BULLS GET A DRAW FOR THE WEEK, BUT SUPPORT BREAKS REMAIN -- BROKEN SUPPORT LEVELS MARK FIRST RESISTANCE TO WATCH -- FINANCE AND BANKING ETFS HIT NEW 52-WEEK LOWS -- AD VOLUME LINES AFFIRM RECENT SELLING PRESSURE

BULLS REGROUP, BUT SUPPORT BREAKS REMAIN... With a rebound over the last two days, the S&P 500 ETF (SPY) held the support level that was shown in Mondays market message. At the time, SPY was also severely oversold. This weeks bounce alleviated oversold conditions, but it was not enough to reverse the technical damage. Chart 1 shows SPY breaking a clear support zone last week and simply firming this week. The support break remains the key feature on this chart. Also notice that SPY broke below the trendline extending up from the July low. The bulls managed to regroup after Mondays rout, but the week still ended in a draw  at best. Even after Thursdays huge gains and Fridays small gain, SPY was still down for the week. The bulls need more than just a draw undo last weeks breakdown.

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Chart 1

Chart 2 shows the Russell 2000 ETF (IWM) with similar characteristics. The ETF broke support from the March-June lows and went on to break the July 2009 trendline. The ETF recovered with the rest of the stock market this week, but remains well below the support break and just below the trendline. The indicator window shows RSI moving below 40 for the first time since early March 2009. Momentum has now moved into bear mode with future resistance expected in the 50-60 zone.

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Chart 2

BROKEN SUPPORT LEVELS MARK FIRST RESISTANCE TO WATCH... A basic tenet of technical analysis is that broken support levels turn into resistance. John Murphy showed resistance levels based on key Fibonacci retracements in Tuesdays Market Message. These levels are further confirmed by tying in broken support. Chart 3 shows SPY with broken supports at 124 and 126 now marking a resistance zone. This zone also sits between the 50% and 61.80% retracements.

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Chart 3

The indicator window shows the Commodity Channel Index (CCI) with trendlines for signals. It takes two peaks or troughs for a trendline. A rising trendline is drawn from the trough below -100 (oversold). The second trough must form after a dip below the zero line. A falling trendline is drawn from the peak above -100. The second peak must form after a bounce above the zero line. There were four signals in the last three months. The current swing/signal remains down with trendline resistance close at hand. Even if we get an upswing breakout, I would still consider it a bear market rally. Chart 4 shows IWM with broken support and key retracements marking resistance in the 76-78 area.

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Chart 4

FINANCE AND BANKING ETFS HIT NEW 52-WEEK LOWS... The Finance SPDR (XLF) has been relatively weak all year and shows no signs of turning the corner. Chart 5 shows the Finance SPDR accelerating lower in early August and remaining under pressure this week. Notice that a small Head-and-Shoulders pattern formed in June-July. A Head-and-Shoulders pattern after a decline is a bearish continuation pattern. The support break around 14.50 confirmed the pattern. XLF went on to break its August 2010 low to forge a new 52-week low. It is hard to imagine the broader market doing well when this key sector is trading near a 52-week low. Also note that XLF closed down on Friday, even as the broader market extended its rebound. Chart 6 shows the Regional Bank SPDR (KRE) also hitting a 52-week low this week.

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Chart 5

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Chart 6

AD VOLUME LINES AFFIRM RECENT SELLING PRESSURE ... Selling pressure over the last few weeks also pushed some key volume-breadth indicators into bear mode. Chart 7 shows the NYSE AD Volume Line and the 125-day EMA of Net Advancing Volume. Net Advancing Volume is the volume of advancing stocks less the volume of declining stocks. It measures the flow of money into and out of the market. The AD Volume Line formed a lower high in July and broke support with a sharp decline. Also notice that the 125-day EMA of Net Advancing Volume moved into negative territory and below June lows. This is the most negative reading since March 2009 and it tells us two things. First, selling pressure was strong enough to reverse the trend. Second, this indicator needs to move back into positive territory for the bulls to fully regain their footing

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Chart 7

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Chart 8

Chart 8 shows the Nasdaq AD Volume Line with the 125-day EMA of Net Advancing Volume. The first dip into negative territory in June signaled trouble. The break below the June low signaled a clear shift from buying pressure to selling pressure. Selling pressure remains the dominant force as long as this indicator is in negative territory.

I was using a 100-day SMA in prior chart, but decided to start using a 125-day EMA. First, 125 days is six months, which should capture the medium-term or long-term trend. Second, an exponential moving average weights recent data more than older data. This increases sensitivity and the importance of recent data.