VALUE STOCKS DRAG DOWN RUSSELL 2000 -- XLU BREAKS FLAG SUPPORT-- NEW LOWS EXPAND ON NYSE AND NASDAQ -- US DOLLAR INDEX HAS A BIG DAY -- GOLD DECLINES ON DOLLAR STRENGTH -- APPLIED MATERIALS REMAINS STRONG -- RF MICRO DEVICES GAPS HIGHER

VALUE LEADING THE WAY DOWN... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor

The Russell 2000 broke below its June lows this week and this break can be attributed to the "value" components. The Russell 2000 can be divided into growth and value stocks. In fact, this division is captured by the Russell 2000 Value iShares (IWN) and the Russell 2000 Growth iShares (IWO). Both of these ETFs moved higher from early March to late May. This portion of the rally was broad based and lifted all boats. Things started changing in June and July as growth stocks continued higher and value stocks failed to keep up. Notice that the Russell 2000 Growth iShares hit a new high in mid July, but the Russell 2000 Value iShares failed to follow suit. As is often the case, the laggard on the way up became the leader on the way down. The Russell 2000 Value iShares gapped down and broke support from the June lows over the last four days. In contrast, the Russell 2000 Growth iShares remains above its June low and could still be classified in an uptrend.

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UTILITIES BREAKING DOWN ... The Utility SPDR (XLU) was hit hard on Tuesday with a 3% loss on heavy volume and continued lower on Wednesday. XLU led the market higher the first five months of the year, but became one of the weakest links over the last two months. On the daily chart, the ETF fell sharply from late May to late June and then bounced from oversold levels. The features of the July bounce are classic for corrective rallies and we should keep this setup in mind for the future. First, the rally retraced 62% of the prior decline. Second, the advance formed a rising flag. Third, the RSI advanced and met resistance around 50. The retracement (50-62%), the pattern (flag/wedge) and the indicator action (return to mid point) are all typical for a corrective advance. The break below flag support signals a continuation lower and the first target is the March lows. The Finance SPDR (XLF) already hit its March lows and it looks like XLU will follow suit.

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BREADTH DETERIORATES ... Last Thursday, John Murphy pointed out the negative divergences in Net New Highs for the Nasdaq and the NYSE. Subtracting new lows from new highs forms the Net New Highs indicator. Unsurprisingly, Net New Highs moved deeper into negative territory this week and exceeded the March low, for both the Nasdaq and the NYSE. This reflects a serious expansion in new lows and this is another bearish development.

The charts below show the NYSE Composite and Nasdaq with Net New Highs (gray line) and the 10-day SMA for Net New Highs (area chart). For reference, the NYSE Composite hit a new all time high on 13-July and the Nasdaq hit a 52-week high on 19-July. A mere week has passed since the Nasdaq's 52-week high and Net New Highs on the Nasdaq dipped to their lowest level since July 2006. Two weeks have passed since the all time high on the NYSE Composite and Net New Highs on the NYSE dipped to their lowest level since October 2005. There sure are a lot of new lows for two indices that looked quite strong a few weeks ago. While the indices looked strong on the outside, there were many weak stocks on the inside. New 52-week lows don't occur overnight. It takes sustained weakness to forge one year lows and this reflects sustained selling pressure.

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DOLLAR SURGES ... The US Dollar Index surged above 80.5 with its biggest move of the year. I went through the financial press looking for a reason, but I could not find anything fundament or political to account for such strength. It appears that this bounce was merely technical and this is not surprising given the oversold nature of the index. On the weekly chart, RSI moved below 30 and to its lowest level since November 2004. RSI is considered oversold when below 30 and overbought when above 70. Today's bounce is just one day and one day is not enough to reverse a long-term downtrend. In fact, today's bounce was not even enough to reverse the short-term downtrend and the index remains below its last support break. Let's see some follow through before putting on our horns.

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GOLD WILTS ... Unsurprisingly, the surge in the US Dollar Index led to weakness in bullion. The StreetTracks Gold ETF (GLD) declined .84% and dropped back below 67. While today's weakness in negative, keep in mind that GLD advanced over 7% from low to high over the prior four weeks and the ETF became overbought as the Stochastic Oscillator moved above 80. Now is the time to look for potential support levels and reversal areas. GLD broke wedge resistance and its 50-day moving average earlier this month. Broken resistance turns into support around 65.5 and the 50-day confirms support in this area. As such, I would look for support around 65.5-66 on any pullback in GLD.

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APPLIED MATERIALS HOLDS FIRM ... Despite the market plunge over the last few days, Applied Materials held firm and recovered Tuesday's losses with a gain today. Today's volume was also higher than Tuesday's volume. The stock led the Semiconductors with a break to new highs in mid July. On the weekly chart, AMAT broke above its January 2006 high with good volume over the prior two weeks. This stock clearly shows leadership and is not backing down this week. On the daily chart, AMAT surged above the June highs with a high volume rally in mid July and then consolidated over the last six days. The pattern looks like a flag and a break above the mid July high would signal a continuation higher.

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RF MICRO DEVICES GAPS HIGHER ... A little market weakness was not enough to deter RF Micro Devices (RFMD) either. The stock gapped up and broke its 200-day moving average with high volume today. The pattern from March to July looks like a big island reversal. The stock gapped down in March and then consolidated for almost four months. This large consolidation formed a base and the gap ended the consolidation. The two gaps created a price island and everyone who bought (and held) on this price island is now sitting with a paper profit. The gap and breakout are bullish as long as they hold and the next resistance area is around 8.5

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