RUSSELL 2000 TESTS IMPORTANT SUPPORT LEVEL - SEMIS GET HIT WITH DOWNGRADE - INTC AND TXN LEAD SEMIS LOWER -ENERGY PACES SECTORS LOWER - WALMART POWERS RETAIL HOLDRS - RETAIL SPDR FAILS TO EXCEED OCTOBER HIGH

RUSSELL 2000 DECLINES TO IMPORTANT SUPPORT LEVEL... Link for todays video. Small-caps are still lagging the broader market. The Russell 2000 first showed relative weakness as the first of the major index ETFs to break below its early October low. RUT again showed relative weakness in the November rally because it failed to break above its October high. In contrast, both the S&P 500 and Dow held their October lows and subsequently broke their October highs. Chart 1 shows the Major Indices Perfchart from September 1st to November 18th with the Russell 2000 in light green. Notice that the Russell 2000 outperformed the other major indices in mid September and again in mid October (red arrows). Outperformance suddenly turned to underperformance as the Russell 2000 declined more than the other major indices in the second half of October (blue arrow). With a strong November rally, the Russell 2000 had a chance to make up for lost ground, but also underperformed on the way up. Notice that the performance lines for the Dow and S&P 500 moved above their October highs, but the performance line for the Russell 2000 fell well short of its October high.

Chart 1

Chart 2 shows the Russell 2000 confirming a double top with a break below its October low. However, the market had other ideas with the November rally and $RUT bounced back towards 600. Is this just an oversold bounce or will this move exceed the Sept-Oct highs? The 3-week trend remains up with support at 580. In addition, MACD (5,35,5) remains above its signal line and trending higher. A break below 580 in RUT and a move into negative territory for MACD (5,35,5) would be bearish. I would then look for a continuation of the October decline and target a move to the 540 area. The height of the double top (~40) is subtracted to the support break (~580) for a downside target.

Chart 2

SEMIS GET HIT WITH DOWNGRADE... Bank of America/Merrill Lynch analyst Sumit Dhanda downgraded a slew of semiconductor stocks and this weighed on the group. Dhanda cited an imbalance between inventories and demand. After stalling near resistance for two days, chart 3 shows the Semiconductors HOLDRS (SMH) gapping down with relatively high volume. While this gap is short-term bearish, SMH has been range bound since August with support around 24 and resistance around 26. At this point, this is just a downswing within a larger trading range. Look for a range break to establish the next medium-term trend.

Chart 3

Chart 4 shows Intel (INTC) also gapping down with above average volume. Like SMH, Intel remains in a larger trading range bound by support around 18-18.5 and resistance around 20.5-21. With Thursdays decline, Intel is trading in the middle of the trading range.

Chart 4

Chart 5 shows Texas Instruments (TXN) also gapping down with a move below 25. However, the stock just broke to new highs last week and was short-term overbought after the run from 23 to 26. The medium-term trend is still up for this stock. Broken resistance around 24-24.5 turns into support and the stock managed to bounce off its intraday low today.

Chart 5

ENERGY LEADS SECTORS LOWER... All nine sectors were down on Thursday with the Energy SPDR (XLE) pacing the decline. Chart 6 shows the Sector Perfchart since mid October (five weeks). The six sectors that exceeded their October highs also outperformed the S&P 500 over the past month. These include consumer discretionary, technology, industrials, consumer staples and healthcare. The three sectors that did not exceed their October highs also underperformed the S&P 500. These include energy, utilities and finance. Not only did these three underperform the S&P 500, but also they actually declined over the last five weeks. The other six sectors still show gains for the month.

Chart 6

Chart 7 shows the Energy SPDR (XLE) within a rising price channel that defines the uptrend. XLE bounced with the rest of the market in November, but fell short of its October high. This November advance retraced just over 62% of the prior decline. With todays decline, XLE is testing an important support level. Further weakness below 56 would break last weeks low and the lower trendline of the rising channel. I would then mark the next support area around 52. The bottom indicator window shows RSI bouncing off the 43-50 zone during the entire advance. Momentum favors the bulls as long as RSI holds this zone. A break below 43 would be bearish for momentum.

Chart 7

RETAIL ETFS DIVERGE... The Retail HOLDRS (RTH) remains strong with a move above the October highs this month. A strong showing from Walmart, its biggest component, fueled a good portion of the advance. Chart 8 shows RTH breaking wedge resistance in early November and moving above 94. Even though RTH is holding its gains, the ETF stalled with indecisive candlesticks the last eight days. A break below the 8-day low would be short-term bearish and argue for a pullback within the bigger uptrend. Broken resistance and the wedge lows mark next support around 89-90.

Chart 8

Chart 9

In contrast to RTH, chart 9 shows the Retail SPDR (XRT) failing to break above its October highs. In fact, XRT has a lower high working and shows relative weakness over the last few weeks. This relative weakness is a concern, but XRT is still in an uptrend over the last three weeks. First support is based on last weeks low. A move below this level would fill last weeks gap and argue for a continuation of the October decline. The next support level is set around 32.5.

Chart 10

You may have noticed that the charts for the Russell 2000 ($RUT), Energy SPDR (XLE) and Retail SPDR (XRT) have some common traits. All three failed to exceed their October highs and show relative weakness in November. All three are currently in short-term uptrends. All three need to break last weeks low to reverse these uptrends. Last weeks lows represent important support levels for many stocks and ETFs.