REACTION LOWS FOR IWM AND RSI - S&P 500 ELLIOTT WAVE REVIEW - FINANCE SECTOR CHALLENGES RESISTANCE - SMH REMAINS BELOW JANUARY HIGH

REACTION LOWS FOR IWM AND RSI... Link for todays video. An uptrend is defined by higher highs and higher lows. With the Russell 2000 ETF (IWM) hitting a new 52-week high last week, we can assume that the overall trend remains up. Chart 1 shows weekly candlesticks for IWM over the last 16 months. The green arrows show reaction lows that coincide with RSI lows around 50. RSI found support at 50 as the ETF forged higher lows the last nine months. Momentum favors the bulls as long as RSI holds above 50. The most recent reaction low in IWM now becomes key support that defines the uptrend. An official downtrend would not begin unless IWM breaks below the reaction low at 57.5. In addition, I would also look for RSI to break below 50. This level offered support in early July, late October and late January.

Chart 1

S&P 500 ELLIOTT WAVE REVIEW... A reader asks if this weeks advance is enough to negate my Elliott Wave count for the S&P 500. The short answer is no. Before opening Pandoras box here, just a reminder that Elliott Wave is part objective and part subjective. This is my interpretation of the theory. I opted for the count shown on Chart 2, which makes the current 12-month advance an ABC correction. I have seen other counts, including bullish counts, that make sense too. In particular, some Elliotticians view the advance from March 2009 as much too strong to be considered a corrective advance. They argue that such strength suggest that this advance is part of a five wave move. Chart 3 shows this version of events.

Chart 2

Chart 3

So which one do we believe? As far as I am concerned, the most important aspect is the current 12-month uptrend. It could be an ABC advance, part of a 5-wave advance or something else. Whatever count, the S&P 500 established a new reaction low with the Feb-Mar bounce. As noted above, an uptrend consists of higher highs and higher lows. A downtrend starts with a break below the last reaction low, which is now the February low. Therefore, a break below the latest reaction low is required to reverse the current uptrend. So, while I still have the ABC correction as my current Elliott Wave count, confirmation is dependent on a trend reversal with a break below the February low. A break above the January high would negate this count and favor the alternative.

FINANCE SECTOR CHALLENGES RESISTANCE... The Financials SPDR (XLF) has been featured in the Market Message the last two Mondays. The Market Message on Monday, February 22, showed XLF testing range support. The Market Message on Monday, March 1, featured XLF forming a pennant after the surge off support. With last weeks surge, chart 4 shows XLF moving towards the top of its six month range. XLF has been bound by support in the 13.5 area and resistance in the 16 area since mid August. An important resistance test is looming. A breakout in XLF would be bullish for the sector and the market overall.

Chart 4

Chart 5 focuses on the latest bounce and pennant breakout. The January high is coming into play and could offer resistance. In addition, the ETF is up over 10% in four weeks and getting short-term overbought. Short-term, Fridays gap is the first zone to watch. This gap is bullish as long as it holds. A decline that fills Fridays gap would reinforce resistance and keep XLF range bound. The indicator window shows the price relative picking up over the last few weeks. Relative performance for XLF was flat from early December to mid February, but picked up as the price relative turned up at the end of February.

Chart 5

SMH IS LAGGING THE BROADER MARKET... The Semiconductors HOLDRS (SMH) remains in a clear uptrend since November 2008, but the ETF has lagged the broader market over the last four weeks. Chart 6 shows SMH with weekly candlesticks over the last 18 months. First, notice that SMH bottomed several months ahead of the S&P 500 (Nov-08 versus Mar-09). This reinforces the status of semiconductors as a leading group. Second, SMH remains within a clear rising price channel since this November low. These are internal trendlines because they cross the February 2009 low and summer highs. Nevertheless, these trendlines capture the overall uptrend. With a bounce over the last five weeks, SMH forged a reaction low at 24. A break below this level would reverse the current uptrend.

Chart 6

Chart 7 shows daily candlesticks with a five month view. The current swing (four week trend) is clearly up, but SMH is showing some relative weakness recently. First, the current advance is hitting resistance near the 62% retracement mark (~27). In contrast, the major indices exceeded their 62% retracements and many exceeded their January highs. Second, the bottom indicator shows the price relative, which compares the performance of SMH against the S&P 500. A lower high formed in February and the price relative edged lower the last three weeks. SMH is underperforming the S&P 500. Semis are an important group for the technology sector and the overall market. Relative weakness should be watched carefully. On the price chart, a rising wedge is taking shape with support based on the late February low. A break below this level would call for a continuation of the Jan-Feb decline. The bulls have the edge as long as this support holds.

Chart 7