WEEKLY EMA LINES ARE STILL POSITIVE -- DAILIES TURN POSITIVE -- STRENGTH IN RETAIL STOCKS IS A POSITIVE SIGN FOR THE MARKET -- RETAIL BREAKOUTS ARE OCCURRING IN BIG LOTS, FAMILY DOLLAR STORES, AND TARGET -- AVOID INVERSE ETFS WHILE MARKET IS RISING

WEEKLY EMA COMBINATION IS STILL UP ... Several recent messages have dealt with the use of "daily" exponentially smoothed average (EMA) crossovers (in particular the 13-34 day EMA combination ) to generate buy and sell signals . One reader suggested that I take a longer-range view of things. Another suggested looking at the 13-34 "week" combination. And another asked how I created the EMA "spread chart" shown in a recent message. Chart 1 addresses all three requests. I've always advocated the use of the weekly EMA crossovers for "longer-term" signals. The daily signals are for "short-term" trading purposes. Weekly signals are always more important than dailies. Chart 1 overlays the 13-week (blue line) and 34-week (red line) EMA lines on weekly bar chart of the S&P 500 for the last three years. The last bullish crossing took place last July (blue arrow) and is still positive. The black line below Chart 1 is the spread between the two weekly EMAs. Crossings above and below its zero line correspond to the EMA crossings (see circles). [You can create that line by inserting 13,34,1 into the MACD indicator]. Although the weekly bullish crossing didn't take place until last July, the EMA spread (black line) actually turned up during March, which gave an early hint that the major trend was improving. The black line has dipped during the first quarter of 2010 as the two EMA lines have converged. So far, that signifies nothing more than a downside correction in an ongoing uptrend.

Chart 1

DAILY EMA LINES TURN POSITIVE... On Tuesday, I wrote about how the ability of U.S. stock indexes to close back above their 50-day averages had improved the market's short-term trend. I also mentioned that a couple of daily EMA combinations were turning positive. I was referring to the 20-50 day EMA and the 13-34 day EMAs. Chart 2 shows the 13-day EMA (blue line) crossing back above the 34-day EMA (red line) this week. [The daily S&P 500 prices are plotted above]. That reverses the short-term sell signal given in late January. Unfortunately, upside volume has been relative light during this week's price advance which detracts from the stronger price action. That suggests a couple of possibilities. One is that the correction is over and prices are starting a new upleg. A second possibility is that prices have entered a trading range between the January high and the February low. Moving averages need a sustained trend in order to function properly. While weekly averages are still bullish, daily averages have been "whipsawed" over the last month. That's often a sign that the market is entering a period of relatively flat (and trendless) price action for awhile.

Chart 2

RETAIL STRENGTH IS A GOOD SIGN ... One of the factors working in the market's favor is the move to new highs by the Consumer Discretionary SPDR and retail stocks in particular. Chart 3 shows the XLY hitting a new 52-week high today after exceeding its January peak, while Chart 4 shows the S&P Retail SPDR (XRT) having broken out of "triangle" formed between October and February (see converging trendlines). Both consumer-oriented ETFs show rising relative strength lines (below charts) since mid-January. Given the importance of consumer spending to the economy and the stock market, the absolute and relative strength shown by both ETFs is a positive sign.

Chart 3

Chart 4

RETAIL LEADERS ... Three retail leaders are showing a bullish combination of strong chart action combined with rising relative strength. The monthly bars in Charts 5 and 6 show promising bullish breakouts in the making by Big Lots and Family Dollar Stores. FDO is now trading at the highest level in six years. Chart 7 shows Target hitting a new 52-week high after having risen above a two-year resistance line. Its relative strength line (below chart) is trading at the highest level in three years. Target also happens to be the most heavily weighted stock in the S&P 500 Retail SPDR (XRT).

Chart 5

Chart 6

Chart 7

WHY I'VE AVOIDED INVERSE ETFS ... A number of readers have asked why I haven't said much about inverse (or bear) ETFs. The main reason is that I wasn't convinced that the recent market dip was serious enough to warrant bearish positions. So far, that view has been justified. Chart 8 shows the ProShares Ultra Short QQQs (QID) nearing a test of its January low. It's also back below its 50-day average (blue line). Inverse funds are not meant as long-term holdings. Their use is only justified when the market is in a serious downward correction or a bear trend. Some short-term profits could have been made in the QID from mid-January to mid-February, but only for very nimble traders. For everyone else, it's back where it started the year. The QID is designed to trade in the opposite direction of the Power Shares QQQ Trust (QQQQ). Chart 9 shows that technology-dominated ETF trading a couple of points from its January high and well above its 50-day line. At the moment, the QQQQ is acting a lot better than the QID.

Chart 8

Chart 9