S&P MIDCAP 400 AND S&P 500 EQUAL WEIGHT INDEX BATTLE SUPPORT -- DEFENSIVE SECTORS LEADING MARKET SINCE APRIL -- AD VOLUME LINES BREAK KEY SUPPORT LEVELS -- NET NEW HIGHS LINES REMAIN BULLISH OVERALL

S&P MIDCAP 400 AND S&P 500 EQUAL WEIGHT INDEX BATTLE SUPPORT... Link for todays video. After sharp declines last week, stocks turned mixed this week and several indices are firming near key support levels. I have been writing about support from the March-April lows for a few weeks now. Wednesday, I showed the Dow and Russell 2000 testing this key support level. Today, I will show the S&P MidCap 400 ($MID) and S&P 500 Equal Weight Index ($SPXEW) testing similar support levels. This means four major indices are testing this support zone. Chart 1 shows $MID declining below 970 last week and firming above 950 this week. Notice how the index dipped below 960 three times this week and recovered each time to close above 960. The battle lines are clear on this chart. A break above this weeks high would argue for a successful support test and keep the bigger uptrend alive. Failure and a break below the March-April-May lows would be bearish and argue for a medium-term trend reversal. The indicator window shows MACD moving into negative territory twice in the last two months. The early May high marks a sort of resistance level for momentum. Look for a breakout to turn momentum bullish again.

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Chart 1

Chart 2 shows the S&P 500 Equal Weight Index also testing support from the March-April lows. The index broke flag support with a sharp decline last week. This weeks consolidation is just a rest after becoming oversold. Will the index continue lower or hold support? Again, a break above resistance would argue for a successful support test, but a break below 2000 would signal a continuation lower. The indicator window shows the Price Relative comparing the performance the S&P 500 Equal Weight Index to the S&P 500, which is weighted by market cap. The equal-weight version has lagged since mid February. The Price Relative is firming, but a breakout is needed for this equal-weight version to show relative strength again.

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Chart 2

DEFENSIVE SECTORS LEADING MARKET SINCE APRIL... Even though we have yet to see key support breaks, there has been a clear shift in sector rotation since early April. The Finance SPDR (XLF) and Technology SPDR (XLK) have gone from leaders to laggards and the defensive sectors have started to outperform. PerfChart 3 shows the percentage change for the nine sector SPDRs since April 3rd. Only the Utilities SPDR (XLU) shows a gain. The other eight sectors show losses with XLK and XLF sporting two of the biggest losses. The Basic Materials SPDR (XLB) and the Energy SPDR (XLE) are also down over 5% since early April. Throw in the Industrials SPDR (XLI) and we can clearly see the five sectors that have born the brunt of selling pressure. All tabs on this chart are white, which means we are seeing the percentage change. The red box for the S&P 500 is checked (filled) to show it on the chart.

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Chart 3

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Chart 4

PerfChart 4 shows same sectors in relative performance mode, which is the default setting. Notice that the S&P 500 tab is shaded to make it the benchmark. Also notice that the red box is hollow, which means the S&P 500 is not selected and not shown on the chart. This chart shows the relative performance for the nine sector SPDRs. Sectors outperforming have positive bars and sectors underperforming have negative bars. Notice that technology and finance are negative, while consumer staples, healthcare and utilities are positive. These latter three are the defensive sectors that hold up the best during times of uncertainty. In a rather interesting twist, the Consumer Discretionary SPDR (XLY) is still holding up and showing relative strength. This is the key sector to watch. A breakdown in this sector could provide the straw that breaks the bulls back.

AD VOLUME LINES BREAK KEY SUPPORT LEVELS... In the April 30th Market Message, I wrote that the Nasdaq AD Volume Line ($NAUD) and the NYSE AD Volume Line ($NYUD) were in uptrends and established key support levels. Flash forward almost two weeks and these two indicators have broken support and reversed their uptrends. Chart 5 shows the Nasdaq AD Volume Line with a head-and-shoulders pattern forming since February. There is a clear support level from the March and April lows. After a weak bounce in late April, the indicator turned sharply lower in May and broke these lows. The uptrend has been reversed and this is a negative sign for Nasdaq breadth. We can now mark resistance at the early May high and it would take a move above this level to turn the AD Volume Line bullish again. Chart 6 shows the NYSE AD Volume Line with similar characteristics.

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Chart 5

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Chart 6

NET NEW HIGHS LINES REMAIN BULLISH OVERALL... While the AD Volume Lines are important indicators, chartists should not rely on one indicator to pass judgment on the broader market. Chartists should also look at other breadth indicators for confirmation. These include the AD Lines, Net New Highs, the percentage of stocks above a particular moving average and the Bullish Percent Indices. I wrote about the Nasdaq 100 %Above 50-day SMA ($NDXA50R) on Wednesday and the Bullish Percent Indices can be found near the end of the Market Summary page. Chart 7 shows the Nasdaq Net New Highs ($NAHL) turning negative the last six days. In the lower indicator window, this indicator can be seen oscillating around the zero line since early April. In the main window, the Cumulative Net New Highs Line represents an aggregate of these daily fluctuations. Even though the advance slowed in April, the indicator still has a slight upward bias and support remains at the mid April low. The Cumulative Net New Highs Line would turn bearish on a break below this support line.

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Chart 7

Chart 8 shows NYSE Net New Highs ($NYHL) turning negative today. This is the fourth dip into negative territory since early April, but these dips have thus far been contained (not deep). Also notice that the cumulative line remains in an uptrend and hit a new high this week. This indicator clearly remains in bull mode.

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Chart 8

Calculation Note: the AD Volume Lines and Cumulative Net New Highs Line are based on Net Advancing Volume Percent and Net New Highs Percent. This means I am dividing Net Advancing Volume by Total Volume to show Net Advancing Volume as a percentage of total volume. This creates a ratio that fluctuates between -1 and +1 (-100% and +100$). Rarely, if ever, is the ratio at the extremes. Net New Highs are shown as a percentage of total issues traded ($NAHL:$NATOT).