S&P 500 STALLS BELOW BREAK, SMALL-CAPS SHOW RELATIVE STRENGTH, UTILITIES SPDR BREAKS DOWN, TREASURY BONDS FORMS BIG ENGULFING, 10-YR YIELD BOUNCES WITHIN DOWNSWING, GOLD AND SILVER BACK OFF BROKEN SUPPORT ZONES

S&P 500 STALLS WELL BELOW SUPPORT BREAK... Chart 1 shows the S&P 500 with a big support break at 2040 and some serious volatility over the last two weeks. Notice that the index fell over 10% and then bounced with a 5+ percent surge back to the 1980-1990 area. Volatility remains an issue, but the index is still in the midst of an oversold bounce as it stalls below 2000 the last two days. I am calling this an oversold bounce for two reasons. First, the index was clearly oversold after a 10+ percent decline and entitled to a bounce. The current bounce, while big in percentage terms, has retraced around half of the 11.2% decline. Second, the support break at 2040 is the dominant chart feature and it is bearish. Broken support turns first resistance in the 2040-2060 area and this is the first area the bulls must recover. The 200-day moving average is a bit further up at the 2075 level. Notice that the 200-day is rolling over and turning down for the first time since 2011.

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Chart 1

SMALL-CAPS SHOW RELATIVE STRENGTH... Chart 2 shows the S&P Small-Cap 600 with a big break down in mid August and the broken support zone turning first resistance in the 690-700 area. Also notice that the 200-day moving average is around 703 and it appears to be rolling over as well. Furthermore, the June trend line affirms resistance in the 700 area. The chart here is currently bearish and I would not reassess this stance unless the index closes above 705.

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Chart 2

Despite a bearish chart overall, small-caps are showing some relative strength recently. First notice that $SML was pretty much unchanged late Monday morning and the S&P 500 was down (~11:20AM ET). Second, notice that the price relative ($SML:$SPX ratio) held the May lows and moved higher the last four weeks. This means the S&P Small-Cap 600 held up better than the S&P 500 from late July to late August.

UTILITIES SPDR BREAKS DOWN... The Utilities SPDR (XLU) was one of the leading sectors in mid August as it broke above its March-April highs. This suddenly changed as the ETF reversed at the 62% retracement and broke down last week. Chart 3 shows XLU gapping down and breaking below the early August low last week. The ETF bounced back to 43 on Thursday-Friday, but fell back sharply today as broken support turned first resistance in the 43-43.5 area. The indicator window shows the price relative (XLU:SPY ratio) turning up in July and August. The ratio is still in an uptrend the last two months, but the breakdown on the price chart overrules this relative strength.

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Chart 3

TREASURY BONDS ON THE HOT SEAT AFTER BIG ENGULFING... Treasury bonds will be on the hot seat this week because there are a slew of economic reports due and the employment report is on Friday. The news and these reports are, of course, secondary to price action. Chart 4 shows the 20+ YR T-Bond ETF (TLT) forming a massive bearish engulfing pattern near a key Fibonacci retracement last week. Overall, I could make the case for a downtrend because TLT formed a lower high in March and broke support in May. The bounce back to the 127.5 area did not exceed the March high and another lower high could be taking shape.

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Chart 4

The bearish engulfing on the chart above could mark the end of the July-August bounce and the beginning of a continuation of the bigger downtrend. As with most candlestick patterns, confirmation is required to confirm this reversal, which means we need to see follow through to the downside. The indicator window shows the MACD Histogram in positive territory the last five weeks. A move into negative territory would signal a bearish signal line cross in weekly MACD and this could be used for bearish confirmation. Chart 5 shows the 7-10 YR T-Bond ETF (IEF) with a bearish engulfing near the March-April highs.

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Chart 5

10-YR YIELD BOUNCES WITHIN DOWNSWING... I always like to confirm Treasury bond analysis with analysis of the Treasury yield charts, which are mirror images. Note that the 10-yr Yield chart mirrors the IEF chart and the 30-yr yield chart mirrors TLT. Chart 6 shows the 10-YR Treasury Yield ($TNX) forming a higher low in April and breaking out with a move above 23 (2.3%) in early June. The yield fell back sharply in July-August, but a big outside reversal formed last week as the 10-YR Treasury Yield opened below 20 and closed near 22 (2.0% and 2.2%, respectively). A break above 23 (2.3%) would be bullish for Treasuries and confirm a downside break in IEF. Chart 7 shows the 30-YR Treasury Yield ($TYX) for reference.

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Chart 6

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Chart 7

GOLD AND SILVER BACK OFF BROKEN SUPPORT ZONES... Chart 8 shows the Gold SPDR (GLD) breaking down in July and bouncing back to the broken support zone in August. This highlights a classic tenet of technical analysis: broken support turns first resistance. The ETF opened strong and closed weak last week to form a dark cloud. This is a bearish candlestick reversal pattern and this intraweek reversal affirms resistance. Also notice that GLD failed at the 62% retracement and at the January trend line. This gives chartists a key resistance level (112.5) to watch for a breakout. The indicator window shows Spot Gold ($GOLD) with resistance at 1170. Chart 9 shows the Silver ETF (SLV) breaking neckline support in July and broken support turning first resistance in the 15 area.

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Chart 8

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Chart 9

THANKS FOR TUNING IN... and have a great day!

--Arthur Hill CMT