SUPPORT COMING INTO PLAY FOR IWM AND SPY - AD VOLUME LINES DECLINE FROM 52-WEEK HIGHS - NET NEW HIGHS HIT MOMENT-OF-TRUTH - BULLISH PERCENT INDICES REMAIN ABOVE 50% - TECHNOLOGY MATTERS

SUPPORT COMING INTO PLAY FOR IWM AND SPY... Link for todays video. With the January decline, the Russell 2000 ETF (IWM) has retraced around 50% of the November-January advance and returned to its triangle breakout. Chart 1 shows IWM breaking triangle resistance way back in early December. This broken resistance zone in the low 60s now turns into a support zone, which is confirmed by the 50% retracement. Securities rarely move in straight lines. Instead, a security usually zigzags higher or lower. The key to an uptrend is a series of higher highs and higher lows. IWM forged a higher high with the move above the Sep-Oct highs. In addition, the ETF was overbought after an 18% run from early November to early January. Some sort of pullback is perfectly normal and this yellow support zone is the first place to look for support. Chart 2 shows the S&P 500 ETF (SPY) trying to firm near the 50-62% retracement zone and support from the late November lows. This is a big test for SPY.

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AD VOLUME LINES DECLINE FROM 52-WEEK HIGHS... The AD Volume Lines both declined sharply over the last two weeks, but these declines are coming from new 52-week highs and the overall trend remains up for these indicators. Before discussing these indicators, lets have a few words on volume in general. Even though volume is an important indicator, it is still an indicator and secondary to actual price action (trend, price chart etc...). Chart 3 shows the Nasdaq advancing from 2050 in early November to 2300 in early January with relatively low volume. The Nasdaq was up over 12% in two months and only two up days featured above average volume. Similarly, chart 4 shows the NY Composite surging 10% in ten weeks and only two up days recorded exceptionally high volume. Low volume provided reason to doubt the rally, but low volume did not stop the rally.

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Another way to look at volume is with the AD Volume Line, which is based on Net Advancing Volume. Net Advancing Volume is not concerned with total volume. Instead, Net Advancing Volume breaks down total volume into two parts. Net Advancing Volume equals the volume of advancing stocks less the volume of declining stocks. The AD Volume Line is a cumulative measure of Net Advancing Volume. It rises when Net Advancing Volume is positive and declines when Net Advancing Volume is negative. We can then plot this line next to the price of the underlying index. Chart 5 shows the Nasdaq with the Nasdaq AD Volume Line. These two have been moving in lockstep since July. Notice that the AD Volume Line moved higher from early November to early January, right along with the index. More importantly, both recorded new highs in December and again in January. Even though the AD Volume Line declined sharply the last two weeks, this decline is coming off a 52-week high and the overall trend is up. Chart 6 shows the NY Composite with the NYSE AD Volume Line. Both also declined sharply after recording new 52-week highs in early January. As far as the bigger trend is concerned, I think the 52-week highs weigh more than the two week pullback. More weakness is needed to overrule the recent highs. Click on the charts to open in SharpCharts and see the settings.

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NET NEW HIGHS HIT MOMENT-OF-TRUTH... With the decline over the last two weeks, Net New Highs plummeted below 50 for both the Nasdaq and NYSE. Net New Highs is simply the number of stocks hitting new 52-week highs less those hitting new 52-week lows. Chart 7 shows Net New Highs for the NYSE exceeding 400 in early January. In fact, there were more Net New Highs in January than in October. This shows some underlying strength in the market. However, just like October, this indicator moved sharply lower after surpassing 400. Despite a dip below 50 this week, the indicator remains positive overall. The indicator bottomed after nearing the zero line in late October and is once again at a moment-of-truth. Further weakness with a move in negative territory would be bearish for the broader market. It is hard to sustain an uptrend if there are more 52-week lows than 52-week highs. This hasnt happened yet, but we need to keep a close watch as these indicators trade below 50. Chart 8 shows the same indicators for the Nasdaq.

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BULLISH PERCENT INDICES REMAIN ABOVE 50%... The Bullish Percent Indices are listed at the bottom of the Market Summary page at StockCharts.com. The major indices are shown first and then the 10 S&P sectors. As the table below shows, all index and sector Bullish Percent Indices are above 50%, which is the bullish/bearish threshold. This means that more than 50% of stocks within these indices and sectors are on Point & Figure buy signals. A move below 50% would signal that the majority were on Point & Figure sell signals. By extension, it seems logical to favor the bulls when above 50% and the bears when below 50%. Except for the telecom sector, more than 60% of stocks are on Point & Figure buy signals. The real trouble (decline) starts if and when these Bullish Percent Indices start dipping below 50%.

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Even though all Bullish Percent Indices favor the bulls, we are seeing less strength in January than in September-October. Chart 10 shows the Info Tech Bullish% ($BPTECH) peaking around 95% in September-October and forming a lower high in January. With the decline over the last two weeks, the indicator moved below 85%. This lower high formed a negative divergence from October to January. Chart 11 shows the Consumer Discretionary Bullish% Index ($BPDISC) forming a lower high in January as well, but remaining above 50%. Chart 12 shows the Financial Sector Bullish% ($BPFINA) holding above 50% since mid July. Also notice that not all crosses above/below 50% are clean. There can be whipsaws and some choppiness in the indicator around this level.

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TECHNOLOGY MATTERS... Information technology is the largest of the 10 S&P sectors. Data for the table below comes from the Standard & Poors website. Info Tech accounts for over 19% of the S&P 500. Finance, which was the biggest sector a few years ago, is next with around 15%. The smallest three sectors account for around 10% of the S&P 500. It is also interesting to note that the materials sector is still quite small relative to the other sectors.

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