BROKEN SUPPORT TURNS FIRST RESISTANCE FOR SPY -- QQQ AND IWM BOUNCE AFTER INVERTED HAMMERS -- SEMIS, INTERNET AND RETAIL ETFS SHOW RELATIVE WEAKNESS -- HOME CONSTRUCTION ISHARES HOLDS NOVEMBER LOW -- OIL SERVICE HOLDRS UNDERPERFORMS OIL

BROKEN SUPPORT TURNS FIRST RESISTANCE FOR SPY... Link for todays video. Stocks moved sharply higher in early trading as rumors swirled that EU leaders were poised to deliver another rescue package. Recent history shows us that speculating on prospective deals or rumors is a lesson in futility. We can be sure about one thing. There will be more market moving rumors in the days and weeks ahead. Chartists should try to keep the bigger trends in mind. While todays one-day bounce is impressive, it pales in comparison to the prior nine day decline. Keep in mind that stocks were severely oversold after this sharp move. With Fridays close, the S&P 500 ETF (SPY) and Nasdaq 100 ETF (QQQ) were down over 8% in just two weeks. The small-cap dominated Russell 2000 ETF (IWM) was down just over 10%. These are the sharpest declines since August 2011 and May-June 2010. Such oversold conditions primed the pump for an oversold bounce. Rumors of an IMF bailout package for Italy and an expansion of the EFSF added fuel to this oversold bounce. Chart 1 shows SPY breaking support around 122 with a gap down and sharp decline last week. Also note that SPY formed a lower high in October. This support break and the lower high are the dominant chart features right now. The gap and support break turn into the first resistance zone to watch in the 122-123 area.

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Chart 1

The indicator window shows the TRIX oscillator. This indicator measures the Rate-of-Change for the triple smoothed exponential moving average. In this example, I am using a 10-period triple smoothed EMA (black) with a 6-period EMA for a signal line (red). The indicator recently moved into negative territory, which means the triple smoothed 10-day triple EMA is now pointed down. You can read more on this indicator in our ChartSchool Article.

QQQ AND IWM BOUNCE AFTER INVERTED HAMMERS... Chart 2 shows QQQ forming an inverted hammer on Friday. This candlestick comes after a decline from 59 to 53 over the last three weeks (10%). We do not need a momentum oscillator to know that QQQ was short-term oversold on Friday. The inverted hammer is just what it says it is: an upside down hammer. After a weak open, QQQ surged above 53.5 during the day, but fell back below 53 by the close. The long upper shadow and small body near the low form the inverted hammer. This is a short-term bullish reversal pattern that requires confirmation. A close above Fridays high would argue for an oversold bounce. However, a big bounce is not expected. Last weeks gap marks first resistance around 55 and broken support turns into resistance around 56. Chart 3 shows IWM with similar characteristics.

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Chart 2

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Chart 3

HOMEBUILDER AND OIL SERVICE ETFS HOLDING UP THE BEST... The next two PerfCharts shows the absolute performance for the S&P 500 ETF (SPY) and nine industry group ETFs. PerfCharts can be used to compare performance of a preset time frame, such as one, three or six months. Alternatively, PerfCharts can be used compare performance during a specific move in the broad market. There have been two significant moves recently. First, the stock market bottomed on October 4th and rallied the entire month. Second, the stock market peaked at the end of October and declined in November. PerfChart 4 starts October 4th because this is when the October rally began. All industry group ETFs are above their early October lows because all show gains over the last 38 trading days. The ETFs with the biggest gains are the furthest above their October lows, which means they show relative strength. The ones with the smallest gains are the closest to their October lows, which means they show relative weakness. As of Fridays close, the FirstTrust Internet ETF (green), Semiconductor HOLDRS (pink), Networking iShares (light blue) and Retail SPDR (blue-green) have the smallest gains and show relative weakness since early October. This is not a good sign for the tech sector or the consumer discretionary sector. On the relative strength side, the Home Construction iShares (ITB) was still up over 17% and the Oil Service HOLDRS (OIH) was up over 10%. Also note that the Regional Bank SPDR (KRE) and Transport iShares (IYT) were holding on to relatively big gains. These four appear to be holding up the best since early October.

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Chart 4

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Chart 5

PerfChart 5 shows these same ETFs from October 28th until Fridays close. As with the broader market, all are down sharply over this period. Notice that the FirstTrust Internet ETF, Semiconductor HOLDRS, Regional Bank SPDR and Oil Service HOLDRS are down the most. These four led the market lower over the last four weeks. Semis and Internet made both PerfCharts and show relative weakness twice. This is a double negative for the tech sector. Of these nine industry group ETFs, the Home Construction iShares shows the smallest loss since October 28th. Again, this is a sign of relative strength. The Oil Service HOLDRS and Regional Bank SPDR contradict themselves on these two PerfCharts. They show relative strength over the last two months, but relative weakness over the last four weeks. The Home Construction iShares (ITB) stays consistent with relative strength over the last two months and the last four weeks.

HOME CONSTRUCTION ISHARES HOLDS NOVEMBER LOW... The early November low has become a line-in-the-sand for the various ETFs and stocks. Those trading above their early November low are showing relative strength on the price chart. Keep in mind that SPY broke below this low. Chart 6 shows the Home Construction iShares (ITB) breaking resistance with the October surge and holding this breakout. Broken resistance in the 10.25-10.50 area turns into first support. This support zone was affirmed with the November 1st low. Overall, the ETF is consolidating between 10.25 and 11.50. A break below the November lows would indicate that the October breakout failed and put ITB in the same boat as the broader market.

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Chart 6

OIL SERVICE HOLDRS UNDERPERFORMS OIL... As John Murphy noted on Saturday, stocks and commodities have been positively correlated this year. The positive correlation between stocks and oil was evident over the last two months. Both surged in October and declined the last two weeks. Despite this positive correlation, note that oil is holding up better than the S&P 500 ETF (SPY). Chart 7 shows the US Oil Fund (USO) breaking above its September high and holding this breakout. SPY did not hold this breakout. Second, notice that the recent decline in oil was shallower than the decline in SPY (yellow area). After declining to 37 last week, USO broke above last weeks high with a strong open today. This move establishes support at last weeks low. Oil remains in an uptrend as long as this low holds. Further weakness in stocks would likely produce a support break.

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Chart 7

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Chart 8

Even though Spot Light Crude broke its September highs with ease, chart 8 shows the Oil Service HOLDRS (OIH) failing to break these highs and showing weakness relative to oil. This is a bit strange. One would expect oil service stocks to follow oil with a breakout and even show relative strength when oil is strong. The indicator window shows the OIH:$WTIC ratio, which is the Price Relative. This ratio peaked in early August and moved to a new low last week. Relative weakness in OIH makes the current rally in Spot Light Crude ($WTIC) a bit suspect. On the price chart, OIH hit major resistance in the 135 area and broke support with a sharp decline below 124.