RUSSELL 2000 ETF TESTS JULY LOW -- A LARGE HEAD-AND-SHOULDERS FOR XLF -- FALLING CHANNEL TARGET FOR XLY -- INTERNET ETFS HOVERING JUST ABOVE IMPORTANT SUPPORT -- NASDAQ AD LINE BREAKS JULY LOW -- NYSE NET NEW HIGHS DIP INTO NEGATIVE TERRITORY
RUSSELL 2000 ETF TESTS JULY LOW ... Link for todays video. The Russell 2000 ETF (IWM) is the first of the major index ETFs to test its July low. We have been talking about relative weakness in small-caps and this is just further evidence. The Dow SPDR (DIA) and S&P 500 ETF (SPY) are around 4% above their July lows. The Nasdaq 100 ETF (QQQQ) is around 6% above its July low. Chart 1 shows IWM around 2% above its July low. In fact, IWM bounced off its July low with the surge above 60 on Wednesday. This area may mark support, but I would consider it just potential support because the bigger trend is down. Notice that IWM forged lower lows and lower highs from May to July. The July surge was impressive as a percentage gain, but it failed to take out the mid June high. There are currently two resistance levels to watch on the daily chart. First, the gap zone around 63-64 marks resistance. IWM became oversold after a 12% decline from its late July high. A consolidation or oversold bounce is possible. The second resistance level resides around 67-68 from the June-July-August highs. A break above these highs is required for a full trend reversal. Chart 2 shows a longer term perspective with the next support zone around 52.5-55.
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Chart 1
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Chart 2
A LARGE HEAD-AND-SHOULDERS FOR THE FINANCE SPDR... Chart 3 shows the Financials SPDR (XLF) testing support that extends all the way back to August 2009. The ETF consolidated from August to January 2009 and then surged with the market in February-March 2010. This surge did not last as the ETF declined back to support and again consolidation. Overall, the pattern at work looks like an elongated head-and-shoulders pattern. XLF led the market lower this August and XLF is once again testing a key support level. A break below the 2010 lows would confirm the head-and-shoulders and target further weakness towards the 9-10 area. More realistically, I also see support around 11 from the July 2009 low. XLF needs to break above the summer highs to invalidate this pattern and revive the bulls.
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Chart 3
FALLING CHANNEL TARGET FOR THE CONSUMER DISCRETIONARY SPDR ... Chart 4 shows the Consumer Discretionary SPDR (XLY) with a falling price channel taking shape since April. With a weekly outside reversal in early August, the ETF formed a lower high and started a move lower. Notice that XLF broke rising wedge support too. To form the channel, I drew the upper trendline first and then drew the lower trendline parallel from the July low. Should this channel extend, the downside target is to around 26, a level that also marks a 50% retracement of the prior advance. The falling channel is valid as long as resistance from the upper trendline and the August high hold. A break above the upper trendline would warn of a possible trend reversal. Further strength above the August high would fully reverse this downtrend.
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Chart 4
INTERNET ETFS HOVERING JUST ABOVE IMPORTANT SUPPORT ... August has been a tough month for most sector and industry group ETFs, but two internet related ETFs have held up quite well. Chart 5 shows the Internet ETF (FDN) breaking wedge resistance with a move above 26 in July. This breakout is largely holding as the ETF consolidates around 26-27 the last four weeks. Broken resistance around 25.5 turned into support in late July and early August. A break below this level would negate the breakout and call for a move lower. The indicator window shows the Commodity Channel Index (CCI) hovering just above the zero line. A move into negative territory would turn momentum bearish.
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Chart 5
Chart 6 shows the Internet HOLDRS (HHH) with an ominous looking pattern. After breaking support with a sharp decline from May to July, the ETF retraced 50-62% of the decline with a rising wedge advance. Both the retracement amount and the pattern are typical for counter trend rallies. The wedge is still rising though. A move below the August low would break wedge support and call for a continuation of the May-July decline. The orange area marks the next support zone around 43-45 for a downside target. In the indicator window, the Commodity Channel Index (CCI) is hovering just above the zero line. A break into negative territory would turn momentum bearish.
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Chart 6
NASDAQ AD LINE BREAKS JULY LOW... With a sharp decline in August, key breadth indicators for the Nasdaq deteriorated further with the AD Line breaking its July low. Before looking at these charts, note a 63-day EMA is shown with the Nasdaq, AD Line and AD Volume Line for a quarterly reference point. There are around 63 trading days in a quarter. Chart 7 shows the Nasdaq hitting resistance around 2300 and forming a lower high in early August. With a lower low in early July, the overall trend here is clearly down.
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Chart 7
Turning to the breadth indicators, the AD Line confirmed Nasdaq weakness by forming a lower high in late July and moving to new lows for the year. The AD Line is a cumulative indicator of Net Advances (advancing issues less declining issues). A break below the July low suggests that downside participation is expanding, which is bearish. The AD Volume Line peaked in late July and moved lower in August, but remains above its July low. Nevertheless, it too remains in a downtrend. Net New Highs moved below -200 this week to match their July low. A sustainable uptrend is hardly likely with more new 52-week lows than new 52-week highs.
NYSE NET NEW HIGHS DIP INTO NEGATIVE TERRITORY ... NYSE breadth indicators were looking quite positive the second half of July, but fell rather sharply in August. Chart 8 shows the NY Composite exceeding its 63-day EMA and then breaking above its mid June high with a big move on August 2nd. After stalling the next six days, the index fell back below 7000 to negate the breakout on August 11th. The failure to hold the breakout and the depth of the August decline indicate that the overall trend remains down.
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Chart 8
Turning to breadth, Net New Highs surged above +100 and the AD Line broke resistance in mid July. These were positive confirmations, but the AD Volume Line failed to follow suit. Instead, the AD Volume Line met resistance near the June high, stalled and then moved lower in August. While the AD Line is still holding up quite well, Net New Highs moved into negative territory this week and NYSE breadth is mixed at best. Net New Highs needs to break back above +100 and the AD Volume Line needs to exceed its 63-day EMA to put breadth back in bullish favor.
LESS THAN 30% OF NASDAQ STOCKS ARE ABOVE THEIR 200-DAY MA... Chart 9 shows the percentage of Nasdaq stocks above their 200-day moving average. This indicator moved above 50% at the end of May 2009 and held above 50% until mid May 2010. Pretty much one year. Since breaking below 50% in May, the indicator has met resistance in the 45-50% area the last three months. With the August decline in stocks, the indicator moved below its July low and less than 30% of Nasdaq stocks are above their 200-day moving average. More stocks are participating in this decline and this is bearish overall. Chart 10 shows the percentage of NYSE stocks above their 200-day. This indicator has been oscillating around 50% the last three months. The most recent oscillation is down as the indicator broke back below 50% in August.
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Chart 9
