RUSSELL 2000 ETF PLUNGES TO FIRST SUPPORT -- FINANCE SPDR FAILS TO HOLD BREAKOUT -- BANK OF AMERICA, CITIGROUP AND GOLDMAN WEIGH ON XLF -- RETAIL SPDR CONSOLIDATES ABOVE BREAKOUT -- RISING RATES WEIGH ON HOME CONSTRUCTION ISHARES

RUSSELL 2000 ETF PLUNGES TO FIRST SUPPORT... Link for today's video. The stock market rally took a breather this week as the S&P 500 ETF traded flat the last five days and the Russell 2000 ETF (IWM) fell rather sharply. In afternoon trading on Friday, SPY is near breakeven for the week, but IWM is down around 2.5% and shows relative weakness. Chart 1 shows IWM falling to broken resistance in the 108 area, which marks first support. This week's decline, while sharp, is not enough to affect the long-term uptrend. IWM has yet to even challenge the late April trend line or key support from the October low.

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Chart 1

Despite clear uptrends, there are some concerns building in the stock market. First, small-caps and mid-caps underperformed in October and show relative weakness. Second, the Finance SPDR failed to hold its triangle breakout and big banks are underperforming. Third, the 10-year Treasury Yield surged over the last three days and interest-rate sensitive stocks were hit. Stocks in general are also quite extended and ripe for some sort of corrective period. This could involve a sideways trading range or a decline that retraces a portion of the prior advance. Chart 2 shows the S&P Midcap SPDR (MDY) with a three day decline and the price relative moving lower throughout October.

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Chart 2

FINANCE SPDR FAILS TO HOLD BREAKOUT ... The Finance SPDR (XLF) went from laggard to leader in mid October, but returned back to the laggard camp over the last two weeks. Chart 3 shows XLF breaking triangle resistance with a surge above 20.7 and then stalling as the S&P 500 ETF continued higher. The indicator window shows the price relative peaking in mid October and moving to a new low by the end of the month. The relative strength breakout failed to hold and XLF shows relative weakness again. Turning back to the price chart, notice how XLF gapped down on 23-Oct, stalled for a few days and then continued lower. This breakout has failed and I would mark first resistance at 20.9. With XLF back in bearish camp, it is time to consider what it would take to prove this stance wrong. The pink trend lines show the potential for a falling flag the last two weeks. A break above 20.9 would break flag resistance and put the triangle breakout back in play.

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Chart 3

BANK OF AMERICA, CITIGROUP AND GOLDMAN WEIGH ON XLF... These three stocks account for around 15% of the Finance SPDR. In fact, Citigroup (C) and Bank of America (BAC) are the fourth and fifth largest holdings, respectively. Chart 4 shows BAC peaking in late July and working its way lower the last three months. The stock formed another lower high in mid October and broke upswing support with a sharp decline the last eight days. There is still a lot of support in the 13.5-14 area, but a bullish catalyst is needed to reverse this downswing. I will mark resistance at 14.35 and watch this level for a breakout that could turn things around. The indicator window shows the price relative (BAC:$SPX ratio) falling sharply the last two weeks.

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Chart 4

Chart 5 shows Citigroup with lower highs in mid September and mid October. While the S&P 500 moved to a new high this week, Citigroup added to its breakdown and fell sharply. Also notice that the price relative moved to a new low. First resistance is set at 50.50.

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Chart 5

Chart 6 shows Goldman Sachs (GS) with a big zigzag advance the last six months. In contrast to Bank of America and Citigroup, Goldman formed a series of rising peaks and rising troughs. Despite an overall uptrend, the stock sputtered in October and fell well short of its September high. A rising wedge is taking shape with support marked at 159, a break of which would reverse the four week upswing. The indicator window shows the price relative (GS:$SPX ratio) trending lower as GS underperforms since early June.

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Chart 6

RETAIL SPDR CONSOLIDATES ABOVE BREAKOUT... The Retail SPDR (XRT) is sputtering above its breakout, but has yet to move back below broken resistance and negate the breakout. Chart 7 shows XRT breaking above 83 last week and holding above this level the last two weeks. Broken resistance turns support and 82.8 is the first level to watch for a failure. I am particularly interested in XRT because retail spending accounts for around 2/3 of GDP and this industry group is important to the consumer discretionary sector. I am also concerned with relative weakness in the group. The indicator window shows the price relative peaking in early October and remaining near its early September lows. Even though XRT hit a new high, its price relative did not even bounce and the ETF shows relative weakness this month.

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Chart 7

RISING RATES WEIGH ON HOME CONSTRUCTION ISHARES ... The Home Construction iShares (ITB) is also an important part of the consumer discretionary sector and this week's uptick in interest rates is weighing on the group. Chart 8 shows ITB forming a lower high as the ETF plunged the last three days. With this lower high, chartists can trace out a triangle formation the last two to three months. The current swing within the triangle is down with this week's decline and key support is set at 21. A break below this level would signal a continuation of the prior decline (mid May to mid August). The indicator window shows the price relative turning back down and moving towards its summer lows.

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Chart 8

10-YEAR TREASURY YIELD SURGES ALONG WITH ISM... The 10-year Treasury Yield ($TNX) extended its run with a surge above 2.6% on Friday. This means Treasuries declined because Treasury prices move opposite of Treasury yields. Treasuries were under pressure because of more tapering talk and a strong ISM report. The ISM Manufacturing Index advanced to 56.4 and beat market expectations. Anything above 50 favors economic expansion and the index has been above 55 the last four months. Strength in the ISM points to strength in the economy and this is negative for Treasuries because it puts more pressure on the Fed to taper. Chart 9 shows the 10-year Treasury Yield surging from early May to mid August, which is a period that corresponds to weakness in ITB. The 10-year Yield then moved lower with a falling channel the last two months. This falling channel looks corrective in nature and a break above 2.75% would signal a continuation higher for Treasury yields.

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Chart 9

AD VOLUME LINES FAIL TO CONFIRM NEW HIGHS IN XLY AND XLF... The Consumer Discretionary SPDR and the Finance SPDR both moved to new highs in October, but their AD Volume Lines have yet to exceed their September highs and bearish divergences are be taking shape. Note that the AD Lines did hit new highs to confirm the new highs in XLF and XLY. Before looking at the charts, let's consider the difference between the AD Line and AD Volume Line? The AD Line is a cumulative measure of Advance-Decline Percent, which equals advancing stocks less declining stocks. An advance equals +1 and a decline equals -1, which means all stocks are treated equally. Large-caps count the same as small-caps or mid-caps. This means the AD Line measure the degree of participation. With more small and mid-cap stocks than large-cap stocks, this indicator clearly favors the "average" stock. The AD Volume Line is a cumulative measure of AD Volume Percent, which is the volume of advancing stocks less the volume of declining stocks. The volume of large-cap stocks is much higher than the volume of small and mid-cap stocks. This indicator, therefore, favors the large-cap stocks within a particular group. Think of the AD Volume Line as a cumulative measure of net buying pressure. The AD Volume Line rises when net buying pressure is positive, and falls when net buying pressure is negative. Now to the charts.

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Chart 10

Chart 10 shows the XLY AD Volume Line ($XLYUDP) hitting a new high along with the ETF and then falling short of its September high this month. This means buying pressure is not keeping up with the ETF and a bearish divergence is forming. A bearish divergence forms when the indicator fails to confirm a new high in the underlying security. Despite less buying pressure, we have yet to see a significant increase in selling pressure. In other words, don't run for the hill just yet. It would take a break below the August-October lows to signal a material increase in selling pressure. Such a move would be outright bearish for the AD Volume Line. Chart 11 shows the XLF AD Volume Line ($XLFUDP) with a bearish divergence brewing over the last two months. Also notice that this indicator turned down with a rather sharp decline the last two weeks.

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Chart 11

StockCharts calculates and publishes breadth data for several major index ETFs and the nine sector SPDRs. These can be used to create the AD Line, AD Volume Line and High-Low Line. Click here for a complete list.