SLOW GRIND HIGHER CONTINUES FOR STOCKS -- BONDS SELL OFF AFTER FED ANNOUNCEMENT -- FINANCE SPDR BREAKS TRIANGLE RESISTANCE -- JP MORGAN AND MORGAN STANLEY BOUNCE -- HOMEBUILDERS ETF CHALLENGES RESISTANCE

SLOW GRIND HIGHER CONTINUES FOR STOCKS... Link for todays video. The elections and the Fed policy statement have passed and the major indices have yet to be knocked out of their uptrends. Upside momentum has slowed, but we have yet to see any downside momentum, and certainly no support breaks. Chart 1 shows the Nasdaq 100 ETF (QQQQ) up around 23% from its late August low, which makes it leader of the pack right now. This run can be divided into two parts. QQQQ surged 15% in 17 days for the first move. After a brief consolidation, the ETF surged 9.2% the last 23 days. A simple rise-over-run (rise/run) calculation reveals that the upside momentum over the last 23 days was not as strong as it was over the first 17 days. This is not bearish. It just tells us the advance is slowing. QQQQ is littered with indecisive candlesticks over the last three week, but none were confirmed with downside follow through. QQQQ is overextended and ripe for a correction, however, there are no signs of weakness to signal that a correction has even started.

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Chart 1

Chart 2 shows the Russell 2000 ETF (IWM) surging from 59 to 71 (+20%) over an eight week period (late August to early October. Since hitting 71 on October 13th, the ETF has moved into a trading range. A little rest after such a strong move is normal. In fact, the ETF hit a new high intraday Wednesday and closed at its highest closing level since mid May. A breakout is in the making that signals a continuation of the uptrend. The indicator window shows CCI dipping at the end of October, but ultimately holding in positive territory and moving back above +100 the last two days. Momentum remains with the bulls as long as CCI is positive.

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Chart 2

BONDS SELL OFF AFTER FED ANNOUNCEMENT... In its policy statement on Wednesday, the Fed delivered QE2 details as promised. The Fed said it would by around $75 billion in long-term bonds each month for the next eight months. That amounts to $600 billion by the end of the second quarter 2011. Even though the Fed promised to buy long-term bonds, the 20+ year Bond ETF (TLT) fell sharply after the announcement. This means that long-term rates rose sharply. The bond market is obviously not impressed. In fact, the bond market appears to have something else on its mind. Even though we have yet to see any evidence of inflation, just the whiff of inflation is enough to send the bond market lower. Chart 3 shows the 20+ year Bond ETF (TLT) peaking at the end of August and moving lower the last two months. Todays decline is nothing new and corresponds to an advance in the 30-year Treasury Yield, which is shown in the indicator window. Notice how TLT opened strong and then moved sharply lower after the announcement. The next support level resides around 97, which stems from broken resistance turned support. A parallel trendline extending down from the September low confirms support here as well. Keep in mind that this is just potential support because the trend since late August is down. First resistance is marked at 104. Chart 4 shows the 30-year Treasury Yield ($TYX) for reference.

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Chart 3

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Chart 4

FINANCE SPDR BREAKS TRIANGLE RESISTANCE... The trading ranges for the Finance SPDR (XLF) continue to shrink. Chart 5 shows weekly candlesticks with XLF trading between 13.2 and 15.1 since June. This large range marks long-term support and resistance. Chart 6 shows daily candlesticks with a surge to range resistance in mid September. A tighter consolidation formed in the upper half of the weekly range (14.20 to 15). This can be considered medium-term support and resistance. With more indecision over the last few weeks, this range tightened even further as a triangle formed. Even though XLF is breaking above the triangle trendline, I would focus on the orange support-resistance zones for the first break. Resistance around 14.80 stems from the 14-Oct gap. Further strength above this gap would be very positive. A solid break above 15 would be bullish on the daily and weekly charts.

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Chart 5

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Chart 6

JP MORGAN AND MORGAN STANLEY BOUNCE... JP Morgan (JPM) and Morgan Stanley (MS) have been weighing on the finance sector since their mid September highs. Both moved higher on Wednesday and further strength in these two could lift the finance sector above resistance. Chart 7 shows JP Morgan (JPM) with a large triangle since July. This amounts to a big consolidation after the April-June decline. The stock is currently trading near the low end of this consolidation. JPM was up over 2% today, but has yet to break above short-term resistance to reverse the downswing within this triangle Chart 8 shows Morgan Stanley (MS) finding support near the 24 for at least the third time since late August. The stock surged last week with volume that was slightly above averaged and surged again today with volume that was slightly below average.

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Chart 7

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Chart 8

HOMEBUIDERS ETF CHALLENGES RESISTANCE... The two home-construction related ETFs remain laggards as both have yet to break resistance. While this has not weighed much on the S&P 500, breakouts would provide additional lift for the market. Chart 9 shows the Homebuilders SPDR (XHB) once again challenging resistance from the July high. The ETF surged to resistance in September and then consolidated the last six weeks. Despite a couple of sharp declines from resistance, the ETF recovered and is right back around 16 again. The orange shading shows a resistance zone around 16 and a support zone around 15.25. Watch these boundaries for the next signal from XHB. An upside breakout would be quite bullish, but a failure at resistance and downside break would be bearish.

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Chart 9

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Chart 10

Chart 10 shows the Home Construction iShares (ITB) hitting resistance in late September and declining in October. The Homebuilders SPDR was relatively flat in October, but the Home Construction iShares clearly declined and showed relative weakness. A falling flag or channel is taking shape with trendline resistance at 11.8. A surge above this level would reverse this fall and signal a continuation of the August-September advance. It has yet to happen though. As the chart now stands, ITB failed at resistance and continues to shows relative weakness.

It is worth noting that the Homebuilders SPDR is performing much better than its peer, the Home Construction iShares. Despite similar names, the composition of these two ETFs is quite different. XHB is a much broader ETF. The top ten holdings include Tempur Pedic (TPX), Mohawk Industries (MHK), William Sonoma (WSM), Pier 1 (PIR), Aarons (AAN) and Simpson Manufacturing (SSD). These stocks are related to the home building industry, but none of them are actual homebuilders. The homebuilders are in the bottom half of the holdings. In contrast, eight of the top ten holdings in the Home Construction iShares (ITB) are actual homebuilders. Home Depot (HD) and Lowes (LOW) are the other two. ITB represents a pure play on homebuilders, while XHB represent a play on homebuilders and related companies.