- Mind the Gap in XLK.
- Offensive Sectors Lead the Correction.
- Bonds Continue to Rise.
- Banks, Utes and the 10-year Yield.
- Yuan Breaks Support.
... Mind the Gap in XLK
... The Technology SPDR (XLK) hit a new high and then gapped down for the third time this year. The red annotations show gaps after new highs on February 2nd, March 19th and June 25th. XLK also gapped down on May 15th, but this was not after a new high and there was no downside follow through.
As the chart below shows, XLK fell over 10% after the first two gaps. Also keep in mind that the ETF moved to a new high after each of these sharp declines. A similar decline from the current high would carry the ETF back to the 64 area, which is just above the April low.
The uptrend in 2017 was quite tame because RSI(10) did not dip below 30 once the entire year. This shows just how shallow the pull backs were last year. In contrast, RSI(10) dipped below 30 four times this year with the fourth occurring yesterday. The big trend in 2018 is still up with higher highs and higher lows, but the swings are much bigger and 10% pullbacks have been the norm so far.
Programming Note - Vacation
It is family vacation time and I will be off the first two weeks of July. We are going to the land of fire and ice for a tour along route 1 in Iceland. I will publish the Weekly Market Review & Outlook on Friday. The next commentary will then be on Monday, July 16th. Happy 4th of July!
Offensive Sectors Lead the Correction
Sector performance over the last two weeks shows a clear preference for defense over offense. Notice that XLK, XLV and XLI are down 4.5% to 6.3% and leading the way lower. XLF closed at its lowest closing level since late November and XLI is down over 6% in just 11 days. XLK held up until recently and selling pressure in these three "offensive" sectors is negative for the broader market.
The Utilities SPDR (XLU) is the runaway leader over the last two weeks with a 6.54% gain. The Consumer Staples SPDR (XLP) and Real Estate SPDR (XLRE) are also up, but not as much as XLU. Strength in these names shows a preference for defense in the stock market.
Bonds Continue to Rise
Speaking of risk-off, the 20+ YR T-Bond ETF (TLT) and the 7-10 YR T-Bond ETF (IEF) extended their short-term uptrends with big advances on Wednesday. The long-term trends remain down, but both are poised to challenge long-term resistance.
The first chart shows unadjusted TLT (_TLT) in the top window and unadjusted IEF in the lower window (_IEF). Chartists can precede a symbol with an underscore to see data that is not adjusted for dividends or payouts. Both bond ETFs surged in late May, corrected and then reversed near the 61.8% retracements. These breakouts are short-term bullish, but still within a bigger downtrend.
The spring highs mark resistance for both ETFs. Also notice that the falling 200-day SMA is coming into play for TLT. Upside breakouts in both would be bullish for Treasury bonds. Further strength in bonds would suggest a weakening in the economy, increasing inflationary pressure or both.
The next charts show the 10-yr T-Yield ($TNX) and 30-yr T-Yield ($TYX) turning lower over the last two weeks. The spring lows mark support and $TYX is already testing this support zone. A break below the spring lows would be bearish for yields and this could have consequences for banks and utilities.
Banks, Utes and the 10-year Yield
The next chart shows the 10-yr T-Yield ($UST10Y) in the top window and the Correlation Coefficient with six other symbols. Positive correlation means the symbol tends to move in the same direction as the 10-yr yield, while negative correlation means the symbol tends to move in the opposite direction as the 10-yr yield.
Three symbols are positively correlated: the Financials SPDR (XLF) and the Regional Bank SPDR (KRE). Thus, a falling 10-yr yield is a negative for the finance sector and banks. Further weakness in the 10-yr would likely weigh further.
Four symbols are negatively correlated: the Utilities SPDR (XLU), REIT iShares (IYR), Consumer Staples SPDR (XLP) and Gold SPDR (GLD). The 10-yr yield is falling and this is a positive for these groups. Further weakness in the 10-yr Yield would be a positive influence here.
Yuan Breaks Support
I do not have any special insight into China’s strategy on a tariff battle with Washington DC, but I can read a chart and identify a downtrend. The chart below shows the Chinese Yuan Fund (CYB) falling sharply the last two weeks. In fact, this is the sharpest ten day decline since August 2015, which is when China's central bank devalued the currency. CYB broke below the February-April lows and below the 40-week EMA. It looks like a trend reversal for the Yuan.
The bottom window shows the US Dollar ETF (UUP). While it is easy to come up with theories on the decline in the Yuan, don't forget that the Dollar has been exceptionally strong since February. Thus, Dollar strength is also pushing the Yuan lower. Notice how CYB rose as the Dollar fell from January 2017 to January 2018.
Questions, Comments or Feedback?
I cannot promise to response to all correspondence, but I will read it and take into under consideration. I greatly appreciate all feedback because it helps me improve the commentary and provides ideas for the future. Sorry, I do not take symbol requests.
Plan Your Trade and Trade Your Plan.
- Arthur Hill, CMT
Senior Technical Analyst, StockCharts.com
Book: Define the Trend and Trade the Trend
Twitter: Follow @ArthurHill
