Financials and Retail

Financials
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
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.

Nice Bounce, But Where Is The Volume?

Last Tuesday I sent an email out with the following -

“(F)rom a technical perspective the highest probability is a reversal in the next couple of days.”

“Will this simply be an oversold relief bounce or something more? …Will the bounce be strong, or merely a weak bounce into moving averages that can be shorted?”

Volume on the rally has been terrible and now the Market Averages are at key resistance. That is the trait of a Bear Market. The S&P 500 ($SPX) has made a vertical move into resistance on declining volume (Red Line). The same goes for the NASDAQ ($COMPQ).



Here are some important sectors. Consumer Discretionary (XLY) and Financials (XLF) have both bounced for the fourth time in recent months. Each of these bounces has been on declining volume into resistance. Maybe this time is different…

Retail (XRT) and Home Builders (XHB) have both had weak bounces on imploding volume and look like they are just consolidating before another leg lower in a sustained downtrend. Trends are trends until they break, and they usually go a lot farther than you think they can go.





These are important sectors. They tend to top out early and serve as an early warning sign for economic weakness and Bear Markets. They peaked in 2006 and 2007 and led the whole way down last time.

Here are some key stocks. These stocks are a huge percentage weighting of the Market Indexes and very important to the economy. All Microsoft (MSFT) has done is get stretched too far below its 50-day average (Black Line and Arrow) and bounce – again, on weak volume. That is the definition of a Bear Market! The same goes for Walmart (WMT).

General Electric (GE) held $15 for nine months and then broke below it in June. It bounced on very light volume and could only get above $15 by gapping above it at the open today – probably to try and trigger a short squeeze. But a failure here would be really, really, really bearish.

Chevron (CVX) has also simply bounced into resistance on horrible volume.





Volume is critical, because it tells you what the big boys are doing with their money. Weak volume means that they aren’t buying and that they are more likely simply moving prices higher, so they can unload more shares. That is the definition of distribution.

Before you get into Bear Markets, the big boys sell for months. They sell just enough to not break prices down completely. Prices sit in narrow ranges, until one day they break and then a flood of selling starts. Prices regress back to moving averages and then another leg of selling starts.

That is what has me so concerned about what is going on with the S&P 500. Nine months of a trading range that sees rallies into the 50-day on weak volume and then support gets broken, followed by a rally on weak volume.

This is yet another make or break point for the markets. A pullback that tests 1,010 and holds gets me excited again. A pullback that breaks 1,010 and next support is 950. Pretty sobering stuff.

Technology Leadership

There are so many components to Technology and so much going on in the group, that I need to break it up into a couple of pieces. I want to start with the names everybody knows, because people tend to like to buy what they know, even though it may not be a great place to be investing.

Here are a couple pairs of current leaders versus past leaders. You tell me which ones the institutions are selling and which ones they are adding to – Apple (AAPL)/Research In Motion (RIMM), BIDU (BIDU)/ Google (GOOG). RIMM is almost at its Bear Market lows! Google’s decision to take on China has been a windfall for BIDU.





What do you think Priceline (PCLN) and Amazon (AMZN) both breaking down together tells you about online consumer spending? EBAY looks worse!



SanDisk (SNDK) makes the “flash” memory for mobile devices, while Seagate (STX) has always focused on Hard Disk Drives for computers and servers. You can see that the mobile devices are where the growth is.



For semiconductors that go into phones, the key is to be a supplier of Apple and not a competitor. Cirrus Logic (CRUS) has chips in iPhones, while Nokia (NOK) devices are clearly not popular at the present time.



Will these trends of outperformance continue? I do not know, but the ability to determine what is leading and what is lagging is a critical skill for investors.

Also keep in mind that although these leaders have held up so far, they often get hit hard too when the markets correct.

Financial Sector Internals

The Financial Index ETF (XLF) looks like it is holding up well. But what is really going on inside the Financial Sector?



Broker Dealers ($XBD), Regional Banks (RKH) and Asset Managers (DJUSAG) have failed to hold key support and bellwether GE has also failed at support.






Broker Dealers
Take a look at the charts of Morgan Stanley (MS) and Goldman Sachs (GS). Nothing bullish here, with price < 50-day < 200-day. Those are Bear Markets.




Regional Banks
The charts of Bank of America (BAC), JPMorgan (JPM) and Wells Fargo (WFC) have broken key support.
Smaller regional banks like BB&T (BBT), Regions Financial (RF), Keycorp (KEY) and Suntrust (STI) have broken support.
PNC Financial (PNC), Fifth Third Bancorp (FITB) and Huntington Bancshares (HBAN) are holding on for dear life.



Asset Managers
Look at the charts of T Rowe Price (TROW), Janus (JNS), Franklin Funds (BEN), Federated Investors (FII), Waddell & Reed (WDR), Eaton Vance (EV) and Cohen & Steers (CNS). What do you think they are telling you about future fees in the Asset Management business?



Discount Brokers
The charts of Charles Schwab (SCHW), Ameritrade (AMTD), E*Trade (ETFC) and Stifel (SF) are all telling me that the markets are expecting trading volume to diminish significantly. I assume that most people like for buy long, so that would not be a bullish indicator for the markets.



I don’t know how to categorize these, but look at the charts of State Street (STT) and Northern Trust (NTRS). State Street peaked last October and Northern Trust is actually at the lows of the Bear Market!



Why are the banks important? Because every single one of them has the capacity to blow up the entire financial system with their exposure to derivatives. I haven’t posted this chart in a long time, but it is clear that the Derivative nightmare has never been address and may still come back to haunt us.

Very Oversold

I’m going to make this post an overview of different markets and sectors. I will then follow it up with a series of emails about key sectors so that you will be able to see the real damage that has been done within the components of the markets.

First, I want to show you are chart that I posted a few weeks ago. It is of the Energy ETF (XLE). I posted about how XLE had a classic reversal pattern and that I would not have been surprised by a bounce. In a bullish market, this bounce would probably have led to new highs, but the fact that the bounce failed into the 200-day (Green Line) shows you how the institutions were using the bounce to sell. This action is the definition of a Bear Market.



I bring this up, because the S&P 500 ($SPX) is very oversold and has the same potential pattern setting up. $SPX actually has two of the same pattern (Blue and Orange triangles), and the pattern low is right on the 38% retracement at 1,008.

I am not telling you that the market has bottomed. I am not telling you to go buy a bunch of anything. I am simply showing you what I see and what I look for. I have to keep looking at what is and making decisions off of what I see. The fact that two Follow Through Days have now failed concerns me greatly.



Here is the hourly S&P 500 futures chart. You can see that it is a downtrend made up of sharp plunges and shallow consolidations. Price seems set to make a sharp move very soon. Will it be up or down? A break of 1,010 would be a significant failure, as it would indicate that the potential bounce lasted all of a few days where most traders were out of town and that the bounce was sold hard. If there is a rally from here, then is it merely an opportunity to short the bounce?



Here are some of the sectors I will be deconstructing today.

Financials (XLF) are holding right on support. Failure from here would not be bullish. This chart looks like a goal line save, but wait until you see how some of the subsectors of Financials look…



Semiconductors have held support four times in recent weeks. Support had better hold or you know the big boys have been selling the bounces. Semiconductors are normally a leading indicator for stocks. It would be very bad it they break critical support.



The 30-year Treasury Yield is on the brink of breaking down. This would be very bullish for Treasury Bonds and give you a clear picture of just how bad things are for the economy.



Crude Oil ($WTIC) has held support and bounced weakly into the 200-day average. If price breaks support, then what does that say for the economy – especially if it happens with a breakdown in some of these other indexes and the 30-day Treasury Yield?