MIND THE GAP IN SPY -- SEMICONDUCTOR SPDR TESTS WEDGE BREAKOUT -- INTC HITS SUPPORT AS AMAT FIRMS WITH HIGH-WAVE CANDLESTICK -- GOLD BENEFITS FROM WEAKNESS IN BOTH STOCKS AND TREASURIES -- SENSEX TESTS SUPPORT AS BRIC ETF HITS RESISTANCE
MIND THE GAP IN SPY... Link for today's video. In Friday's Market Message I showed some correction targets for the S&P 500 ETF (SPY) and Russell 2000 ETF (IWM) using weekly charts. Today I would like to get more granular by using daily charts for both. With strong selling pressure on Thursday morning, the SPY gapped down and broke the late July low. This gap held on Friday as the ETF closed lower for the third day in a row. At this point, the gap and support break are short-term bearish, and the onus is on the bulls to prove this break otherwise. The gap zone and broken support turn first resistance. A quick move back above 169 would fill the gap and show strength. The 50-61.80% retracement zone and early July breakout mark the next support zone in the 162.50 area.

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Chart 1
The indicator window shows MACD(5,35,5) and the Commodity Channel Index (CCI) to two takes on momentum. MACD is good for defining directional momentum, while CCI is good for overbought and oversold levels. Directional momentum is down when MACD is below its signal line and falling. Directional momentum is up when MACD is above its signal line and rising. Directional momentum is currently down. CCI plunged below -200 for the second time in three months, and the second time this year. CCI is clearly oversold, but it is too early to bet on a bounce because MACD has yet to turn up and SPY has yet to reach its next support zone. Personally, I would not bite on the MACD first upturn or sign of strength. Notice the little head fake in mid June. Chart 2 shows the Russell 2000 ETF with similar characteristics.

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Chart 2
SEMICONDUCTOR SPDR TESTS WEDGE BREAKOUT... With a pullback over the last few weeks, the Semiconductor SPDR (XSD) hit it first support zone on Friday and showed signs of firmness on Monday. Chart 3 shows XSD peaking four weeks ago and displaying some relative weakness in July. However, notice that the price relative (XSD:SPY ratio) has been rising since October 2012 and XSD has been outperforming the market for months. On the price chart, XSD broke wedge resistance in early July, and then fell back to this breakout in mid August. Broken resistance in the 54 area turns first support, which marks the first test for this key tech group. The four week decline looks like a falling flag with resistance at 56.50. A breakout would signal a continuation of the bigger uptrend and be bullish for the tech sector.

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Chart 3

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Chart 4
Chart 4 shows the Market Vectors Semiconductor ETF (SMH) forming a falling wedge the last six weeks. First, note that the overall trend is up with broken resistance turning support in the 36 area. Second, the ETF surged to a new high in early July and fell back with this wedge. A break above wedge resistance would signal a continuation of the bigger uptrend.
INTC HITS SUPPORT AS AMAT FIRMS WITH HIGH-WAVE CANDLESTICK ... Applied Materials (AMAT) and Intel (INTC) are two of the biggest, and most important, semiconductor stocks. Intel accounts for over 18% of the Market Vectors Semiconductor ETF, while Applied Materials account for 4.63%. Chart 5 shows Intel at an interesting juncture. Notice that the decline to 22 retraced around 61.80% of the prior advance and formed a falling wedge. Both the retracement and pattern are typical for corrections within bigger uptrends. The stock bounced in late July with good volume, but did not break the wedge trend line and fell back. Intel is getting another bounce today. A high volume breakout at 23 would reverse the 2-3 month downtrend.

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Chart 5
Chart 6 shows AMAT falling towards support and then forming a high-wave candlestick on Friday. These candlesticks feature a large high-low range with a smaller candlestick body. Technically, the body (open-close range) is on the large side, but the essence of a high-wave candlestick is there. The stock basically stalled with an indecisive day, which can sometimes foreshadow a reversal. The blue lines mark a Raff Regression Channel to define the five week downtrend. A move above 15.25 would break the Raff channel and reverse this short-term downtrend.

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Chart 6
GOLD BENEFITS FROM WEAKNESS IN BOTH STOCKS AND TREASURIES... There is something strange happening in the intermarket arena. Chart 7 shows the S&P 500 ETF (black) and 20+ Year T-Bond ETF (green) falling over the last two weeks. In contrast, the Gold SPDR (red) and the US Oil Fund (pink) are rising. Stocks are usually positively correlated with oil. It is unusual to see stocks fall and oil rise over the same period. Tensions in the Middle East could be putting a premium in oil. Stocks and Treasuries have been negatively correlated for most of the last two years. With both falling over the last two weeks, this inverse relationship is under threat as correlation turns short-term positive. An inverse relationship between stocks and Treasuries is normal. An improving employment picture and expanding economy put pressure on the Fed to taper, which is negative for Treasuries. At the same time, an expanding economy is bullish for stocks. The fact that both Treasuries and stocks are falling suggests that something is amiss in the markets. This may be just a short-term phenomenon, but chartists should watch correlation switch as long as it persists. In the meantime, weakness in stocks and Treasuries is helping gold, which is an alternative to the two. Weakness in the Dollar is also helping gold. Chart 8 shows the Gold SPDR (GLD) heading towards resistance in the 135 area with the two biggest weekly surges since October 2011.

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Chart 7

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Chart 8
SENSEX TESTS SUPPORT AS BRIC ETF HITS RESISTANCE... India is a key player in emerging markets and part of the iShares BRIC ETF (BKF). Chart 9 shows the India Sensex Index ($BSE) advancing in 2012 and stalling out in 2013. The index has been stuck between 18000 and 20500 since October 2012. With the S&P 500 moving higher during this period, the Sensex has severely underperformed the US. Note that the index closed lower again on Monday (18307), and is testing support extending back to the November lows. The Sensex is down over 8% from its July highs and experiencing strong selling pressure. A break below support would fully reverse the 18 month uptrend. This would be bearish for Indian equities and the iShares BRIC ETF. Chart 10 shows BKF hitting resistance from broken support over the last four weeks.

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Chart 9
