DOW TESTS MAY LOWS - TRANSPORTS FORM DOUBLE TOP - RETAIL HOLDRS SHOWS RELATIVE WEAKNESS - WAL-MART WEIGHS ON RETAIL - SMH BREAKS PITCHFORK TRENDLINE - EURO GIVES BACK GAINS - GOLD FIRMS AT SUPPORT

INDUSTRIALS AND TRANSPORTS TEST MAY LOWS... After a sharp decline in June, a number of key indices, ETFs and stocks are testing support from their May lows. First up, chart 1 shows the Dow Industrials with support from broken resistance around 8200. This support area was confirmed with a couple bounces in May. With a sharp decline the last two weeks, the Dow is once again testing support here. A bounce off this support level is possible, especially considering that the Dow became short-term oversold with the 300 point decline below 8400 over the last two weeks. Using a little deduction, we can infer that broken support around 8600 now turns into short-term resistance. These are the next support-resistance levels to watch for the Dow.

Chart 1

NON-CONFIRMATION FROM DOW TRANSPORTS... Chart 2 shows the Dow Transports with a trading range unfolding over the last two months. Before looking at this chart specifically, I would like to point out the recent non-confirmation by the Dow Transports. The Dow Industrials moved above its May high in June, but the Dow Transports met resistance at its May high and did not forge a higher high. This non-confirmation reflects relative weakness in the Dow Transports. On the price chart, the Dow Transports met resistance just above 3400 in May-June and established support just below 3000. As with the Dow Industrials, the May lows mark an important support level to watch. A break below support here would confirm a double top and argue for further weakness towards 2600. In classic technical analysis, the height of the pattern is subtracted from the support break for a target. Support, however, is holding for now. Should both the Dow Industrials and the Dow Transports break their May lows, we would have a bearish Dow Theory signal. Conversely, a bullish signal (confirmation) would occur with break above the May-June highs.

Chart 2

RETAIL HOLDRS TEST KEY SUPPORT... The May lows also mark an important support level for the Retail HOLDRS (RTH). Like the Dow Transports, chart 3 shows RTH hitting resistance in May and failing at this resistance level in June. With a sharp decline in June, RTH is testing support from the May lows. A break would forge a lower low and confirm a double top that is taking shape. The bottom indicator shows the price relative (RTH:SPY Ratio). This line rises when RTH leads SPY and falls when RTH lags SPY. With a lower high forming in early June, RTH is starting to show relative weakness. Chart 4 shows the Consumer Discretionary SPDR (XLY) with a similar pattern at work.

Chart 3

Chart 4

HOME DEPORT AND WAL-MART LAG... Wal-Mart (WMT) and Home Depot (HD) are the two biggest components of the Retail HOLDRS. Wal-Mart weighs in around 22% and Home Depot accounts for almost 13%. They are also important stocks when it comes to the overall retail group. Wal-mart is the nations largest retailer, while Home Depot is an extension of the housing market. Chart 5 shows WMT with an array of bearish patterns at work. First, a large head-and-shoulders pattern is taking shape with neckline support just below 49. Second, the right shoulder formed with a rising wedge. Third, WMT is consolidating around 48-49. The stock broke rising wedge support with a sharp decline in early June. This decline also carried the stock below the head-and-shoulders neckline. Even though WMT managed to firm around 48-49 with a flat consolidation recently, the odds favor a consolidation break and continuation lower.

Chart 5

Chart 6 shows Home Depot breaking wedge support two weeks ago and sinking below 23 this week. Notice how the stock started showing relative weakness in May as the price relative moved lower the entire month.

Chart 6

SMH BREAKS FIRST SUPPORT... Last week I featured the Semiconductors HOLDRS (SMH) using Andrews Pitchfork to draw trendlines. Chart 7 shows Pitchfork support just below 21. Support in this area was also confirmed by the early June low. In addition, I suggested that SMH remains in an uptrend as long as the 5-period SMA of StochRSI (50) remains above .50. Yeah, it is a bit complicated, but it is also a chance to look at a new indicator or put a twist on an old one. Anyhow, SMH broke support and the 5-day SMA for StochRSI moved below .50. This combination looks bearish from where I sit.

Chart 7

EURO GIVES BACK GAINS... The Euro ETF (FXE) surged above 140 with a huge advance on Tuesday, but gave most of it back as the Dollar surged on Wednesday. In todays FOMC statement, the Fed did not change its bond purchase program (aka Quantitative Easing or QE). Perhaps the Dollar bears were looking for more QE. After all, the Dollar plunged and the Euro surged when the Fed first announced its intent to purchase bonds on March 18th. Chart 8 shows FXE plunging back below 140 today. With this sharp decline, I am redrawing a falling flag over the last few weeks. Big gains should hold and todays failure argues for a reassessment of Tuesday's surge. A subsequent recovery and break above this weeks high would put the bulls back on track.

Chart 8

Chart 9 shows the US Dollar Index ($USD) surging back above 80 today with a nice rebound. There is still a lot of resistance just above 81 as a triangle consolidation takes shape in June. With the range narrowing and the coil tightening, the Dollar could be poised for a break. An upside breakout would be bullish for the greenback, bearish for the Euro and probably bearish for gold. It aint happened yet though. Also notice that 14-day RSI has yet to break its red trendline or above 50. Look for an upside breakout in this indicator to turn momentum bullish.

Chart 9

GOLD ATTEMPTS TO BOUNCE... In a rather strange twist, gold was rather subdued as the Euro surged on Tuesday. On Wednesday, GLD opened strong as the Euro opened weak. The Euro ETF finished with a one percent loss on Wednesday, but the Gold ETF gained half a percent. These two usually move in tandem. Even though it is just two days, the positive correlation between the Euro and gold is getting a test. Chart 10 shows the Gold ETF finding support around 90 in June. Support in this area stems from broken resistance and the 50-62% retracement zone. Also notice that GLD formed a falling flag over the last three weeks. There was a breakout attempt today, but GLD closed weak to form a black candlestick. Look for a second surge above 92.5 to break resistance and put the bullion bulls back on track. Upside momentum is improving as the Commodity Channel Index (CCI) moved back above -100. The green dotted lines shows prior bounces from oversold levels in March and April. CCI is considered both oversold and bearish when below -100. This move back above -100 shows momentum improving for the first time in over a week. Chart 11 shows the continuous futures contract for gold ($GOLD). As with the ETF, the falling wedge in June retraced 50-62% of the prior advance. In addition, there is support from broken resistance around 920-925. Look for a wedge break to reverse the three week slide.

Chart 10

Chart 11