SPY CHALLENGES JULY HIGH - QQQQ LEADS THE SURGE - SMH GAPS HIHGER - GOLD AND GDX MOVE SHARPLY HIGHER - DOLLAR BREAKS TRIANGLE SUPPORT - EURO HOLDS SUPPORT - MCCLELLAN OSCILLATORS REMAIN BEARISH

SPY SURGES BACK TO JULY HIGH. ... After breaking below its May lows just seven days ago, the S&P 500 ETF (SPY) recouped its July losses with a surge over the last three days. The strength behind the move of the last three days is extraordinary (3 days, 5+ points, 5+ percent). In addition, all sectors were up with five of nine gaining over 3%. Failed support breaks and strong advances force a rethink. Last week I was arguing for the head-and-shoulders pattern and the neckline support break. Mondays recovery back above support raised the yellow flag. Todays surge provides follow though with a break above the channel trendline and a challenge to the July. Despite such a strong move, chart 1 shows that SPY is already short-term overbought as CCI moved from oversold (< -100) to 95 in just a few days. Above 100 is considered overbought. Moreover, there is still resistance in the mid 90s from the May-July highs. Let's see how SPY handles this bigger resistance zone.

Chart 1

TECHS LEAD THE WAY... In addition to the resurgent finance sector, the Nasdaq 100 ETF (QQQQ) and techs continue to show leadership. SPY and DIA both broke below their May lows, but QQQQ held well above its May low to show less weakness (relative strength). Chart 2 shows QQQQ firming last week with three small candlesticks and then surging above 36 this week. It is an impressive move, but the ETF is already at resistance and getting overbought after a 5+ percent surge in three days. Chart 3 shows the Semiconductors HOLDRS (SMH) surging above 22 with a big gap. Even though the trend is up, CCI moved to its highest level in over eight months. At around 300, this momentum oscillator is clearly overbought.

Chart 2

Chart 3

GOLD AND GDX SURGE... The Gold ETF (GLD) surged above its wedge trendline with a big move on Wednesday. Chart 4 shows GLD breaking below 90 last week, but managing to firm near the 62% retracement with a couple of inside days (Thursday-Friday). Hmm, this price action is similar to what we saw in QQQQ. After a nice bounce on Monday and stall on Tuesday, the ETF broke out with a gap today. There is still the matter of resistance from the late June high at 93. The bottom indicator shows the Commodity Channel Index (CCI) breaking its down trendline and moving solidly into positive territory. This bullish signal is similar to the one seen in late April.

Chart 4

Chart 5 shows the Gold Miners ETF (GDX) bouncing off trendline support with a big move over the last three days. This trendline marks a series of higher lows extending back to January. Yes, the ETF has been working its way higher the entire year. The bottom indicator shows the Commodity Channel Index (CCI) with a double bounce from oversold levels. As with GLD, this momentum indicator surged into positive territory today.

Chart 5

DOLLAR ETF BREAKS TRIANGLE SUPPORT... Weakness in the Dollar provided the catalyst for the gold rally. Chart 6 shows the Gold ETF with the Dollar Bullish ETF (UUP). These two actually had a positive relationship in January-February, which is also when the stock market swooned. The inverse relationship was also in disarray from late February to late April (orange area), but got back on track in May. Most recently, the Dollar moved sharply lower the last five days, while gold moved sharply higher the last three days (yellow area).

Chart 6

Chart 7 shows the Dollar Bullish ETF breaking below triangle support with a sharp decline on Wednesday. The ETF has been in a downtrend since the mid March plunge, which happens to mark the Fed's first announcement on quantitative easing (QE). Todays weakness was attributed to two items. First, China announced a record for its cash reserves. China may seek to diversify away from the Dollar and this could put downward pressure on the greenback. The second reason stems from strength in the stock market, which increases investor confidence and detracts from the Dollar as a safe-haven currency. The Yen, which is also a safe-haven currency, declined sharply today too.

Chart 7

Chart 8 shows the Euro ETF (FXE) surging above 140 on Wednesday. The ETF remains within a triangle consolidation, but the trend since March is up. Despite a sharp decline in early June, the ETF ultimately held support around 138. The odds favor a continuation of the uptrend as long as this support level holds.

Chart 8

MCCLELLAN OSCILLATORS STILL BEARISH... The McClellan Oscillator is a breadth indicator that fluctuates above and below zero. Formula details are beyond the scope of this commentary, but you can find plenty of information from the chart school. In a nutshell, the indicator is the 19-day EMA of Net Advances less the 39-day EMA of Net Advances. Chart 9 shows the McClellan Oscillator for the Nasdaq. Chart 10 shows the McClellan Oscillator for the NY Composite.

Chart 9

Chart 10

Both oscillators peaked in mid March and have been deteriorating the last two months. They turned negative in mid May and then moved to new lows in mid June. This shows increased selling pressure within the Nasdaq and the NY Composite. However, relative to these oscillators, the NY Composite and Nasdaq held up pretty well. The Nasdaq held above its May low, while the NY Composite rebounded near its May low this week. Nevertheless, I would still classify these indicators as bearish because they remain below their bullish thresholds. This is also a reason to exercise some caution with the current surge. The dotted lines are set at +50 and -50. While divergences and movements into positive/negative territory can trigger signals, they are also prone to whipsaw. Therefore, I set the bullish threshold at +50 and the bearish threshold at -50. This weeds out insignificant moves. Breadth turns bullish with a move above +50. Breadth turns bearish with a move below -50. There have been four signals over the last eight months. The last signal was a move below -50 in mid June. Despite a rebound over the last two days, the indicator has yet to move back above +50. That could change today as the market is up sharply with strong breadth today. This is not a stand-alone signal or system. As with all indicators, it should be used in conjunction with other analysis techniques.