semiconductor SPDR (XSD)).

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Chart 6

There were, however, a few key leaders that got whacked from relatively high levels. The Regional Bank SPDR (KRE), the Broker-Dealer iShares (IAI), the Bank SPDR (KBE), the Biotech iShares (IBB), Retail SPDR (XRT) and the Media ETF (PBS) were part of the downside leadership brigade over the last five weeks. New leadership on the downside tells us that selling pressure is expanding and this is enough to tilt the market balance to the bears.

In particular, I am most concerned with the break down in the banking-related ETFs and the Retail SPDR. These banking ETFs represent the health of the financial system and the retail ETF represents consumer spending. Chart 7 shows KBE forming a double top in June-July and then breaking support with a sharp decline the last three days (bears +1). The double top is relatively small, but the support break reverses the overall uptrend and I will mark resistance at 36.5 for now. The indicator window shows the medium-term PPO turning negative (bears +1), but the long-term PPO remaining positive (bulls +1). At this point, I will go with the support break and medium-term PPO for a bearish stance on KBE. Chart 8 shows the Broker-Dealer iShares with a break down as well. Chart 9 shows the Retail SPDR plunging the last five weeks. XRT went from a 52-week closing high five weeks ago to a six month low this week. Talk about a turn around.

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Chart 7

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Chart 8

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Chart 9

SEVERAL ASIAN INDICES ARE IN BEAR MARKETS... John Murphy noted weakness in the Emerging Markets ETF (EEM) on Wednesday and much of this stems from weakness in Asia. Note that China (24%), South Korea (14.3%) and Taiwan (11.83%) account for around 50% of EEM. Chart 10 shows CandleGlance charts for the Australia All Ords Index ($AORD), the South Korea Seoul Composite ($KOSPI), the Singapore Strait Times ($STI), the Hang Seng Composite ($HSI), the Shanghai Composite ($SSEC) and the Taiwan Weighted Index ($TWII). With another decline in Shanghai on Friday, all are below their 200-day moving averages. In other words, these indices are in bear markets right now. Singapore, Hong Kong and Taiwan are trading at 52-week lows and leading lower. This is hardly surprising given their proximity and ties to China. It is also interesting to note that the Shanghai Composite peaked in mid June, which was two months AFTER the other five. The red arrows show the other five peaking in April. Thus, these Asia markets were weakening ahead of China and well before the devaluation in the Yuan.

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Chart 10

SHANGHAI COMPOSITE BREAKS LONG-TERM MOVING AVERAGE... Chart 11 shows the Shanghai Composite ($SSEC) moving below its 50-day moving average, stalling and then breaking its 200-day moving average. A triangle formed to mark the consolidation over the last two months and this is a consolidation within a downtrend, which is typically a bearish continuation pattern. With a close at 3507 on Friday, the index broke the 200-day and triangle support to signal a continuation lower. Chart 12 shows the X-Trackers China A-Shares ETF (ASHR) breaking support in late June, bouncing back to 44 and breaking down again this week.

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Chart 11

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Chart 12

Thanks for tuning in and have a great weekend.
--Arthur Hill CMT