Charting the Market

The financial sector has been challenged from every direction and continues to lag the broader markets. Taking a look at the chart below of XLF, SPDRs Select Financial ETF the sector is poised to break through resistance at the $15 level. Based on the technical data the breakout would be a positive from the three month consolidation range. The question mark is can the technical data overcome the fundamental weakness in the sector?

Taking a closer look at the chart we see volume has been declining during the rise off the July low. We could dismiss this and say that is true of the broader market as well. However, that is the challenge with the broader market rally also. The series of higher lows and higher highs is at a key pivot point to maintain the short term uptrend. This bares watching and giving room before committing capital to the sector.

Fundamentally the issues run deeper and the challenges facing the sector are bigger to overcome. Earnings reports were positive for the second quarter, but the fundamental structure of expenses to revenue are rising and this creates a problem. Cost cutting will be the primary way the sector deals with profit. The ability to increase revenue is shinking due to less lending in the capital markets. Credit card, mortgages and private capital financing have all reduced considerably over the last six months. It was just reported by the mortgage lenders, nine consecutive months of contracting mortgage business. The housing problem is still far from over. All of this adds up to challenges relative to revenue for the major institutions. Throw in financial regulatory reform and you have additional problems thrown on top of the already revenue burdened sector.

Where does this leave us relative to the owning the sector? From an investment stand point, I would avoid the broad sector and focus on specific stocks which are bucking the trend or have a unique niche in the market place. From a trading perspective, a momentum breakout technically would be worth trading based on a defined strategy, but no more than a trade.

We will have to be patient about building any longer term positions in the sector and look for the balance sheets to improve fundamentally over time.

Can the Dow give us an indication on market direction? The index has moved back to a resistance level worth watching short term. 10,365 is the level to watch in conjunction with the 200 day moving average. As the chart below shows the pink line is the June high, the blue line is the 200 day, and the green trendline is in play as well.

There is plenty happeing is such a small range if the index can break up and above this congestion the upside towards the 10,900 mark could be clear sailing. It doesn’t sound like much, but it would be positive for the broad markets overall and invite buyers back to the table.

Volume at the bottom of the chart remains weak, but could move above the average line if the breakout takes place. Watch as an indicator of strength on the move. The reversal would take out the short term downtrend line started in April. The reversal would have to find some solid strength to the upside to challenge the April high. The January high at 10,723 would by my expectations on the break through this resistance/congestion. DIA, DIAMONDS Trust Series ETF is a simple way to invest in the Dow Jones Industrial Average.

As with any opportunity to put your money at risk measure twice before you play. Risk management is money management!

The uptrend for gold has been the one constant over the last couple of years. In June the metal hit a new high at $1266 and has fallen more than $80 since. Is this another pullback in a series of higher lows or has a serious correction set in? I for one will be the first to state I don’t have crystal ball to predict the future, but I do watch trends and pay attention to the potential breaks and resulting consequences.

Taking a look at the chart of GLD, SPDR Gold Trust, we can see the short term trend off the March low was broken (green trendline) on July 1st, the day gold dropped more than $40. That bar resulted in a bear flag pattern over the next eight trading days (pink lines) and broke lower from the pattern on Friday. Monday the price continued lower confirming the short term break lower. The longer term trendline is now in play as support near the $114.50 mark. $113.50 is support from the April high and the next support level, then the 200 day moving average. Technically there is plenty of support short term for gold. The pattern break, height of the pole on the bear flag, would suggest a downside target of $113.50 approximately, short term. (green arrow/light pink bar)

The longer term trend for gold is still intact to the upside. Based on what we are currently looking at both technically and fundamentally the longer term trend looks safe at this point. A bounce off support would provide the opportunity to add a position in gold on the pullback with a successful test. Be patient in pursuing a position in gold as the metal works through the emotions of investors and traders determining to hold or sell.

GDX, Gold Miners ETF does not share the same outlook. The chart below shows the double top formation and the break lower to support at the $48.50 level. Monday the cart broke support at this level and fell below the 200 day moving average. In addition the break of the trendline was big negative to the sector. The outlook for the miners is not as optimistic as the metal itself at this point in time. The next levels of support are plain on the chart, but you have to question the rebound in the mining stocks near term. Be patient and let them determine support, test and hold prior to making any commitment of capital.

Near term the buyers have left and the sellers are in control of gold and gold miners. Gold from the technical perspective offers the better opportunity once support is attained and a reversal is established. As with any investment have a disciplined strategy for putting your money at risk. Define your entry, target and stop prior to investing!

Bank of America and Citigroup announced earnings last week and the reception was anything but favorable. Both earned a net income of nearly $3 billion, better than expectations, but the bottom line numbers weren’t what mattered. The focus was on the decline in revenue year over year. The better than expected write down in consumer loans didn’t matter either, it was the potential decline of revenue from the new financial regulatory bill. The end result was a 9% decline for Bank of Americaand a 6.2% decline for Citigroup. The Dow Jones US Bank index fell 5.7% as a result. What does this mean for the sector?

The financial sector was hoped to be a surprise during this earnings season. Analyst had made upgrades in anticipation of better than expected numbers. The bottom line numbers from those reporting were better, but the reaction, as you can see, wasn’t very friendly. Taking a look at the chart of the financial index below we see challenges facing the sector.

The rally back to the top of the current trading range last week was in anticipation of good news from earnings. The 200 day moving average has proven to be significant resistance for the sector since May. The reversal at this level in conjunction with the earnings announcements has pushed the index to support at 253. One big question mark for the sector is banks. The money center or big banks were deemed to be the strength of the sector looking forward. The regional banks are the concern, but based on the reaction by investors, the entire sector may be in trouble.

The chart below is KBE, SPDRs KBW Bank ETF. The break above the downtrend line last week was a positive short term sign, but the damage done of Friday has the focus back on the selling. The next level of support is at $22 and then $20.70. Watch these levels on the downside for insight into the sector, but more importantly, the broad market. Banks account for nearly 16% of the S&P 500 index and remain a barometer of direction. With the excessive selling on Friday watch for a bounce off support. One man’s trash is another man’s treasure.

KRE, SPDRs KBW Regional Bank ETF chart looks similar to the big banks. KRE is sitting on support at $23.30 and key support at $22.30 is just below. This sub-sector is more susceptible to the downside near term.  I would avoid the sector and watch for future opportunities.

There have been comments made relative to another banking collapse and a test of the March 2009 lows. While I have been taught to never say never, the potential of that happening near term is not likely, but the test of key support level for XLF, KRE and KBE are all near by and worthy of watching.

The financial sector has been moving sideways and lagging the broad markets since August of last year. The break above resistance in March lasted six weeks before retreating back to the previous trading range. The hope leading up to the beginning of earnings was a breakout quarter for the sector. We have witnessed earnings from JP Morgan, Bank of America and Citigroup the last two days and the results were better than expected relative to earnings. Revenue was in line or slightly below expectations. Write offs from loans declined better than expected. But, the stocks have actually declined in value? Where is the problem?

The comparison to year ago numbers. Revenue and earnings declined for the quarter in comparison. Since I am not a pure fundamentalist relative to analyzing stocks, give me a break, is my response. Yes, this is a tough market relative to earnings and increased pressure being placed on banks, but the numbers were solid and the outlook is good. No, it isn’t great and we are likely to see expenses rise relative to the regulatory bill, but the fact all three institutions are dealing with consumer loan issues faster than expected is a positive. My view is watch the sector as we move forward, the current negative views could change.

The following are charts of the three companies reporting. I added KBE, SPDRs Bank ETF to look at the index of bank stocks as well. The view is technical and balances the negative fundamental outlook with some potential opportunities. Put them on your watch list to see if they pan out.

JP Morgan shows an attempted breakout, but the selling today could change that. Watch and see what develops near term.

Bank of America is still attempting to break higher – watch to see if it can overcome the negative reaction to earnings short term.

Citigroup broke above resistance and is testing support of the break out point. Watch to see it the rally can sustain itself after a pullback?

KBE is the banking ETF and shows a break higher from consolidation, but is in the process of a reversal or test on the reaction to earnings. Watch and play accordingly.

The market made a nice bounce off the lows and recover from some aggressive selling, the question is can it find the necessary catalyst to push through these levels towards the next plateau? Alcoa did its part by beating earnings estimates and raising forward guidance on global demand for aluminum. Those are the words investors are looking for – raising forward guidance. It would have been better if they raised their revenue and earnings outlook, but you take what you get at this point.

Our outlook is for the first round of earnings to help the markets continue the bounce. This should provide the catalyst to push the indices through their respective resistance points. How high and how long? All the way to the next resistance point on each and then the challenge will begin relative to sustainability. Unfortunately our outlook is for another test of the lows off the current bounce. Yes, this is likely just a bounce and the downside is still in play. Respect the trendline off the April high. The following charts show the points we are referring to for the bounce move to continue.

NASDAQ standing at the gap. The attempt to fill the gap is in progress. This also presents some resistance for the index at the topside of the gap near 2205. A break above this level opens the way to the 2325 mark or the previous high. The key for the index will be the technology sector along with semiconductors. Watch Apple, Google, SanDisk and Novellus to provide the needed leadership short term.

S&P 600 approaching the January summit. The index has pushed to the January high and the 200 day moving average. This is offering some resistance as seen on the chart. Monday’s test to the upside reversed and closed back near the previous uptrend line. The volatiltiy in the small cap sector is worthy of note as well. A move through this resistance level puts the 360 mark as the target for the continuation move higher short term.

S&P 500 is staring at resistance from the 1080 mark. We updated this chart last week relative to the chatter on the head and shoulder pattern break lower. As you can see the break lower was a false move and the index has rallied back to resistance. A catalyst is needed to push back near the 1115 resistance and the 200 day moving average. Earnings are the obvious catalyst. Alcoa, as stated, started the news on a positive note and now we look to see how it plays the balance of this week. Large cap stocks are the key to the bounce continuing.

Pushing the outlook further than this week, watch for the indices to hit against the next level of resistance after a positive response to the early earnings announcements. We would then expect a test of the previous lows or a reversal off resistance. The wild card of course is earnings, if they are stronger than expected with a positive outlook towards the third quarter the rally could stick. Take what the market gives and protect against the downside risk. The trendline is still down and would need to take out the 1120 mark to shift the trend. There are plenty of emotions at work, be patient and honor your stops.

The market has taken steps to continue the downside leg started off the April high. The break of the 1040 support last week gives the 950 support level an opportunity. The chart below shows the current downtrend in play and technically what is happenings short term. As you are aware, technical analysis is a strategy like any other, it forecasts a specific outcome based on statistical probability. It is not a definitive indicator and the risk of any investment based on this process should be taken into account. In other words, defined entry, stop and target on any investment is a priority in the planning process.

The chart shows the initial leg lower to 1110 in May on the electronic crash. The bounce didn’t hold and the next move lower was to support near 1060 resulting in a double bottom test of support near the 1040 level. The bounce back near 1120 failed and the current leg lower off the bounce is in play. Thus, the downtrend has been defined by lower highs and lower lows.

The downtrend off the April 23rd high is the primary trend to watch at this point. A bounce or relief rally could potentially move back towards the trend line as a test short term. What would be the catalyst? Earnings, if they are better than expected, we start reports next week and it could provide some short term relief to the selling. Watch the 1020 and 1000 levels for some short term support.

There is a head & shoulder pattern in play as well. The three white boxes show the left and right shoulder with the head as the peak in April. The shorter green horizontal line between 1040 and 870 is the height of the pattern and thus the target move for the break below 1040. The 870 level corresponds to one of the key support levels for the S&P 500 index as the low from last July. This pattern should be watched closely over the coming weeks. One thing is certain in technical analysis, the more people who recognize a pattern, the more likely is becomes a self-fulfilling prophecy.

Adding strength to the downside potential is the cross of the 50 day moving average (green) below the 200 day moving average (blue). This is known as the death cross in technical analysis and a clear indicator or confirmation of the downtrend in play.

Bottom line, there is plenty going on technically on this chart. They all add up to a negative trend in play, the second leg of the trend is in place with the move below 1040 and a target on the downside is 870. Thus, my conclusion would be to have a strategy in place to capture this downside opportunity as it plays out in the coming weeks or months.

Define the risk of any play and plan your entry, stop and target before you put money at risk in the market.

The market is pushing lower again after a modest bounce off the 1040 support level of the S&P 500 index. We have all read plenty concerning why this is happening with the economy, Europe, currency, commodities, the Gulf disaster, etc. The report and rationals are endless, but the process of manage our money is the primary focus. Therefore, I want to look at three sector of the market to watch for some insight relative buying into the selling or avoiding being invested short term.

The first area is Treasury bonds. I know, what do bonds have to do with stocks and the market? Plenty! When fear rises relative to risk money moves towards Treasury bonds for safety. The two charts below show, first IEF, iShares 7-10 year Treasury Bond ETF. As you can see the price of the bonds have risen significantly over the last eight weeks. Why, the second chart, which is the yield on the these bonds have fallen to 3.07% from 4% during the same period. Fear is rising and money is moving. Watch, a break of 3.05% support would be a big negative looking forward.

The second area is technology. The leadership from this sector over the last year plus has been important. If we break support and the trend shift is lower, you have to take note of the downside risk for the broad market to follow suit and move lower. The question on the investors mind is, how much lower? The answer to that will come in the result of the economic growth looking forward. For clues keep your eye on the technology sector near term.

The third area is the consumer. For obvious reasons the consumer plays a vital role in the equity markets. If the consumer stops spending the markets will fall. We saw that clearly in 2008. Watch the consumer discretionary ETF, XLY for clues relative to this sector. It is important to note the drop in consumer related activities over the last four weeks. The sales report for May was ugly, home sales this week showed continued weakness and same store sales data has been weaker. Walgreens and Bed Bath & Beyond reported weakness in recent earnings data as well. This is the type of data that has the investor concerned short term.

The outcome will show in these areas moving forward. Watch for them to bottom and reverse back to the previous uptrends or continue lower breaking key support and testing the next levels of support. Planning is the best tool for managing money short term or long.

Despite the negative market sentiment and lack of broad based leadership there are still stocks pushing to new highs. It is one thing to find strong stocks in a uptrending market, but finding them in a downtrending market validates their strength. Watching these three stocks will give insight relative to market direction near term. A reversal would be an indication the current bounce is over.

Netflix (NFLX) over the last five trading days has pushed to a new high breaking from a 10 week trading range. The move above $110 is positive technically, and holding the move higher would be a plus for the markets. However, should it reverse and retest the move higher it could be a indicator for the broad markets.

Boston Beer Company (SAM) shows similar leadership and broke to a new as well. The move above $62 and $68 have been bullish for the stocks short term. The move higher has come with strong volume and plenty of interest from investors. As you can see on the chart the trend is intact and a break would be an indication of a reversal in the broad markets.

SanDisk Corporation (SNDK) is another strong leader which has built on the uptrend consolidation patterns and breaks higher during this push to a new high. The leadership in the semiconductor stocks could prove to be helpful if the balance of the sector joins the push higher off the current bounce. Upgrades yesterday helped push the stock into new territory. Another leader worthy of watching as an indicator for the current bounce.

Watch and gain insight form these and other leaders pushing to new highs during the current bounce off near term lows. If these leaders pullback and test, it is not likely a buying opportunity, it is more likely an indication the sellers are ready to push for the next leg lower in the broad markets. In other words it is a time to be cautious not aggressive in the current market environment.

The challenge with crude has been demand. The rise many had anticipated in use over the last 12 months has never really materialized. The slowing economic picture for the global economies has not help in the last month and thus, oil prices dropped. The question now begs, will it find its way higher? Technically the chart below shows a bullish pattern worth watching from my view. The bear flag (blue) shows the potential to move higher from the current levels.

A break above the $34.20 level would be positive. This is a daily chart and I would look at this a trade (0-13 weeks) and not a longer term outlook for the price of crude. If you want to look longer term you should consider USL as the it buys and averages the forward 12 month contracts on oil futures. USO is the current month contract only. It holds higher risk and volatility as a result. Know what you are investing in prior to put any money at risk.

Natural gas has been on the move higher as well the last week. The ETF UNG broke from a six month base and is in the process of testing the move. It is worthy of being added to your watch list as well. Stay disciplined in you approach to investing. Define your entry, exit/stop and target on every play. This allows you to manage your risk and know before you invest what the worst case scenario would be.

Make it a great day!