NASDAQ AND NY COMPOSITE HIT RESISTANCE -- A VOLATILE 16 WEEK PERIOD -- FINANCE AND SEMIS HIT RESISTANCE -- OIL AND GASOLINE ETFS FORM TRIANGLES -- EURO ETF HITS KEY RETRACEMENT -- EURO AND STOCKS ARE POSITIVELY CORRELATED
NASDAQ AND NY COMPOSITE HIT RESISTANCE LEVELS... Link for todays video. Resistance from prior highs and key retracements is coming into play for the Nasdaq and NY Composite. Chart 1 shows the Nasdaq hitting resistance around 2300 with a stall over the last two days. Resistance in this zone stems from the highs in early and mid June. In addition, the 2300-2350 zone marks a 50-62% retracement of the April-July decline. Also keep in mind that the Nasdaq is up around 10% from its July low (18 days). This is a big rally in a short period of time. We do not need a momentum oscillator to figure out that the Nasdaq is short-term overbought. Reasons for resistance and overbought conditions make the Nasdaq ripe for a pullback or consolidation (choppy trading). Nasdaq support is set at 2150, which is based on the mid July low. However, if this is the start of an extended advance, the index should find support above this level, probably in the 2200-2250 area.

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Chart 1
Is the July rally the start of an extended advance or just a bounce within a trading range? This is the big question. At this point, the July surge looks strong enough to have legs. For early clues, chartists can watch the Commodity Channel Index (CCI). This indicator became overbought with the move above 100. There are two types of overbought readings. First, overbought readings extend in a strong uptrend. Second, overbought readings are relatively brief when the bigger trend is down or there is a trading range. The March-April period shows an extended overbought reading. There was a brief overbought reading in mid June that called the June high. The current overbought reading is just a few days old. The key to CCI (momentum) resides around the zero line. Momentum favors the bulls as long as CCI stays positive. A break into negative territory would show deterioration in momentum. Chart 2 shows the NY Composite with similar characteristics.

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Chart 2
A VOLATILE 16 WEEK PERIOD... Charts 3 and 4 show the NY Composite and Nasdaq with the Zigzag indicator set at 8%. As these zigzags show, price action has been exceptionally volatile since mid April (16 weeks). Both indices have seen six moves of at least 8% since the April high (3 up and 3 down). Six 8% moves in 16 weeks. The average is one 8% move every 2.66 weeks. This is great for swing traders, but not so great for investors. This means we could see a sharp pullback if these volatile swings continue. Chartists can apply the Zigzag indicator as an overlay and set the parameters at 8 to see these moves.

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Chart 3

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Chart 4
FINANCE AND SEMIS HIT RESISTANCE AS WELL... The finance sector is one of the most important parts of the NY Composite. Similarly, the semiconductor group is one of the most important parts of the Nasdaq. Like the NY Composite and Nasdaq, the Financials SPDR (XLF) and the Semiconductors HOLDRS (SMH) are both hitting resistance this week. Chart 5 shows the Financials SPDR (XLF) with a downtrend from mid April until early July. The downtrend slowed over the last two months as the ETF consolidated with sideways trading. In fact, the blue arrows mark a potential inverse head-and-shoulders pattern. A break above 15 would confirm the pattern and argue for higher prices. A breakout in the key sector would benefit the broader market. Unconfirmed, however, this pattern is just a consolidation within a downtrend. In other words, the downtrend has yet to be reversed until a confirming breakout.

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Chart 5
Chart 6 shows the Semiconductor HOLDRS (SMH) hitting resistance in the 28.5-29 area for the fourth time since mid May. SMH has been in one volatile trading range the last 13 weeks. The Zigzag indicator (not shown) reveals six 10% moves since late April. SMH surged over 10% with a move above 28 in early July. After a pullback below 27.5, the ETF made another run at resistance last week. No breakout so far. Top pickers are licking their chops as the ETF backs off resistance and the Stochastic Oscillator moves back below 80. If the broad market rally is to continue, SMH needs to break above 29 and take out this resistance level.

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Chart 6
OIL AND GASOLINE ETF FORM TRIANGLE CONSOLIDATIONS... Oil continues to move with the stock market for the most part. After moving higher in July, the S&P 500 ETF (SPY) and the US Oil Fund ETF (USO) are both hitting some resistance near their June highs. Chart 7 shows USO hitting resistance in the 35-36 area in June and now July. The first bounce into this zone retraced 38-50% of the May decline, which was unusually sharp. Notice that this decline also broke support in the 34-35 area. The July bounce failed to exceed the June high and a lower high formed with this weeks decline. Overall, a triangle consolidation is taking shape. Given the sharpness of the May decline and the big support break, the odds favor a break to the downside and further weakness. It would take a break above this weeks high to argue for higher prices. Chart 8 shows the US Gasoline Fund ETF (UGA) with a similar pattern.

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Chart 7

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Chart 8
EURO ETF HITS KEY RETRACEMENT ... After a sharp advance the last 7-8 weeks, chart 9 shows the Euro ETF (FXE) hitting resistance around 130. This level marks a 62% retracement of the April-June decline. The Euro merits a close watch because it seems to influence equities and gold. Gold and stocks are covered in detail below. 130 on the FXE chart corresponds to 1.30 on the Dollar/Euro cross. This is a psychologically important level as well. For now, the trend is up for the Euro, which means the trend for the Dollar is down. Is this a corrective rally within a bigger downtrend? If yes, then I would expect a reversal sooner rather than later. Last weeks low marks chart support and a break below this level would reverse the 7-8 week uptrend.

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Chart 9
The indicator window shows the Commodity Channel Index (CCI). This momentum oscillator fluctuates around the zero line. In general, momentum favors the bears when CCI is negative and the bulls when CCI is positive. Notice how CCI stayed negative from mid April until mid June, which corresponds with the April-May decline in FXE. CCI turned positive in mid June and has been largely positive the last six weeks. There was a brief dip just below the zero line at the end of June. A move below this late June low would turn momentum bearish and could be used to confirm a trend reversal in FXE.
EURO LED SPY ON LAST TWO REVERSALS... While the markets focus is always subject to change, it appears that US stocks are taking a cue from the Euro. The Euro is certainly not the only influence on US stocks, but recent correlation suggests that it remains an influence worth watching. Chart 10 shows the Euro ETF (red line) along with the S&P 500 ETF (black line). The Euro and stocks have not always been positively correlated. From December to March, the Euro declined and stocks advanced. Positive correlation began in April as both declined from late April until early June. FXE bottomed in early June and SPY bottomed a month later. Both moved sharply higher the last four weeks. Strength in the Euro points to increasing confidence in the European economy and its banks, which is turn benefits the US. A downturn in the Euro would signal the opposite and this could hurt US stocks.

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Chart 10
GOLD AND EURO ARE NEGATIVELY CORRELATED... Gold is perhaps even more affected by strength in the Euro. Chart 11 shows the Euro ETF (red line) with the Gold ETF (black line). Gold advanced as the Euro fell in April and May. The Euro bottomed in early June and gold peaked 1-2 weeks later. Since late June, the Euro has advanced from 122 to 130 (+6.5%) and the Gold ETF (GLD) has fallen from 123 to 114 (-7.3%). As noted before, gold is one of the few alternatives to paper currencies. Bullion benefitted when traders lost confidence in the Euro and appears to be suffering as traders gain confidence in the Euro. Of course, the Euro is not the only driver when it comes to gold. However, it appears to be an important factor that should be watched.
