It was a mixed day on Wall Street. The Nasdaq and Dow were up fractionally, whilethe Russell 2000 and S&P 500 declined slightly. As a result, a number of doji andsmall candlesticks formed on Tuesday. After a sharp three day sell off, stocks becameshort-term oversold and some firming is not surprising. The S&P 500, Russell 2000 andDow Industrials remain above their June lows and these lows provide some support. TheNasdaqs broke their June lows and techs continue to lead the way lower.
The chart above shows the Nasdaq relative to the NYSE Composite. There is nooverlap in these indices. The price relative (red line) broke down in April and again inJuly. I will remain on the defensive as long as techs underperform and lead the way lower.
The sectors were mixed with six up and three down. Energy led the way lower asoil prices fell yesterday. The Materials sector also lost ground as commodity relatedstocks were weak too. Even though six sectors moved higher, these advances were relativelytame and there was no real leadership. At this point, I would have to call this anoversold bounce.
The Finance SPDR (XLF) broke rising flag support with a gap down and two longblack candlesticks last week. This is the biggest sector in the S&P 500 and this breakdown weighs heavily. The stock firmed yesterday and is finding support from the July lows.However, I would not be impressed unless the stock can fill last week’s gap andrecover the support break with a move above 32.8. Right now, the rising flag support breakand gap dominate the chart. These are bearish and point to lower prices.
In the intermarket arena, gold and oil were down sharply as talks of a diplomaticsolution started to spread. The US Dollar Index gained and bonds were up slightly.
Gold and oil were up sharply in the last few weeksand some sort of pullback can be expected. In addition, the run up over the past week waspartially fueled by tensions in the Middle East. These tensions are going to rise and fallover the next few days as both sides jockey for position. I really do not think Israelwill stop until southern Lebanon is clear of weapons and Hezbollah has been immobilized.
The U.S. Oil Fund ETF (USO) broke triangle resistance on Friday and came backthrough on Monday. There is a lot of resistance around 73-75 and USO needs to clear 75 fora solid breakout. This triangle represents a huge consolidation in a long-term uptrend.Keep in mind that USO moved from 40 to 75 in the year prior to this triangle. A breakoutat 75 would signal a continuation of this massive advance and project a move to the upper80s.
Before moving on to the position summary, let’s look at the essence ofoversold. Just what is oversold anyway? Oversold can be defined by an indicator or thedepth/speed of the decline. Actually, indicators measure the depth and speed of a decline.Common sense tells us that a 150 point Nasdaq decline in two weeks creates an oversoldcondition. In addition, the 14-day Stochastic Oscillator moved below 20 and the 20-dayCommodity Channel Index moved below –200.
For CCI, this is the third oversold reading in the last three months. Theseoversold readings serve as an alert to prepare for a bounce or consolidation. The indexformed a small rising flag after the oversold reading in May and a large rising flag afterthe oversold reading in June. Neither offered much of a play on the long side. Theserallies were more like rising consolidations or slight advances that failed. The thirdoversold reading tells me that it is too late for new short positions. Even thoughsecurities can become oversold and remain oversold, the risk of a bounce in the next fewdays is too high to justify new shorts.
***PositionSummary***
I moved into short positions for the S&P 500 and Russell 2000 on Thursday andplan to sit tight for now. Stocks are oversold and ripe for a bounce, but I want to seesome evidence of a bounce before picking a bottom or closing shorts. There is onlyevidence of a consolidation or one day of firmness. I am going to put a stop-loss justabove Thursday’s high in the S&P 500 and Russell 2000. I have no plans to takelong positions at the moment.
What could spark a rally? There are currently three wild cards that could spark arally. A truce in Lebanon would send oil lower and spark buying interest in stocks. Alower than expected Consumer Price Index on Wednesday would send rates lower and stockshigher. Comments from Bernanke on Wednesday or Thursday could bolster stocks. These threecould also go against the market and trigger more selling pressure in an already fragileenvironment. While I will keep an eye on the fundamental news flow, I will maintainfocused on price action and this will be the ultimate arbiter for trading decisions.
On the daily chart, the rising flag support break and falling price channelremain the dominant chart features. The lower trendline extends to around 1400 by the endof the month and that is the downside target. The index is oversold after a 140 pointdecline in two weeks and managed to firm yesterday. This just shows less selling pressureand I want to see some buying pressure before considering an oversold bounce. Brokensupport at 1511 turns into the first resistance level to watch for signs of a bullishrevival.
On the intraday chart, the index traded flat the last two days and the Nasdaq 100has held up better than the broader market – for two days only. I am focused on thetrendline extending down from the 3-July high in both the index and RSI. The trend isfirmly down as long as both hold. Key resistance is set at 1511 and it would take a moveabove this level to reverse the short-term downtrend.
***S&P 500***
The S&P 500 formed a doji yesterday and there is no change on the dailychart. This doji signals one day of indecision, but does not change chart. The S&P 500broke rising flag support and moved back below its 200-day moving average last week. Thisbreak looks pretty solid and I expect a move below the June low. The lower channeltrendline extends to around 1180 by the end of the month and this is the target (redcircle).
On the intraday chart, the S&P 500 became short-term oversold and thenconsolidated around 1235 over the last two days. A break above 1240 would be positive andargue for a rally back towards broken support at 1260. I do not think such a move would beplayable and would expect a reaction high to form below 1260. I am also watching thedowntrend in RSI. As long as the red trendline holds and RSI remains below 50, I remaincomfortably bearish.
There is no change on the daily chart. The Russell 2000 broke rising flag supportand the lower trendline extends to around 635 by the end of the month. This is the initialdownside target.
On the intradaychart, the index triggered a bear signal with the support break at 703 and remains in bearmode. RUT consolidated around 680 over the last two days and a move above 685 would bemildly positive. This would argue for an advance back towards broken support
***Breadth***
AD Volume Net% finished at zero yesterday as bulls and bears ended the day in astalemate. July has been nothing but selling pressure and the McClellan Volume Oscillatorremains in negative territory However, the McClellan Volume Oscillator is not as oversoldas in May and June. This means it could go further.
What’s this?Monday saw a little buying pressure in the Nasdaq 100 as AD Volume Net% finished at itshighest level of the month. Some money is inching back into techs, but it is too early toturn bullish on breadth.
Good day and good trading
-Arthur Hill
Disclaimer: Arthur Hill is nota registered investment advisor. The analysis presented is not a solicitation to buy,avoid, sell or sell short any security. Anyone using this analysis does so at his or herown risk. Arthur Hill and TD Trader assume no liability for the use of this analysis.There is no guarantee that the facts are accurate or that the analysis presented will becorrect. Past performance does not guarantee future performance. Arthur Hill may havepositions in the securities analyzed and these may have been taken before or after theanalysis was present.
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About: The Daily Swing is posted everytrading day around 6AM ET and focuses on short-term trends and price patterns. These canbe as short as a few days or as long as a few weeks.
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Sources: Data fromBloomberg.com, CBOT.com, Kitco.com and ino.com; Charting from Metastock (equis.com).Closing data from Reuters.com, eSignal.com, MS QuoteCenter and Yahoo! Finance.
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