SPY HITS RESISTANCE ZONE - MEDIUM-TERM MOMENTUM REMAINS BULLISH FOR SPY - QQQQ STALLS NEAR BROKEN RESISTANCE - BREADTH CONTINUES TO WEAKEN - AD VOLUME LINE FORMS NEGATIVE DIVERGENCE - VIX NEARS DOWNTREND RESISTANCE

SPY HITS RESISTANCE ON WEEKLY CHART... There is still a compelling case for a stock market correction or decline from current levels. Chart 1 show the S&P 500 ETF (SPY) surging over 40% from its March low without a correction. Even though the spring uptrend remains in place, the index is meeting resistance from the October-January highs (orange zone). A move below the May lows would reverse the three month uptrend. Further upside is always possible, but the odds favor a corrective period after such a sharp advance to a resistance zone. There are two ways to correct: decline or trade sideways. A decline could retrace 50% of the March-June advance.

Chart 1

CCI also points to a correction as it moved below 100 for the first time since the beginning of May. CCI is a momentum oscillator that should be considered both overbought and bullish above 100. The move below 100 is not outright bearish, but a downturn from overbought levels is the first sign of weakening momentum since the rally began. Looking back, CCI became overbought in May 2008 with a move above 100. The subsequent move back below 100 signaled an important top (yellow highlight). Current CCI readings are based on Thursdays close (92.22) and the week is not yet finished. Fridays close will ultimately determine the final value for CCI this week.

UPTREND REMAINS ON THE DAILY CHART... Even though there are hints of an impending peak on the weekly chart, the three month uptrend has yet to actually reverse. If and when this trend reverses, then we can expect a correction or decline to unfold. Chart 2 shows SPY with a series of short-sharp declines from March to June (green arrows). These 2-5% declines lasted 1-3 days. The most recent short-sharp decline features a move from 95.08 to 91.55 (-3.5%) in three days (15-17 June). On a time and percentage basis, this move is in line with the prior short-sharp pullbacks. SPY firmed on Wednesday with a doji and bounced on Thursday with a small, but tentative, advance. This is the usual spot for a bounce. It is the unusual that would alert us to a possible trend change. What would be unusual right now? Failure to bounce and a move below Wednesdays low would suggest that a medium-term trend change is afoot.

Chart 2

StochRSI shows a bigger loss of momentum on the most recent decline. Yesterday I showed 50-period StochRSI for the Semiconductors HOLDRS. Basically, this indicator (momentum) favors the bulls as long as its holds above .50 and the bears when it is below .50. I am using 50-days because this fits a medium-term timeframe. Most recently, the indicator moved above .50 in mid March and has remained above .50 for three months. In fact, StockRSI traded between .80 and 1 for most of the advance. The indicator dipped below .80 with the May decline and below .60 with the June decline. Momentum aint what it used to be and a move below .50 would turn StochRSI bearish.

QQQQ CONTINUES TO HOLD BREAKOUT... The technology sector and the Nasdaq 100 ETF (QQQQ) have been leading the market higher. Technology is the one to watch for signs of weakness that could foreshadow a broader market decline, which could already be starting. While SPY and IWM posted small gained on Thursday, QQQQ was down fractionally and lagged the broader market. Chart 3 shows QQQQ breaking above pennant resistance around 35 and this breakout holding. QQQQ declined below 36 Monday-Tuesday, but firmed with indecisive candlesticks on Wednesday-Thursday. This is a moment of truth for QQQQ. Chart 4 shows 60-minute bars for an expanded view. After a channel break and gap down, QQQQ consolidated with a flat trading range the last two days. A move below the trading range lows would signal a continuation lower, while a surge above the consolidation highs would keep the bulls alive.

Chart 3

Chart 4

BREADTH STARTING TO FADE... On Tuesday, John Murphy showed negative divergences in the McClellan oscillators for the Nasdaq and NYSE. These reflect weakening breadth. Charts 5 shows the percentage of NYSE stocks above their 50-day moving average. This indicator also reflects weakening breadth over the last few weeks. For the NYSE, over 90% of stocks were trading above their 50-day averages in early May. John also featured this indicator on June 5th and suggested that a drop below 80% would be the first sign of a short-term market top. While the NY Composite continued to a higher high in June, the indicator formed a lower high. In other words, fewer stocks were trading above their 50-day averages in June than in May. Furthermore, the indicator broke below 80 this past week and exceeded its prior low. This is negative for the broader market. Chart 6 shows the percentage of Nasdaq stocks above their 50-day average. While this version did not make is above 90%, it did surpass 80% and then formed a negative divergence in early June. The indicator has since turned negative by breaking below its May low.

Chart 5

Chart 6

AD VOLUME LINE REMAINS WITH NEGATIVE DIVERGENCE... Chart 7 shows the AD Volume Line for the NYSE failing to exceed its May high and forming a negative divergence. A negative divergence forms when the underlying security moves above its prior high, but the indicator fails to exceed its prior high and forms a lower high. The indicator, advance-decline volume in this case, is not keeping pace with the underlying. With the AD Volume Line currently trading near its May low, we are at a make or break point. A break below the May low would chalk up another negative for breadth. Incidentally, the NYSE AD Line did not form a negative divergence. Neither did the AD Line or the AD Volume Line for the Nasdaq.

Chart 7

VIX NEARS RESISTANCE... I am also watching the S&P 500 Volatility Index ($VIX) for signs of a trend reversal - in both volatility and stocks. Before looking at the daily chart/trend, lets look at the long-term picture for volatility. Chart 8 shows three distinct periods over the last three years: bull market volatility 10-18, bear market volatility 17-32 and crisis volatility 32-80. Notice that these boundaries overlap somewhat. Thats probably because we are dealing with emotions in the options market. With a steady decline since October, emotions are settling down and the VIX is back into normal bear market volatility. At least we are out of crisis volatility for now.

Chart 8

Chart 9 shows the VIX as a 3-day SMA, which smooths out daily fluctuations. The VIX broke support on 12 March and this coincided with the March surge in the S&P 500. The VIX continued to trend lower as the S&P 500 extended its advance. While the S&P 500 hit a new high for the move in June, the VIX recorded a new reaction low to keep pace. With the sharp decline over the last few days, the VIX surged off its June low and broke the trendline. Further strength above the late May high would signal a trend reversal for the VIX. A new uptrend in the VIX would be bearish for the S&P 500. Chart 10 show the Nasdaq 100 Volatility Index ($VXN) for reference.

Chart 9

Chart 10