STOCKS GIVE UP EARLY GAINS - BEARISH FAILURE SWING FOR RSI - INTEL AND TEXAS INSTRUMENTS LEAD SEMIS - DOLLAR DIPS AS RISK APPETITE INCREASES - GOLD BOUNCES OFF SUPPORT - OIL FAILS TO HOLD EARLY GAINS

STOCKS GIVE UP EARLY GAINS... Link for todays video.

Stocks surged in early trading with the major index ETFs sporting nice gains after the first hour of trading. However, there was no follow through as stocks drifted lower the rest of the day. Charts 1, 2 and 3 show 60-minute bars for the S&P 500 ETF (SPY), Russell 2000 ETF (IWM) and Nasdaq 100 ETF (QQQQ). All three advanced over the last six days, but their retracements are different. SPY retraced 50-62% of the prior advance with a rising wedge. IWM retraced a little over 62% with a rising wedge. QQQQ recouped almost allof the prior loss with an advance back to the resistance zone. Despite todays weak close, the trendlines extending up from last weeks lows are holding. Short-term traders can look for a break below these trendlines and Tuesdays low to reverse the seven day advance.

Chart 1

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BEARISH FAILURE SWING FOR RSI... Developed by J. Welles Wilder, RSI is one of the most popular momentum oscillators in technical analysis. Wilder introduced the indicator in his 1978 book, New Concepts in Technical Trading Systems, which you can find in the StockCharts.com bookstore. Wilder expounds on the failure swings in this book. And, it just so happens that we have a live example of a bearish failure swing in the Dow Diamonds (DIA). Chart 4 shows DIA with RSI behind the candlesticks. There are three steps to a bearish failure swing. First, RSI moves above 70 to become overbought. Second, RSI falls and forms a reaction low. Third, RSI rises and fails to exceed its prior high. Fourth, RSI declines and breaks below the prior reaction low. In this example, 10-period RSI moved above 70 in early May to become overbought. After a decline to 50, the indicator rose back towards the overbought line, but did not surpass it. A lower high formed and RSI broke below its prior low with a sharp decline in mid June. This is a bearish signal from RSI.

Chart 4

In addition to this bearish signal, RSI moved decisively below 50 for the first since early March. I have noted this many times over: momentum is generally bullish when RSI is above 50 and bearish when below 50. After plunging to the low 30s in June, RSI bounced back towards the centerline (50). This area often acts as support in an uptrend or resistance in a downtrend. Notice how RSI bounced near 50 in late April and late May (green arrows). If a downtrend has started, then I would expect RSI to meet resistance around 50**. SPY and IWM also show bearish failure swings in 10-period RSI, but the QQQQ chart is more ambiguous.

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SEMIS SHINE ... The Semiconductors HOLDRS (SMH) led the market higher on Wednesday. I featured SMH last week as the ETF broke below the lower trendline of Andrews Pitchfork. In addition, 50-period StochRSI moved below .50. These developments looked bearish at the time, but Mr. Market served up a little crow for lunch today. After further review, it looks like a falling flag formed in mid June. Chart 7 shows SMH breaking flag resistance with the surge over the last five days. While this breakout is short-term bullish, it was on very low volume that makes it a bit suspect. I am now marking support at the June low. A move below this level would break the rising price channel and reverse the four month uptrend.

Chart 7

INTEL AND TEXAS INSTRUMENTS LEAD SEMIS... Intel (INTC) is the biggest component (~23%) of the Semiconductors HOLDRS. Chart 8 shows INTC breaking wedge resistance last week and breaking above its May-June highs this week. Not many stocks are trading above their May-June highs right now. Intel is showing leadership. Chart 9 shows Texas Instruments (TXN) challenging its June high today. TXN accounts for around 22% of the Semiconductors HOLDRS. TXN provided a big boost for the ETF with a 57% advance from the March lows.

Chart 8

Chart 9

DOLLAR SINKS AS APPETITE FOR RISK IMPROVES... With stocks moving higher, the appetite for risk increased and the demand for safe-havens decreased. In particular, ETFs from Taiwan (EWT) and South Korea (EWY) led the markets higher. Gains in these emerging markets came at the expense of the Dollar, which fell sharply on Wednesday. The US Dollar Index ($USD) finished back below 80 today. Chart 10 shows $USD consolidating in June with resistance just above 81. There were a couple of big surges, but no breakout. Also notice that 14-day RSI has yet to break above 50. This downtrend is defined by resistance from the June highs and RSI below 50. Until both break out, the trend for the greenback is down and the odds favor a break to new lows. It aint broken until its broken. Chart 11 shows the Euro ETF (FXE) breaking back above resistance with a surge today. This reinforces the current uptrend with the June lows marking key support.

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Chart 11

WEAK DOLLAR BOOSTS GOLD... After taking a hit on Tuesday, gold rebounded with a strong gain on Wednesday. Gold futures were up over $10 in afternoon trading. Todays strength can be attributed to weakness in the Dollar as investors sought alternatives. Chart 12 shows the Gold-Continuous Futures ($GOLD) establishing support around 925. Gold broke wedge resistance in early May and broken resistance turned into support. After a decline the first three weeks of June, gold managed to stabilize around 925 the last 2-3 weeks. Also notice that the June decline retraced around 62% of the prior advance. This is another reason to expect support around 925. The combination makes conditions ripe for a bottom, but gold has yet to break through 950. Watch for a breakout here to bolster the bullion bulls. Chart 13 shows the Gold ETF (GLD) with a shorter timeframe. GLD fell back after breaking wedge resistance last week. Todays surge puts the breakout back in play with the first support level around 90.

Chart 12

Chart 13

OIL HITS RESISTANCE... Despite weakness in the Dollar, oil moved lower on Wednesday. Actually, oil was trading in positive territory this morning, but fell sharply after the US government reported an unexpected jump in fuel supplies. Oil was down over $1 in late afternoon trading. Chart 14 shows West Texas Intermediate ($WTIC) hitting resistance in the low 70s over the last few weeks, but the overall trend is still up. $WTIC became overbought above 70 as RSI moved above 70 twice. A 38-50% correction of the Apr-Jun surge would extend to the low 60s. Chart 15 shows the US Oil Fund ETF (USO) meeting resistance near 40. The ETF is also trending higher within a rising price channel. USO met resistance near the Dec-Jan highs and the 200-day moving average. A 38-50% correction of the prior surge would extend to the 33-35 area.

Chart 14

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