HOW MUCH CORRECTION CAN WE EXPECT FROM SPY AND IWM? -- GAPS REMAIN IN THE CONSUMER DISCRETIONARY SPDR -- WEAKNESS IN RETAIL AND HOUSING WEIGHS ON MARKET -- METALS & MINING SPDR HITS BIG RESISTANCE ZONE -- GOLD HITS FIBONACCI CLUSTER

HOW MUCH CORRECTION CAN WE EXPECT FROM SPY AND IWM?... Link for today's video. The S&P 500 ETF (SPY) extended its correction with the third weekly decline in four weeks. Even though the bigger trend is still up, this correction could extend in both price and time. Admittedly, it is quite challenging to predict the length and duration of any move. Chartists can, however, look at prior correction for time guidelines and mark support zones for price levels. Since the 2011 bottom, chart 1 shows four corrections that lasted from five to nine weeks. This puts the average at 7.5 weeks. Chartists expecting a mere four week correction are probably being a bit optimistic. Using the Fibonacci Retracements Tool, a long-term trend line and the summer low, I would estimate support in the 155-157 area. This area actually fits pretty well with a correction that lasts around 8 weeks and declines around 9% from the August high. The indicator window shows RSI with a support zone in the 40-50 area. This is the momentum target for a correction. Chart 2 shows the Russell 2000 ETF (IWM) with a target in the 94 area.

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Chart 1

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Chart 2

GAPS REMAIN IN THE CONSUMER DISCRETIONARY SPDR... The Consumer Discretionary SPDR (XLY) recovered from its mid June gap quite quickly, but did not recover from the August gaps as buyers refused to step up. Chart 3 shows XLY gapping down in mid June and then filling this gap with a strong move back above 57. Also notice that the price relative bottomed in early June as XLY showed relative strength going into the late June surge. Fast-forward and we have XLY gapping down on August 15th and breaking support. Both the gap and the support break held as the ETF continued lower this week. Notice that XLY gapped down again on Tuesday and this gap is also holding. At this point, a move above 59 is needed to fill the most recent gap and break wedge resistance. Until then, the short-term downtrend remains and this correction is set to extend. The indicator window shows the price relative (XLY:SPY ratio) flattening out over the last two months. We have yet to see a support break that would signal relative weakness, which is positive. A break below support, however, would change this and be negative.

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Chart 3

WEAKNESS IN RETAIL AND HOUSING WEIGHS ON MARKET... Syria and Fed tapering may be dominating the headlines, but I think weakness in retail and housing are dominating investment/trading decisions. These two industry groups are vitally important to the consumer discretionary sector, and the economy. Chart 4 shows the Home Construction iShares (ITB) within a clear downtrend since late May. This key group peaked well ahead of the broader market and continues to show relative weakness. Broken support in the 21.5 area turned into resistance and held in August. I am setting key resistance at 22. A break above this level is needed to negate the support break and exceed wedge resistance. It is hard to imagine a sustained advance in the broader market without a breakout in ITB.

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Chart 4

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Chart 5

The Retail SPDR (XRT) is holding up better than ITB, but the August downtrend remains and the ETF is starting to show relative weakness. Chart 5 shows XRT peaking in early August, gapping below support in mid August and hitting an eight week low this week. Broken support turned into resistance just above 80 and a break above this level is needed to reverse the short-term downtrend. Barring a breakout and reversal, the next support zone resides in the 73-74 area. The indicator window shows the price relative breaking below its prior lows as XRT starts to underperform the broader market. Relative weakness in retail, which drives some 2/3 of GDP, is negative for the broader market.

METALS & MINING SPDR HITS BIG RESISTANCE ZONE... I wrote about Spot Copper ($COPPER) on Wednesday as it hit resistance. This key industrial metal fell sharply the last two days. Media reports suggested that the strong showing in US GDP growth (2.5%) was to blame. Say what?! I though a strengthening economy would increase demand for industrial metals and the price would rise. It appears that the copper market is more worried about tapering. Better-than-expected GDP growth increases the odds of Fed tapering and less quantitative easing translates into weakness for emerging markets. As noted in Wednesday's market message, emerging market stock indices are positively correlated with the price of copper.

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Chart 6

It also follows that weakness in copper would weigh on the Metals & Mining SPDR (XME) and the Copper Miners ETF (COPX). Chart 6 shows XME hitting resistance in the 38 area and falling back this week. The bigger trend is clearly down because the ETF recorded a 52-week low in late June. The July-August bounce, therefore, is just a counter-trend bounce within a downtrend. The two month trend remains up with the mid August low marking first support. A break below this level would reverse the short-term uptrend and call for a continuation of the bigger downtrend. Chart 7 shows COPX hitting resistance from broken support in the 9.8-10 area. Notice that the StockCharts Technical Rank (SCTR) has not been above 20 since mid February and COPX shows serious relative weakness.

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Chart 7

GOLD HITS FIBONACCI CLUSTER ... Spot Gold ($GOLD) came under pressure the last two days as the Dollar bounced off support. Make no mistake about it, the two month rise in gold coincided with a sharp decline in the US Dollar Index ($USD). Gold is up over 15% since early July, while the Dollar is down around 3%. We cannot really compare the percentage moves because gold is much more volatile than the US Dollar Index. The point is that gold rose and the Dollar fell over the last two months. The indicator window in chart 8 shows the 60-day Correlation Coefficient in negative territory for most of the last eleven months.

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Chart 8

Turning to the price chart, we can make the case for stiff resistance in the low 1400s. First, there is the consolidation zone from late May to early June. Second, there is the Fibonacci cluster zone in the 1400-1450 area. Sometimes it is hard to pick the starting and ending points for the Fibonacci Retracements Tool. Chartists could start from the January high, the March high or even the May high. In this instance, I chose the January and March highs. Notice that the 50-61.80% retracements cluster in the 1400-1450 area. A typical counter trend bounce within a bigger downtrend often retraces 50-61.80% of the prior decline.

GLD CHANNELS HIGHER AND BECOMES OVERBOUGHT... Ok, so gold shows signs of turning back at resistance and the Dollar is bouncing off support. The overall setup is looking bearish, but chart 9 shows the Gold SPDR (GLD) in a two month up trend with support at 130. A move below this level would break the wedge trend line and reverse this counter trend advance.

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Chart 9

Gold bulls can make the case for a new uptrend by turning to RSI. Notice how RSI became oversold and hit resistance in the 50-60 zone during the downtrend. The recent surge above 70 shows strong upside momentum that could in fact herald the start of a long-term uptrend. However, GLD is short-term overbought and vulnerable to a correction. If GLD is indeed in a new uptrend, then I would expect RSI to find support in the 40-50 zone on any pullback.