BONDS ROCKED BY PAYROLLS - BACK TO BASICS WITH HIGHER HIGHS AND HIGHER LOWS FOR SPY - EQUAL-WEIGHT QQQQ VERSUS QQQQ - NET NEW HIGHS EXPAND TO JANUARY LEVELS - OIL CHALLENGES RESISTANCE

BONDS ROCKED BY BETTER-THAN-EXPECTED PAYROLLS... The Labor Department reported that non-farm payrolls declined 36,000 for the month of February, which was much better than the consensus estimate for a decline of 68,000 jobs. Positive news on the jobs front sent bonds sharply lower and yields sharply higher. Bonds are especially sensitive to interest rates and Fed policy. While the economy has yet to show any job growth, the decline in non-farm payrolls is certainly slowing and this could affect Fed policy down the line. Chart 1 shows the 20+ Year Treasury ETF (TLT) hitting resistance from the January-February highs and declining sharply in early trading on Friday. Notice that broken support turned into resistance in the 92 area. Also notice that a triangle may be taking shape with support in the 88-89 area. Chart 2 shows the 10-Year Treasury Yield ($TNX) with a mirror image of the TLT chart. Yields found support near broken resistance around 3.55% (35.5 on the chart). This means the December breakout is holding and rates are in an uptrend as long as the February lows hold.

Chart 1

Chart 2

BACK TO BASICS WITH HIGHER HIGHS AND HIGHER LOWS... Lets step back with some very basic charts and a basic momentum oscillator. Chart 3 shows the Rydex S&P 500 Equal Weight ETF (RSP) as a 5-day SMA, which smooths the daily fluctuations. A 65-day SMA is overlaid for two reasons. First, dips below the 65-day SMA are deemed significant enough to be called reaction lows and qualify as support levels. Second, the direction of the 65-day SMA confirms the underlying trend. The trend is up when the 65-day SMA turns up and rises. The trend is down when the 65-day SMA turns down and falls. Notice that the 65-day SMA turned up in mid April and remains up. The green arrows show the last three reaction lows with the last low marking current support at 38. With nothing but higher highs and higher lows since April, the trend is clearly up. A move below 38 would break support and argue for a trend reversal.

Chart 3

A 65-day Aroon oscillator is shown in the indicator window to measure momentum. Developed by Tushar Chande, Aroon means dawns early light in Sanskrit. The Aroon oscillator is constructed by subtracting Aroon(down) from Aroon(up). It fluctuates above/below zero. A new uptrend emerges with the move above zero, while a new downtrend emerges with the move below zero. More details can be found in the ChartSchool. Notice that Aroon turned positive in mid April and remained positive until mid February, when Aroon moved to its lowest level since April. This makes the Jan-Feb decline the sharpest since Feb-Mar 2009. Aroon is flashing a warning sign, but we have yet to see confirmation with a downturn in the 65-day SMA and a break below the February low. One strike here. Two to go.

Chart 4 shows the same indicators for the S&P 500 ETF (SPY). As pointed out in Thursdays commentary, these two ETFs are good for comparing the performance of large-caps and not-so-large-caps. SPY is based on the market-cap weighted S&P 500, which means large-caps dominate. RSP treats every stock equal, which means smaller stocks dominate because there are more smaller stocks. Like RSP, chart 4 shows SPY trending higher with higher highs and higher lows since April, which is also when Aroon turned positive and the 65-day SMA turned up. Based on this chart, the overall trend is still up with key support based on the February low. There are some concerns here as well because Aroon turned negative for the first time since April.

Chart 4

EQUAL-WEIGHT QQQQ VERSUS QQQQ... We can also compare the Nasdaq 100 ETF (QQQQ) against the Nasdaq 100 Equal-weight ETF (QQEW) to compare large-cap techs against not-so-large-cap techs. QQQQ is dominated by Apple (AAPL), Google (GOOG), Microsoft (MSFT), Intel (INTC), QualCom (QCOM) and other tech heavy weights. QQEW treats all 100 components the same. Charts 5 and 6 show both QQQQ and QQEW are in uptrends overall, but QQEW is holding up a little better than QQQQ. First, notice that Aroon turned negative for QQQQ. Second, notice that QQQQ is further below its January high. The February lows mark key support for both.

Chart 5

Chart 6

NET NEW HIGHS EXPAND TO PRIOR HIGHS... Net New Highs survived their third corrective period and surged over the last few weeks. Chart 7 shows Nasdaq Net New Highs surging back above +200 this week. Prior surges in October and early January hit the +200 area. Notice that there have been three corrections over the last eight months. Net New Highs dipped into negative territory in early July, late October and early February. These red areas are small as Net New Highs moved back into positive territory soon thereafter. In fact, notice that Net New Highs found support at or above -50. This means we should expect a trend reversal if and when new 52-week highs break below -50.

Chart 7

Chart 8 shows NYSE Net New Highs. Notice how this indicator bounced near the zero line in early July, early November and early February. Also notice that cumulative Net New Highs have been rising (above the 10-day SMA) for over 8 months. Even though Net New Highs are considered a lagging indicator, they have captured the current uptrend by staying largely positive. SharpCharts subscribers can click on these charts to see the settings and save to their favorites list.

Chart 8

OIL CHALLENGES RESISTANCE... Chart 9 shows West Texas Intermediate ($WTIC) challenging resistance in the low 80s for the third time in five months. Note that this is the 5-day SMA. Oil first hit 80 in late October and edged above 80 in early January. Even though the overall trend is up, some signs of weakness are starting to appear. First, Aroon moved into negative territory for the first time since mid March. Second, the 65-day SMA turned down over the last two months. There are two strikes so far, but West Texas Intermediate itself has yet to break support in the low 70s. A break below the Dec-Feb low would be strike three.

Chart 9

Chart 10 shows the Energy SPDR (XLE) trading flat since mid October, when the ETF first crossed above 56. There are similar signs of weakness appearing in XLE as Aroon turned negative and the 65-day SMA turned down. As with crude, XLE remains above support in the 54-55 area. A break below this level would reverse the uptrend. Chart 11 shows the Oil Service HOLDRs (OIH) holding up better than both crude and XLE. Notice that Aroon remains positive and the 65-day SMA has yet to turn down, though it has flatted in the last two months. Watch key support at 115 for a trend reversal here.

Chart 10

Chart 11