QQQ STALLS AT KEY RETRACEMENT -- APPLE TRACES OUT BEARISH CONTINUATION PATTERN -- RETAIL SPDR TESTS GAP ZONE -- AAII BULLISH SENTIMENT SURGES ABOVE 40% -- NATURAL GAS FUND SURGES OFF SUPPORT

QQQ STALLS AT KEY RETRACEMENT... Link for todays video. The Nasdaq 100 ETF (QQQ) and the technology sector came under selling pressure early Monday. Chart 1 shows QQQ surging above 67 with a sharp two day advance on 31-December and 2-January. We have yet to see follow through on this advance because QQQ was trading back below 67 early Monday. Also notice that the ETF hit resistance near the 61.80% retracement and a rising wedge is taking shape. Both the retracement and the pattern are typical for counter-trend rallies. In other words, the decline from 70 to 61 may have started a bigger downtrend and the rally back above 67 was a mere corrective advance. For now, however, QQQ is holding its 2-Jan gap and last weeks low. A move below 66 would provide the first sign of a short-term breakdown. Medium-term support remains at 63.5 and a break below this level would fully reverse the two month uptrend. The indicator window shows RSI with support in the 40-50 zone. A break below 40 would turn momentum bearish. Chart 2 shows the Technology SPDR (XLK) failing to hold last weeks wedge break and moving back to support from broken resistance.

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Chart 1

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Chart 2

APPLE TRACES OUT BEARISH CONTINUATION PATTERN... Chart 3 shows Apple (AAPL) under pressure again on Monday. The stock led the market lower from mid September to mid November and then consolidated the last two months. Buying pressure has been anemic as the stock formed a lower high in early December and another lower high in early January. In fact, connecting these lower highs reveals a descending triangle of sorts with support at 500. A close below this level would signal a continuation lower and target a move to the low 400s. The height of the pattern (590-500) is subtracted from the support break for a downside target. Key resistance remains at 556 for now. Chart 4 shows long-term support in the 400-425 area from broken resistance and the 61.80% retracement.

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Chart 3

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Chart 4

RETAIL SPDR TESTS GAP ZONE... Retailers will be in the spotlight on Wednesday when the Commerce Department reports December retail sales numbers. According to the National Retail Federation, holiday sales accounted for around 20% of total retail sales in 2011. This makes the December report a big one. Chart 5 shows the Retail SPDR (XRT) surging above resistance to open 2013, but falling back that very day and over the last few days. XRT has yet to complete erase the gains from 2-Jan, but it has yet to follow through and complete a resistance breakout. A small falling wedge is taking shape with resistance at 63.5. Another break above 63.5 is needed to put this ETF back on the bullish track. The indicator window shows the XRT:SPY ratio moving lower since late November. XRT continues to underperform SPY and this is a potential negative for the market overall. Chart 6 shows Macys (M) trying to firm in the 36.5-37 area. Macys, a bellwether holiday retailer, fell back below support last week and is in a clear downtrend as long as this support break holds.

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Chart 5

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Chart 6

AAII BULLISH SENTIMENT SURGES ABOVE 40%... Every week the American Association of Individual Investors posts the results of its sentiment survey on their website (AAII.com). This is a simple survey that asks members if they are bullish, bearish or neutral for the stock market over the coming six months. There was a big surge this week as the percentage of bulls surged to 46.4% (up 7.7) and the percentage of bears plunged to 26.9% (down 9.3). This surge would seem to confirm the data on mutual fund inflows, which surged to their highest level since 2008. According to Bank of America Merrill Lynch, weekly mutual fund inflows hit $19 billion the prior week. This was also the fourth highest inflow in 12 years. These surges in bullish sentiment and inflows have some analysts suggesting that bullish sentiment is hitting an extreme, which is potentially bearish. But what do the charts suggest? First, note that these charts were created using a PRO account at StockCharts.com. Pro accounts allow users to upload and chart 10 custom data sets. Sorry, but this chart is not live and cannot be clicked to see the settings and data.

Chart 7

Chart 7 shows percent bulls in green and percent bears in red. The AAII data can be choppy so I am showing percent bulls and percent bears as 4-week simple moving averages. First, notice that percent bulls bottomed around 27.5% and percent bears peaked around 42.5% in June 2012. Percent bulls has been zigzagging higher and the 4-week SMA surged to its highest level since March 2012. The yellow areas show prior surges in November 2011 and January 2012. Notice that the market does not always peak after such surges. In fact, notice that the 4-week SMA of percent bulls surged above 55% at the beginning of 2011. Sentiment indicators work similar to overbought and oversold readings in oscillators. Sentiment can become excessively bullish or bearish and remain so during a strong trend.

Chart 8

Chart 8 shows the AAII Bull/Bear Ratio surging above 1.5 for the third time in six months. This is simply percent bulls divided by percent bears. The yellow areas show when this ratio surged above 2. Again, notice that this sentiment surges warn that bullishness is reaching an extreme, but do not always coincide with a reversal. Sentiment can reach an extreme a few months before the market actually reverses course. Sentiment indicators are just one piece of the puzzle. Chartists must combine these findings with other aspects of technical analysis. Click here to see the data on the AAII website.

NATURAL GAS FUND SURGES OFF SUPPORT... Natural Gas perked up on Monday with the Natural Gas futures and the US Natural Gas Fund (UNG) both surging over 1%. First, lets look at a long-term chart using the Natural Gas Spot Price. Chart 9 shows $NATGAS in an uptrend since April 2012, over nine months. The commodity pulled back sharply in December, but managed to firm near broken resistance and a key retracement the last two weeks (yellow area). A break above the mid December highs would reverse 6-7 week slide and signal a continuation of the nine-month uptrend.

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Chart 9

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Chart 10

Chart 10 shows UNG breaking below its August low, but immediately bouncing with a surge above 19 the last three days. This move broke the November trend line and the early January high. I would, however, defer to the weekly chart for $NATGAS or the March 2013 Natural Gas Futures Contract (^NGH13) for signals here. In other words, look for $NATGAS to break 3.55 to reverse this downtrend. The Oil and natural gas ETFs are tricky because they loose track of the underlying commodities over time. At best, the US Natural Gas Fund and the US Oil Fund (USO) are good for short-term and medium-term trading, but not long-term investments.