SPY CORRECTS WITH FALLING FLAG -- IWM AND QQQ ESTABLISH KEY LEVELS TO WATCH -- CONSUMER DISCRETIONARY LEADS AS FINANCE LAGS -- KEY BREADTH INDICATORS CONFIRM RECENT HIGHS -- OIL & GAS EQUIPMENT/SERVICES SPDR OUTPERFORMS CRUDE

SPY CORRECTS WITH FALLING FLAG... Link for today's video. The S&P 500 ETF is lagging the Russell 2000 ETF and Nasdaq 100 ETF, but the long-term trend is up and the current decline looks like a correction. Chart 1 shows SPY hitting a new high in mid September and then correcting with a decline the last two weeks. A new high means the long-term trend is up and pullbacks are viewed as corrections. Note that this is the third correction in the last six months. Things are getting interesting because the correction looks like a falling flag and prices have retraced 50-61.80% of the prior advance. This week's highs mark resistance and a break above 169.5 would reverse the two week slide. While such a breakout would be short-term bullish, a head-fake breakout is possible with this news driven market. Notice how SPY broke out twice in June and then plunged below 157 in just four days.

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Chart 1

The indicator window shows 20-day StochRSI with upswing resistance marked at .60 and downswing support marked at .40. These levels were placed just above and below the centerline (.50) to reduce whipsaws, which would increase if .50 was used to generate signals. StochRSI triggered a bearish signal at the end of September to confirm the short-term downtrend in SPY. Look for a break above .60 to put momentum back on the bullish track. StochRSI is the Stochastic Oscillator applied to RSI, which means its measures the momentum of momentum. You can read more about StochRSI in our ChartSchool Chart 2 shows the Dow Industrials SPDR with downswing resistance marked at 152.

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Chart 2

IWM AND QQQ ESTABLISH KEY LEVELS TO WATCH... While DIA and SPY declined the last two weeks, the Russell 2000 ETF and Nasdaq 100 ETF hit new highs at the beginning of the week and held short-term support levels. Something needs to give. Either SPY and DIA join IWM and QQQ with breakouts or IWM and QQQ join SPY and DIA with support breaks. Chart 3 shows IWM breaking to a new high in mid September and then consolidating the last two weeks. The ETF hit another new high with a brief move to 107.95 on Tuesday. Even though this new high did not hold, the ETF remains above short-term support at 105. This is the first level to watch for signs that IWM is joining SPY and DIA with a correction. The indicator window shows StochRSI testing .40 with a decline the last two days. This is the moment-of-truth for IWM. Chart 4 shows QQQ with short-term support in the 78 area.

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Chart 3

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Chart 4

CONSUMER DISCRETIONARY LEADS AS FINANCE LAGS... We are also seeing disparate performances in two key sectors of the S&P 500. In particular, the Consumer Discretionary SPDR (XLY) remains relatively strong and near its September high, but the Finance SPDR (XLF) is relatively weak and broke down last week. Chart 5 shows XLY stalling just above 60 and establishing short-term support here. A short-term support break would be negative for the broader market and likely extend the correction in SPY. The indicator window shows the XLY:SPY ratio, which is also known as the price relative. This indicator hit a new high in early October as XLY continues to outperforms SPY. Relative strength in the most economically sensitive sector is positive for the market overall.

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Chart 5

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Chart 6

Chart 6 shows XLF with a different picture. First, the ETF failed to exceed its July high and formed a lower high in mid September. Second, XLF broke upswing support with a sharp decline. Third, XLF shows relative weakness as the price relative peaked in late July and moved lower the last ten weeks. The current outlook for XLF is bearish and I am looking for what would prove this outlook otherwise (wrong). There are two things to watch for. XLF did manage to firm this week with a small hammer-esque candlestick on Thursday. A break above this week's high would be short-term bullish. I am also watching the price relative for a break above the July trend line. Charts 7 and 8 show the Industrials SPDR (XLI) and the Technology SPDR (XLK) for reference.

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Chart 7

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Chart 8

KEY BREADTH INDICATORS CONFIRM RECENT HIGHS... There are no signs of a major top or long-term downtrend in the AD Line or AD Volume Line for the S&P 1500. Both indicators, however, are in short-term downtrends that confirm the correction underway in the S&P 1500 ($SUPUPX). Although not always, a deterioration in market breadth often precedes a top or significant trend reversal. The AD Line, the AD Volume Line and the S&P 1500 recorded new highs in mid September to affirm their long-term uptrends. No bearish divergences here. Lower highs in one or both would suggest weakening breadth that could lead to a trend reversal. Chart 9 shows the S&P 1500 AD Line ($SUPADP) breaking below short-term support with a decline the last few days. This decline is considered a correction within the bigger uptrend. The red dotted line marks short-term resistance and a break above this level would reverse the short-term downtrend. I marked some prior short-term resistance levels so you can see how past breakouts fared. The August lows mark long-term support. Chart 10 shows the S&P 1500 AD Volume Line ($SUPUDP) with similar characteristics.

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Chart 9

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Chart 10

OIL & GAS EQUIPMENT/SERVICES SPDR OUTPERFORMS CRUDE... Even though oil fell sharply in September, the Oil & Gas Equipment/Services SPDR (XES) held short-term support and acted quite well considering. Chart 11 shows Spot Light Crude ($WTIC) falling from the 110 area to the 102 area from early September to early October. Oil got a bounce on big Thursday, but the short-term trend remains down with resistance marked at 106. Note that I am using the Raff Regression Channel to define this short-term downtrend. The middle line is a linear regression and the out lines set equidistant from the furthest high-low. You can learn more about the Raff Regression Channel in our ChartSchool

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Chart 11

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Chart 12

Chart 12 shows the Oil & Gas Equipment/Services SPDR breaking wedge support in early September and surging to a new high near 43. The ETF held near this high even as oil fell in September and showed relative strength. Perhaps oil fluctuations are immaterial as long as prices remain above $100. In any case, XES established support at 41 with consolidation lows the last four weeks. The ETF performed quite well this week with a support test on Monday and surge above 42. The bulls clearly have the edge as long as support at 41 holds.