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Mike Paulenoff

Mike Paulenoff

Mike Paulenoff is author of the MPTrader.com, a real-time diary of his technical analysis and trading alerts on ETFs covering metals, energy, equity indices, currencies,…

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What Sector Charts Say About Economy

This week we look at the sectors of housing, retail, basic materials, transportation that reflect economic growth or contraction to see what they're telling us about the economy and if there's any reason or area in which to get aggressive in this market.

Housing Sector

Starting with housing, let's take a look at the chart of the SPDR S&P Homebuilders (XHB). Not a very pretty picture. The 50-day is about to cross the 200-day, which is not a signal to do anything but watch. It broke its trend line in June, rallied back to it, failed from it, and now it's starting to look toppy. The rally last week failed and preserved the series of lower lows and lower highs. So, the XHB is saying to be careful of the homebuilders. If it gets through 13.78, and makes a new low, then we should figure it's going lower.

Looking at little closer at a couple housing related stocks in that ETF, we first review the chart of Ryland Group Inc. (RYL), which looks awful. When it got up to 25 it trapped everyone. Then it took out the uptrend line at 20-20 1/2, and has stair-stepped its way down since then. Now it is staring at some very important lows at around the 15 1/2 - 15 mark, which if broken could unleash some pretty serious downside follow-through.

The weekly chart shows that Ryland will probably go back and test the lows, but if it holds and rallies off 12, then just maybe that group is building a base. But for now, Ryland is still under pressure.

Lennar Corp. (LEN) might be in better shape than Ryland technically, but it has its issues technically as well. It looks like it wants to retest the July lows at 13 1/2 and the 12.70 trend line from March of 2009, and if that breaks then there's a top in place, and if it doesn't hold at 11.50 it's going even lower.

Let's take a look at the flip side of housing, The Home Depot, Inc. (HD). If this chart was looking great, that would tell us that contractors are doing well, and that a lot of home improvement is being done and people are fixing up the homes they have rather than buying new homes. But that's not the case. Home Depot shows that a major top that is starting to break down. If it breaks the 27 level, it could get into the 22.80 to the 24.50 area, which isn't good.

So these charts tell us that the housing sector is not particularly in a position to give us optimism about the economy.

Retail Sector

The Retail HOLDRs ETF (RTH) chart looks worse than the homebuilders. It had a massive rally, but since April it has orchestrated a stair-step decline that is terrible-looking. Like the other charts we've looked at, it rallied back to resistance and then failed so far. If it comes down to 85, holds, and turns back up, then that's a different story. But for now it doesn't look good, turning down with lower highs and lower lows. Let's take a look at some retailers.

The TJX Companies, Inc. (TJX), or TJ Maxx, doesn't look so bad right now, but it could begin to look bad if it doesn't hold its 200-day, which is around 41-40.90. It looks like it peaked, came down, and is coming down again. You can make the case that it broke at around 42, had a chance last week to do some damage by jumping off the 200-day and getting into the 50-day at 44. But it didn't. So, there's a high, a lower high, more lower highs, and now if it doesn't hold at around 40.77, it will go right down to the next support area at 36.35, maybe 37, but that's still an 8% to 10% move, and that's just for starters.

Costco Wholesale Corporation (COST) has a crown top on it. These are the worst tops because they are nasty and ugly and powerful. It was 62 at the high, dropping $5 to the 57 low, so a measured move takes it down to 52, and chances are it won't stop until it tests support at 50. So, it also has a 10% move staring it in the face potentially.

The weekly chart shows an enormous upmove from 2003 to 2008, when everything collapsed. It then rallied back 63% and now it's coming back down. So, it had a 65% recovery and in the process created a crown top, which is not a good sign. If it can't hold 50, then it will go down to the major trend line at 41. If it does get anywhere near that, it will be a double-dip.

Wal-Mart Stores Inc. (WMT), a major bargain retailer, looks like it's in for some problems. If it breaks 48, it's going to retest the 46 area, which does not bode well for either Wal-Mart or the economy in general and consumer demand.

Online retailer, Amazon.com Inc. (AMZN), has created a series of lower highs and lower lows, and last week's rally could have done some damage had it gotten over 129, but it didn't. It failed and turned down. It failed against the 50-day, the 200-day is flattening out, the 20-day is pointed down, and it looks like Amazon is going down to test the 106 level. It's got a $10 move ahead of it and that's going to be a tricky deal.

This chart of Amazon tells me that Internet retailing is not going to save the economy. It will turn out to be part of the problem and not part of the solution. It may hold up better, but it could go down further.

Coach Inc. (COH), a retailer of luxury items, hasn't broke down yet, but has built a top and is coming down the other side of it. If it gets through the July low at 34 and change, and the February low at 33, then it's in trouble and could be heading to 25. On a weekly chart, it would not be surprising to see Coach get down to $30, a 10-12% down move from here. So, what the chart shows is that demand isn't fantastic even for this luxury retailer.

Harley-Davidson, Inc. (HOG), also a retailer of luxury items and which comes out with earnings next week, is looking pretty toppy, too. If it breaks 21.25, it could see 15 very soon.

So, from looking at the charts in various areas of the retail sector, we can see that the retail sector is also not showing an improvement in the economy.

Materials Sector

Materials Select Sector SPDR (XLB) covers the basic materials and companies that appeal to two entities; China and the stimulus package. Where did China go? Well, it looks like China is not exactly helping the situation. Not right now. And what happened to the stimulus package?

The XLB has a big rolling top and looks like it's going to break down. It failed at the sharply declining 50-day, failed to take out the prior rally peak at 31.80, which was on June 21, and will probably retest the July low around 27-28. It's one to keep an eye on because it has to hold. If it doesn't hold, it will tank.

One of the largest cement makers in the world, CEMEX, S.A.B. de C.V. (CX), looks like it's struggling, and, in fact, if it doesn't hold around the 9.00 - 8.80 area, it's going to head still lower. The bottom of the down channel is at 7.50, or 18% lower.

The weekly chart looks even worse. The rally in March 2009 failed in September 2009, and CX has been fighting ever since trying to stay above 9.00. If I have to look at it as an economic indicator, this chart is telling me to be really careful. Obviously, whoever needed cement, which probably puts homebuilding at the top of the list, needs less, if any at all.

Alcoa, Inc. (AA)'s chart shows a top, with a series of lower highs and lower lows well preserved. We have to figure that Alcoa is going down to retest 10 again, and if it breaks 10, it's going to 8. That's the way it looks to me. When things are good for Alcoa, they're really good, such as when China has a strong demand for aluminum, but when China's lights go off, that's the last stock you want. Right now Alcoa has an ugly chart.

Other stocks covered in our video include Freeport-McMoRan Copper & Gold Inc. (FCX), which has also topped, and EI DuPont de Nemours & Co. (DD), whose chart hasn't yet topped and is coiling and may be benefitting from the agricultural side of its business.

Transportation Sector

The iShares Dow Jones Transportation Average (IYT) is topping but it hasn't created a top just yet. It hasn't confirmed it. But more weakness that takes the IYT below 70 will be a very damaging and dangerous breakdown. It may be going back to the 60 level, a very big move. That would imply that whether it's air freight, rail freight or truck freight, everything is slowing down.

I suspect that the reason why the transports have been holding up so well is because a lot of equipment was taken out of service to produce a tight demand for equipment, and rates were raised on that equipment. So freight rater went up 30% and the freight companies tried to make up the difference for the lack of demand by raising prices. If the economy slows down where they can't even get away with that, then this chart is going to roll over in a big way.

CSX Corp. (CSX), a rail transporter, which we looked at last week, looks very much like IYT. The key level for CSX is a test of the 47 level. If it breaks through that it's going to the 42.50 level. That's a topping chart in CSX even though it looks better than most charts we looked at today.

FedEx Corporation (FDX) looks terrible. Corporations, businesses, companies, individuals all use on FDX. But this looks like one big topping chart. The same as the others. Can't get through the 50-day, as it's declining with a series of lower lows and lower highs, and if it comes down and breaks the 70 level, then it's going a lot lower. The top at 95 to 75 is $20. So 54 is the optimal target if FDX breaks down.

The chart tells us that the economy doesn't support a big upmove for FDX. At least right now, FDX needs to prove itself by getting above the prior high and the 200-day at around 83.20.

United Parcel Service, Inc. (UPS) is arguably worse. It closed below the 200-day, as did FDX, but the top looks pretty mature. It has a head-and-shoulders topping pattern that's putting a lot of pressure on the 56 area. If it gets through 56, it has a target of $42. So, that's a dangerous chart. To prove itself, it needs to get over the 50-day, which is 61 3/4.

Other transport charts include JB Hunt Transport Services Inc. (JBHT), a trucker, whose chart is coiling and trading above its 50- and 200-day, and is about the best we've seen thus far; and JetBlue (JBLU) and AMR Corp. (AMR), which are sideways airline charts that don't tell us much either way.

Finally, this week we look at the chart of the Shanghai Composite to see what, if anything, can be expected out of China to help spur any of these sectors. Nothing on the chart leads us to be optimistic. We find that the best-looking chart is actually the iShares Barclays 20+ Year Treas Bond ETF (TLT), which is the exact opposite of all the charts we've looked at, with its pattern telling us that something is out there that could take long rates to low yields that are hardly conceivable. Hardly a positive sign for the U.S. economy and stocks that are dependent upon it.

View video at http://www.mptrader.com/chartsofweek/


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