Sunday, July 18, 2010

Financials and Retail

GE is the mother of all lenders, so let’s start here. GE had a low-volume rally (a wedge) into old support (now resistance) at $15 and imploded on Friday on heavy volume (Red Arrow). Bank of America (BAC) rallied into its 50-day on weak volume at got creamed for -9.2% on Friday – also on massive volume. That is not the action of a Bull Market…

Credit Cards
You have to wonder how much of the selloff in Financials on Friday was the result of the new Financial Reform Bill. MasterCard (MA) and Visa (V) have both found significant support right below their current prices on 3 previous occasions and those levels had better hold here.

The potentially bullish side is that the 50% retracements of the recent Bull Market sit just below the breakdown points, so a shakeout on a price break and then a rapid rally back up above support would not surprise me. The same thing happened recently on Semiconductors (SMH). Just more computerized fleecing of the average investor by the con artist on Wall Street.

Retail is an absolute train wreck. Take a look at the charts of Wal-Mart (WMT), Macy’s (M), Sears Holdings (SHLD), Best Buy( BBY), Nordstrom (JWN), Bed Bath & Beyond (BBBY), Costco (COST), Tiffany (TIF), JC Penny (JCP), Target (TGT), Saks (SKS), Overstock (OSTK)…

There are a lot of horrible looking charts in Retail. That can’t same much good about the Consumer.

Education – The “Wedge” Pattern

People ask me what do I mean by a “wedge” and why they should even bother looking at a chart.

Markets move in trends. During these trends, price moves too far and becomes extended. Extended would be defined as stretched away from key moving averages (the 50-day and the 200-day). Pullbacks are needed to regress price back towards these key moving averages. These pullbacks take the form of a “wedge” – a narrow spike counter to the prevailing trend.

You can see that during the Bull Phase last year, when prices became overbought, they were capped by a line (Upper Green Line) that paralleled the 200-day (Lower Green Line). Several sharp pullbacks can be seen taking price back down into the rising 50-day and the 200-day averages. The sharp pullbacks are the “wedges” and are defined by the Blue Lines.

The opposite is true during the recent Bear Phase, where price extends significantly below the 50-day and then sharply regresses back into the 50-day and the 200-day. The trend is defined by the parallel Black Lines. Wedges are rallies into a now declining 50-day average.

See how the last moves on the S&P 500 have been selloffs that extend below the 50-day and then sharp rallies (wedges) that take price back up into the 50-day? That is the definition of a Bearish Phase. It should be of great concern that seven days of gains were wiped out in just a few hours of trading on Friday.

See the pattern of a downtrend, with sharp counter-rallies into the trendline? The pattern is apparent for Homebuilders (XHB), Retail (XRT) and Energy (XLE).

Financials (XLF) and Materials (IYM) have bearish wedges, but they are in a trading range, with support (Red Line) holding so far for each Sector.

Remember, Financials and Retail topped in early 2007, so they will need to be watched closely as a leading indicator for a potential market top. A market rally that does not include Financials and Retail would be very ominous. I am going to do some detailed charts of the Financial and Retail sectors later this evening.

Has Gold Topped For Now?

Gold was been wedging up towards $1,250 over the past few years. It overshot the top of the uptrend in June, and that is often what happens at a top and a reversal of trend. Gold got sold off to close out June and has now tested and failed to break back above the 50-day (Black Line). It now sits on the support line (Blue Line) of the entire multi-year rally. With all the commercials on the radio about buying Gold, you have to wonder if there is any money available to drive prices higher right now.

It is not just the metal Gold, it is also the Gold Mining companies (GDX) that are testing their multi-year uptrend. GDX failed to break above obvious resistance (Red Line) and have now not only failed on a rally into the 50-day, but has also failed to hold support from the February 2010 lows (Green Line). The uptrend from 2008 looks very suspect at this moment.

The same goes for Silver. It failed to break out last month and has now failed at the 50-day (Black Arrow). Support is obvious.

All of this is important for Precious Metals, because in Bear Markets price rallies into declining 50-day averages and then collapses. It is also important, because big money had a chance to break prices out to new highs and they failed to do so. It still could happen, but as of right now, there is not enough new money or conviction to move prices higher.