SMALL-CAPS LEAD LATE SURGE, BUT BIG TECHS LAG -- STOCKS AND TREASURIES MAINTAIN NEGATIVE CORRELATION -- 7-10 YEAR BOND ETF CORRECTS AFTER FIFTH OF THE FIFTH -- CHANNEL TRENDLINE MARKS LONG-TERM SUPPORT FOR GOLD

SMALL-CAPS LEAD LATE SURGE, BUT TECHS SHOW RELATIVE WEAKNESS... Link for todays video. Small-caps led a ninth inning surge as the stock market rallied for a strong close. Chart 1 shows the Russell 2000 ETF (IWM) advancing around 1.5% on the day. The two day advance is certainly impressive in percentage terms, but it pales relative to the prior decline. This still looks like a bear market rally. IWM clearly broke support around 76 and this area turns into resistance. There is also a resistance level at 72 from last weeks high. Even though a break above last weeks high would show some resilience, I would expect the larger downtrend to pull trump somewhere in the 72-76 area.

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Chart 1

Chart 2 shows the Nasdaq 100 ETF (QQQ) gaining less than 1% on Wednesday. Large techs lagged the broader market with below average gains. Relative weakness in this key group is a potential negative for the market. Overall, broken support and last weeks high mark a resistance zone around 54.

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Chart 2

STOCKS AND TREASURIES MAINTAIN NEGATIVE CORRELATION... Bonds moved sharply higher on the heels of a better-than-expected Durable Goods report. Profit taking could also be a factor after a meteoric rise the prior four weeks. Todays Durable Goods report may have spooked traders betting on another stimulus package announcement from Bernanke on Friday. Chart 3 shows the 20+ year Bond ETF (TLT) surging from the low 90s to around 112. While the long-term trend is clearly up for Treasuries, the ETF was overbought after this big surge. Some sort of correction or consolidation would be quite normal. A 38.2% retracement of the February-August advance would extend to the 102 area. There is also support in the 103 area from the August 12th low. Together, these mark thee first target zone for the pullback.

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Chart 3

The first indicator window shows TLT with the S&P 500 ETF (red). For the most part, these two move in opposite directions. The second indicator window shows the 63-period Correlation Coefficient confirming this largely negative correlation. 63 trading days represents around three months or one quarter. Over the last 12 months, the Correlation Coefficient was positive for a brief period from early May to early June. The indicator is currently below -.90, which shows a strong negative correlation. This explains why stocks moved higher as bonds moved lower today.

7-10 YEAR BOND ETF CORRECTS AFTER FIFTH OF THE FIFTH... Chart 4 shows the 7-10 year Bond ETF (IEF) with a couple of five wave sequences. The February-August advance consists of five ways with an extended fifth. This extended fifth breaks down into a five wave advance from early July to late August. An ABC zigzag or flat correction could now take hold. The minimum correction would be to the Wave 4 low around 101.5 (red). The maximum correction would be to the Wave 4 low of a larger degree (blue). There is also a big support zone around 96-98 marked by broken resistance and the 50% retracement.

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Chart 4

CHANNEL TRENDLINE MARKS LONG-TERM SUPPORT FOR GOLD... After going a little parabolic from early July to late August, the Gold SPDR (GLD) plunged over the last two days. Despite this plunge the long-term trend for gold remains up. Chart 5 shows GLD within a rising price channel since January 2009. Both the upper and lower trendlines were touched at least three times. GLD exceeded the upper trendline with the move above 180, but quickly declined back into the channel. The lower trendline and broken resistance in the low 150s mark the next long-term support zone.

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Chart 5

Gold is no stranger to big moves. The indicator window shows the weekly Rate-of-Change. GLD was up over 5% last week, which marked the biggest weekly gain since January 2009. The current decline has yet to exceed -5%. If 2008 is any guide, a weekly decline below -5% would suggest something more than just a short-term pullback. The 9+ percent decline in March 2008 heralded the last major correction in bullion. GLD declined around 30% from its March 2008 peak to its November 2008 low. A decline back to 150 would mark a relatively minor 19% correction from the August high.

KEY RETRACEMENT MARKS SHORT-TERM SUPPORT FOR GLD... Chart 6 shows daily bars for GLD. This one year chart confirms long-term support in the 150s and also marks a potential support level near current levels. With the current advance beginning in July, chartists can draw the Fibonacci Retracements Tool from the early July low to the August high. The 38.2% retracement is around 170. The August 12th low also marks support at 168. Combined, chartists can mark a support zone in the 168-170 area.

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Chart 6

The Fibonacci Retracements Tool was also drawn from the January low the August high. This is obviously a bigger advance so it will represent a longer term support zone. Notice that the 50-61.80% retracement zone resides around 149-156. This area jibes with the channel trendline and broken resistance. Before moving on, I would like to say a few words on Fibonacci. I dont use Fibonacci retracements on their own. Instead, I look for other factors to confirm a particular level. In addition, I do not use Fibonacci retracements to pinpoint reversal levels or support/resistance. Instead, I use zones to serve as alerts. Once prices enter these zones, I look for reversal signals from candlesticks or oscillators for validation.

SILVER ETF FORMS LOWER HIGH AT KEY RETRACEMENT... Unsurprisingly, the Silver Trust (SLV) was also under pressure the last two days. Silver is the hybrid metal. It is part industrial and part precious. The industrial side perhaps explains the lower high in August. While gold moved to a new high this month, silver failed to reach its April high. In fact, the July-August advance retraced 61.80% of the prior decline. This is a normal retracement for a counter-trend advance. A move below the wedge trendline and August low would signal a continuation lower and target further weakness towards next support in the 26-27 area.

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Chart 7

The indicator window shows RSI forming a lower high in August and moving sharply lower the last two days. With the ETF forming a higher high in August, a bearish divergence has taken shape in the indicator. A break below the early August low would turn RSI bearish and could be used to confirm a breakdown on the price chart.