STOCKS STAGE ANOTHER RECOVERY WITHIN A DOWNTREND -- SEMICONDUCTORS SHOW SOME RELATIVE STRENGTH -- TEXAS INSTRUMENTS AND INTEL FIRM -- EURO BOUNCES DESPITE BAD NEWS -- LONG TERM BREADTH INDICATOR NEARS MAKE OR BREAK POINT

STOCKS STAGE ANOTHER RECOVERY WITHIN A DOWNTREND... Link for todays video. Wednesdays trading day looks a lot like Monday. Stocks declined until noon and then advanced in the afternoon. Neither the morning decline nor the afternoon rebound were convincing. All in all, Wednesdays trading action looks like a stalemate. Chart 1 shows the Dow SPDR (DIA) testing last weeks closing low with a dip into the 104-105 area today. Since gapping down on Friday, the ETF has moved lower the last four days. Todays decline was relatively muted as a spinning top formed. These candlesticks have small bodies and long upper/lower shadows. They signal indecision that can sometimes foreshadow a bounce. Fridays gap establishes resistance at 108, which is confirmed by the blue trendline.

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Chart 1

The indicator window in chart 1 shows MACD(5,35,5). This is a faster version of the standard MADCD(12,26,9). First, the shorter moving average is shorter (5 versus 9, which makes it faster. Second, the long moving average is longer (35 versus 26), which makes it slower. A faster short moving average combined with a slower longer moving average makes for a more sensitive MACD. The signal line is set at 5. The last bottom occurred when MACD broke above its prior reaction high in mid February. MACD is currently below its signal line and clearly in bear mode. Look for a break above last weeks high to perk up momentum.

SPY FORMS LONG LEGGED DOJI... Chart 2 shows a similar version of events with the S&P 500 ETF (SPY). The ETF remains in a downtrend after last weeks lower high and the gap down on Friday. The blue trendline and gap mark resistance at 116. With a dip below 111, SPY is testing the 7-May closing low. The ETF closed below 112, but a long legged doji formed. These are doji with long upper and lower shadows, which represent the intraday high and low. Doji signal indecision that can sometimes foreshadow a reversal or bounce. RSI is shown trending lower in the indicator window. A move above 50 is needed to reverse the downtrend in momentum. A sustainable stock market reversal requires good volume and strong breadth.

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Chart 2

SEMICONDUCTORS SHOW SOME RELATIVE STRENGTH... While most of the market was down on Wednesday afternoon, the Semiconductors HOLDRS (SMH) were slightly positive and showed some relative strength for the day. Chart 3 shows SMH testing its 7-May closing low around 27 over the last four days. Also notice that the ETF is again testing the 50-62% retracement zone. After a long red candlestick and sharp decline on Tuesday, SMH firmed above 27 on Wednesday. There appears to be some support a 27, but the overall trend remains down because SMH formed a lower high last week and gapped down on Friday. The blue dotted trendline and Tuesdays high mark the first resistance level to watch. RSI is shown trending lower in the indicator window. A break above 50 is needed to reverse the downtrend in momentum.

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Chart 3

TWO KEY SEMICONDUCTOR STOCKS... Chart 4 shows Texas Instruments (TXN) firming in a support zone around 24.5. This zone stems from the 50-62% retracement and the March consolidation. Chart 5 shows Intel (INTC) recovering after a dip to 21 earlier today. The stock is also finding support in the 50-62% retracement zone and near broken resistance.

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Chart 4

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Chart 5

EURO BOUNCES IN THE FACE OF BAD NEWS... Germany unilaterally banned naked short selling on some key financial stocks and credit default swaps on European bonds. This was considered bad news for two reasons. First, Germany decided to go it alone on issue, which shows some disunity within the EU. Second, more regulation is not the answer to the problem. It looks like the other European governments agree because they have yet to follow suit. In any case, the global nature of todays market insures that London, Asia or the US will pick up the slack. May 21st is the next date to watch for the Euro. A vote on the European bailout is expected in Brussels. Despite more uncertainty today, chart 6 shows the Euro ETF (FXE) getting an oversold bounce. A bounce in the face of bad news is positive. FXE declined from 136.5 to 122.5 (10%) in five weeks to become quite oversold. RSI moved below 30 on May 5th and pretty much remained oversold the last 12 days. Should an oversold bounce materialize, I would expect resistance in the 125-129 area. RSI resistance is set in the 50-60 zone. Chart 7 shows the DB Dollar Bullish ETF (UUP) exceeding the upper trendline of a rising price channel. In contrast to the Euro, UUP is overbought and ripe for a pullback or consolidation. The yellow area marks a potential support zone around 24.5-25.

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Chart 6

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Chart 7

LONG-TERM BREADTH INDICATOR IS NEAR MAKE-OR-BREAK POINT... The percentage of stocks above their 200-day moving average provides a good clue on the long-term health of the market. So far, over 50% of Nasdaq and NYSE stocks remain above their 200-day moving averages. First, chart 8 shows the NYSE %Above 200-day SMA ($NYA200R). After peaking above 90% in September-October, lower highs formed in January and April. The indicator broke support for the second time this year with a sharp decline in early May. While this is medium-term bearish, the indicator remains well above 50% and has yet to turn long-term bearish. Notice that it has been above 50% since late May 2009 (almost one year). The indicator window shows the NY Composite actually breaking below its 200-day moving average twice in the last two weeks.

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Chart 8

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Chart 9

The Nasdaq %Above 200-day SMA ($NAA200R) is weaker than the NYSE indicator, but the Nasdaq itself is stronger than the NY Composite. Chart 9 shows the indicator peaking above 80% in September and then forming lower highs in January-April. The 2010 highs were about equal. The indicator broke support for the second time this year with a sharp decline in early May. Notice that it is tested the 50% level for the second time this year. A break below 50% would be long-term bearish for the Nasdaq. As such, an important make-or-break moment is upon us. The indicator window shows the Nasdaq holding above its 200-day moving average. With the NY Composite breaking its 200-day twice, the Nasdaq is holding up better.

MEDIUM-TERM BREADTH INDICATOR IS NEAR OCTOBER-FEBRUARY LOW... The percentage of stocks above their 50-day moving average offers clues on the medium-term health of the market. For both the Nasdaq and NYSE, this indicator is clearly below 50% and bearish. First, chart 10 shows the NYSE %Above 50-day SMA ($NYA50R). This indicator is considered oversold when below 35%, which occurred in July, October, January-February and May. A subsequent move back above 50% puts the indicator back in bull mode (green dotted lines). The surges back above 50% werent always clean though. The red arrows show failed attempts just before the actual break back above. There were also throwbacks in November and February (blue arrows). No indicator is perfect, but I would suggest that another surge above 50% would put the market back on bullish footing.

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Chart 10

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Chart 11

Chart 11 shows the Nasdaq %Above 50-day SMA ($NAA50R). This indicator plunged below 50% in early May and remains below 50%. The 30-35 area marked oversold conditions on the last two corrections (October and January-February). With the indicator back in the 30-35 area, it is both oversold and bearish. A move back above 50% is needed to put the indicator back in bull mode and argue for a rebound in stocks.