On the daily chart of EWZ below, notice how the 20-day EMA acted as
support on its pullback at the end of last month:
Also bucking the trend of the broad-based weakness lately has been the
natural resources/metals and mining sector. Sporting a similar daily chart
pattern to EWZ and RSX, the S&P Metals and Mining SPDR (XME) rallied sharply
after touching support of its 20-day EMA yesterday. With global demand keeping
this sector strong, expect XME to continue showing relative strength to the U.S.
markets, even if the major indices head south again. It goes without saying that
energy ETFs have also been incredibly strong, regardless of broad market
conditions. The daily chart of XME is below:
Unfortunately for the domestic markets, banking stocks showed major relative
weakness to the S&P, Dow, and Nasdaq yesterday. The Bank Index ($BKX)
tumbled 1.7% yesterday and is now in danger of breaking down to a new multi-year
low, below a key area of price support that has been in place throughout this
year. The daily performance of the $BKX index is important to monitor, as the
index is heavily weighted within the S&P 500. If the $BKX breaks down to a
new multi-year low, it will undoubtedly weigh heavily on the main stock market
indexes. the The precarious position of the $BKX Index is shown on the weekly
chart below:
The charts of the S&P, Dow, and Nasdaq continue to look as though they
could resume last week's weakness at a moment's notice. As we illustrated
yesterday, the Nasdaq is still forming the right shoulder of a bearish "head and
shoulders" pattern. The Dow Jones Industrial Average is forming a "bear flag"
pattern below its 50-day moving average. The S&P 500 is also forming
a "bear flag" pattern, and a move below yesterday's low will cause the index to
crack support of its 50-day MA as well. "Lower lows" within the new descending
trend channels have already been set by both the S&P and Dow. In the Nasdaq,
a break of the May 23 low of 2,430 (the neckline of its head and shoulders) will
cause that index to set a "lower low" as well. We're presently net long the
stock market, riding momentum of the short-term bounce while it lasts, but our
fingers are on the sell triggers, ready to reverse course at a moment's notice.
A break below yesterday's lows in the S&P and/or Dow would provide ideal
levels to re-enter short positions in the corresponding broad-based ETFs, such
as the UltraShort Dow 30 ProShares (DXD) that we sold for a nice profit several
days ago.
Open ETF positions:
Long - SMH,
RSX, GLD
Short - (none)