CONSOLIDATION BREAKOUTS TURN INTO FIRST SUPPORT LEVELS - FINANCE AND CONSUMER DISCRETIONARY SECTORS START TO LAG - BIOTECHS BUCK THE SELLING PRESSURE - AMGEN AND GENZYME BREAK RESISTANCE - VIX CONTINUES TO TREND LOWER - NET NEW HIGHS EXPAND

STOCKS PULL BACK ... Link for todays video.

After a four day surge that produced consolidation breakouts, the major index ETFs pulled back on Wednesday. Chart 1 shows the S&P 500 ETF (SPY) with a flag/wedge breakout on Monday. With a ~6% surge the prior four days, some sort of pullback or consolidation can be expected. Broken resistance around 92-93 turns into support and this is the first area to watch for firmness. Strong securities hold their breakouts. A more back below 92 would show weakness. As far as the medium-term trend is concerned, the late May surge reinforced support from the May lows. Look for a break below these lows to actually reverse the trend. Both support areas are marked with the orange shading. Chart 2 shows the Nasdaq 100 ETF (QQQQ) with a pennant breakout last Friday. Broken resistance around 35 turns into the first support zone to watch. Medium-term support is based on the May lows around 33.

Chart 1

Chart 2

FINANCE AND CONSUMER DISCRETIONARY START TO LAG... The Consumer Discretionary SPDR (XLY) and the Financials SPDR (XLF) led the market higher throughout March and April. May was a different story as both started to lag. The indicator window shows the price relative, which compares the SPDRs performance against the S&P 500 ETF. The XLF price relative peaked in early May (Chart 3) and the XLY price relative peaked at the end of April (Chart 4). Both price relatives have been moving lower the last few weeks. This reflects underperformance by two key sectors. This underperformance can also be seen on the price chart. While SPY moved above its May highs this week, the Consumer Discretionary SPDR and the Financials SPDR did not. In other words, these two sectors failed to confirm the new reaction high in SPY. This non-confirmation is only a few weeks old. Moreover, both XLF and XLY remain above their May lows. A break below these support levels would reverse the medium-term uptrends.

Chart 3

Chart 4

BIOTECHS BUCK THE TREND... While most industry groups and stocks were weak on Wednesday, Chart 5 shows the Biotech iShares (IBB) bucking todays weakness with a move higher. IBB broke triangle resistance with a gap up on Monday and this gap held. The next resistance zone around 74-75 marks the upside target for this breakout. CCI is shown in the indicator window with a move above 100. Even though this is technically overbought, it is also a show of strength. Strong securities become overbought, not weak ones. Within the group, chart 6 shows Amgen (AMGN) breaking triangle resistance with a surge above 51 today. Chart 7 shows Genzyme (GENZ) breaking flag resistance and its May high with a move above 62 today. Volume was a bit low for both and could have been higher. There were also good moves in Celgene (CELG) and Biogen Idec (BIIB).

Chart 5

Chart 6

Chart 7

VIX RETURNS TO NORMAL... We have been getting some questions regarding the volatility indices so now is a good time to review the S&P 500 Volatility Index ($VIX) and the Nasdaq 100 Volatility Index ($VXN). Because these volatility indices can trend, trading based on extremes does not always work. Therefore, we must sometimes look at the underlying trend. VIX and VXN can be quite, well, volatile, so I elected to show these as 3-day SMAs on the ensuing charts. This also puts the focus on medium-term signals. Chart 8 shows a range bound S&P 500 Volatility Index from August 2007 until August 2008. Keep in mind that this is the 3-day SMA of the VIX. Bearish sentiment was getting too high as the VIX approached 28-30, while bullish sentiment was getting too high as the VIX approached 18-16. With stocks plunging in September 2007, the 3-day SMA broke above its bearish extreme with a surge above 40. Chart 9 shows the indicator going on to break 75 as stocks continued lower into October. A double top formed in October-November and the indicator broke support in December. Although not in a straight line, the S&P 500 Volatility Index has been moving lower throughout 2009.

Chart 8

Chart 9

VIX AND VXN TRENDING LOWER... Chart 10 shows the 3-day SMA breaking below 30 in late May and early June, which is the lowest reading since September 2008. Perhaps volatility is returning to normal. The important thing to note here is that the VIX is trending lower and this is bullish for stocks. On this chart, I drew trendlines to define the current trend. There have only been two trends in 2009: an uptrend from January to March and a downtrend from March to June. Stocks, as measured by the S&P 500, moved lower from January to March and higher from March to June. As far as a VIX reversal, I would look for the 3-day SMA to break above 32. Such a move would also break the March trendline and late May high. An upturn in the VIX would be bearish for stocks. The bulls have the edge as long as the VIX trends lower.

Chart 10

Chart 11 shows the 3-day SMA for the Nasdaq 100 Volatility Index ($VXN). The signals are similar to those in the VIX. The Nasdaq bulls have the edge as long as the VXN trends lower. I set resistance at 34 and a break above this level would reverse the downtrend. There is also something quite fascinating over the last eight months. The VIX and the VXN are virtually equal. The implied volatility for a basket of options is about the same for the S&P 500 and the Nasdaq 100. Who would have thunk it. Readers may also want to check out the iPath S&P 500 VIX Short-Term ETN (VXZ) and the S&P 500 VIX Medium-Term ETN (VXX) .

Chart 11

NET NEW HIGHS SWING TO LIFE... I previously talked about the inability of Net New Highs to expand during this rally. Chart 12 shows the cumulative net new highs line for the NYSE ($NYHL) over the last 12 months. Dont pay attention to the scale because this number depends on when the calculation started. You can see this difference when looking at a 12 month chart versus a 3 month chart. The trend is what is important here. Net new highs equal new 52-week highs less new 52-week lows. This line rises when net new highs is positive for the day and falls when it is negative. After declining from June 2007 to March 2008, the net new highs line flatted from March to June. The market rose as the cumulative Net New Highs stabilized.

Chart 12

Chart 13 shows this same indicator over the last three months to provide more detail. Technically, the indicator did not bottom until early April. The line has been rising the last two months as net new highs become more and more positiv. Just this week, the cumulative net new highs line moved to its highest level since early March. The trend here is up as long as the mid May low holds. A move below the mid May low would signal another expansion new lows and this would be a bearish development.

Chart 13