QQQ AND IWM ESTABLISH IMPORTANT SHORT-TERM SUPPORT -- XLF BOUNCES WITHIN TRIANGLE CONSOLIDATION -- REGIONAL BANK SPDR FORMS MORNING DOJI STAR -- TRANSPORTS AND RETAILERS REMAIN STRONG OVERALL -- AIRLINE INDEX BREAKS RESISTANCE WITH BIG SURGE

QQQ AND IWM ESTABLISH IMPORTANT SHORT-TERM SUPPORT... Link for todays video. With a bounce over the last few days, the Nasdaq 100 ETF (QQQ) and Russell 2000 ETF (IWM) established important short-term levels to watching going forward. It is important to realize that major trend reversals occur in stages. A short-term breakdown is followed by a medium-term breakdown and then a long-term breakdown. The markets rarely move from long-term uptrends to long-term downtrends in a few days. It is usually a process. Currently, the stock market remains in a long-term uptrend (6+ months), medium-term uptrend (2-6 months) and short-term uptrend (1-8 weeks). Chart 1 shows QQQ hitting a new 52-week high in late April and then consolidating the last few weeks. Broken resistance turned into support with last weeks low around 58. This is now the first level to watch for a short-term trend reversal. Medium-term, QQQ broke triangle resistance with the mid April surge and the mid April low now marks key support. This level is also confirmed by the trendline extending up from November. The indicator window shows MACD, which can be used to assess medium-term momentum. MACD dipped into negative territory for a few weeks in March, but moved back into positive territory at the end of March and remains in bull mode.

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Chart 1

Chart 2 shows IWM hitting a new 52-week high on May 1st and holding above its mid April low with the pullback last week. The ETF reversed just above this level and we now have a clear support zone in the 81-82 area. I would consider this medium-term support. A move below these lows would also break the November trendline. This would be enough to reverse the medium-term uptrend.

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Chart 2

XLF BOUNCES WITHIN TRIANGLE CONSOLIDATION... The Finance SPDR (XLF) has been a thorn in the bulls hoof since he February high. While the broad indices broke their February highs recently, XLF has been wallowing near its March lows. The ETF showed a little relative strength on Tuesday with the third largest gain among the sectors. The Consumer Discretionary SPDR and Utilities SPDR were the biggest gainers. This is promising, but follow through is needed. Chart 3 shows XLF with a triangle taking shape sine February. The ETF formed a lower high in early April and a higher low in mid April. Given the prior advance (late November to mid February), this triangle may be a bullish consolidation. However, as noted on Friday, a break is needed for a directional clue. The mid April low and last weeks high mark the key levels to watch.

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Chart 3

REGIONAL BANK SPDR FORMS MORNING DOJI STAR... The Regional Bank SPDR (KRE) was also one of the strongest industry group ETFs on Tuesday with a 1+ percent gain. Chart 4 shows the ETF with a morning doji star taking shape the last three days. Before getting out your candlestick book, note that I am allowing for a little flexibility in the interpretation. This is nothing new. It is just a blending of Art and Science for technical analysis. Steve Nison talks of pattern flexibility in his books on candlestick charting. Technically, Morning Doji Stars form with a long black candlestick, a doji that gaps away from the prior close and a white candlestick that closes well into the body of the first. Even though the doji did not gap away (down) from the black candlestick, I believe the essence of the pattern is there. I see a sharp decline (black candlestick), indecision (doji) and a reversal (white candlestick). This is just a short-term pattern though. Overall, KRE remains stuck in a trading range with the noose tightening. A break above the late April high would be bullish and a break below the mid April low bearish.

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Chart 4

TRANSPORTS AND RETAILERS REMAIN STRONG OVERALL... Transports remain one of the stronger groups in the stock market as the Dow Transports trades near a 52-week high. According to Dow Theory, transports represent a key component of the economy because these companies move people and products. Demand for such movement is dependent on the economy. For example, strong retail sales translate into more product shipments. This can either be at the wholesale level to traditional retail stores or at the retail level to internet retailers. Strength in the economy also translates into more business activity that requires travel. Consumers are also more likely to travel further for vacation when the economy is strong. Rails represent a key transport mode for industrial materials such as coal or metals. I realize that there are debates raging on the actual strength of the economy and the consumer, but the charts for the Retail SPDR (XRT) and Dow Transports suggest more strength than weakness in the economy right now. Chart 5 shows the Dow Transports hitting a new 52-week high with a surge above 5500 in late April. There is nothing but uptrend on this chart. Broken resistance, the April low and the July trendline (internal) mark the first support level just below 5200.

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Chart 5

The indicator window shows the Dow Transports/Dow Industrials ratio, which is the Price Relative. This indicator shows the performance of the Dow Transports relative to the Dow Industrials. The Transports were lagging in January-February, but the ratio bottomed at the end of February and turned up the last two months. The lowest window shows a breakout of the Transportation group. Truckers and Rails have been exceptionally strong since summer. Airlines had a tough time from November to April, but surged over the last two weeks. Chart 6 shows the Retail SPDR hitting a new 52-week high in late April.

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Chart 6

AIRLINE INDEX BREAKS RESISTANCE WITH BIG SURGE... With a little help from oil, the DJ US Airline Index ($DJUSAR) surged above a few resistance levels and started showing relative strength. Airlines have been lagging for months as the broad stock indices hit new highs in April and the DJ Airline Index hit multi-month lows in April. Much of the blame goes to oil no doubt as West Texas Intermediate surged from the mid 70s to the mid 90s. Airline stocks took full advantage as oil dropped back to the low-mid 80s this month. Chart 7 shows the index with a small double bottom in April and a breakout in late April. Strength continued as the index broke above the late May highs and November trendline. After a 15% run the last 12 days, the index is getting short-term overbought. While the surge and breakouts are medium-term bullish, we could see a pullback towards the mid 70s to alleviate overbought conditions.

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Chart 7

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Chart 8

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Chart 9

Chart 8 shows the Amex Airline Index ($XAL) and chart 9 shows the Guggenheim Airline ETF (FAA) for reference. One is not necessarily better or worse than the other. They move a little differently because of the component and weighting are different. Check the respective websites for more details. It is important to understand the construction of an index or ETF to identify the key drivers. For example, Southwest Airlines (LUV), United Continental (UAL) and Delta (DAL) account for over 45% of the Airline ETF (FAA) and 8 of the top 20 holding are foreign airlines.