Mon, Apr 30 2012 1:57 PM ET Previous Market MessageNext Market Message NOOSE TIGHTENS FOR THE TRANSPORT ISHARES -GOLD FOLLOWS STOCK MARKET AND BREAKS WEDGE TRENDLINE -- US DOLLAR FUND BREAKS DIAMOND SUPPORT -- NASDAQ AND NYSE AD VOLUME LINES ESTABLISH KEY SUPPORT -- NET NEW HIGHS SURGE AND REMAIN BULLISH By Arthur Hill NOOSE TIGHTENS FOR THE TRANSPORT ISHARES ... Link for today’s video. While the S&P 500 and Dow zoomed to new highs on April 2nd, the Dow Transports and Transport iShares (IYT) fell short and continue to underperform. Even though we have yet to see a break down or trend reversal in this key group, chartists should keep a close eye in the coming days and weeks. Chart 1 shows the Transport iShares peaking around 96 in mid March and then forming a lower peak around 95 in early April. Overall, the ETF remains in a large consolidation pattern with support near 90 and resistance at 96. Prices have started to narrow within this consolidation as a triangle takes shape. A break above 95 would be bullish and signal a continuation higher. We should watch the transports closely because this economically sensitive industry is important to the health of the overall market. Sub-industry groups include airlines, airfreight, trucking and railroads. A break below 91, on the other hand, would be bearish and trigger a reversal. This would be negative for transports in general and could affect the market overall. The indicator window shows the Price Relative (IYT:SPY ratio) trading flat since late February. An upside breakout is needed to show relative strength. Chart 2 shows the Dow Transports with similar characteristics. (click to view a live version of this chart) Chart 1 (click to view a live version of this chart) Chart 2 GOLD FOLLOWS STOCK MARKET AND BREAKS WEDGE TRENDLINE... The Gold SPDR (GLD) is at a rather interesting juncture. Chart 3 shows GLD breaking the falling wedge trendline with a surge above 160 last week. Note that gold surged along with the stock market last week. This breakout is largely holding as 160 turned into support early Monday. Despite this positive development, the overall trend for GLD remains down. Follow through above 164 is needed to break the April highs and forge an actual trend reversal. A move above 164 would signal a continuation of the January-February advance and target a move toward the February highs around 174. The pink trendlines show an alternative pattern developing. Should a lower high form at 162, a pennant would take shape and a break below pennant support would signal a continuation of the downtrend that started in late February. (click to view a live version of this chart) Chart 3 Gold's future may depend on stocks and the greenback. The indicator window shows the Correlation Coefficient for GLD/$SPX (red) and GLD/UUP (green). For the most part, gold ispositively correlated with stocks and negatively correlated with the Dollar. This means a surge in stocks and decline in the Dollar would be positive for gold. Conversely, a decline in stocks and surge in the Dollar would be negative for gold. Chart 4 shows the Silver Trust (SLV) in a downtrend with key resistance at the mid April high. Also notice that Aroon Down (red) has been above Aroon Up (green) since early March. (click to view a live version of this chart) Chart 4 US DOLLAR FUND BREAKS DIAMOND SUPPORT... Chart 5 shows the US Dollar Fund (UUP) consolidating for around three months with a diamond pattern taking shape. The left half looks like an expanding triangle, while the right half resembles a contracting triangle. It is basically one big trading range, which is neutral until there is a breakout. With last week’s decline, the ETF broke the lower trendline and exceeded the prior low. This is a bearish support break for the greenback and such a move could turn out bullish for gold. Also notice that MACD moved below its signal line seven days ago. Momentum is negative and trending down. (click to view a live version of this chart) Chart 5 Strength in the Euro is the main reason for weakness in the US Dollar Fund because the Euro accounts for around 57% of this ETF. Even though the news out of Europe may seem bad, currency traders are not selling the Euro in favor of the Dollar. Failure to go down on bad news is actually positive. Chart 6 shows the Euro Currency Trust (FXE) challenging the late February trendline. A descending triangle is potentially negative, but FXE needs to peak at 132, turn lower and break support to confirm this pattern. So far we have yet to see a bearish reversal at 132. (click to view a live version of this chart) Chart 6 NASDAQ AND NYSE AD VOLUME LINES ESTABLISH KEY SUPPORT... With last week’s sharp advance, the AD Volume Lines for the Nasdaq and NYSE established key support zones and kept their uptrends alive. Before looking at these charts, note that the AD Volume Line is a cumulative measure of Net Advancing Volume, which is the volume of advancing issues less the volume of declining issues. I take this one step further by dividing Net Advancing Volume by total volume. This shows Net Advancing Volume as a percentage of total volume, which is better for comparative purposes. These indicators measure money flow for the Nasdaq and NYSE. Chartists can use technical analysis on the AD Volume Line to define the trend and set support/resistance. Obviously, an uptrend favors the bulls, while a downtrend favors the bears. (click to view a live version of this chart) Chart 7 As the AD Volume Lines currently stand, both established key support zones with the March-April lows and remain in uptrends. Chart 7 shows the Nasdaq AD Volume Line in the main window and Net Advancing Volume Percent ($NAUD:$NATV) in the indicator window. Notice how Net Advancing Volume Percent fluctuates above/below the zero line on a regular basis. Chartists can get an idea of the aggregate or general trend by showing this plot as “cumulative” (chart attributes/type). Cumulative Net Advancing Volume Percent, or the AD Volume Line, produces a line chart that can be analyzed and compared to the underlying index, which is the Nasdaq. The AD Volume Line formed a higher low in mid December and broke resistance in early January. After a new high in March, the indicator pulled back sharply, but ultimately held the March low and remains in an uptrend. A break below the March-April lows would reverse this uptrend and turn this key indicator bearish. It ain’t happened yet though. Chart 8 shows theNet Advancing Volume Percent for the NYSE ($NYUD:$NYTOT) and the AD Volume Line with similar characteristics. Market Message readers can click on these charts to see the settings and save them to their favorites list. (click to view a live version of this chart) Chart 8 NET NEW HIGHS SURGE AND REMAIN BULLISH ... Net New Highs can also be used to create breadth indicators to measure broad market strength or weakness. As with Net Advancing Volume Percent, I am using Net New Highs Percent, which is Net New Highs divided by total issues. Net New Highs equals new 52-week highs less new 52-week lows. Dividing this difference by total issues shows it as a percentage of total issues and allows chartists to compare levels over time. Chart 9 shows NYSE Net New Highs Percent ($NYHL:$NYTOT) in the indicator window and Cumulative Net New Highs Percent in the main window. First, notice how Net New Highs Percent surged last week and hit its highest level since early March. This shows broadening participation in last week’s rally. Second, notice how the cumulative line never broke its 10-day EMA and move to another new high last week. This indicator has been above its 10-day EMA since 1-Dec (bullish) and has yet to turn down. A move below the mid April lows would turn this indicator bearish. (click to view a live version of this chart) Chart 9 Chart 10 shows Nasdaq Net New Highs Percent ($NAHL:$NATOT) and the cumulative line. Net New Highs Percent has been weakening since its peak in February. The indicator turned negative a few times in April and the cumulative line even broke its 10-day EMA. However, Net New Highs returned to positive territory last week. Also note that the cumulative line held the early April low. At this point, I will stay bullish on the indicator as long as the cumulative line holds its April lows (key support).
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