Initial Steps toward Clarity?

December 5th, 2012

by Dominic Cimino

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As I mentioned yesterday, the current market hodge-podge seems muddled to me. The S&P 500 Index continues to vacillate between converging support and resistance levels (refer to - S&P Parameters are Well Defined). However, two charts that I previously presented are suggesting caution for markets as this waiting game continues. These two are tipping my scale slightly toward a bearish stance. But many more confirmations are required before my scale tips significantly. The broad based indices remain in uptrends for now, although significant support levels have been tested recently and may soon be tested again.

The first chart is an update of one presented in my July 9th article A Key Spread to Watch. In that article, I presented a retail sector ratio spread of XRT to XLP, and explained why any future divergence presented by this spread, in relation to the broader based market, could be a warning signal for the broader based market. Then on August 10th, in an article entitled S&P 500 Index Yellow Flag Confirmed, I presented the divergence that did indeed develop within the ratio spread. Subsequently, the market pressed on to a new recovery high one month later on September 14th, at 1474.51. But then it quickly succumbed to a break of nearly 9%. It has since rallied back some and into this current area of converging support and resistance. However, notice in the updated chart below how trend channel support is being tested by the ratio spread (e.g. Spread is noted in green). Are we approaching the point when retail finally capitulates (see "Et Tu, Retail? Then Fall S&P") and becomes a harbinger for the broader based market? I believe future performance of the retail sector in relationship to the staples sector may be telling.

The second chart is an updated version of one that I presented in "Et Tu, Retail? Then Fall S&P". As you can see, the Dow Jones U.S. Retailers Specialty Index has since broken the trend channel support line that I had referenced, and is now testing it as a resistance level. I suggested back then that, "If trend-line support is broken, it may be the tip of the retail iceberg." If retail does continue to falter, I view this as a negative development, possessing a significant potential for spillover into the broader market.

In conclusion, technical observations within the retail sector are alluding to potential difficulties for retail stocks, and they are suggesting we at least question the stock market's current intent. More negative chart observations are needed before I announce an official overall bearish stance, but with markets in limbo and chinks appearing in retail's armor, I believe it's prudent to remain cautious until current parameters are supplanted by clarity.

Dominic Cimino

Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Preferred planning concepts, LLC & Cambridge are not affiliated.


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