The Trader Daily

 | Apr 25, 2014 | 7:30 AM EDT
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Every once in a while, it's necessary to look in slightly unusual places to gain a better understanding of what the market is trying to do. Given our recent discussions on utility stocks and why equity bulls should be concerned by their overall out performance, I thought this would be an opportune time to review the ratio chart of the Russell 2000 iShares (IWM) against the S&P 500 SPDR (SPY).

If we use IWM to represent riskier small-cap stocks and the SPY to represent safer large-cap stocks, I think we can agree that seeing the IWM breakdown against the SPY is not a bullish development. In fact, look what happened to the S&P 500 (the bottom pane) the last time traders turned against the IWM in favor of the SPY. While I won't go so far as to say equity bulls should panic. I will suggest a heightened sense of concern is warranted. 


IWM-SPY Ratio -- Daily


Just because I want to give the bears a bit more to chew on, let's also review the ratio chart of the Energy Select Sector SPDR ETF (XLE) against the Financials Select Sector SPDR ETF (XLF). This is a simplistic way of examining how traders react when a traditionally late-cycle sector (XLE) begins to outperform an early-cycle sector (XLF). Similar to the IWM:SPY ratio chart above, it's easy to see that equity bulls would rather see the XLF outperforming the XLE and that is not what's currently happening.


XLE-XLF Ration -- Dailyl


The near-term story on the SPY is pretty simple. The bulls gain a serious tailwind above $188.65 and are sent back to the penalty box beneath $187.05. Day timeframe traders can review my notes on the chart below.


SPY 15-Minute Volume Profil
Source: eSignal


Shortly after 7 a.m., the CME-traded Gc gold contract was trading at $1,270. Fast forward a few hours and the contract was spiking toward $1,300. Rather than speculate on why buyers poured into the gold pits at that moment, let's focus on the fact that the contract advertised beneath its early-April lows was unable to pull additional supply into the market and quickly recovered. At least in the short term, traders have identified a price sellers feel is too cheap to do business.

While I'm not yet convinced the Gc contract won't simply rotate between $1,310 and $1,270 for a couple weeks (churning both longs and shorts toward a frustrating death), I do have a longer-term bullish view of both the metals and miners. A bit more basing will likely transform me from a day timeframe trader of gold, to a higher timeframe and more-committed participant. Suffice to say, a sustained break back beneath Thursday's early morning low would be a major negative for gold bulls.


Gold Futures -- Daily
Source: eSignal


Additional Notes:

  1. Following a moderately disappointing earnings report, shares of Peabody Energy (BTU) reversed higher on Thursday on much stronger than normal trading volume. Breakout buyers should remain focused on $18.25.
  2. Cliffs Natural Resources (CLF) still has a long way to go before it begins to look bullish. But Thursday's price action was constructive. Remember, as much as we'd like to see a sign of strength in shares of CLF, we're also looking for a general shift into late-cycle material names.
  3. The SPDR S&P Bank ETF (KBE), which is composed primarily of regional banks, thrifts and mortgage companies, was absolutely hammered on Thursday. As ugly as the collapse was, I don't expect to see too many commentators squawking about it unless it closes beneath $31.70-32.
  4. We have a number of major catalysts next week. In addition to an ongoing earnings season, there's a two-day Federal Open Market Committee (FOMC) meeting on Tuesday and Wednesday. The ADP employment data are released on Wednesday. And the all-important, but rarely accurate, employment report is released on Friday.

Any trading or volume profile related questions can be posted in the comments section below, emailed to me at or posted to my twitter feed @ByrneRWS

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Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...
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