SMALL-CAPS AND MID-CAPS LEAD STOCKS HIGHER -- GOLD MINERS ETF SPRINGS A BEAR TRAP -- BONDS MAINTAIN CONSOLIDATION AFTER THE FED -- NASDAQ NET ADVANCING VOLUME RATIO SURGES -- NYSE AD LINE CONTINUES TO SHOW STRENGTH

SMALL-CAPS AND MID-CAPS LEAD STOCKS HIGHER... Link for todays video. Stocks stalled on Wednesday, but held most of their big gains from Tuesday as the Fed voted to maintain current policy. In particular, small-caps led the way higher the last two days with the Russell 2000 ETF (IWM) surging off support the last four days. Chart 1 shows IWM moving above its mid June highs with a gap and long white candlestick on Tuesday. Some pundits attributed this surge to short-covering ahead of the Greek confidence vote, which was later that evening. I am not sure who was buying and for what reason, but it is clear that there was some strong buying pressure on Tuesday. Breadth indicators are featured later in this commentary. At this point, support from the 2011 lows held and the ETF broke a clear short-term resistance level around 79.5. This breakout and the gap are the first levels to watch for signs of a failure. A move back below 79 would argue for a reassessment. The indicator window shows RSI trying to break trendline extending down from the early April high and move above 50. Chart 2 shows the S&P MidCap 400 SPDR (MDY) holding the March low and breaking short-term resistance at 172.

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Chart 1

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Chart 2

GOLD MINERS ETF SPRINGS A BEAR TRAP... Something had to give sooner or later as the disconnect between gold and gold stocks continues to grow. Four days ago, the Gold Miners ETF (GDX) was trading at its lowest level since September as gold was in spitting distance of its all-time high. As noted before, the chart pattern looked like a massive Double Top with a support zone around 53. Chart 3 shows GDX breaking below this support zone last week, but roaring back with a surge above 55 over the last four days. This failed support break now looks like a bear trap. Chart 4 shows the Junior Gold Miners ETF (GDXJ) firming near support from the January low and surging over the last two days. Both are still underperforming bullion, but gold stocks could continue to do well as long as gold remains near 1500.

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Chart 3

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Chart 4

BONDS MAINTAIN CONSOLIDATION AFTER THE FED... The 20+ year Bond ETF (TLT) continues to consolidation near a potential reversal point. Chart 5 shows TLT with an ABC corrective move that is currently near a key retracement. There is also resistance around 98 from broken support. Overall, TLT has been consolidating between 95 and 98 this month. These are the levels to watch for the next signal. A break above 98 would invalidate this ABC count and call for higher prices (lower interest rates). Conversely, a move below support at 95 would end the ABC correction and signal the start of an impulse wave lower (higher interest rates). The direction of bond prices is important to the stock market. Rising bonds prices (falling rates) suggest economic weakness that would be negative for stocks. Falling bond prices (rising rates) are indicative of economic strength, which is positive for stocks. Chart 6 shows the 10-year Treasury Yield ($TNX) for reference.

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Chart 5

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Chart 6

NASDAQ NET ADVANCING VOLUME RATIO SURGES... Among other ways, breadth statistics can be analyzed using a cumulative line and ratio oscillator. Before looking at the charts, here is a brief explanation of the calculations. The AD Line and AD Volume Line are cumulative lines of Net Advances and Net Advancing Volume, respectively. Net Advances equals advances less declines. Net Advancing Volume equals advancing volume less declining volume. Think of these lines as running totals. Each days value increases or decreases the total or cumulative value. Consequently, these lines rise when Net Advances or Net Advancing Volume are positive and fall when negative. Ratios are found by dividing Net Advances by total issues and Net Advancing Volume by total volume. Dividing by total issues or volume shows these indicators as ratios, which allows us to compare values over time. In general, surges above .50 show strong bullish breadth (buying pressure), while plunges below -.50 show strong bearish breadth (selling pressure). Users can click on any of these charts to see the settings and save them to their favorites list.

Chart 6 shows the AD Line (gray), the Nasdaq (pink) and Net Advances Ratio in the indicator window. By overlaying the AD Line with the Nasdaq, chartists can compare movements in this breadth indicator with the underlying index. Notice that the AD Line peaked in February and formed a lower high in April. With the Nasdaq moving to a new high in late April, this amounted to a bearish divergence. The AD Line subsequently declined below its March low as the Nasdaq found support near its March low. Turning to the Net Advances Ratio, we can see strong selling pressure the first half of June and then two bullish breadth surges over the last two weeks. These surges show broad participation in the bounce off support.

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Chart 7

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Chart 8

Chart 8 shows the AD Volume Line (gray), the Nasdaq (pink) and the Net Advancing Volume Ratio. Notice how the AD Volume Line tracks the actual Nasdaq much better than the AD Line. This is probably because the Nasdaq and NY Composite are market-capitalization weighted indices. In other words, the biggest stocks account for the most weight. The biggest stocks are also the volume leaders and this drives the AD Volume Line. Both the Nasdaq and the AD Volume Line bounced near their March lows over the last two days. Perhaps more importantly, notice that the Net Advancing Volume Ratio surged to its highest level of the year (>.80). This reflects strong one-sided buying pressure that reinforces this bounce off the March lows. Many important lows are marked by such strong one-sided breadth surges.

NYSE AD LINE CONTINUES TO SHOW STRENGTH... Chart 9 shows the AD Line (gray), NY Composite (pink) and Net Advances Ratio. While the NY Composite declined all the way to the March low, the AD Line held well above this low. In fact, the AD Line even held above the April low. With an advance the last three days the AD Line is back above its mid June highs. The indicator window shows the Net Advances Ratio surging well above .50 twice in the last two weeks. In fact, the Net Advances Ratio surged to its highest level of the year on Tuesday. Notice that strong breadth surges occurred at the mid March and mid April lows. Failure to hold this weeks breadth surge and a break below the March lows would be most bearish.

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Chart 9

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Chart 10

Chart 10 shows the AD Volume Line, NY Composite ($NYA) and Net Advancing Volume Ratio. Again, notice how the AD Volume Line tracks the NY Composite closer than the AD Line. Both the AD Volume Line and NY Composite ($NYA) tested their March lows and surged over the last three days. The Net Advancing Volume Ratio surged above .75 twice in the last two weeks. Strong positive breadth surges reinforce the bounce off support. Failure to hold these surges and breaks below the March lows would be most bearish.