MAJOR MARKET AVERAGES ARE CONSOLIDATING OVER SUPPORT LEVELS

DOW DIAMONDS HOLD 50-DAY LINE ... The Dow Diamonds have been moving sideways since the start of August. Despite their loss of upside momentum, there hasn't been much chart damage either. Chart 1 shows the Dow Diamonds surviving a test of their 50-day moving average at the start of last week and have remained above that initial support line. The 9-day RSI line is also holding at the 50 line, which is usually indicative of a market in a consolidation phase. The daily MACD histogram are starting to bounce, but are still in negative territory. All in all, a pretty neutral picture. The same is true for the other major market averages.

Chart 1

S&P 500 STAYS OVER MARCH PEAK ... When I last wrote about the S&P 500 SPDRs (SPY) on Friday August 5, I was concerned about the start of a downside correction. I pointed out, however, that the first line of support was the early March peak around 122. That's because market indexes should find support along previous breakout points. So far, the 122 level has held. The 12-day Rate of Change (ROC), however, is still below the zero line. That shows the absence of upside momentum. A study of the ROC line shows that strong market up moves usually take place when the ROC is rising above the zero line. It's inability to do so suggests a market that's in a holding pattern.

Chart 2

NASDAQ 100 SHARES AND BOLLINGER BANDS ... Chart 3 shows that the Nasdaq 100 Shares (QQQQ) have been pulling back from chart resistance formed at the end of last year. The blue lines surrounding the daily bars are Bollinger bands. Those bands carry good and bad news on a short-term basis. The good news is that prices have bounced off the lower band near 39. The bad news has to do with the fact that the bands have been contracting. That's shown on the line beneath the chart which measures Bollinger band width. Market trends take place when the bands are expanding. Consolidations and corrections take place when the bands are contracting. Right now, the bands suggest a consolidating market. One of the market's problems over the past two weeks has been rising oil prices. As I suggested in an earlier update today, however, oil shares look overbought and vulnerable to short-term profit-taking. The market took some comfort in energy selling today. Any further pullback in the energy patch may be enough to keep the market from suffering any further damage. It may not be enough to push the market much higher; but it may be enough to keep it in an August trading range.

Chart 3