SEMICONDUCTOR SPDR BOUNCES WITHIN FALLING WEDGE -- KEY SECTORS REMAIN IN SHORT-TERM DOWNTRENDS -- TWO SHOOTING STARS AND TWO GAPS FOR XLB -- COPPER HITS RESISTANCE AS ISHARES BRIC ETF TURNS LOWER -- LUMBER PRICES FAIL AT RESISTANCE AND TURN DOWN

SEMICONDUCTOR SPDR BOUNCES WITHIN FALLING WEDGE... Link for today's video. Stocks are rebounding today with the Semiconductor SPDR (XSD) leading the way. Chart 1 shows XSD finding support near broken resistance in the 54 area. Despite today's move, the ETF remains in a short-term downtrend that is defined by the falling wedge. Follow through is needed to make this one-day bounce more than just an oversold bounce. A move above Monday's high would break wedge resistance and reverse the four week slide. The indicator window shows the StockCharts Technical Rank (SCTR) moving above 50 in late April and remaining above 50. In fact, the SCTR spent most of its time above 70, which shows good relative strength. Also notice how the SCTR troughed in mid August and moved up the last two weeks. This means XSD held up better than the market the last two weeks.

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Chart 1

KEY SECTORS REMAIN IN SHORT-TERM DOWNTRENDS... The next charts show price bars for the sector SPDR in the main window (middle) with four breadth indicators. The price chart tells us what is happening on the surface, while the breadth indicators tell us what is happening under the surface. It is like lifting the hood of a car and checking out the engine. From top to bottom, we have the AD Line, AD Volume Line, the 21-day EMA of the High-Low Line and the Bullish Percent Index. Keep in mind that these indicators are based on the stocks in the specific sector. The price chart, AD Line, AD Volume Line and Bullish Percent Index include 21-day EMAs, which is around one month. Even though there is a lot of information on these charts, simply start from the top and work your way down one window at a time. The message should be clear by the time you get to the Bullish Percent Index at the bottom. You can read more at the bottom of the technical indicators page in our ChartSchool

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Chart 2

In a nutshell, these charts and indicators show short-term downtrends and long-term uptrends. The broader market is not going to turn around without help from the consumer discretionary, finance and industrials sectors. Chartists should therefore watch these three carefully. Chart 2 (above) shows the Consumer Discretionary SPDR (XLY) with these key breadth indicators. The XLY AD Line ($XLYADP) and XLY AD Volume Line ($XLYUDP) both peaked in early August and moved below their 21-day EMAs. They are in short-term downtrends. The XLY High-Low Line ($XLYHLP) broke below support the second week of August, while the Consumer Discretionary BPI ($BPDISC) formed a bearish divergence and broke below the late June low. All four indicators are falling and the August trend is down until they break their falls. On the price chart, XLY is nearing a support zone in the 56-57 area for the first big test. The Raff Regression Channel, broken resistance and 61.80% retracement mark support here.

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Chart 3

Chart 3 shows the Finance SPDR (XLF) with the same indicators. The XLF AD Line ($XLFADP) and XLF AD Volume Line ($XLFUDP) are both below their 21-day EMAs and moving towards an important support zone. XLF is also in a short-term downtrend and below its 21-day EMA. Look for these three to break their 21-day EMAs to reverse the short-term downtrend. Further down the chart, the 21-day EMA of High-Low Percent ($XLFHLP) broke short-term support. The Finance BPI ($BPFINA) formed a bearish divergence and broke below the 21-day EMA. Chart 4 shows the Industrials SPDR (XLI) with similar characteristics.

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Chart 4

TWO SHOOTING STARS AND TWO GAPS FOR XLB... Chart 5 shows the Basic Materials SPDR (XLB) hitting some stiff resistance in the 41.5 area with two shooting stars and two gaps in the last three weeks. Shooting stars are short-term candlestick reversal patterns with small bodies and long upper shadows. They represent an intraday price reversal because prices moved higher during the day, but fell back and closed near their lows. The gap confirms the reversal and should be considered short-term bearish as long as it holds. There is also short-term support from the August lows to consider. The indicator window shows MACD(5,35,5) turning down and breaking its signal line. Want to see more? Check out a this chart with all the breadth indicators.

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Chart 5

COPPER HITS RESISTANCE AS ISHARES BRIC ETF TURNS LOWER... Speaking of basic materials, copper had a nice bounce in August and then hit resistance with a stall the last two weeks. Weakness in global equities over the last few days is starting to weigh on copper, which is a key industrial metal. Chart 6 shows Spot Copper ($COPPER) hitting resistance in the 3.40 area. Resistance here stems from broken support and the May highs. Copper is currently consolidating on a short-term basis (two weeks). A break below consolidation support would be bearish and argue for an extension of the bigger downtrend.

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Chart 6

Chartists should keep copper in mind when looking at emerging markets. The indicator window shows the iShares BRIC ETF (BKF) moving step-for-step with copper the last several months. While copper holds its consolidation, BKF moved lower and broke the June trend line this month. The bottom indicator window shows the Correlation Coefficient for copper and BKF. I am using 60 days because that amounts to around three months. These two have a strong positive correlation, which means the breakdown in BKF could foreshadow a breakdown in copper. Chart 7 shows the Copper ETF (JJC) for reference. Chart 8 shows the Base Metals ETF (DBB).

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Chart 7

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Chart 8

LUMBER PRICES FAIL AT RESISTANCE AND TURN DOWN... Chart 9 shows Lumber Futures-Continuous ($LUMBER) breaking down with a sharp decline in April-May and then hitting resistance near the support break around 340. Prices turned down again in July and broke the June trend line this week. Falling lumber prices suggest weakening demand and this could foreshadow a slowdown in housing. Look for a break above 330 to reverse this downtrend. The indicator window shows the Home Construction iShares (ITB) trending lower with trend line resistance at 22.

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Chart 9

WATCH THE EURO AND YEN FOR CLUES ON THE DOLLAR... The Dollar is hitting support, but cannot seem to bounce because the Euro remains strong and the Yen is holding support. Note that the Euro accounts for around 57% of the US Dollar Fund (UUP), while the Yen weighs around 13.5%. Chartists should focus on these two for clues on the Dollar. Chart 10 shows UUP hitting support in early August and firming over the last few weeks. The recent highs plus a small buffer mark short-term resistance at 22.2. A break above this level would suggest a successful support test and new upswing in the greenback. The indicator window shows the StockCharts Technical Rank (SCTR) below 50. Yes, you can use the SCTR to gauge relative strength in UUP. The SCTR shows UUP relative to the ETF universe (excluding leveraged and inverse ETFs). For most of the last 11 months, the SCTR has been below 50, indicating that UUP is in the bottom half for performance. A break above 50 would put it in the top half and be positive for the ETF.

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Chart 10

I am going to use the Euro Index ($XEU) to analyze the Euro because this corresponds to the Euro/Dollar currency cross (pair). Basically, the US Dollar Fund will not rise until the Euro breaks down. Chart 11 shows $XEU hitting support in the 127-128 area from November to July. The most recent bounce carried the Euro to the June high, which could be considered resistance. I am hesitant to call this resistance because the short-term trend is up (since early July). First support is marked at 132. A break here would be short-term bearish and keep the Euro range bound. CCI support is set at the zero line, a break of which would be short-term bearish.

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Chart 11

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Chart 12

Chart 12 shows the Yen Index ($XJY) getting a bounce off the May trend line. $XJY represents the Yen/Dollar currency cross. The May trend line and last week's low mark support just above 100. A break below this support level would be Yen bearish and Dollar bullish. It ain't happened yet though. The indicator window shows the Nikkei 225 ($NIKK) moving opposite the Yen. This is because Japanese exporters benefit from a weaker Yen. A bounce in the Yen, therefore, would be negative for the Nikkei 225.