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Last week's bottom line can be summarized quite simply: There's a lot of serious chart damage out there! We certainly can look forward to a bounce -- and that could be seven hours or seven days -- that repairs or recovers some of the damage from last week. However, my sense is that the bounce will be fleeting and followed by another down leg.
A quick look at the charts of the Volatility Index
(VIX), or fear index, and the iShares Barclays 20+ Year Treasury Bond
(TLT), or flight to safety ETF, support the argument for a brief bounce in the stock market. The VIX had a huge downside reversal Friday that usually signals a directional change, and the TLT didn’t make a new high on Friday while a lot of indices took out their "flash crash" lows.
But, again, the expected rally in the stock market will be tough to sustain, as it will be used by big fund managers to sell positions that they want to lighten up on into the strength so that they can raise cash and go shopping later on in this quarter.
The focus of my analysis this week is on the commodities and materials sectors, and what they tell us about both the near- and intermediate-term direction of the market.
Any discussion of this sector begins with China, the big procurer of materials. The Shanghai Composite Index
(SHCOMP) has the worst looking multi-month chart of the all the indices, having peaked at 3483 in August of last year and last Friday hit 2482, a 34% down move. However, from a near-term technical perspective, the Shanghai should rally off of Friday's low and get to 2700-2800 before its next down move.
The Reuters/Jefferies CRB (Commodity Research Bureau) Index
looks somewhat like the Shanghai, having had a coil-type pattern from its January high of 29.38, followed by a fall-out into last week’s low of 24.75, a 16% sell-off.
Any rally in the CRB index off of 24.75 is going to smash into some serious resistance at the prior low at 25.73, which would be a 2.3% rally. That's the kind of bounce, somewhere between 2% and 5%, I’d expect for most of these indices after absorbing so much damage.
The ProShares Ultra Oil & Gas ETF
(DIG) doesn’t look well either. It has a major top that is as large and as wide as the base it came out of originally. Based on the daily chart, it looked like a bull market followed by a correction, but put into perspective on the weekly chart it looks like it finished the correction on the upside and now has some difficulty ahead.United States Oil
(USO), the oil component of the DIG, has the same look as the DIG, which is not surprising, Maybe United States Oil can get back to the 34-35 zone, but the weekly chart shows it’s already headed back down from a small recovery.
The transportation sector, which is impacted by oil, lately hasn't looked very good. There’s a big top on the iShares Dow Jones Transportation Average
(IYT), which needs to get back over the 80 level for it to really take off again. Friday’s upside reversal from 73.60 to a 76.64 close, or 4%, seems disappointing when you think about that fact that oil has just gotten crushed. It could be telling us that the economy isn’t doing all that well despite the fact that oil prices have come down so much.
Both FedEx Corporation
(FDX) and United Parcel Service, Inc.
(UPS) both look toppy as well. These companies thrive on economic growth on retail consumption. It's not to say that UPS can’t rally to the 65 level, but right now it looks like a countertrend rally because the downside isn’t finished yet. Both FedEx and UPS could be significant indicators about US economic growth in the coming months. The iPath DJ-UBS Copper TR Sub-Idx ETN
(JJC) had a big recovery on Friday, but it looks very toppy, too. Copper held where it had to at 38.80 or so, but can it get above the big top at 42-43?
The Market Vectors Steel ETF
(SLX) shows that steel broke down also, surpassing its February low last week at 51 and change. It’s bounced off that, but will have its work cut out to get back above 60, and probably won't be able to do much about 57, after which it could run as low as the mid-40s over the next couple months.Market Vectors Coal ETF
(KOL) is another one that is toppy. If the rally gets back up into the 32-30 area, a 6-7% move up, it looks like this will be used to get out of certain positions.
The Peabody Energy Corp.
(BTU) is certainly a toppy chart. It looks like, starting at about 40 up to 42, it will be very difficult to get through, and if the perception is among fund managers that there’s a top on Peabody, they will be selling in this area. There will be a real problem and it’s going to rollover after that selling.
Looking at the commodities charts internationally, Brazil -- which is tied into a lot of commodities, such as coffee, sugar, oil, cotton, grain, and others -- looks like it has a top, too. The iShares MSCI Brazil Index
(EWZ) could rally from 60 to the 64-65 area along the same magnitude as seen elsewhere, but unless the EWZ can get over 65 and start to consolidate above 65, it will roll over again and make another new low, maybe in the mid-50s if not low 50s thereafter.
Of course, we can't go beyond commodities without looking at the iShares MSCI Australia Index
(EWA). Australia has multiple issues. It's a commodity play, and in general the commodities are struggling, with weakened demand from China. There are political issues in Australia as the government wants to raise taxes big time on corporations. In addition, there's the central bank of Australia, which continues to raise interest rates. So Australia has a lot of headwinds.
Could the EWA rally? Sure it could. It could rally probably into the resistance area at 20 1/2 to 21 from 19 and change. Then it will probably roll over again, with a chance to see 15 to15 1/2 thereafter, as the reality is Australia's in tough shape.
Looking at the corporate side and the Materials Select Sector SPDR
(XLB), which is tied into economic growth in the US, the chart shows a very big multi-month top has been created, too. The XLB on Friday broke the February low at 29.48, but held above 29 and managed to close higher. This is another indication that there will be a rally, but the quality and strength of that rally will determine whether it's a big top or a sideways channel from where the price structure can stage a new up leg.
I have my severe doubts about this, and foresee a rally rolling over into a declined towards 25 in the XLB.Alcoa, Inc.
(AA) may tell us more about whether this is a big top or sideways channel. Arguably the worst looking of the minors going into last week, Alcoa looked like it could go to 10. It got down to 10.80, and looks like it’s trying to bounce.
The lowest target I expect it to rally to is 12, and the optimal target would probably be about 12.65 up to 12.90, and then, for a real test, probably 13 1/2. If it rolls over from anywhere between 12.60 to 13.50, the next down leg should take Alcoa probably to 9.00.
The weekly chart shows Alcoa had a huge bear market in 2008 into early 2009. There was a recovery rally from 5.16 to 17.60, but the huge rally was dwarfed by the bear market that preceded it. So, Alcoa has some problems on a longer-term chart basis that could take it a whole lot lower than 9.00 if it can’t get out of its own way.
However, if it rallies above 13.60, we’ll have to take another look at it.
So we’ll be watching Alcoa's rally and expected ensuing pullback carefully as a litmus test, or weather vane, for the commodities and mining/materials sector and for China, too.For more on ETFs take a FREE 14 day trial to Minyanville's Grail ETF & Equity Investor newsletter. Ron Coby & Denny Lamson find early trend changes and ride them to profits. Learn more.