HEAD-AND-SHOULDERS PATTERNS TAKING SHAPE IN DIA, XLI AND MDY -- CUMULATIVE NET NEW HIGHS LINES HOLDING UP -- US DOLLAR FUND EXTENDS CONSOLIDATION AS EURO FIRMS -- GOLD REMAINS IN DOWNTREND WITH FALLING WEDGE -- SILVER TRUST CONSOLIDATES WITHIN DOWNTREND

HEAD-AND-SHOULDERS PATTERNS TAKING SHAPE IN DIA, XLI AND MDY... Link for todays video. Wednesday I noted that the Dow Industrials SPDR (DIA) and Russell 2000 ETF (IWM) formed rising flag patterns after the sharp April decline. Taking a look at price action since early February, it is also possible that head-and-shoulders patterns are taking shape. Before explaining these patterns, keep in mind that a bearish head-and-shoulders pattern is not confirmed until there is a break below neckline support. These patterns are simply large consolidations until there is a confirming break.

Chart 1 shows the S&P MidCap 400 SPDR (MDY) with a left shoulder forming from early February to early March, a head forming in the second half of March and a potential right shoulder taking shape in mid April. Should the shoulders become more symmetrical, one would expect MDY to peak near 180 and trade sideways for another week or two. A move below the March-April lows would confirm the pattern and target further weakness towards the 162 area. Traditionally, the distance from the neckline to head high is subtracted from the neckline break for a downside target. This distance is roughly 10 points and the neckline is at 172. Also notice that the 50-61.80% retracement zone, broken resistance and the 200-day moving average mark next support in this area.

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Chart 1

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Chart 2

Chart 2 shows the Dow Industrials SPDR with a similar head-and-shoulders pattern taking shape. I added volume bars to these charts because volume is an important part of these patterns. A potentially bearish head-and-shoulders pattern should see downside volume increasing as the second half of the pattern takes shape (from the head high). Indeed, downside volume did pick up in April for MDY and DIA. These volume flows confirm an increase in selling pressure. Chart 3 shows the Industrials SPDR (XLI) with a head-and-shoulders working since February.

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Chart 3

CUMULATIVE NET NEW HIGHS LINES HOLDING UP... Net New Highs took a hit in early April, but rebounded and we have yet to see a bearish signal here. Before looking at the chart, note that Net New Highs equals new 52-week highs less new 52-week lows. Also note that I am using Net New Highs divided by total issues ($NYHL:$NYTOT is the symbol). This shows Net New Highs as a percentage of total issues, which is better for comparative purposes.The cumulative line is simply a running total of the daily Net New Highs values. Instead of an oscillator, the cumulative line trends and moves along with the broad market index.

Chart 4 shows the NYSE Cumulative Net New Highs Line ($NYHL) turning up in mid October. Notice how the line moved above its 10-day EMA in late November and remained above the last 4 1/2 months. This is one strong uptrend and it has yet to be broken, but the bears are making some noise. For the first time since late November, we saw new lows exceed new highs as Net New Highs briefly dipped into negative territory the first week of April. Net New Highs moved back into positive territory the last two weeks and the cumulative line edged higher. The bulls are still winning, but another surge in new lows would likely push this line below its 10-day EMA. It has yet to happen, but chartists should keep a close watch because this would be a bearish development for stocks. Chart 5 shows the Nasdaq Cumulative Net New Highs Line ($NAHL).

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Chart 4

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Chart 5

US DOLLAR FUND TESTS SUPPORT AT EURO BOUNCES... Despite negative news out of Europe the last two weeks, the Euro held up quite well and has yet to break support. The ability to hold up in the face of negative news is positive. Chart 6 shows the Euro Currency Trust (FXE) breaking the mid January trendline with a decline in March and then consolidating. Overall, a descending triangle could be forming with support at 129.5 and resistance at 133. A break below the March-April lows would confirm the pattern and target a test of the January low.

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Chart 6

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Chart 7

Chart 7 shows the US Dollar Fund (UUP) as a mirror image of the Euro. Remember, the Euro is the main driver for UUP because it accounts for around 57% of the ETF. UUP surged from late October to mid January and then retraced 61.80% with a decline into February. The advance looked set to resume with the March surge, but the ETF fell back into a consolidation. Even with bad news on Spain, the ETF failed to break resistance and continue higher. A triangle, or perhaps even a diamond, is taking shape over the last 1-3 months. The break from this pattern will provide the next directional signal.

GOLD REMAINS IN DOWNTREND WITH FALLING WEDGE... Chart 8 shows the Gold SPDR (GLD) within a falling wedge pattern since late February. The pattern is tempting from a bullish standpoint because the ETF is stalling around the 61.80% retracement level. However, we have yet to see a sustainable surge or convincing breakout. There were a few surges above 162, but each failed as the ETF quickly fell back below 160 . I am marking key resistance at the April highs (call it 164). A move above this level would break the wedge trendline, forge a higher high and trigger a convincing breakout.

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Chart 8

Gold remains negatively correlated to Dollar and any significant moves in the Dollar will likely affect gold. The indicator window shows the Correlation Coefficient (GLD,UUP) This means an upside breakout in the Dollar would be bearish for gold, while a downside break in the Dollar would be bullish. Keep an eye on the Dollar for confirmation of any signals generated on the gold chart.

SILVER TRUST CONSOLIDATES WITHIN DOWNTREND... The Silver Trust (SLV) is also at an interesting juncture as it stalls at the 61.80% retracement. Being more of an industrial metal, I think silver is more tied to the stock market and economy than gold. Chart 9 shows SLV falling to the 61.80% retracement in mid March and stalling in the 30-31 area the last few weeks. The trend is down, but chartists should watch this one closely as it stalls near the retracement. A move above 32 would break the wedge trendline and comfortably exceed last weeks high.

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Chart 9

The indicator window shows Aroon Up (green) and Aroon Down (red) moving in a tight parallel downtrend. This is how these two indicators act during a consolidation phase. Basically, both upside momentum and downside momentum are deteriorating as prices trade sideways. The first to surge higher and break 70 wins the battle. Before leaving SLV notice the small pennant within the falling wedge. A break below pennant support would signal a continuation lower.