***Position Summary***
Even though the major index ETFs edged higher the last two days, trading was more indicative of a consolidation or stalling process. We saw two up gaps in the last two days and these gaps are largely holding. However, there was no follow through and the bulls are betting tired. This does not mean the bears are going to take complete control, but it does increase the odds of a correction or extended trading range.
The sectors and industry groups remain mixed. Technology and Energy are strong, but Finance and Consumer Discretionary are weak. Software and Internet are strong, but Retail and Banks are weak. Who will win the battle? I think the Finance and Consumer Discretionary sectors are bigger and more important than Technology and Energy. Finance is the biggest sector and Consumer Discretionary is the most economically sensitive. These two are relatively weak and this outweighs relative strength in Technology.
I am currently short IWM and long SPY. This does not make much sense, but it is the way the breakouts are playing. IWM is close to a breakout, but no cigar just yet. I missed the QQQQ breakout last week and caught the SPY breakout this week. However, I am not that confident in the position and will move my stop-loss to breakeven. See the IWM, QQQQ and SPY analysis for details.
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***Technical Highlights***
~Still Edging Higher~ Stocks extended their gains with another up day and the Nasdaq 100 ETF (QQQQ) is now up five days in a row. All of the major index ETFs were on Thursday with the S&P 400 Midcap ETF (MDY) leading the way (+.94%). The chart below shows MDY still in an uptrend with a rising wedge. There is resistance around 160-162 from broken support, but the uptrend rules as long as key support at 157 holds.
NYSE and Nasdaq volume was below average and enthusiasm for this rally is less than inspiring. Six of the nine sector SPDRs were up with Materials, Energy and Finance leading the way. What's this? The Finance SPDR (XLF) was among the leaders? This could be a positive development and we should keep a close eye on Finance related stocks. In the inter-market arena, oil surged to a new high and shows no signs of weakness. Gold rebound, the U.S. Dollar edged lower and bonds bounced off support.
~USO Surges Again~ The United States Oil Fund ETF (USO) surged above $63 and West Texas Intermediate Crude ($WTIC) closed above $82.5. The long-term trend is clearly up because new highs are bullish. However, USO is getting overbought as it trades above the upper channel trendline and RSI is overbought. Notice that RSI became overbought in July and formed a negative divergence (ND) that preceded a pullback. RSI also has a negative divergence working. Look for a move below last week's low in both USO and RSI to start the pullback process. USO should be considered strong and overbought as long as it holds above 60.
~Retail and Transports~ Continued strength in oil will keep energy related ETFs strong and could also put downward pressure on transport and retail related ETFs. I noted earlier this week that the Transport iShares (IYT) was one of the weakest ETFs out there because it has yet to move above its late August or early September highs. Broken support turned into resistance around 89-90 and the ETF consolidated the last few weeks. At this point, the odds favor a continuation of the Jul-Aug decline and it would take a move above 90 to revive the bulls. The Retail HOLDRS (RTH) gapped down on Tuesday and stayed down. The ETF managed to firm over the last three days, but I find this gap bearish until proven otherwise. We need to see a move above 102 to fill the gap and revive the bulls. Further weakness below Tuesday's low would break the August trendline and this would weigh on the overall market.
~Finance and Banks~ The whole problem with the rally over the last six week as has been relative weakness in the Finance SPDR (XLF), the Consumer Discretionary SPDR (XLY), the Regional Bank HOLDRS (RKH) and the Retail HOLDRS (RTH). All four are still well below their July highs and not keeping pace. XLF and RKH retraced 62% of their prior declines and met resistance near their August highs. Both surged with the Fed cuts on 18-Sept, but gave back most of these gains over the last seven days. XLY, RTH and XRT also gave back most of their Fed-induced gains. This is the second time in two months that Finance related stocks surged on a Fed cut and then gave almost all of its back (gray ovals). Evidently Wall Street is not convinced the cuts are enough. The trends since mid August are still slightly up and a move below 147 in RKH and 33.3 in XLF would be bearish.
~LDG Revisited~ Long Drugstores (LDG) was featured on 20-Sept and the stock has since tested support around 49. The bull flag remains in place and LDG edged higher with big volume on Thursday. Something may be cooking here and I am going to lower my bullish trigger to 51.1. A move above this level would break the upper flag trendline and signal a continuation of the August surge. I would then set key support at 49.
***Nasdaq 100 ETF (QQQQ)***
QQQQ stalled for the second day running with a doji, which can foreshadow short-term reversals. A small gap down and a long black candlestick today would produce a bearish candlestick reversal pattern (evening doji star). Let's see it happen first through. Broken resistance turns into support around 50-50.75 (blue box) and QQQQ could firm in this area. I raised key support to 50 and a break below this level would argue for at least a correction that could extend to around 48-48.5. On the 60-minute chart, QQQQ gapped up twice and these gaps are largely holding. There was not much movement after the gaps and this advance is growing weary. I raised key support to 51. A move below this level would fill the two gaps and reverse the short-term uptrend. The downside target would be the wedge low around 50.
Position: No current position.
***S&P 500 ETF (SPY)***
SPY gapped up the last two days and stalled after the gap. The gaps held, but the inability to follow through after the gaps means the bulls are getting tired. Even so, the overall trend remains up and I am raising key support to 150. This level marked resistance and the double Fed cut inspired a breakout on 18-Sep. This breakout better hold. A move back below 150 would be quite negative and SPY would then form a lower high (below the July high). On the 60-minute chart, the flag breakout is holding, but the bulls did not come charging out of the gate on the breakout. Key support is set at 151.5 and a move below this level would negate the breakout. I would then turn bearish and expect a move towards the next support zone around 148-149.
Position: Long from 27-Sep at 152.56. Talk about uninspired. I am moving my stop-loss to 152.6 and will simply move aside on further weakness. A move below 151.5 would reverse the short-term uptrend and I will then go short again.
***Russell 2000 iShares (IWM)***
IWM moved back above 80 with two doji and this is hardly inspiring. The ETF broke resistance at 80 and this breakout is largely holding. The trading range over the last 6-7 days amounts to a consolidation as the bulls and bears slug it out. Medium-term support remains at 77 and a break below this level would reverse the medium-term uptrend. On the 60-minute chart, IWM gapped up on Wednesday and held this gap. However, there was not much follow through and the ETF is getting resistance at 81. The ETF has gone nowhere since the 19-Sep gap and we could get a directional move soon. A break above 81 (81.1) would be bullish and a break below 80 (79.9) would be bearish.
Position: Short from 25-Sep at 79.64. The range is tightening and this trade is at its make-or-break point. I will exit on a move to 81.1 and go long with a stop-loss at 79.9.
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.
