CONSUMER DISCRETIONARY SPDR FAILS AT RESISTANCE -- RETAIL SPDR HOLDS DOUBLE TOP SUPPORT BREAK -- STOCK MARKET REMAINS ON DEFENSIVE FOOTING OVERALL -- TELECOM ETF STARTS SHOWING RELATIVE STRENGTH -- VERIZON AND AT&T HIT 52-WEEK HIGHS

CONSUMER DISCRETIONARY SPDR FAILS AT RESISTANCE... Link for todays video. As with August 2011, volatility invaded the stock market over the last three weeks. Chart 1 shows the Consumer Discretionary SPDR (XLY) breaking below support in mid May, failing at broken support in late May and moving sharply lower last week. This sharp move lower was cut short with a surge back to broken resistance this week. While the rebound is impressive, XLY has yet to fully negate this mid May support break. Notice how XLY opened at 43.70 on Thursday and then closed 43.03, well below its open. For now, I am marking key resistance at 44. A move above this level would counter the mid May support break and call for a reassessment of the bearish prognosis. As long as this break holds, the downside target is in the 39.5-40 area. Support here is marked by broken resistance and the 50-61.80% retracement cluster. Cant decide which lows to use for the Fibonacci Retracements Tool? Try using both and looking for Fibo clusters.

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Chart 1

The indicator window shows the Price Relative (XLY:SPY ratio) stalling in May and early June, but not reversing its uptrend just yet. Technically, XLY remains relatively strong and continues to provide upside leadership. A break below the May low would indicate relative weakness in this key sector and such a development would be quite negative for the market overall.

RETAIL SPDR HOLDS DOUBLE TOP SUPPORT BREAK... I am also watching the Retail SPDR (XRT) quite closely for clues on the consumer discretionary sector and market overall. Chart 2 shows XRT in a downtrend after a double top support break in mid May. XRT moved above and below the support break twice since, but has yet to totally negate this signal. I am marking key resistance at 60. Even thought XRT is currently on a bearish signal, chartists must always be looking for price action that would negate their assessment. The May-June decline could be just a falling wedge correction of the prior advance. If so, a break above 60 would signal a continuation of this advance. As long as resistance at 60 holds, the next downside target is in the 53-54 zone. Again, broken resistance and a Fibonacci cluster mark support here.

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Chart 2

STOCK MARKET REMAINS ON DEFENSIVE FOOTING OVERALL... The stock market has been on a defensive footing since early April and remains on a defensive footing. This means the defensive sectors (utilities, consumer staples, healthcare) are outperforming the offensive sectors (consumer discretionary, technology, finance, industrials). Of the three outperforming sectors, the Utilities SPDR (XLU) is the only sector that is up over this time period. The Consumer Staples SPDR (XLP) and Healthcare SPDR (XLV) are down, but they are down less than the S&P 500 and this accounts for their relative strength. PerfChart 3 shows the three sectors outperforming since April 5th. XLU is clearly the strongest performer as investors seek safety during times of uncertainty and dividends (yield) because treasuries yield less than 1.7%. Also note that utilities derive almost all of their revenue in the US and have little overseas exposure.

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Chart 3

Chart 4 shows the Utilities SPDR (XLU) breaking triangle resistance in late April, stalling for a few weeks and moving to a new high in early June. Notice how well XLU held up during the May decline. This showed relative strength and XLU led the market higher with a fresh 52-week high this week.

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Chart 4

TELECOM ETF STARTS SHOWING RELATIVE STRENGTH... Telecom stocks are also considered relatively defensive. As with utilities, telecom service providers derive most of their revenue in the US and their business is relatively insulated from an economic downturn. Chart 5 shows the Telecom iShares (IYZ) moving along with the stock market the past year. In other words, the ups and downs in the S&P 500 match the ups and down in IYZ. The Telecom iShares moved lower since late March, but the Price Relative turned up the last six weeks and IYZ is starting to show some relative strength for the first time since spring 2011. On the price chart, notice that IYZ retraced 61.80% of its prior advance (November to March) with the move below 21. This decline is defined by the Raff Regression Channel. The middle line is a linear regression and the outer lines extend parallel from the widest point. The upper trendline ends at 21.50 and I am marking resistance here. A move above 21.50 would suggest a successful test of the 61.80% retracement and a reversal of the current downtrend. You can read more on the Raff Regression Channel in our ChartSchool.

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Chart 5

VERIZON AND AT&T HIT 52-WEEK HIGHS... Verizon (VZ) and AT&T (T) are the two biggest components of the Telecom iShares (IYZ). Chart 6 shows Verizon hitting a new high and in a clear uptrend. The stock may be a little overbought as it nears the upper trendline of a rising channel, but certainly shows no signs of weakness. Chart 7 shows AT&T moving sharply higher in late April and continuing higher in May-June. The Price Relative (T:SPY) ratio) broke out and moved straight up in May. Both stocks yield around 5%.

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Chart 6

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Chart 7

A FIVE WAVE DECLINE FOR THE S&P 500 ... The April-June decline in the S&P 500 sure looks like a five wave move. Yes, it is time to open Pandoras box with some Elliott Wave analysis. Instead of going back and looking at the long-term first, I am going to keep it simple with a basic wave count for the April-June period. In Elliott Wave theory, there are impulse waves and corrective waves. Impulse waves move in the direction of the trend to one higher degree and corrective waves move counter to this trend. Impulse waves break down into five smaller waves. Waves 1,3 and 5 are in the direction of the bigger trend, while wave 2 and 4 run counter to that trend. Corrective waves typically break down into three smaller waves to form ABC zigzags, flats and other corrective patterns. There are only three hard and fast rules in Elliott Wave. First, Wave-2 cannot retrace more than 100% of Wave-1. Second, Wave-3 cannot be the smallest of the three impulse waves. Third, Wave-4 cannot overlap Wave-1. The rest, according to Frost and Prechter, are just guidelines open to interpretation.

Chart 8 shows the S&P 500 with a five wave decline since early April. Wave-1 occurred the first week of April and then Wave-2 retraced almost all of Wave 1 with a bounce back above 1410. A large retracement of Wave-1 is typical for Wave-2 corrections. Wave-3 commenced in May and the S&P 500 decline sharply. This wave was clearly the strongest of the five, which is typical for the third wave. After a sharp Wave-4 advance, the index continued to new lows in early June to complete Wave-5.

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Chart 8

Because this is a five wave sequence, it is considered an impulse wave and part of a bigger decline. This means it is either the first (I) of a five wave decline or Wave-A of an ABC correction. Either wave, the outlook points to a corrective wave now (Wave-II or Wave-B) and then another wave down (Wave-III or Wave-C). Because Wave-II and Wave-B are corrective waves, we would expect them to breakdown into a three wave sequence, which means we may now see an ABC correction back to the 1350 area. There is resistance from broken support in this zone as well as the 50-61.80% retracement zone. You can read more about Elliott Wave in our ChartSchool.