SPY AND IWM RETAKE 50-DAY MOVING AVERAGES -- INDUSTRIALS SPDR TRACES OUT AN INVERSE HS PATTERN -- GE AND UPS LEAD XLI HIGHER -- FINANCE SPDR FORMS BIG DIAMOND -- REGIONAL BANK SPDR HOLDS GAP WITH PENNANT FORMATION

SPY AND IWM RETAKE 50-DAY MOVING AVERAGES... Link for todays video. Stocks surged in early trading on Wednesday with a broad rally that lifted all sectors. The combination of oversold conditions and a bounce in the Euro triggered some pre-Christmas buying pressure, which may just be the start of the Santa Claus rally. Before getting too excited, remember that trading volume is light and likely to remain light the rest of the year. This means we could see some exaggerated swings, both up and down. Those not interested in the short-term swings should try to keep the bigger picture in mind. Chart 1 shows the Russell 2000 ETF (IWM) reclaiming its 50-day moving average with a surge above 72. Even so, the ETF remains in a downtrend since the December 5th high. A sort of falling flag may be taking shape here. Follow through above 74 would break flag resistance and argue for a continuation of the late November surge. Long-term, the real test resides around the 200-day moving average in the 76-77 area. Resistance here also stems from the October-November-December highs. A break above these highs is needed to impress for the long-term.

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Chart 1

Chart 2 shows the S&P 500 ETF (SPY) trying to recapture the 50-day SMA with a surge above 122 early Wednesday. The decline over the last two weeks also formed a falling flag and SPY is challenging the upper trendline. I am watching StochRSI to confirm a flag breakout before taking it seriously. This indicator is the Stochastic Oscillator applied to RSI, which makes it RSI on steroids (hyperactive). It fluctuates between zero and one. A surge above .80 shows a bullish thrust, while a plunge below .20 shows a bearish thrust. The last thrust was below .20 and bearish. It would take a thrust above .80 to reverse this signal.

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Chart 2

Even if SPY starts a short-term uptrend, the long-term outlook is still cloudy at best. As with IWM, resistance from the recent highs and 200-day moving average is just ahead in the 126 area. Also notice that the 200-day moving average is falling. This means that the average price over the last 200-days is getting lower and lower. Falling prices means investors are losing money on average and not happy shareholders.

XLI TRACES OUT AN INVERSE HS PATTERN... The Industrials SPDR (XLI) also hit major resistance from its recent highs, but the ETF could be forming an inverse Head-and-Shoulders pattern. In fact, inverse Head-and-Shoulders patterns could be taking shape on a number of charts. After an advance, an inverse Head-and-Shoulders pattern is a bullish continuation pattern. However, as with SPY and IWM above, the Oct-Nov-Dec highs hold the key. A breakout above these highs is needed to confirm the pattern. Without confirmation, it is merely an unresolved consolidation. Chart 3 shows XLI with neckline resistance in the 34-34.5 area. The shoulder lows are around 32 and the head low is around 31. A falling flag formed the right shoulder and the ETF is challenging flag resistance with todays bounce. This bounce also establishes support at 32. Needless to say, a break below 32 would negate the pattern.

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Chart 3

GE AND UPS LEAD XLI HIGHER... The chart of XLI shows the ETFs top ten holdings with GE (10.78%) and UPS (5.69%) at the top of the list. In fact, notice that the top six components account for over 30% of the ETF and the top ten components make up almost 50%. Chart 4 shows General Electric (GE) breaking above consolidation resistance with a surge above 17 on Wednesday. Resistance from the late October high is near, but GE clearly shows relative strength this month with the breakout. Chart 5 shows UPS breaking above its October high in early December and establishing support near 70 the last two weeks. Chart 6 shows MMM within a consolidation since mid October. The stock is challenging flag resistance with todays gain. However, a break above major resistance is needed to show some long-term progress. Note that all three of these stocks are also part of the Dow Industrials.

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Chart 4

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Chart 5

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Chart 6

FINANCE SPDR FORMS BIG DIAMOND... The Finance SPDR (XLF) got a nice bounce on Wednesday, but is down sharply for the year and has traded flat since mid August. XLF began the year around 16 and is down around 20% year-to-date. Most of the weakness occurred from mid February to early October, which is when the monster October surge took hold. Despite this big move, the ETF is essentially flat since mid August and a big diamond pattern is taking shape. The right half of this pattern is a symmetrical triangle, which is a flat consolidation. Chartists should watch support from the late November low and resistance from the early December high for a resolution to this pattern.

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Chart 7

The current bias remains bearish, which favors a downside resolution to this pattern. First, note that the big trend is down as XLF trades below its falling 150-day SMA. A move above 13.50 would break this moving average. Second, notice that the Price Relative remains in a clear downtrend. This relative strength indicator hit a new low in late November. A break above the late October high is needed to reverse chronic underperformance.

REGIONAL BANK SPDR HOLDS GAP WITH PENNANT FORMATION... The Regional Bank SPDR (KRE) is holding up much better than the Finance SPDR. First, notice that KRE is back above its October breakout at 22. Even though the ETF dipped back below 22 in late November, it surged above this level with a gap on November 30th. Second, the Price Relative (KRE:SPY ratio) is challenging resistance from the November highs. Also notice that this relative strength indicator is well above its September low. This means regional banks are holding up much better than the big money center banks, which dominate XLF.

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Chart 8

On the price chart, the December consolidation holds the first key. The November 30th gap is still holding as the ETF formed a pennant consolidation in December. Todays surge off the pennant lows reinforces support. A move above 24 would break pennant resistance and signal a continuation higher. On the downside, a break below 22.50 would start filling the November 30th gap and be negative.