***Position Summary***
Finance related stocks got a boost on Thursday and this propelled the S&P 500 (SPY) higher. A surge in GM and MCD lifted the Dow, but the Russell 2000 (IWM) remained near support and relatively weak. Large-caps are looking relatively strong, but relative weakness in small-caps continues to overhang the market.
I remain short IWM, but will be watching this position closely in the next few days. Frankly, IWM and the Russell 2000 hold the key to the market overall. A break above the August highs would be bullish for all, while failure and a break below the September lows would be bearish for all. The rally in large-caps (the generals) is likely to fail without support from small-caps (the troops).
There are some important economic releases, earnings reports and meetings in the next few days and these will keep the market on edge as well as increase volatility. We have industrial production and retail sales on Friday, which are both important for the economy. Four key brokers report earnings next week and the extent of sub-prime problems will become more apparent (or perhaps even less apparent!). There is also the Fed meeting on Tuesday as well as the Producer Price Index (PPI) on Tuesday and Consumer Price Index (CPI) on Wednesday.
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***Technical Highlights***
~Low Volume Advance~ Stocks moved higher yesterday with low volume on the Nasdaq and NYSE . Volume will likely return to the market next week with a barrage of reports scheduled to hit. Large-caps led the way higher with the Dow Industrials (DIA), S&P 100 (OEF) and S&P 500 (SPY) outperforming. Small-caps and techs were relatively weak with small gains in the Nasdaq 100 (QQQQ) and Russell 2000 (IWM). Relative weakness from small-caps has been the norm, but relative weakness from Technology was something new.
As the two charts below show, volume has been below average for 18 days and this may be a record. Except for the surge on 17-August, the entire rally is build on low volume. This shows uncertainty and could be part of a wall-of-worry. The trend since mid August remains up for the Nasdaq and NY Composite as rising flags take shape. The early September lows mark key support and a break below these levels would be bearish.
~Finance Bounces~ Next week is big for the Finance sector. In addition to the Fed meeting on Tuesday, Bear Stearns (BSC), Lehman Brothers (LEH), Goldman Sachs (GS) and Morgan Stanley (MS) report third-quarter earnings next week. There is plenty of money on the sidelines and I am sure there are plenty of nervous shorts out there. Some positive news could trigger a sharp rally in the Finance sector and related industry groups. As the biggest sector in the S&P 500 (SPY), Russell 2000 (IWM) and NY Composite, a rally in the Finance sector would boost the broader market and this is the current risk to short positions. The charts below show the Finance SPDR (XLF) and three key industry group ETFs within the Finance sector: the Broker Dealer iShares (IAI), the Regional Banks (RKH) and the REIT iShares (IYR). XLF and RKH gapped up and broke their flag trendlines. While XLF and RKH formed falling flag, IAI held up better with a flat flag and the ETF bounced off support yesterday. IYR also held above its late August low (70) and formed an inverse head-and-shoulders over the last seven weeks. All four need to break above their early September highs to reverse the current downtrends. Buying ahead of the breakout and ahead of the reports next week improves the risk-reward ratio. One possible play might be a hedge or an options straddle that could make money on a big move either way.
~XLV and XLP breakout~ The Healthcare SPDR (XLV) and the Consumer Staples SPDR (XLP) both broke above resistance yesterday. This is important because it shows relative strength in these two groups, which are normally viewed as defensive in uncertain times. XLV could have a rising flag working over the last four weeks, but the bulls get the benefit of the doubt as long as the flag rises and key support at 34 holds. XLP broke above consolidation resistance yesterday and this shows relative strength. The breakout reinforces support at 26.6 and the bulls have the edge as long as this level holds. Procter & Gamble (PG), Coke (KO) and Kellogg (K) led XLP while Johnson & Johnson (JNJ) led XLV.
~MMM Breaks Trendline~ I am going to keep today’s stock setup simple too. 3M is a big industrial company that is part of the Dow and S&P 500. The stock has been swinging up and down the last three months and I think a downswing is beginning. MMM gapped up on 31-Aug and filled this gap with two long black candlesticks. This decline broke the August trendline and the stock bounced off support from the late August low. The stock rebounded over the last three days, but volume was low and price action tentative. The advance looks like a rising flag or wedge on the 60 minute chart with support at 88.5. I am going to add MMM to the stock setups as a short position on a break below 88.5 (88.4) with a stop-loss at 91.7.
***Nasdaq 100 ETF (QQQQ)***
Let’s keep it simple with trendlines, support and resistance. QQQQ broke the July trendline and resistance to reverse the Jul-Aug downtrend. The ETF remains above the august trendline and key support at 47.8. The bulls get the benefit of the doubt as long as these hold. The 60 minute chart is a little more complicated. The ETF broke the 4-Sept trendline and resistance at 48.8 to reverse the downtrend on 11-Sept and moved above 49. QQQQ met resistance at 49.4 and consolidated the last two days. The four day trend is technically up with key support at 48.8. I am treating this as a corrective advance and a move below 48.8 would signal a continuation of the early September decline. The two day consolidation looks like a flat flag and a break above 49.4 would signal a continuation higher. This would be bullish and project further strength towards the July highs (50.5).
Position: No current position.
***S&P 500 ETF (SPY)***
SPY is up over 10 points from its August low and the trend over the last four weeks is up. However, there is considerable resistance around 150 from broken support, the August high and the early September high. The surge off the August lows is truly impressive and the ETF is now consolidating between 143.5 and 150. These levels hold the key to the next signal on the daily chart. On the 60 minute chart, SPY gapped up and held the gap. The trend over the last four days is up and I am marking key support at 147.3. A move below this level would fill the gap, break the trendline and forge a lower low.
Position: No current position.
***Russell 2000 iShares (IWM)***
IWM remains the weakest of the big three. The ETF gapped down last Friday and remains down. I do not think a broad market advance can begin without a break above 80 in IWM. The ETF broke down in July and has yet to reverse the downtrend with a resistance break. In contrast, QQQQ and SPY broke above their August highs and have been trending higher the last four weeks. On the 60 minute chart, IWM broke above the 10-Sept high and the short-term trend is up. However, this advance looks like a corrective move or a retracement of the prior decline. I am marking key support at 77.1 and a break below this level would reverse the four day advance. This would signal a continuation of the early September decline and target further weakness towards the low 70s.
Position: Short from 6-Sept at 79.07. I will keep my stop-loss near breakeven (79.15).
Good day and good trading -Arthur Hill
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Disclaimer: Arthur Hill is not a 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 her own 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 be correct. Past performance does not guarantee future performance. Arthur Hill may have positions in the securities analyzed and these may have been taken before or after the analysis was present.
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about: The Daily Swing is posted every trading day around 6AM ET and focuses on short-term strategies for QQQQ, SPY and IWM. In addition, at two stock setups are featured every day with a detailed trading strategy. As warranted, coverage extends to broad market topics, key sectors and industry groups and inter-market securities (gold, bonds, the Dollar and oil).
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Sources: Data from Bloomberg.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.
