SEMICONDUCTORS HOLDRS TESTS RANGE SUPPORT -- ADI, INTC AND TXN TESTS AS WELL -- BOND ADVANCE LOOKS PARABOLIC -- OIL AND GASOLINE ETFS FORM BEARISH WEDGE -- STRONG YEN HURTS JAPANESE EQUITIES -- LOST DECADE FOR US AND JAPAN -- TSAR OF THE EMERGING MARKETS

SEMICONDUCTORS HOLDRS TESTS RANGE SUPPORT... Link for todays video. The Semiconductors HOLDRS (SMH) defines the current state of unusual uncertainty in the stock market. Chart 1 shows SMH locked in a volatile trading range since early May. From low to high or high to low, the ETF has moved 10% at least six times in the last 15 weeks. Thats one 10% move every 2.5 weeks (12-13 trading days). It is a swing traders dream, provided you are nimble enough to catch these swings. With another move down, the ETF failed at resistance and is once again testing an important support zone around 25.5-26. SMH firmed the last three days and a surge off support would signal the start of another upswing. A close below 25.5 would break support and argue for further weakness that would weigh on the overall market. The indicator window shows StochRSI (14), which is the Stochastic Oscillator applied to RSI. This makes it a momentum indicator of a momentum indicator. Put another way, it is RSI on steroids. StochRSI is prone to whipsaws and best used as a short-term indicator. Currently, the indicator is short-term oversold and remaining below .50, its mid point. A surge back above .50 would provide the first sign that an upswing was beginning.

(click to view a live version of this chart)
Chart 1

ADI, INTC AND TXN TESTS IMPORTANT SUPPORT LEVELS... Chart 2 shows Analog Devices (ADI) declining from range resistance to range support over the last few weeks. Even though volume has been light in August, volume managed to expand as ADI fell to support. Chart 3 shows Intel (INTC) with a gap and surge above 21.5 in mid July. Despite high volume, this alleged breakout failed to hold as the stock filled the gap with above average volume. Chart 4 shows Texas Instruments (TXN) hitting resistance around 25.5 three times since July. The stock declined to support last week with above average volume.

(click to view a live version of this chart)
Chart 2

(click to view a live version of this chart)
Chart 3

(click to view a live version of this chart)
Chart 4

BOND ADVANCE STARTS LOOKING PARABOLIC... Despite low yields, money continues to find its way into the bond market. Among other reasons, a recent article at Bloomberg.com cited shrinking supply for the rush into bonds. According to the sources, the treasury will issue some $1.2 trillion worth of bonds this year, but the supply of corporate bonds, mortgage-backed securities and debt tied to consumer loans may recede by $1.3 trillion. This more than offsets the increase in supply from the treasury. Also consider that the Fed is buying bonds through its quantitative easing program. The US is also benefiting because there are fewer countries with top bond ratings. Throw in some weak economic number recently and there is plenty of fuel for the biggest bond rally since 2008. Chart 5 shows the 20+ Year T-Bond ETF (TLT) breaking flag resistance with a big move last week and surging over 2% today. With todays move, the long bond ETF is up some 5% in less than two weeks. Simply amazing. RSI moved to its highest level since, well, 2008. Chart 6 shows the 7-10 Year Treasury ETF (IEF) moving straight up from early April until now. The ETF is up over 12% in 20 weeks. Notice that IEF exceeded its 2008 high. Also note that the current advance is looking parabolic in nature. While there are currently no signs of weakness, parabolic advances are often dangerous to chase.

(click to view a live version of this chart)
Chart 5

(click to view a live version of this chart)
Chart 6

OIL AND GASOLINE ETFS FORM BEARISH WEDGE... Oil and stocks have been joined at the hip in 2010. Chart 7 shows the US Oil Fund ETF (USO) with the S&P 500 ETF (SPY) since January. The positive correlation is clear as these two continue to rise and fall together. My educated guess is that strength in the stock market bodes well for the economy and this in turn would increase demand for energy. Conversely, weakness in the stock market bodes ill for the economy and energy demand. In addition to the reasons listed above, strength in bonds can also be attributed to weakness in the economy. Bonds and oil were rising together from late May until early August. That suddenly changed as bonds surged the last eight days and oil fell.

(click to view a live version of this chart)
Chart 7

Chart 8 shows the US Oil Fund ETF (USO) breaking support in May and then forming a rising wedge the last few months. Notice that this wedge retraced 50-62% of the prior decline. Technically, wedge support is still holding as the ETF stopped just short of a trendline break last week. With some further weakness today, USO is trading right at trendline support. A break would signal a continuation lower and target further weakness towards the 26-28 area. This would be negative for the stock market and positive for bonds. The indicator window shows the MACD-Histogram, which measures the distance between MACD and its signal line. Notice that the histogram turned negative last week. This means MACD moved below its signal line. Chart 9 shows the US Gasoline Fund ETF (UGA) with similar characteristics, but UGA is looking weaker after a wedge break.

(click to view a live version of this chart)
Chart 8

(click to view a live version of this chart)
Chart 9

STRONG YEN HURTS JAPANESE EQUITIES... Strength in the Japanese Yen continues to weigh on Japanese equities. Japanese companies are dependent on exports and exports are dependent on exchange rates. A strong Yen makes Japanese exports more expensive, which reduces demand. Chart 10 shows the Yen ETF (FXY) breaking above its 2009 highs with the move above 115 this month. Even thought the Dollar The ETF is up some 10% since late April and showing no signs of weakness. Notice how the ETF is holding the May trendline and MACD(5,35,5) remains above its signal line. Chart 11 shows the Nikkei 225 ($NIKK) failing at resistance around 9800 and moving to its July lows last week. The indicator window shows the Yen ETF (red) and the Nikkei (black). These two clearly have an inverse relationship as the price plots form mirror images. The Nikkei rises when the Yen falls and visa versa. Dont expect a bottom in Japanese equities until the Yen reverses its uptrend.

(click to view a live version of this chart)
Chart 10

(click to view a live version of this chart)
Chart 11

TSAR OF THE EMERGING MARKETS... China surpassed Japan as the worlds second largest economy. It was simply a matter of time. China has been growing fast as Japan struggles to keep its head above water. PerfChart 12 shows stock markets for China, Japan and the US over 10 years. Talk about the lost decade. The S&P 500 ($SPX) and Nikkei 225 ($NIKK) are both down over this period. In contrast, the Shanghai Composite ($SSEC) is up some 62%. Even so, it has been a wild ride for Chinese equities. All three equity markets were flirting with unchanged levels in 2006 when a major bull run in Chinese equities started. The Shanghai Composite ($SSEC) surged over 250% in 2007 before falling back down to earth.

(click to view a live version of this chart)
Chart 12

(click to view a live version of this chart)
Chart 13

Chinese equity performance is impressive, but it pales relative to the Russian, Brazilian and Indian indices over the last 10 years. Perfchart 13 adds the Brazilian Bovespa Index ($BVSP), Russian TS Index ($RTSI) and the Bombay Stock Exchange 30 ($BSE)**. Users can add or remove an index by clicking the small colored boxes at the top of a PerfChart. A filled box shows the index. A hollow box hides the index. The Russians are blowing everyone away over the last 10 years (+1548%). The Brazilians came in a distant second with a 473% gain and the Indians came in a respectable third with a 285% gain. These are clearly the big growth areas of the world.