RETAILERS LEAD OVERSOLD BOUNCE -- RSI TURNS OVERSOLD FOR RETAIL HOLDRS -- AIRLINE INDEX BOUNCES OFF SUPPORT -- ALASKA, JETBLUE AND UNITED-CONTINENTAL LEAD AIRLINES -- NYSE NET NEW HIGHS FLIRT WITH NEGATIVE TERRITORY -- GERMAN DAX FIRMS AT KEY RETRACEMENT

RETAILERS LEAD OVERSOLD BOUNCE... Link for todays video. Stocks edged higher in early trading on Monday with retailers showing relative strength. It is going to be a big, and possibly volatile, week for the markets. Several key ETFs are testing their March lows as the Papandreou government braces for a confidence vote on Tuesday. As soon as this is out of the way, the Fed begins its meeting with a policy statement on Wednesday afternoon. Chart 1 shows the Russell 2000 ETF (IWM) firming at support from the 2011 lows. This week could be the make-or-break week for some major support levels.

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Chart 1

Retail stocks provide traders with a good yardstick on the domestic situation. Not many retailers have exposure, directly or indirectly, to Greece. Chart 2 shows the Retail SPDR (XRT) moving lower with the rest of the market and holding well above its March lows, which mark a pretty significant support level. The ETF declined sharply in June and then formed a potential pennant over the last 1-2 weeks. This pennant has a slight rise that makes it look like a small rising wedge. Technically, the trend is up as long as this wedge/pennant rises. A break below pennant support would signal a continuation of the early June decline and target a support test around 46-47.

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Chart 2

The indicator window show the Price Relative, which show XRT performance relative to the S&P 500 ETF (SPY). Despite a sharp decline the last seven weeks, the Price Relative has been flat. In other words, the Retail SPDR is holding up rather well. This is the level chartists need to watch for signs of a breakdown (relative weakness) in retail.

RSI TURNS OVERSOLD FOR RETAIL HOLDRS... Chart 3 shows the Retail HOLDRS (RTH) taking an especially hard hit from mid May to mid June. RTH was down almost 9% from high to low over the last eight weeks. This sharp decline was enough to push RSI below 30 for the second time since late June-early July. Also notice that RTH is trading at the top of a support zone extending back to December. Talk about an important test. The rising 200-day SMA (not shown) also marks support in the 104 area. Short-term resistance is marked at 106.5 and a break above this level could give way to an oversold bounce.

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Chart 3

AIRLINE INDEX BOUNCES OFF SUPPORT... Even though airline stocks were hit hard over the last several weeks, the Amex Airline Index ($XAL) found support near the April low and bounced on Friday-Monday. Chart 4 shows XAL hitting support near the 62% retracement in April and surging above 44 in early May. After a two-week consolidation around 44-55, the index broke short-term support and plunged back to the April lows. Instead of breaking this low, XAL found support and firmed at 40. A successful support test could be in the making here. A break above last weeks high, which marks short-term resistance, would be the first sign of success. The indicator window shows the Percent Price Oscillator (PPO) turning up from oversold levels. A move above the signal line would be positive for momentum.

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Chart 4

Chart 5 shows the Airline ETF (FAA) also bouncing off support from the April low. The indicator window shows the 12-Month US Oil Fund (USL) for reference. Airlines were buoyed by a sharp decline in oil prices in late April (red/green arrows). After some stalling in oil and weakness in stocks, airlines declined in late May and early June. The recent decline in oil prices could be putting another bid into airline stocks. The indicator window shows FAA relative to the S&P 500. Despite the sharp decline back to the April lows, the Price Relative held above its April low and FAA is showing some relative strength.

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Chart 5

ALASKA, JETBLUE AND UNITED-CONTINENTAL LEAD HIGHER... Chart 6 shows Alaska Air Group (ALK) breaking resistance from an inverse Head-and-Shoulders pattern and surging to 70 in May. After hitting this 52-week high, the stock corrected with the rest of the market. Notice that ALK retraced 62% of the March-May surge and reversed in mid June with high volume. ALK is definitely one of the strongest airlines stocks in 2011. Chart 7 shows JetBlue (JBLU) surging off support for the third time since March. The stock has been range bound since February with support around 5.40 and resistance around 6.40. Chart 8 shows United Continental Holdings (UAL) reversing at the 62% retracement with a break above 23. The stock was up every day last week and broke resistance on good volume

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Chart 6

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Chart 7

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Chart 8

NYSE NET NEW HIGHS FLIRT WITH NEGATIVE TERRITORY... Nasdaq Net New Highs dipped deeper into negative territory in June, but NYSE Net New Highs are trying to firm around the zero line. Chart 9 shows the Nasdaq Net New Highs Ratio ($NAHL:$NATOT)) with its 10-day EMA in the indicator window. Applying a short moving average smooths the data series and reduces crosses above/below the zero line. Notice how the ratio turned negative in early June and moved to levels not seen since August. The 10-day EMA also moved to its lowest level since August. In the main chart window, this expansion of new lows pushed the cumulative Net New Highs line below its 10-day EMA. These are bearish developments for Nasdaq breadth. To reverse this bearish breadth, we need to see the cumulative Net New Highs line turn back up and the 10-day EMA of net new highs move back into positive territory.

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Chart 9

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Chart 10

In an interesting twist, NYSE Net New Highs are holding up much better. Chart 10 shows the NYSE Net New Highs Ratio ($NYHL:$NYTOT) with its 10-day EMA in the indicator window. The ratio dipped below zero a couple times this month, but the 10-day EMA has yet to turn negative. It is currently at zero. Also notice that the cumulative Net New Highs line remains above its 10-day EMA (barely). With the NY Composite trading at support from the March lows, these indicators and the index are at their moment-of-truth. A successful support test in the index and strong uptick in Net New Highs would keep the NY Composite on bullish footing.

GERMAN DAX FIRMS AT KEY RETRACEMENT... Despite the current challenges in Europe, German stocks remain relatively strong and this is positive for Europe as a whole. The German DAX Index ($DAX) declined with the rest of the global stock market over the last seven weeks, but held up much better than the S&P 500 and French CAC Index ($CAC). Chart 11 shows the DAX retracing 50-62% of its March-April surge with a decline to around 7000. In contrast to the DAX, the S&P 500 and the French CAC Index are testing their March lows. The DAX remains well above this low. Like the S&P 500, the DAX is consolidating after a sharp decline the last seven weeks. Support at 7000 holds the first key. A break below this level would be bearish for German stocks and perhaps Europe as a whole. Germany remains the strongest stock market and economy in Europe right now. A break below 7000 would target a move to the March lows, which mark the next support level. On the upside, a break above the mid June highs would reverse the seven week slide.

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Chart 11

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Chart 12

Chart 12 shows the French CAC Index breaking its April lows and the July trendline. Notice that the Price Relative ($CAC:$DAX ratio) moved to a new low this month. French stocks are underperforming German stocks at the moment.