SMALL-CAPS MID-CAPS AND TECHS LEAD STOCKS HIGHER -- PORTUGUESE INDEX BREAKS IMPORTANT TRENDLINE -- SPANISH BOLSA LEADS EUROPE LOWER -- WEAKNESS IN GLOBAL EQUITIES LIFTS THE NIKKEI -- OIL FALLS BACK TO BROKEN RESISTANCE

SMALL-CAPS MID-CAPS AND TECHS LEAD STOCKS HIGHER... Link for todays video. Stocks surged on Wednesday with the Russell 2000 ETF (IWM), the S&P MidCap 400 SPDR (MDY) and Nasdaq 100 ETF (QQQQ) taking the lead. Just looking at the gaps over the last five trading days reveals a lot. Chart 1 shows the Russell 2000 ETF gapping higher and breaking a short trendline last Wednesday. This gap/breakout held for four days, even with Tuesdays sharp decline. In contrast, the S&P 500 ETF (SPY) and Dow Industrials SPDR (DIA) filled their gaps. Relative weakness in the finance sector weighed on these two. Chart 2 shows SPY filling this gap. In addition to holding the gap, also notice that IWM has already moved to a new high for the week. IWM held up better on the way down and is now leading on the way up. It all adds up to relative strength in small-caps and this is positive for the market overall.

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Chart 1

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Chart 2

Chart 3 shows the S&P MidCap 400 SPDR with a pattern similar to IWM over the last few weeks. MDY gapped up and broke the short trendline last Wednesday and held this gap-breakout. With another gap, the ETF is trading at its highest level of the week and showing relative strength. The indicator window shows the price relative hitting a new 52-week high. Chart 4 shows QQQQ following suit by holding last weeks gap and moving above 53 in early trading on Wednesday. Semis are leading todays charge. It is possible that a rising wedge is taking shape, but this would not be confirmed or reversed unless QQQQ breaks below 52.

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Chart 3

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Chart 4

PORTUGUESE INDEX BREAKS IMPORTANT TRENDLINE... Greece and Ireland have accepted bailouts. Conventional wisdom suggests that Portugal is next. Be careful turning to media pundits or government officials for clues. It is often better to watch the charts. Chart 5 shows the DJ Portugal Index ($PTDOW) hitting resistance near the April high and declining sharply over the last four weeks. The index broke the trendline extending up from the May lows with a long red candlestick this week. Colored candlesticks are red when the current candlesticks close is below the prior candlesticks close. Candlesticks are filled when the close (last price) is below the open. Also notice that the index formed a lower high, well below the January high. It looks like a continuation of the bigger downtrend is starting here and that is not a good sign. The indicator window shows the price relative, which compares the DJ Portugal Index with the German DAX Index ($DAX). This indicator edged below its May low as Portugal shows relative weakness. Note that the DJ Portugal Index is updated throughout the trading day.

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Chart 5

SPANISH BOLSA LEADS EUROPE LOWER... Even though the outlook for Portugal has dimmed, its bigger neighbor is performing even worse. In fact, the Spain Bolsa de Madrid IBEX 35 Index ($IBEX) led European equities lower over the last five weeks. Spanish and EU officials are trying to convince the markets that Spanish banks are in good shape, just as Ireland did a few weeks ago. Once again, we need to focus on the Euro, the respective bond spreads and the Equity markets for the truth. The Euro is still in a freefall. Spanish/German bond spreads are widening as investors demand more yield for more risk. Equity-wise, chart 6 shows the IBEX forming a lower high in October and breaking support. Combined with the lower lows in 2010, the IBEX is clearly in a long-term downtrend. Recent support breaks signal a continuation of this downtrend and project a move to at least the May-June lows. Spain poses a big challenge for the EU because it is much bigger than Greece, Ireland or Portugal. Chartists looking to track Spanish equities throughout the day can use the DJ Spain Index ($ESDOW).

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Chart 6

WEAKNESS IN GLOBAL EQUITIES LIFTS THE NIKKEI... The Nikkei 225 ($NIKK) is one of the best performing equity indices in the world over the last two weeks. Who would have thunk it? PerfChart 7 shows the performance of the Nikkei 225 and eight other indices since November 8th. Seven of the nine are down with the Shanghai Composite ($SSEC) leading the way. The German DAX Index ($DAX) and the Nikkei 225 are the only gainers. Regarding the DAX, Bloomberg reports that business confidence in Germany hit a record high in November. In addition, money is likely moving out of peripheral Europe to the strongest core country.

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Chart 7

Chart 8 shows the Nikkei 225 breaking above resistance with a move the last four weeks. Notice that the index retraced 50-62% of its prior advance with a falling wedge, which makes this decline look like a correction within a bigger uptrend. The index consolidated after the trendline break and then broke resistance at 9700 this month. The indicator window shows the Yen ETF (FXY) turning down the last four weeks. This helps Japanese exporters because a lower Yen makes their goods more competitive. The Yen rose sharply from April to late October, which coincided with a decline in the Nikkei. Also notice that the downturn in the Yen coincides with the upturn in the Nikkei. Looks like the Nikkei prefers a weaker Yen.

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Chart 8

OIL FALLS BACK TO SUPPORT FROM BROKEN RESISTANCE... With weakness in the stock market and strength in the Dollar, oil was hit with a double whammy over the last few weeks. Chart 9 shows West Texas Intermediate ($WTIC) breaking diamond resistance in late September and continuing above its April-May highs. The breakout and new high are clearly associated with uptrends and strength. A key tenant of technical analysis is that broken resistance turns into support. $WTIC broke out around 80 and returned to this level over the last few days. A strong breakout should hold. A move back below 80 would call for a re-evaluation.

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Chart 9

The indicator window shows oil along with the S&P 500 and US Dollar Index ($USD). Oil and stocks have been positively correlated the last 18 months or so. Both tend to rise or fall together. This makes sense because economic fortunes rise and fall along with the stock market. Inter-market analysis teaches us that the Dollar and oil are negatively correlated. This relationship was strained from November 2009 to April 2010 when both rose, but appears to be back on track since April. Therefore, we should still watch stocks and the Dollar for clues on oil. Chart 10 shows the USO Oil Fund (USO) getting a bounce off support.

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Chart 10

HAPPY THANKSGIVING!... On behalf of John and the StockCharts.com team, I wish you all a happy and safe Thanksgiving weekend.

Chart 11