Art's Charts

XLK Underperforms as QQQ Forms Bear Flag

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It was a fairly good week for the bulls. The S&P 500 ETF (SPY) and Dow Industrials SPDR (DIA) gained around 1.5%. The Finance SPDR (XLF) led the way with a 3% gain. The Consumer Discretionary SPDR (XLY) and the Industrials SPDR (XLI) also performed well with ±1.75% gains. The Technology SPDR (XLK) was the big laggard with a measly .21% gain on the week. The PerfChart below shows the nine sectors relative to the S&P 500 over the past week. Notice that XLK (green)and XLE (black) significantly underperformed. Meanwhile, XLF (scarlet) and XLV (purple) seriously outperformed. Judging relative performance, the bulls should avoid techs and energy, while the bears should avoid finance and healthcare. 

121008perf


121008qqq

Even though stocks edged higher last week, I was not so impressed with price action, especially at the end of the week (Friday). SPY opened strong and closed unchanged on Friday as selling pressure took hold in the afternoon. QQQ closed down a 1/2% and formed a bearish engulfing. Note that Apple and QQQ are showing relative weakness the last five weeks. QQQ has a rising flag working the last eight days and a break below flag support would target a decline to the 65 area (ouch!).

121008aa

Third quarter earnings season kicks off on Tuesday with Alcoa reporting. The reporting calendar is fairly light the next two weeks and kicks into high gear from the 22nd onwards. Over the last two months, we have seen more negative guidance than positive guidance. FedEx, Intel, Caterpillar, Norfolk Southern and Nike are just a few of the companies to disappoint recently. The early trend is not positive for third quarter earnings. Is this negative news already baked into the cake? I don't think so because the S&P 500 is currently trading above its spring highs and near a 52-week high. The S&P 500, it seems, is priced for more quantitative easing, but not for a negative round of earnings.

121008spyi

On the 60-minute chart, SPY broke resistance in the 145.5 area and this area turns into a support zone. A strong breakout should hold and a move below this support zone would provide the first sign of weakness. I am, therefore, setting first support at 145. Note that a move below this level would also fill Wednesday's gap. I am setting key support at 143.50. A move below this level would break the two week trend line and last week's low. RSI support is set at 40.  

121008iwmi

121008iwmi

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The breakdown in the 20+ Year T-Bond ETF (TLT) is bullish for stocks, as is the upturn in the 10-year Treasury Yield ($TNX). TLT broke support at 123 and then fell sharply after the employment numbers on Friday. Despite this breakdown, the ETF is at a potential support zone. Notice that the decline retraced 50-61.80% of the prior advance and broken resistance (trend line) turns into potential support.

121008tlti

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The US Dollar Fund (UUP) broke down last week and this is also positive for stocks. This breakdown has to hold and the resistance lines are clear. UUP has resistance from the late September highs and RSI has resistance at 60. Breakouts in both would be bullish. Until then, the trend is down for the greenback and up for the Euro.

121008uupi

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Oil is all over the place, but the general trend is clearly down since mid September. USO broke support and broken support held. A falling wedge may be taking shape, but the trend is down as long as the wedge falls. I am leaving resistance at 34.75 and a break above this level is needed for a definitive trend change. RSI remains in bear mode with resistance at 60.

121008usoi

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There is not much change in gold, which remains negatively correlated to the Dollar and positively correlated to stocks. The Gold SPDR (GLD) edged above 172 in mid September and closed just above 172 on Friday. GLD has not moved much in the last three weeks. The trend is up and this is still viewed as a consolidation within an uptrend. First support is set at 171, but I will focus my attention on key support at 167. 

121008gldi

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Key Reports and Events:   
                                                           
Mon - Oct 08 - 09:00 – EU Finance Ministers Meet    
Tue - Oct 09 - 09:00 - EU Finance Ministers Meet    
Wed - Oct 10 - 07:00 - MBA Mortgage Index    
Wed - Oct 10 - 14:00 - Fed's Beige Book                
Thu - Oct 11 - 08:30 - Jobless Claims            
Thu - Oct 11 - 11:00 – Oil Inventories    
Fri - Oct 12 - 08:30 – Producer Price Index (PPI)        
Fri - Oct 12 - 09:55 - Michigan Sentiment
Thu – Oct 18 – 09:00 – EU Summit
Fri – Oct 19 – 09:00 – EU Summit

Charts of Interest: Tuesday and Thursday

This commentary and charts-of-interest are designed to stimulate thinking. This analysis is not a recommendation to buy, sell, hold or sell short any security (stock ETF or otherwise). We all need to think for ourselves when it comes to trading our own accounts. First, it is the only way to really learn. Second, we are the only ones responsible for our decisions. Think of these charts as food for further analysis. Before making a trade, it is important to have a plan. Plan the trade and trade the plan. Among other things, this includes setting a trigger level, a target area and a stop-loss level. It is also important to plan for three possible price movements: advance, decline or sideways. Have a plan for all three scenarios BEFORE making the trade. Consider possible holding times. And finally, look at overall market conditions and sector/industry performance.
Arthur Hill
About the author: , CMT, is the Chief Technical Strategist at TrendInvestorPro.com. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London. Learn More
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