Douglas Busch

Derailed: Looking at the transports is often a good tell on the genuine health of the US economy. If one was to take a look as a whole in the small field they would come away with not such a sanguine feel. CSX is one of the better actors in the group, and it still is on the cusp of "correction" mode down 9% from its most recent 52-week highs. NSC looks more sickly 23% off its own annual peak, and even more since a rejection at the very round 300 number to start 2022. It is attempting to stabilize here near the round 200 figure after a recent 6-week losing streak. CNI slumped almost 6% last week and CP CLOSED 2 of the last 3 weeks hard upon its lows for the WEEKLY range. Below is the chart of UNP, whose most recent gap-up after its latest earnings reaction was a bit misleading as revenue came in light, but the PRICE jump was most likely attributed to the announcement of the CEO stepping down. This name also has more influence upon the XLI, being its second-largest holding, and the only rail name in the top 10 components. 

Software Holding Up Best: Not that that means much on an absolute basis as both are trending lower, just that the IGV is giving up less ground than the SMH. Does that mean that the SMH is closer to a bottom than the IGV? Perhaps, but it is silly to anticipate, and better to look for examples of PRICE potentially firming up via bottoming candlestick patterns like an engulfing, piercing line or morning star. This at least gives one a good risk/reward area to play against. Over the last one and 3 month periods the IGV is essentially UNCH, while the SMH has surrendered 6% over the same time periods. The ratio chart below shows this theme and the IGV was never able to see any follow-through after a potent 3-week tight breakout from the 3 weeks ending between 7/14-28 that all CLOSED very tautly within just .77 of each other, and we know that type of coiling action often produces very powerful moves. So the fact that did not occur was a red flag. The SMH is possibly going to form a bearish WEEKLY 3 black crows pattern if Friday CLOSES in this area.

Concentration Matters: There is an old adage that says concentration builds wealth and diversification preserves it. As we take a look at the ratio chart below comparing the XLY to the XRT, we can see the superior behavior of the XLY as it forms a bull flag, which is a continuation pattern that usually breaks in the direction it formed. Again this is a relative chart, not absolute, so this does not mean both can not decline, it just states that the XLY is acting better, and in this current market environment means it is dropping less. In fact, in our Monday Consumer Note, we looked at the top holding in AMZN and were concerned with the number of times it was touching its 50-day SMA in such a short period of time. Wednesday it touched that line, for the sixth time in less than 2 months. I believe contrary to most technicians that the more a line is touched, the less reliable that support becomes. The rest of the week should prove very telling not only for AMZN, but the consumer sector as a whole with the stocks influence. Below we also take a look at how feeble the overall XLY is with, at the moment just 20% of its holdings trading above their 50-day SMAs. Vulnerability is pervasive and is best for a technical catalyst to emerge before doing anything meaningful within the group.