SMALL-CAPS CONTINUE TO OUTPERFORM LARGE-CAPS -- SETTING CHANNEL TARGETS FOR IWM AND SPY -- KEY BREADTH INDICATORS TURN BACK UP -- S&P 1500 HIGH-LOW LINE HITS A NEW HIGH -- GOLD BREAKDOWN SIGNALS A CONTINUATION OF LONG-TERM DOWNTREND

SMALL-CAPS CONTINUE TO OUTPERFORM LARGE-CAPS... Link for today's video. September has been a good month for stocks with the Russell 2000, Nasdaq and S&P 500 advancing over 3% month-to-date (nine trading days). The Russell 2000 is the leader of the pack as small-caps continue to show relative strength. Chart 1 shows the Russell 2000 relative to the S&P 100 ($OEX) using the price relative ($RUT:$OEX ratio). The Russell 2000 outperforms when this ratio rises and underperforms when this ratio falls. Notice how the ratio broke resistance in early May and recorded a new high in September. The August low marks support, a break of which would signal underperformance by the Russell 2000.

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Chart 1

The indicator window shows the Correlation Coefficient for the Russell 2000 and this ratio ($RUT:$OEX). This indicator spent most of the last two and a half years in positive territory, which means the two are positively correlated. This makes sense because relative strength in small-caps indicates that risk appetite is strong. Small-caps are more volatile than large-caps, have higher betas and generally carry more risk. Chart 2 shows the Nasdaq outperforming the NY Composite as the price relative ($COMPQ:$NYA ratio) surged from late April to late August.

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Chart 2

SETTING CHANNEL TARGETS FOR IWM AND SPY ... Chart 3 shows the S&P 500 ETF (SPY) moving higher the last two weeks and forming a higher low in late August. The November trend line (blue) and August low now mark first support in the 163 area. A break below this level would reverse the 10 month uptrend and argue for a deeper correction. As long as the trend is up, it makes more sense to consider an upside target. The pink lines mark a rising channel with the upper trend line extending to the 180 area in October.

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Chart 3

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Chart 4

Chart 4 shows the Russell 2000 ETF (IWM) within a steady advance since November 2011. The blue trend line defines the rate-of-change and support in the 99-100 area. Broken resistance further confirms support in this area. This is the first level to watch for signs of a trend reversal. The blue trend lines define a steeper, and tighter, rising channel over the last nine months. The upper trend line marks a potential upside target for IWM in the next 1-2 months.

KEY BREADTH INDICATORS TURN BACK UP... Chart 5 shows the S&P 1500 AD Line($SUPADP) in a long-term uptrend. Since the mid November low, this breadth indicator has worked its way higher with a series of rising peaks and rising troughs. After a pullback in August, the AD Line formed another higher low and turned up with the September surge. Chartists can now mark key support at the August lows.

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Chart 5

The lowest indicator window shows the 20-day SMA for AD Percent, which is advances less declines divided by total issues. This indicator oscillates above/below the zero line like a momentum oscillator. A move into negative territory signals that breadth is weakening, while a subsequent move back into positive territory indicates that breadth is strengthening. The signals are not perfect, but crosses into positive territory were pretty good at signaling a resumption of the bigger advance. Most recently, the indicator crossed back into positive territory this week, but this cross is still young and the indicator is barely positive. Also notice that the June and August dips into negative territory were the deepest of the year. This suggests that more stocks are participating in the declines. Despite these issues, I will continue to give this indicator a bullish bias as long as it holds in positive territory.

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Chart 6

Chart 6 shows the S&P 1500 AD Volume Line ($SUPUDP) also in a long-term uptrend with the August lows marking key support. The 20-day SMA of AD Volume Percent is shown moving into positive territory this week. As with the AD Line, the June and August dips were the deepest of the year, which suggests that selling pressure is increasing on the declines. This indicator remains bullish as long as it holds in positive territory.

S&P 1500 HIGH-LOW LINE HITS A NEW HIGH... Chart 7 shows the S&P 1500 High-Low Line ($SUPHLP) in the main window and Net New Highs in the lower indicator window. The High-Low Line has been above its 10-day EMA since late November and recorded a new high this week. Net New Highs dipped into negative territory twice in August (red arrows), but turned back up and exceeded +10% earlier this week. Even though Net New Highs remain below the July peaks near 25%, the bulls have the edge as long as there are more new highs than new lows.

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Chart 7

GOLD BREAKDOWN SIGNALS A CONTINUATION OF LONG-TERM DOWNTREND... With a sharp decline this week, Spot Gold ($GOLD) broke wedge support to reverse the medium-term uptrend and signal a continuation of the long-term downtrend. Before looking at the charts, note that analysts at Goldman Sachs came out with a bearish forecast for gold and a price target of $1050 in 2014. Goldman believes that a strengthening economy and reduced tapering will dampen demand for bullion. Chart 8 shows gold hitting resistance in the 1400 area in late August and falling back towards 1300 this month. Long-term, there are two support zones to watch. The July 2010 low and June 2013 low mark support in the 1150-1180 area. Further down, the 2010 low marks support in the 1050 area. The indicator window shows RSI moving below 50 in December 2012 and remaining below 50 throughout 2013. The momentum cup is half empty (bearish) when RSI is in the bottom half of its range, which is zero to one hundred.

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Chart 8

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Chart 9

Chart 9 shows daily candlesticks over the last eight months for the Gold SPDR (GLD). The ETF hit resistance from the June high and broke wedge support with a sharp decline this week. The break down clearly reverses the two month uptrend, which was always considered a corrective bounce within a bigger downtrend. The indicator window shows the Dollar also moving lower in September, which is a bit strange because gold and the Dollar usually enjoy a negative correlation. This positive correlation may not last long, and could even foreshadow a bounce in the Dollar.

DOLLAR TESTS LONG-TERM SUPPORT ... The Dollar got a feeble, and I do mean feeble, bounce on speculation that Lawrence Summers will be appointed the new Fed chairman. Keep in mind that this is pure speculation. First, we have yet to see an official appointment. Second, any appointment needs to be confirmed by the Senate. Regardless of the new Fed chair-person, chart 10 shows the US Dollar Index ($USD) testing support in the 80.5-81 area. The index got a bounce off this support zone in late August, but fell back in September for a retest. A move below 80.5 would break support and reverse the uptrend that has been in place since mid 2011.

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Chart 10

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Chart 11

Chart 11 shows the US Dollar Fund (UUP) with a small advance on Friday. The ETF established support in the 21.9 area with bounces in June and August. The August bounce was rather short-lived as the ETF fell back to 22 in September. At this point, a move above the August-September highs is needed to break resistance and turn bullish on the Dollar.