SEMIS LEAD WITH A MOVE ABOVE DECEMBER HIGH -- INTEL, XILINX AND MICRON MAKE A MOVE -- GOLD MINERS ETFS CONSOLIDATE AFTER SURGE -- OIL SERVICE ETFS WEIGHED DOWN BY SCHLUMBERGER -- TRANSPORTS AND INDUSTRIALS CLEAR OCTOBER HIGHS

SEMIS LEAD WITH A MOVE ABOVE EARLY DECEMBER HIGH... Link for todays video. Semiconductor HOLDRS (SMH), which is now part of a Market Vectors ETF clan, is showing relative strength in 2012 with a triangle breakout and surge above the early December high. Chart 1 shows SMH surging above 32 in October and then consolidating with a rather volatile triangle. Note that QQQ formed a similar pattern over this timeframe. SMH broke resistance with a strong open on Tuesday, stutter stepped and then surged above 31.50 the last three days. The indicator window shows the Price Relative (SMH:SPY ratio) declining from mid November to mid December and then turning up the last two weeks. This indicates that semis are starting to outperform the broader market.

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Chart 1

INTEL, XILINX AND MICRON MAKE A MOVE... Chart 2 shows Intel (INTC), which is the biggest holding for SMH, challenging its 2011 highs with a surge the last three weeks. Volume has been below average during this surge, but it is hard to challenge the trend when prices are close to a 52-week high. Chart 3 shows Xilinx (XLNX) surging above last week high and breaking the triangle trendline. Chart 4 shows Micron Technology (MU) breaking resistance with high volume last week. Overall the pattern since August looks like a large inverse head-and-shoulders reversal.

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Chart 2

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Chart 3

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Chart 4

GOLD MINERS ETFS CONSOLIDATE AFTER SURGE... After surging at the end of December and first day of January, the Gold Miners ETF (GDX) and the Junior Gold Miners ETF (GDXJ) consolidated the last five days. Chart 5 shows GDX forming a piercing pattern the last week of December and then surging above 53 to start the year. The question now is how will GDX resolve this consolidation? A move above 54.50 would break consolidation resistance and call for a continuation of the prior surge. Failure to breakout and a move below last weeks lows would be short-term bearish. Chartists should also bear in mind that the bigger trend is down. Note that GDX forged a lower peak in early November, broke down in December and formed a lower trough at yearend. Chart 6 shows GDXJ with similar characteristics. Chart 7 shows the Gold SPDR (GLD) hitting resistance in the 157.5 area the last four days. Chart 8 shows the Silver Trust (SLV) hitting resistance at 29 and consolidating with a small falling wedge (pennant).

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Chart 5

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Chart 6

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Chart 7

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Chart 8

OIL SERVICE ETFS WEIGHED DOWN BY SCHLUMBERGER... John Murphy noted a triangular pattern in the Energy SPDR (XLE) last Tuesday as the ETF surged above 70. XLE is trading near its October-December highs and threatening a breakout. In contrast to XLE, the iShares Oil Equipment & Services ETF (IEZ) is well below these highs and the Market Vectors Oil Services ETF (OIH) remains in a downtrend the last three months. Underperformance in both can be attributed to relative weakness in their top component, Schlumberger (SLB), which makes up over 18% of both ETFs. Chart 9 shows OIH zigzagging lower the last 2-3 months. Despite a downtrend, notice that this decline retraced 61.80% of the October surge and a falling channel formed. Both the pattern and the retracement are typical for corrections after sharp advances. Even though this decline could be corrective in nature, we have yet to see a breakout of any kind. The ETF remains below the upper trendline of the falling channel and below the late July trendline. Breakouts here would be quite positive and target a move to the next resistance zone around 135-137. The indicator window shows OIH relative to Spot Light Crude ($WTIC). OIH has been underperforming oil, which is a negative sign. A break above 1.3 is needed to reverse this trend.

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Chart 9

Chart 10 shows Schlumberger (SLB) testing support around 65 for at least the third time since mid October. The stock declined sharply in the first half of December and then formed a rising flag, which is a bearish continuation pattern. A move below the late December low would confirm the pattern and signal a continuation of the December slide. At what point would the bear flag become negated and the support test look robust? Technically, the 3-4 week trend is up because the flag is rising. A surge above the flag high would invalidate the flag and reinforce the support zone. Such a breakout would also be bullish for OIH, which is so heavily dependent on SLB. Chart 11 shows IEZ for reference.

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Chart 10

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Chart 11

TRANSPORTS AND INDUSTRIALS CLEAR THEIR OCTOBER HIGHS... Dow Theory turned bullish on October 14th when both the Dow Industrials and Dow Transports moved above their August highs. Recent breaks above the October highs confirm these bullish signals. Dow Theory is a market philosophy built on the writings of Charles Dow, editor/founder of the Wall Street Journal and creator of the Dow Averages. According to Dow, the market is bullish when both Averages move above their prior peaks and bearish when both move below their prior troughs. This is basic trend analysis. An uptrend is present when the Averages form a series of rising peaks and rising troughs. A downtrend is present when the Averages form a series of falling peaks and troughs. This is the science or objective part. Picking the right peaks and troughs is the art or subjective part. Chartists can use the Zigzag indicator to separate minor peaks and troughs from significant peaks and troughs. Chart 12 shows the Dow Industrials with the 6% zigzag indicator (pink dotted line). Only moves of at least 6% are shown with the pink zigzags. Notice how this indicator filters out the smaller ripples to focus on the big waves. Rising peaks and troughs were in play until late July when the Dow failed to exceed the May peak. A lower trough followed with the early August support break. After a volatile period from early August to early October, the Dow surged in October and broke the late summer peak around 11600. This higher peak reversed the bearish signal from early August.

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Chart 12

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Chart 13

Dow Theory is built on the principle of confirmation. A higher peak or lower trough in the Dow Industrials must be confirmed with a higher peak or lower trough in the Dow Transports. Chart 13 shows the Dow Transports with the 8% zigzag indicator as well. I opted for a wider zigzag because the Dow Transports is more volatile than the Dow Industrials. Notice that the 10-day Rate-of-Change (ROC) for the Dow Industrials fluctuates between -15% and +9%, while the 10-day ROC for the Dow Transports fluctuates between -20% and +14%. The Dow Transports confirmed the support break on August 2nd and the resistance break on October 14th. Both Averages moved above their October (closing highs) with further strength the last two weeks. This means higher peaks formed to affirm the current uptrend or bullish environment. As the charts now stand, the late November trough marks the key level for both. A break below these troughs by both Averages would trigger a bearish signal. Note that more aggressive chartists may consider using the mid December troughs as key support.