BREADTH MEASURES SHOW SHORT-TERM DIVERGENCE -- IBM CONTINUES TO REFLECT NEW TECHNOLOGY BLUE CHIP DOMINANCE -- MICROSOFT HITS NEW 52-WEEK HIGH -- MORE PRECIOUS METAL INDEXES NEAR BULLISH BREAKOUTS -- BARRICK GOLD NEARS RECORD

NYSE ADVANCE-DECLINE LINE SHOWS MINOR DIVERGENCE ... One of our readers asked me to comment on short-term negative divergences showing up on some of our market breadth measures. The main one, of course, is the NYSE Advance-Decline line ($NYAD). Chart 1 shows the divergence referred to. While the NYSE Composite Index (green line) has moved to new highs, the NYSE AD line (red), has yet to do so. In an ongoing uptrend, we always like to see both lines hitting new highs together. I went back to see when we've seen that type of divergence in the past. I found two such instances over the last two years. They're shown in Chart 2. The first negative divergence took place in September 2005 (first arrow) and led to 5% market correction. The second one took place in May 2006 (second arrow), which led to an 8% market pullback. The red circle in Chart 2 shows the third negative divergence, which has yet to be resolved one way or the other.

Chart 1

Chart 2

NUMBER OF NEW HIGHS IS ALSO LAGGING ... As our reader correctly pointed out, the number of NYSE stocks hitting new highs has been dropping as well. The red line in Chart 3 is the NYSE High-Low ($NYHL) line. It plots the difference between stocks hitting new 52-highs and lows. A rising red line means that the number of new highs is expanding. The two lines rose and fell together from the start of 2007 through the end of May. Since then, however, the two lines have diverged. The NYSE (green) line is hitting a new high, while the NYHL (red) line is dropping. Chart 4 compares the two lines over a longer time period. In Chart 4, the green line is still the NYSE Composite Index. The red line, however, is a 10-day moving average of the NYHL line. I did that for easier comparison purposes. Bear in mind that the red line doesn't have a long-term trend like the NYSE. The red line tends to oscillate between upper and lower extremes. The chart shows that the market does better when the red line is rising (new highs expanding). Negative divergences have often led to market pullbacks. The red arrows show that happening in May 2006 and this February. The third divergence exists at the moment. That tells us that fewer stocks are participating in the market rally. That's probably a reflection of the fact that most of the stocks hitting new highs are large caps. Small and midsize market indexes have yet to hit new highs. Since there are fewer large caps than small caps, fewer stocks are hitting new highs. Even so, it's worth keeping an eye on.

Chart 3

Chart 4

IBM SHOWS ROTATION TOWARD BIG TECHS ... Today's explosive rally in IBM is reflective of the trend toward large cap technology stocks and blue chip stocks in particular. Chart 5 is an updated version of a chart that I posted on April 24 in an article entitled "IBM Is Another Blue Chip Coming Back Into Favor". I suggested that a close above its early 2004 peak near 100 would initiate a new uptrend. That has happened. I also showed the IBM/S&P ratio (blue line) turning up for the first time in five years. That ratio line has broken out to a new two-year high.

Chart 5

MICROSOFT BREAKS OUT... Microsoft is another huge new technology leader that's achieving a bullish breakout. The daily bars in Chart 6 show the new Nasdaq leader breaking out today to a new 52-week high. That's not all. The monthly bars in Chart 7 show the big stock moving above its early 2001 peak at 30.64. The next target is its mid-2001 peak near 32.50. Chart 8 plots a ratio of MSFT divided by the S&P 500. It shows the stock's relative strength (RS) line bottoming a year ago after six years of underachievement. The seven-year down trendline has also been broken. Add Microsoft to your growing list of large technology stocks that are showing new market leadership for the first time in years.

Chart 6

Chart 7

Chart 8

MORE GOLD INDEXES NEAR BREAKOUTS ... Last week I showed the PHLX Gold & Silver (XAU) Index breaking out to a new 52-week high. I noted, however, that two other precious metal stock indexes had yet to do so. That's about to change. The weekly bars in Chart 9 show the AMEX Gold Bugs (HUI) Index on the verge of accomplishing a bullish breakout of its own. So is the Market Vectors Gold Miners ETF (GDX) in Chart 10. The latter is the most important of the three because it's the only one of the three that can be bought as an ETF. The GDX is also the broadest of the three indexes. While the XAU includes 16 stocks and the HUI 15, the GDX includes a much larger sampling of 36 mining stocks. At the moment, the XAU is the only one that includes Freeport McMoran Copper and Gold (FCX) which is trading at a new record. That may explain the stronger chart pattern for the XAU. All three leaders, however, do include one standout performer.

Chart 9

Chart 10

BARRICK GOLD IS BIGGEST AND STRONGEST ... Last Thursday (July 12) I wrote an article headlined "Barrick Gold Helps XAU Index Break Out". I mistakenly wrote that Barrick wasn't included in the HUI Index. That's not correct. Barrick Gold is not only included in all three gold stock indexes, it's the biggest holding in all three. It's also the strongest. The weekly bars in Chart 11 show ABX trading up to a new 52-week high on rising volume. The stock's relative strength ratio (bottom of Chart 11) has also turned up for the first time in a year. There's more. The monthly bars in Chart 12 show ABX trading back over its 1996 high and on the way to achieving a new record. That bodes well for the stock, for the precious metals group, and the price of bullion.

Chart 11

Chart 12

UTILITIES BOUNCE -- FINANCIALS DON'T ... Earlier in the week, I showed the Dow Transports hitting a new record high, which confirmed earlier action in the Dow Industrials. The Dow Utilities, which have been the weakest of the three, are showing some resilience as well. After surviving a test of its 200-day line, the UTIL is trading back over its 50-day line. That's providing some short-term relief to the entire Dow complex. Unfortunately, the same is not true of financial stocks. Arthur Hill pointed out yesterday that the Financials SPDR had fallen back below its 200-day average. It's still there today. Its RS line continues to drop as well (bottom of Chart 14). If there's any threat to the market's ongoing uptrend, it's most likely to come from the financial group.

Chart 13

Chart 14