ChartWatchers

A Key Breadth Indicator Holds Strong During April Dip

The AD Volume Line held strong during the April pullback and formed a small bullish divergence over the last few weeks. The AD Volume Line is a cumulative measure of AD Volume Percent, which is advancing volume less declining volume divided by total volume. In this example, we are looking at the S&P 1500 AD Volume Line ($SUPUDP). I like to use the AD Volume Line instead of total volume because it represents net buying pressure. Advancing volume represents buying pressure and declining volume represents selling pressure. AD Volume Percent, therefore, is net buying pressure. The AD Volume Line rises when buying pressure is stronger and falls when selling pressure is stronger.

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The chart above shows the AD Volume Line moving lower the first two weeks of April and holding above the March low. Meanwhile, notice that the S&P 1500 did not hold its March low. The higher low in the AD Volume Line amounts to a bullish divergence and indicates that net buying pressure remains strong. The AD Volume Line surged towards its early April high last week and remains in a clear uptrend. I view this as positive for the broader market, especially large-cap stocks because large-caps dominate the most active lists on the NYSE and Nasdaq.

Good weekend and good trading!
Arthur Hill CMT

Bullish Bond Patterns Could Foreshadow Stock Market Correction

The 7-10 YR T-Bond ETF (IEF) is tracing out two potentially bullish patterns and chartists should watch these patterns for clues on the stock market. The chart below shows IEF hitting resistance in the 102.25-102.5 area and then correcting with a falling wedge. With Friday's big surge, "correcting" could be the key word here because a breakout would signal a continuation of the January advance. Note that stocks were weak when Treasuries advanced in January. Taking a step back, notice that the ETF is also forming a big cup-with-handle, which is a bullish continuation pattern. A break above rim resistance would also be bullish and argue for a move to the 105 area. The height of the cup is added to the breakout zone for a target. The indicator window shows MACD falling just below zero the last few weeks. A break above the red trend line would reverse the downswing in MACD and turn momentum bullish.

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Even though we have yet to see a breakout, note that strength in Treasuries could be negative for stocks for several reasons. First, stocks and Treasuries have been negatively correlated for most of the last five years. Second, money flowing into Treasuries is money that is not available for stocks. Third, Treasuries rise as the outlook for the economy falls. Fourth, strength in Treasuries reflects a certain risk aversion in the market. This risk aversion was reflected in the stock market because small-caps and techs are bearing the brunt of selling pressure on Friday.

Good weekend and good trading!
Arthur Hill CMT

Treasury Bond ETFs Surge off Golden Crosses

Stocks and bonds have been inversely correlated for most of the last four years, which means they tend to move in opposite directions. This inverse correlation showed up in January as stocks swooned and Treasuries surged. February was mixed because stocks surged and Treasuries traded flat. The inverse correlation reasserted itself this week as stocks dipped and Treasuries surged. I am particularly interested in this weeks surge because the 7-10 YR T-Bond ETF (IEF) and 20+ YR T-Bond ETF (TLT) held their golden crosses. A golden cross occurs when the 50-day moving average moves above the 200-day moving average.

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The chart above shows TLT breaking out with the January surge and then moving into a flat consolidation that looks like a flag. Notice how the 50-day day moved above the 200-day in early March and TLT found support near this cross. The ability to hold these moving averages and the golden cross are long-term bullish for TLT. Medium-term, the flat flag is a bullish continuation pattern. A break above the flag highs would signal a continuation higher and target a move to the 114 area. A flag flies at half-mast and the flagpole extends around 8.5 points (100.7 to 109.2). An 8.5-point advance from the flag lows would project such a move. A upside breakout in Treasuries would be negative for stocks and could facility further selling pressure. The chart below shows IEF with similar characteristics.

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Good weekend and good trading!
--Arthur Hill CMT

Finance Sector Lags as Consumer Discretionary Catches Up

The market can be divided into nine sectors using the S&P Sector SPDRs and the Rydex Equal-weight Sector ETFs. These sectors can be subsequently divided into three groups: offensive, defensive and other. Technology, finance, consumer discretionary and industrials make up the offensive group, which is key to a healthy bull market. Healthcare, consumer staples and utilities make up the defensive group, which typically outperforms when the market is in risk-off mode. The energy and materials sectors represent the "other" group. In a bull market, which we are in, I am most concerned with the performance of the offensive sectors. Further insight can be gained by looking at performance for the market-cap weighted SPDRs and the equal-weight Rydex ETFs (hat tip J.A.). The SPDRs, of course, tell us what is happening with large-caps, while the equal-weight ETFs reflect the performance of  small and mid-caps.

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The CandleGlance chart above shows the four offensive sector SPDRs and their equal-weight counter parts. I also added the S&P 500 SPDR (SPY) and Equal-Weight S&P 500 ETF (RSP) for good measure. First, the broader market is in good shape because SPY and RSP recorded new highs, although SPY appears to be struggling to hold this high. Second, the consumer discretionary sector was lagging at the beginning of the month, but surged in February and the Equal-Weight Consumer Discretionary ETF (RCD) hit a new high. This is positive. Third. The technology sector ETFs both hit new highs and this sector is leading. Note that XLK formed a rather tight consolidation the last two weeks and chartists should watch this support level closely. Fourth, the finance is lagging because XLF remains below its January high and the RYF has yet to forge a new high. Both remain in upswings, but chartists should watch support from the late February lows for signs of a weakness. And finally, the industrials sector is challenging its prior highs, but has yet to forge new highs. Overall, we have five ETFs with new highs, three ETFs at their highs and two below their highs. It is a bit of a mixed picture. Let's see if the strong can hold their highs and the others can confirm with new highs of their own. Check out this mailbag article for 14 essential CandleGlance groups.

Good weekend and good trading!
Arthur Hill CMT

The S&P 500 is Flat this Year, but Three Sectors Rise Above

Chartists can find sectors with consistent performance by analyzing PerfCharts across different timeframes. The three PerfCharts show different performance periods for the S&P 500 and the nine sector SPDRs. I am looking at year-to-date performance and then dividing 2014 into two parts. The first part covers the period from January 2nd to February 4th, which is when the S&P 500 fell sharply. The second period covers February 4th to February 14th, which is when the S&P 500 rebounded. By looking at these three distinct periods, chartists can uncover which sectors show consistent relative strength and which show consistent relative weakness.

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Year-to-date, we can see that the Technology SPDR (XLK), Utilities SPDR (XLU) and HealthCare SPDR (XLV) are the only sector SPDRs showing gains. These three show both absolute and relative strength. The Consumer Discretionary SPDR (XLY), Industrials SPDR (XLI), Materials SPDR (XLB), Energy SPDR (XLE) and Consumer Staples SPDR (XLP) are down more than the S&P 500 and show relative weakness. Even though healthcare and utilities are defensive sectors that typically lead when the market is in risk-off mode, note that the technology sector is also leading and this is positive for the market overall. Also notice that the consumer staples sector is lagging and this suggests that the market is not all that defensive.

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The PerfCharts above show the breakdown for 2014. First, notice that healthcare and utilities gained from January 2nd to February 4th, which is when the S&P 500 declined. These two showed both absolute and relative strength. Talk about strong. Second, notice that the technology sector declined less than the S&P 500. This shows relative strength. Meanwhile, the consumer discretionary sector showed the most weakness with a 6.92% decline. The second PerfChart shows the gains over the last two weeks. Notice that technology and healthcare outperformed. These two are clearly the top two sectors in 2014. The utilities sector underperformed with a smaller gain, but a 4.46% advance ain't too shabby for high-dividend group and it is still the best performing sector for 2014. You can learn more about PerfCharts in these videos.

Good weekend and good trading!
Arthur Hill CMT

High-Low Percent Indicator Dips to a Reversal Zone

High-Low Percent for the S&P 1500 dipped into negative territory in late January. This is potentially significant because prior dips did not extend past the -2% level and marked turning points in the S&P 1500. The chart below shows the S&P 1500 High-Low Line ($SUPHLP) in the main window and High-Low Percent in the bottom window. High-Low Percent equals new highs less new lows divided by total issues. The High-Low Line is a cumulative measure of High-Low Percent. First, notice that the High-Low Line has been above its 10-day EMA (rising) since November 2012. This is an extraordinarily long time and indicative of a strong uptrend. The last flattening occurred in late August.

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Turning to High-Low Percent, notice how this indicator dipped into negative territory in late June, mid-late August and mid December. The indicator almost dipped into negative territory in early October, but not quite. Subsequent dips and moves back above +2% provided opportunities to partake in the long-term uptrend. In other words, a dip to the zero line signaled a correction within the uptrend. Another bullish signal triggered this week as High-Low Percent dipped into negative territory and then moved back above 2% on Thursday. Before getting too bullish, notice that there was a double dip in August as the market produced one more leg lower during the August correction. This is not a stand-alone signal and should be used in conjunction with other aspect of technical analysis, such a chart patterns and momentum indicators. Note that StockCharts calculates and provides breadth data for over a dozen indices and sector SPDRs.

Good trading, good weekend and great football!
--Arthur Hill CMT

Consumer Discretionary and Finance Sectors Fall in Sector Rankings

It has been a rough year for stocks and two key offensive sectors are leading the way lower. I like to group the sector SPDRs into three groups: offensive, defensive and other. The consumer discretionary, technology, finance and industrials sectors are offensive because they are key to market performance. The consumer discretionary sector is the most economically sensitive sector, the technology sector represents growth stocks, the finance sector reflects the health of the banking system and the industrials sector makes the capital goods required for capital spending. The utilities, consumer staples and healthcare sectors are defensive because they provide products we need regardless of economic circumstances. The energy and materials sectors fall into the "other" category.

The following CandleGlance charts show these nine sector SPDRs and their StockCharts Technical Rank (SCTR). This ranking system ranges from zero to one hundred with one hundred being the strongest and zero the weakest. Healthcare, technology and industrials are at the top of the list with strong SCTRs (above 75). They are stronger than the S&P 500 SPDR (SPY) and are leading the market. This third of the market is fine.

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The other two thirds is not. The next six CandleGlance charts show sectors with SCTRs that are lower than the SCTR for SPY, which is the benchmark SCTR. The Consumer Discretionary SPDR (XLY) has underperformed the entire month and its SCTR moved to a twelve month low this week. The Finance SPDR (XLF) was holding up well last week, but broke down this week and its SCTR moved below 50 for the first time since September 2012. Relative weakness in these two offensive sectors is negative for the market and suggests that some sort of correction is underway, which means we may see a 7-10% pulled in the S&P 500.

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Good weekend and good trading!
--Arthur Hill CMT

Flags are Flying Around and Within the Dow

The Dow Diamonds (DIA) and several key stocks within the Dow formed bullish continuation patterns over the last two weeks and traders should watch these patterns for breakouts. DIA formed a falling flag and this pattern represents a rest after a sharp advance. Such a rest or pullback is actually healthy because it alleviates short-term overbought conditions. We could use a momentum oscillator, such as the Stochastic Oscillator or the Commodity Channel Index (CCI) to quantify overbought conditions, but a simple look at the price chart shows us that prices moved quite far quite fast. DIA was clearly overbought after a 5+ percent surge in just eleven days during mid December. Also note that DIA is up around 12 percent since early October, a mere three months ago. Even though I am concerned with medium-term overbought conditions and the possibility of a deeper correction, note that a move above last week's high would break flag resistance and argue for a continuation of the December surge. Yes, DIA is overbought and could become even more overbought. Based on a flag flying at half-mast, the upside projection would be to the 171 area (163 + 8 = 171).  

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The Dow is a price-weighted average of thirty stocks, which means the stocks with the highest prices carry the most weight. With prices above 175 dollars per share, Visa (221.13), IBM (187.26) and Goldman Sachs (178.39) are the big hitters in the Dow. With prices well below 30 dollars per share, the influence of Cisco (22.22), Intel (25.53) and General Electric (26.96) is way overshadowed by the three highest price stocks. Chartists looking for an edge on the Dow should focus on the highest priced stocks. Even though the four stocks below are not the highest priced, they are priced high enough to exert some serious influence. I picked these from the Dow CandleGlance charts because all four have bullish continuation patterns taking shape. CAT is already making a breakout bid. Chartists should also watch AXP, MMM and XOM for potential breakouts in the near future.

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Best wishes for 2014!
--Arthur Hill CMT

Tech Stocks Take Charge as 2014 Approaches

Key industry group ETFs within the technology sector are leading the market. This shows a healthy appetite for risk and bodes well for the economy. The PerfChart below shows one-month performance for the S&P 500 ETF (SPY) and six tech-related ETFs. The Nasdaq 100 ETF and the Nasdaq 100 Equal-Weight ETF (QQEW) are outperforming SPY by a two to one margin. The Biotech iShares (IBB), which represents some of the riskiest stocks in the market, is outperforming the broader market by 3 to 1. The Semiconductor SPDR (XSD), which represents the cyclical semiconductor group, is also outperforming SPY by a three to one margin. Relative strength in these tech-related ETFs is positive for the market as we head into 2014.

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The next chart group shows CandleGlance charts for these tech-related ETFs. Notice that the FirstTrust Internet ETF (FDN), XSD, QQQ and QQEW hit new highs last week. IBB did not hit a new high last week, but hit a new high in late November and held broken resistance with a surge above 220. The Networking iShares (IGN) was the laggard of the group, but this ETF caught fire last week and broke above the September trend line. Basically, there is broad underlying strength in the tech sector and traders should look for bullish setups within these groups as we head into 2014.

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Happy Holidays! -- Arthur Hill CMT

The January Effect Gets Earlier and Earlier

The "January effect" refers to the propensity for stocks to outperform in January and for small-caps to outperform large-caps in January. According to this theory, stocks tend to rise more in January than most other months and small-caps tend to rise even more. Chartists looking to test these theories can put our new seasonality tool to work. As mentioned by Chip in ChartWatchers on November 23rd, the new seasonality tool gives StockCharts users the power to measure seasonal tendencies for any symbol. Chartists can even measure "relative" seasonality and compare the performance of one asset against another.

Let's look at seasonal tendencies for the stock market first and then relative tendencies for small-caps. The first chart shows monthly seasonal tendencies for the S&P 500 over the last twenty years. Notice that April and December show the highest tendency to advance (75% and 74%, respectively). Second, notice that the average gain for April is 1.7% and the average gain for December is 1.6%. This study suggests that the "January effect" has moved up a month and December is the month to watch. Also notice that the market tends to rise in April, which is right before the bearish six month cycle begins in May (sell in May and go away).

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The second chart shows relative seasonality by comparing the performance of the Russell 2000 (small-caps) to the S&P 100 (large-caps). Notice anything special? December is by far the strongest month for small-caps because the Russell 2000 outperformed the S&P 100 seventy four percent of the time in December. Moreover, December outperformance averaged a whopping +2.4%, which is also the strongest month for outperformance, by far. This study does indeed suggest that the January effect is really in December and the chances are pretty good that small-caps will outperform large-caps this month. In fact, small-caps are already starting their run because the Russell 2000 is up 2.86% the last four weeks and the S&P 100 is up 1.86%.

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Finance Sector Leads with a Fresh 52-week High

Three of the nine sector SPDRs hit new highs this week with the Finance SPDR (XLF) leading the way. The Energy SPDR (XLE) and the Healthcare SPDR (XLV) also recorded new highs. Even though XLF has been underperforming the S&P 500 since summer, this key sector is showing new signs of life since the flag breakout in early November. Note that XLF was the second best performing SPDR over the past week and over the last four weeks. XLV gets top honors as strength in pharmaceuticals, hospitals and healthcare providers lifted this sector. Admittedly though, offensive sector performance was not that great this week because the Consumer Discretionary SPDR (XLY) and Technology SPDR (XLK) actually fell and did not partake in Dow 16000. Looks like the finance, industrials and healthcare sectors are carrying the torch for the bulls.

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Turning to the XLF price chart, the ETF broke flag resistance with a big move two weeks ago (8-Nov). After a few days of backing and filling, the advance resumed as XLF moved to new highs. Broken resistance in the 21 area turns into first support. The indicator window shows the price relative, which measures the performance of XLF relative to SPY. Even though XLF has underperformed SPY since the July, it is not that weak because the ETF scored a fresh 52-week high this week. As one of three sector SPDRs to score 52-week highs, XLF is showing “chart” strength and leading the market in this regard.

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Good Trading and Good Weekend!

Arthur Hill CMT

Breadth Indicators Confirm with New Highs

When a major index records a new high, I go straight to the key breadth indicators to see if these highs were confirmed. Breadth indicators are sometimes called "internal" indicators because they measure what is happening inside a specific index or ETF. We can see what is happening on the outside by looking at the price chart of the underlying index, but we need breadth indicators to analyze the innards. The S&P 1500 hit a new high this week and today we will see if this high was confirmed with internal strength.

First, let's review the index and the breadth indicators. The S&P 1500 is a great index for breadth indicators because it combines the S&P 500, the S&P Midcap 400 and the S&P SmallCap 600. The combination of large-caps, small-caps and mid-caps makes this an ideal index for measuring broad market breadth. The AD Line is a cumulative measure of net advances (advances less declines). This indicator captures the performance of small and mid-cap stocks. An advance counts as +1 and a decline counts as -1, regardless of volume or market cap. With more small and mid caps than large-caps, this indicator clearly favors the little guys. The AD Volume Line is a cumulative measure of net advancing volume, which is the volume of advancing stocks less the volume of declining stocks. This indicator reflects the performance of large-caps because large-cap stocks typically trade much more volume than small and mid-caps.

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The chart above shows the S&P 1500 AD Line ($SUPADP)** pulling back from late October to early November and then breaking out with a surge this week. The indicator exceeded the late October high and forged a 52-week high, just like the underlying index (S&P 1500). Potential trouble starts if/when the AD Line fails to confirm and forms a bearish divergence. The chart below shows the S&P 1500 AD Volume Line ($SUPUDP) also breaking out and hitting a new high. This indicator has been trending higher the entire year with a series of higher highs and higher lows. The early November low now marks first support. With the S&P 1500 and these two breadth indicators hitting new highs, the long-term uptrend is clearly intact and clearly strong.

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Good weekend and good charting!
Arthur Hill CMT

Surge in Yields Could Signal Resumption of Bigger Uptrend

Basic Elliott wave teaches us that there are two types of price movements: impulse and corrective. Similarly, Dow Theory teaches us that there are primary price movements and secondary price movements. Impulse and primary moves are in the direction of the bigger trend. Corrective and secondary price moves run counter to that trend. The challenge for chartists is to distinguish between impulse-primary moves and corrective-secondary moves.

The chart below shows the 10-year Treasury Yield ($TNX) with a huge advance from early May to early August. This key benchmark advanced from the 1.6% area to the 3.0% area, which is almost a double. Something clearly changed in the bond market and this advance looks like an impulse or primary price move. If so, then the decline from 3% to 2.5% would be a corrective or secondary price move.

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Two technical aspects suggest that this is indeed a correction. First, notice that the decline retraced 38% of the prior advance, which is the minimum Fibonacci retracement expected for a correction. Second, the decline formed a falling wedge, which is typical for a correction. The three day surge off support suggests that this correction may be ending and the long-term uptrend is resuming. Notice how the 10-year Treasury Yield found support near the July lows and surged above 2.6% on Friday. A move above the wedge trend line would provide the second signal, while a move above the mid October high would complete a medium-term trend reversal. Also, notice that Aroon Up is above 50 and a surge to 100 would turn this indictor bullish. Chartists should watch the 10-year Treasury Yield closely because a breakout could have negative implications for the utilities sector, housing stocks, REITs and other interest rate sensitive stocks. 

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Good trading and good weekend!
Arthur Hill CMT

Financials Lead Stock Market to New Highs

Stocks went on a tear the last two weeks with all indices and sectors moving higher. In the past week, we saw fresh 52-week highs in the Russell 2000 (small-caps), Nasdaq (techs) and the S&P 500 (broader market). These new highs affirm the long-term uptrends in stocks and we have yet to see any divergences among the major stock indices. Among the sectors, the Technology SPDR, Finance SPDR, Consumer Discretionary SPDR, Energy SPDR and Healthcare SPDR recorded new highs this week. Outside of the Google-led move in technology, I was most impressed with the performance of financials over the last two weeks. The PerfChart below shows XLF with the biggest gain since the S&P 500 bottomed nine days ago.

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In addition to relative strength, XLF also sports a triangle breakout on the price chart. The chart below shows XLF gapping up from the 19.50 area and surging above triangle resistance. This breakout signals a continuation of the bigger uptrend. Notice that this surge occurred with strong volume as three of the last eight days topped 75 million shares. Using classical technical analysis, the triangle breakout targets a move to the 22.25 area. The height of the triangle is added to the breakout point for an upside target. Before getting too bullish, note that the ETF is getting short-term overbought after a ~7 percent surge. This means we could see a little backing and filling in the coming days.

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Good trading and good weekend!
Arthur Hill CMT

Relative Strength in Small-caps Supports the Current Bull Market

The Russell 2000 ($RUT) and the Nasdaq ($COMPQ) are leading the relative performance game and this is positive for the stock market. The Russell 2000 represents small-caps and the Nasdaq represents the technology sector. Together, these two represent risk appetite because their stocks have higher betas, which translates into higher volatility. The appetite for risk is strong when these two lead and weak when these two lag. Also note that small-caps are less diversified and more dependent on the domestic economy. This makes small-caps the proverbial canaries in the economic coalmine. Relative strength in small-caps is also a positive indication for the economy. 

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The first chart shows the Russell 2000 relative to the S&P 100 using the price relative ($RUT:$OEX ratio). This ratio broke out in May, trended higher for several months and hit a 52-week high this week. A new high in the price relative means small-caps are outperforming large-caps and this is bullish for the overall market. The indicator window shows the Russell 2000 ($RUT) hitting a new high earlier this week and affirming the long-term uptrend. The August lows mark key support around 1000. The second chart shows the Nasdaq relative to the NY Composite using the $COMPQ:$NYA ratio. This ratio also hit a new high this week as the Nasdaq continues to outperform the NY Composite.

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Good trading and good weekend!
Arthur Hill CMT

Metals & Mining SPDR Backs off Resistance with Sharp Decline

After bottoming in late June and advancing some 15%, the Metals & Mining SPDR (XME) hit resistance in the 39 area with a pop-and-drop this week. The chart below shows XME surging above 39 on the FOMC statement day and then giving most of it back with a decline below 38 on Thursday-Friday. Despite this pop-and-drop, the ETF remains in an uptrend since late June. The trend line and last week’s low mark first support just below 37, while the August lows mark key support just below 36. Watch these levels for breaks that could signal a reversal of the three month uptrend.

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The first indicator window shows RSI holding the 40-50 support zone during this uptrend. A break below 40 would turn RSI (momentum), bearish. Put another way, such a move would signal enough selling pressure to warrant a trend change. The bottom window shows the price relative (XME:SPY ratio) flattening out the last six weeks. Even though XME moved higher during this timeframe, it did not outperform and did not show upside leadership. A breakout here is needed to signal relative strength. Otherwise, a downturn and break below the September lows would signal a return to relative weakness.

Good trading and good weekend!
Arthur Hill CMT

Home Construction iShares Bounces, but Remains Short of Breakout

Treasury yields fell after Friday’s jobs report and interest rate sensitive stocks got a bounce as utilities, REITs and homebuilders moved higher. My focus is on the Home Construction iShares (ITB) because this group is important to the consumer discretionary sector and housing is key to the overall economy. The first chart shows ITB in a downtrend since late May. The ETF broke neckline support from a head-and-shoulders pattern and remains below broken support, which turns into resistance. Downside, however, has been limited since a big bullish engulfing pattern formed in mid August. Notice how ITB fell back and tested this low in the 20.5 area. It is still too early to call for a trend reversal, but I will be watching resistance in the 21.5-22 area. A follow through breakout here would be bullish for ITB and this would be positive for the market overall. The second chart shows the Homebuilders SPDR (XHB) in a downtrend since late May and testing the 2013 lows.

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Have a great weekend!
--Arthur Hill CMT

Russell 2000 ETF Starts Correction within Bigger Uptrend

The Russell 2000 ETF (IWM) moved sharply lower this week to start a short-term downtrend, but this is still considered just correction within a bigger uptrend. There are simply no signs of a major top at this moment. Tops often form with major reversal patterns or consolidation, a bearish divergence in the Advance-Decline Line or relative weakness in the key offensive sectors. These factors were not present when the market peaked in early August. A correction at this point is hardly surprising given the run up from mid November to early August. The Russell 2000 ETF surged some 40% from the November low to the August high, while the S&P 500 ETF (SPY) and Nasdaq 100 ETF (QQQ) advanced over 25%. These are huge moves that deserve a rest, which is what a correction implies.

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The chart above shows IWM within a rising channel the last two years. The ETF hit the upper trend line in late July, stalled for a few weeks and fell back below 102 this week. At this point, chartists can start contemplating correction targets and timeframes. Short corrections last a few weeks. The last two "long" corrections lasted 9-10 weeks. A 10 week correction would extend into mid October. For price levels, broken resistance in the 99-100 area turns first support for a short correction. Broken resistance, the June lows and the lower trend line mark key support in the 93-95 area. Note that the lower trend line does not reach this area until November. Chartists can also use RSI to set a support zone because it usually trades between 40 and 80 during an uptrend. Notice how this momentum oscillator bounced off the 40-50 zone in May and November 2012. RSI has yet to breach 50 in 2013, which is testament to the strength of the current uptrend. Chartists can mark RSI support in the 40-50 zone and look for IWM to firm if/when RSI reaches this zone.

Good weekend and good charting!
--Arthur Hill CMT

Key Breadth Indicators Confirm Underlying Strength

The major stock indices recorded 52-week highs this week and these highs were confirmed by the breadth indicators for the S&P 1500. Note that the S&P 500, S&P MidCap 400, S&P SmallCap 600, Nasdaq 100 and Dow Industrials recorded fresh 52-week highs this week. When the major indices hit 52-week highs, I always check key breadth indicators for confirmation. Failure to confirm suggests that the stock market is not hitting on all cylinders. New highs in key breadth indicators, on the other hand, reflect broad underlying strength that validates the overall uptrend. I like to use the breadth indicators for the S&P 1500 because this is a broad index that covers large-caps, mid-caps, small-caps and Nasdaq stocks. Over 500 stocks in the S&P 1500 are traded on the Nasdaq.

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The chart above shows the S&P 1500 AD Line ($SUPADP) turning up this week and moving above the 23-July high. The overall trend is clearly up and breadth is keeping pace with the underlying index (S&P 1500). The indicator window shows the 20-day SMA of Net Advances for the S&P 1500. This moving average acts as like a momentum oscillator for short-term breadth. The green lines mark short-term support levels. Prior support breaks coincided with pullbacks in the S&P 1500. The first two were real short, while the third lasted a few weeks. Chartists can watch the current support line for breaks that may lead to a pullback in the stock market. The chart below shows the S&P 1500 AD Volume Line ($SUPUDP) with similar characteristics.

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Small-caps Lead the Way and Outperform Large-caps

The Russell 2000 ($RUT) is leading the market higher with a breakout on July 8th and a series of 52-week highs the last two weeks. This key small-cap index was one of the first of the major indices to break above its May high. Even though the index is looking a little overbought after a 10+ percent move the last 18 days, the breakout is clearly holding and bullish until proven otherwise. Should we see a pullback, broken resistance in the 1000 area turns into the first support zone to watch. The late June low marks long-term support. The indicator window shows the price relative ($RUT:$OEX ratio) moving to a new high as well. This means the Russell 2000 (small-caps) is outperforming the S&P 100 (large-caps). Relative strength in small-caps is positive for the market overall because smaller companies are more sensitive to changes in the economy. In addition, smaller companies tend to be more domestically oriented and relative strength bodes well for the US economic outlook.

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Good trading and good weekend!
--Arthur Hill CMT

The Case for $1000 Gold

Gold is medium-term oversold and ripe for a bounce, but the long-term trend remains down with a target in the $1000 area. There are two big moves defined by two sets of retracement lines on this chart. The first extends from the 2001 low to the 2011 high (±250 to ±1900). A normal 50-61.80% retracement of this advance would extend to the 900-1100 area. There is also potential support in the 1000 area from broken resistance and the February 2010 low (orange shading). Thus, 1000 is the long-term target for gold at this point.

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Medium-term, gold is oversold after a plunge from 1800 to 1200. Notice that 12-month RSI is near 30 for the first time since 1999. Oversold conditions typically occur in downtrends, not uptrends. Overbought conditions are typical for uptrends (green arrows). In addition to medium-term oversold conditions, gold is in a support zone marked by the 61.80% retracement and broken resistance from the December 2009 high. The combination of oversold conditions and support could give way to a bounce back towards the 1320-1350 area. The long-term downtrend, however, is expected to takeover at some point and the subsequent resumption would open the door to $1000, which might make Grover Cleveland happy.

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Have a great weekend!
--Arthur Hill CMT

S&P 500 Remains with a Flag that Refuses to Fly

The S&P 500 got a two day bounce last week and a nice surge on Thursday, but fell back Friday as it met resistance at 1650, which is now the short-term level to beat. Overall, notice that the index formed a falling flag type correction the last four weeks. After a sharp advance from mid April to mid May, the index was overbought and ripe for a rest. The falling flag provided this rest and alleviated oversold conditions with a modest pullback. Notice how broken resistance in the 1600 area turned into support.

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The flag is still falling and has yet to be confirmed as a bullish continuation pattern. A falling flag also took shape in September-October 2012. Instead of breaking out for a continuation higher, the index broke the lower trend line and plunged in November. This decline retraced 61.80% of the prior advance before finding support and reversing. The bears have a short-term edge as long as this flag falls, which means further weakness is possible. The March-April lows and 38.2% retracement mark next support in the 1540-1550 area. An upside breakout at 1650 would take this downside target off the radar and project a move to new highs.

Good golf and good trading!
--Arthur Hill CMT

US Dollar Index Tests Breakout ahead of Big Economic Week

The US Dollar Index ($USD) is in a long-term uptrend, but the index pulled back this week to test the most recent breakout. A strong breakout should hold, while a weak breakout would fold. This is am important test for the greenback as we head into a big economic reporting week. The chart below shows the index basing from October to February and then breaking out with a strong move above 81.50 in late February. Broken resistance turned into support as the index fell back to the 81.50 area in early May. This fall back formed a falling flag/channel and the index then broke resistance with a surge above 83. With this week’s pullback, another test is in store as the index retraces 50% of the May surge.

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The index pulled back this week because the Dollar fell against the Euro and the Yen, which are the two biggest components of the index. The indicator window shows the Euro Index ($XEU) moving above 130 and the Yen Index ($XJY) moving above 99.5 for the first time since early May. The Euro Index is bouncing off support from the late April low. The Yen Index is getting an oversold bounce after a sharp decline. Next week could be pivotal for the Dollar because the employment data will influence the future of quantitative easing, which in turn will affect the Dollar. Strong employment numbers would suggest a tapering in quantitative easing and be bullish for the Dollar. Weak numbers would open the door for sustained quantitative easing and be bearish for the Dollar. The current trend favors a strong employment report. The second chart shows weekly jobless claims in a clear downtrend and the four week average below 350,000. 

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Have a great weekend!
Arthur Hill CMT

PerfCharts Show the Tectonic Shift from Defense to Offense

There were concerns a month ago when the defensive sectors were leading the market, but this changed as the offensive sectors took control over the past month. The defensive sectors include healthcare, consumer staples and utilities. The offensive sectors include technology, consumer discretionary, industrials and financials. Chartists can use PerfCharts with different date ranges to spot shifts in sector rotation. The first PerfChart shows the percentage change for the nine sector SPDRs from mid March to mid April. Chartists can set a past date range by right clicking on the date slider to select one month and then dragging the slider to the left. Notice that the three defensive sectors were up sharply during this period. In contrast, three of the four offensive sectors were down. The Consumer Discretionary SPDR (XLY) gained, but this gain was a paltry .47%, and the sector still showed relative weakness.

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The second PerfChart shows these same nine sectors from mid April to mid May. Notice that the four offensive sectors are up more than 8% and seriously outperforming the defensive sectors. Relative strength in these offensive sectors reflects a strong appetite for risk and this is healthy for the market. It is also positive to note that the Energy SPDR (XLE) and Materials SPDR (XLB) are also showing upside leadership. These two sectors are also considered "cyclical" because they perform best when the economy is expanding.

Good charting!
--Arthur Hill CMT

Consumer Discretionary and Retail Continue to Lead the Market

The Equal-weight Consumer Discretionary ETF (RCD) and the Retail SPDR (XRT) hit 52-week highs in price and relative strength this week. New highs and relative strength in these two groups is very positive for the market overall. As its name suggests, the consumer discretionary sector is the most economically sensitive sector. Retailers feature prominently in this sector and retail spending accounts for some 2/3 of GDP. If performance of these two ETFs is indicative of consumer spending, then the economy and broader market are in good shape. Neither shows absolute or relative weakness for the moment.

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The first chart shows RCD within a large rising channel over the last 18 months. The ETF is now in the upper half of this channel and the upper trend line extends into the low 70s over the next few months. Support is marked in the 59-60 area. There is also a smaller rising channel taking shape since November. The ETF is nearing the upper trend line of this channel and getting short-term overbought. The second chart shows the Retail SPDR (XRT) with similar characteristics.

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