10-YEAR TREASURY YIELD BREAKS JULY LOWS -- EURO AND YEN SURGE AFTER JOBS REPORT -- GOLD ETF SURGES AS DOLLAR FALLS -- SMH FORMS BEARISH ENGULFING AT RESISTANCE -- NYSE SUMMATION INDEX BOUNCES OFF LONG-TERM SUPPORT

10-YEAR TREASURY YIELD BREAKS JULY LOWS... Link for todays video. Even though some of the economic reports were positive this week, the employment related reports on Thursday and Friday were decidedly negative. Initial jobless claims, a weekly statistic, rose on Thursday and Fridays non-farm payrolls showed 131,000 fewer jobs in July. This worse-than-expected number sent treasuries higher and interest rates lower. The Fed is unlikely to raise rates as long as the economy continues to shed jobs and the employment rate remains high. The short end of the curve has little room to fall, but there is still room for rate to fall at the long end. Chart 1 shows the 10-Year Treasury Yield ($TNX) breaking below its July low and trading at its lowest level since early April 2009. John Murphy pointed out a descending triangle last week and todays move broke descending triangle support.

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Chart 1

Chart 2 shows weekly prices with the 10-Year Treasury Yield breaking range support at the end of April. The long-term trend is clearly down with the next support level around 25 (2.5%). The indicator window shows the 10-Year Treasury Yield and the S&P 500. Notice how the 10-Year Treasury Yield bottomed three months ahead of the S&P 500 (December 2008 versus March 2009). The 10-Year Treasury Yield peaked at the beginning of April and moved lower the last four months. Stocks also moved lower from late April to early July, but decoupled from bonds in July. This de-coupling that makes us wonder if something needs to give. Either falling rates pull stocks lower or rising stocks push rates higher.

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Chart 2

EURO AND YEN SURGE AFTER JOBS REPORT... Further job losses in July insure that the Fed will keep rates low for an extended period of time and may even hint at more quantitative easing (QE) at next weeks meeting. These prospects, combined with the prospects of further weakness in the economy, pushed the Dollar lower again the Yen and Euro. Chart 3 shows the Euro ETF (FXE) surging around 1% with a move above 132.5 for the first time since late April. The trend since early June remains up, but the Euro is entering a potential resistance zone from the February-April consolidation (132.5-137.5). Momentum also remains in bull mode with the Commodity Channel Index (CCI) holding well above zero (since late June). Chart 4 shows the Yen ETF (FXY) surging to a new 52-week high with a move above 116 today. The Yen has been on a right tear since early May. Japanese exporters are not going to be happy with that.

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Chart 3

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Chart 4

GOLD ETF SURGES AS DOLLAR FALLS... Gold and the Dollar got back to their old ways on Friday. With yields breaking to new lows and the prospects of more Dollar dilution from quantitative easing, gold returned as an alternative to fiat currencies. Google fiat money for some history. Not only do we see a decoupling between stocks and bonds, but we are also seeing a decoupling between the Euro and gold. Today, gold is rising along with the Euro. Chart 5 shows the Gold ETF (GLD) breaking above wedge resistance and moving above 118 today. Chart 6 shows GLD bouncing off the trendline extending up from the January 2009 low. Chart 7 shows the Gold Miners ETF (GDX) breaking above resistance with a big move on Friday.

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Chart 5

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Chart 6

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Chart 7

SMH FORMS BEARISH ENGULFING AT RESISTANCE... The technology sector is important to broad market performance and the semiconductors are important to the technology sector. Semiconductors are also cyclical in nature, which means they are dependent on the economic cycle to a certain extend. Chart 8 shows weekly candlesticks for the Semiconductors HOLDRS (SMH) over the last two years. SMH bottomed in November 2008, which was a few months ahead of the overall market. As the market bottomed in March 2009, SMH formed a higher low and broke resistance in late March. Flash forward to 2010 and SMH could be forming a lower high. After a sharp decline in April-May, the ETF formed a consolidation over the last 12-13 weeks. Major support is around 25 and major resistance is around 29. The ETF surged to resistance in mid July, but formed a weekly bearish engulfing last week. SMH has yet to follow through to confirm bearish engulfing though. A close below last weeks low (26.9) would put the ETF on a collision course with range support at 25. A range support break would forge a lower low and signal the start of a significant downtrend. Before getting too bearish, I would consider the cup half full until a minor support break. A break above range resistance at 29 would be bullish for SMH, the technology sector and the market.

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Chart 8

NYSE SUMMATION INDEX BOUNCES OFF LONG-TERM SUPPORT... Like many momentum oscillators, the NYSE Summation Index ($NYSI) has bull market and bear market ranges. The Summation Index is not a momentum oscillator like RSI and MACD, which are based on the price of the underlying security. Instead, the Summation Index is a slower version of the McClellan Oscillator, which is a momentum oscillator of Net Advances. See below for a more detailed description. Chart 9 shows the NYSE Summation Index over the last six years, which encompasses a bull run, a bear run and a bull run. During the bull run, the Summation Index found support near the -500 area three times (blue arrows). During the bear run from August 2007 until April 2009, the Summation Index hit resistance near +500 three times. A bull run started with the May 2009 break above +500 and the Summation Index found support just above the -500 area in June 2010. Based on the last six years, the bull run begins with a decisive break above +500 and continues until a decisive break below -500. Similarly, a bear run begins with a decisive break below -500 and continues until a decisive break above +500. The last three runs lasted more than one year.

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Chart 9

Chart 10 focuses on the NYSE Summation Index in 2010. The indicator formed a bullish divergence in June-July and moved above its 10-day SMA to turn bullish. The Summation Index is currently above its 10-day SMA and rising, which is still bullish. We can expect the Summation Index to continue rising as long as the McClellan Oscillator remains positive (lower window). As you can see from the long-term chart, it is not uncommon for the Summation Index to reach the 1000-1200 area. A move below the 10-day SMA would show deteriorating breadth momentum that could lead to a stock market reversal.

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Chart 10

What is the Summation Index? The NYSE Summation Index is a breadth indicator based on the McClellan Oscillator, which is based on Net Advances (advances less declines). The McClellan Oscillator equals the 19-day EMA of Net Advances less the 39-day EMA of Net Advances. This makes it a momentum oscillator that works like MACD. In essence, the McClellan Oscillator puts momentum in Net Advances or the AD Line. The Summation Index is a cumulative McClellan Oscillator. While it still oscillates above/below the zero line, the cumulative nature of the Summation Index makes it a medium-long term indicator. It is basically a slower version of the McClellan Oscillator. Factoid: The Summation Index can be replicated by entering the NYSE McClellan Oscillator ($NYMO) in the symbol box and choosing cumulative as type under chart attributes.

INTERMARKET PERFCHARTS REFLECT SHIFT TO-AND-FROM RISK-ON TRADE... The intermarket picture shows a preference for the risk-on trade over the last five weeks. Fridays market action may signal the start of a shift back to the risk-off trade and this section will tell us what to look for. The next two PerfCharts show five intermarket ETFs over two distinct timeframes. The first timeframe extends from late April until early July, which is when stocks declined sharply. The second timeframe extends from early July to early August, which is when stocks advanced sharply. A sharp decline in stocks reflects risk aversion or the risk-off trade. Weakness in stocks extended to oil, which has been positively correlated to the stock market all year. The risk-off trade also involves a flight to safety. Notice that bonds, the Dollar and gold advanced when stocks were weak. The second PerfChart, which extends from early July to early August, is pretty much the inverse of the first. Stocks advanced sharply and this coincided with an advance in oil. Strength in stocks means investors are embracing risk. Unsurprisingly, the flight-to-safety securities suffered over the last five weeks as bonds, the Dollar and gold moved lower.

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Chart 11

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Chart 12

While it is hard to tell which intermarket security is the supreme leader, I suspect that stocks are the main driver here. Strength in stocks improves the outlook for consumer sentiment and the economy, which improves the outlook for energy demand. An improving economy also takes pressure off the Fed to keep interest rates low, which would weigh on bonds. On the flip side, weakness in stocks weight on sentiment and the economy, which is turn dampens demand for oil. This means the Fed must remain accommodating and keep rates low.

It takes a bigger percentage advance to make up for a decline. Despite a double digit advance, stocks have yet to fully recoup their prior losses. Notice that SPY declined 15.04% from late April to early July and rose 10.42% from early July to early August. It is obvious that a 10.42% gain will not make up for a 15.04% loss. However, also note that it takes a bigger percentage advance to fully recovery from a decline. For example a decline from 100 to 85 is 15%. It would take a 17.64% advance from 85 to make it back to 100 (15/85 = .1764).