Five Charts to Watch

By Mike Paulenoff

This week we analyze four key market segments -- Brazil via its the iShares MSCI Brazil Index ETF (EWZ), the semiconductor sector via the Semiconductor HLDRs (SMH), the dollar via the PowerShares Dollar Bullish ETF (UUP), and financials via Bank of America (BAC) and Wells Fargo (WFC). Each write-up is accompanied by a link to Mike's video chart analysis.

Starting with the EWZ, the chart analysisshows that while January was a destructive month, taking out threemonths’ worth of action and closing near the low, it is not as bearish a situation as it could have been, as the high for the month did not takeout the high for December. Had the EWZ made a new high and then reversed, it would have had a major downside reversal.

This is still a nasty chart, but for me the likelihood that this is a major decline that starts a bear market in the EWZ is less likely than this is a correction of the bull move in the EWZ. You can’t step in front of the train right now, as there’s been a lot of damage, but I would be looking for continued accumulation somewhere in the 60-58 target zone in the upcoming weeks or months. That’s the area between the 36-month moving average at 63 1/2 and 12-month at 57.75, considerably lower than where the EWZ is now but a window of opportunity, nonetheless.

See EWZ video analysis at http://www.mptrader.com/chartsofweek/7/

The SMH, on the other hand, had a major reversal in January. Not only did it close well lower on the month (opening at 28.35 and closing at 24.76 near the low), it reversed from a new high it had made, at 28.72, for the entire upmove from November 2008.

In addition, the trendline from the Mar 2009 low through the Jan 2010high was broken at about 25.85-25.90. In addition, the 36-month movingaverage also was an impediment to upside continuation, retaining the movingin December and again in January, and in the future will be a seriousresistance plateau for the semiconductors.

With a Jan close at 24.76, the next level is around 24 1/2 down to 23.00, with Nov & Oct provide support in the 24.10 to 23.00 area, where the 12-month moving average is rising. My sense is the semis have reversed trend completely, which is to say the entire up-channel ahs been broken and reversed, and we’re going to retrace most of it, especially if lower support in the 20.00 is broken.

See SMH video analysis at http://www.mptrader.com/chartsofweek/8/

The bright spot on the upside is the dollar, as represented by the UUP. The dollar and UUP have an accumulation base pattern from last September through January. At the end of January, the UUP broke out of the neckline of its resistance plateau, gapping up on Friday and closing above its decline 200-day moving average for the first time since May. A measured move takes you to somewhere to 24-24.20, or more than 3% higher than where we are now.

The momentum coming out of this base, as depicted also by the RSI, is suggesting we have higher to go. In addition, cycle work on the chart depicted in the video shows we may have another month to six-weeks in the current up-cycle. Finally, the dollar is still the biggest short position in town, and there are lots of shorts to cover here. Adding in Fibonacci retracement levels, my suspicion is the dollar is going to go somewhere between 24 1/2 to 25 in the UUP.

See UUP video analysis at http://www.mptrader.com/chartsofweek/9/

We also look this week at the financial sector through two of its bellwethers, starting with BAC. The financial sector and BAC peaked in October and since then BAC has been trading in a contractionary range down to 14.12, up to a lower high at 17.18, and then down to lows at 14.68. Let’s also notice that the 200-day moving average is at the top of the arrow, which happens to be at 14.60, and the 50-day is at 15.90. Even though there’s a contractionary range, what we see now is possibly a range inside of a range, between 16 and 14.60. The 50-day and even the 20-day are moving sideways, and may turn lower, juxtaposed against the 200-day.

Either this contractionary range is a high-level bullish consolidation ahead of a big breakout, or alternatively it is a high level topping-type of pattern that could put into progress a significant downside correction. However, because January was such a devastating downmove for the market, and because the market, from my other work, appears vulnerable, I need to look at BAC as being vulnerable to breaking its 200-day. If that's the case, where can it go on the downside?

The distance between the October and November downmove, which is $5, gives us a measured move that would take BAC down to about 12. In addition, a Fibonacci retracement of 38% would get you to about 12.80. I don’t precisely know what to expect for BAC just yet, but I do know the downmove so far has been confirmed and that there’s a lot of pressure on the 200-day, which bothers me. If I was a long holder of BAC, I’d be concerned that a break of the 200-day would unleash a fairly big percentage move. Let’s keep in mind that along the continuum of these objectives there is the potential of a decline between 14% and 20% from current levels.

See BAC video analysis at http://www.mptrader.com/chartsofweek/10/

WFC is a less bearish chart than BAC. While the market was tanking on Friday, WFC was acting well and actually broke above its Oct-Jan resistance line at around 28.90 and continued up to 29.17 or so but failed to continue to the Jan high and instead reversed and closed down on the day. All that minor reversal did was to return WFC back in to its contractionary range. Will it be able to preserve this range or will it drop out?

The weakness looks like it will break through the 50-day at 28.10 and probably retest the Jan 27 low at 26.88. As of Friday, WFC was trading above the 20- 50- and 200-day moving averages, which is a much better position than we discussed in the BAC situation. A long position looks relatively safe as long as WFC holds above the Jan 27 low at 26.88 and wherever the 200-day is at the time of that break.

If that breaks then we can start calculating a move down to 22.50-22.10 area, or about 6 ½ points down from here. 6 ½ is used, as that was the amount of the big move down between October and December. The bigger picture of WFC shows that 22.60 coincides with earlier support in the upmove from May-June-July – so that is a very important support plateau if WFC breaks down from here. Looking at the Fib support levels, a 38% retracement would take WFC to 22.50.

See WFC video analysis at http://www.mptrader.com/chartsofweek/11/

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