RUSSELL 2000 ETF CHALLENGES FLAG RESISTANCE -- HOME CONSTRUCTION ISHARES FILLS THE GAP AS TOL BOUNCES -- HOME DEPOT LIFTS XHB OFF KEY RETRACEMENT -- TRIANGLE TAKES SHAPE FOR DJ AUTO INDEX -- GM LEADS AUTO INDEX WITH NEW HIGH

RUSSELL 2000 ETF CHALLENGES FLAG RESISTANCE... Link for today's video. Last week the Finance SPDR surged and broke flag resistance. Today the Russell 2000 ETF (IWM) is joining the fray with a break above flag resistance. First and foremost, chart 1 shows an overall uptrend because prices are moving from the lower left of the chart to the upper right. After recording a 52-week high in late October, IWM pulled back with a zigzag below 108. Notice that broken resistance turned into first support and held as a fat harami formed on Friday. I am calling this a "fat" harami because Friday marked an inside day with a long white candlestick. The ETF remains near its highs after this strong advance with a consolidation just below 110. A follow through above this level would break flag resistance and signal a continuation higher. Note that bull flags are continuation patterns that form after a sharp advance and slope down. A flag breakout, therefore, would signal a continuation of the October advance and project a move to new highs. The indicator window shows the price relative (IWM:SPY ratio) breaking down in late October as IWM underperformed. A break above the early November high is needed to put IWM back in relative strength mode. Chart 2 shows the Nasdaq 100 ETF (QQQ) with a flatter flag over the last few weeks. A break above flag resistance would signal a continuation of the bigger uptrend.

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Chart 1

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Chart 2

HOME CONSTRUCTION ISHARES FILLS GAP AS TOL BOUNCES... The homebuilders were hit with rising interest rates the last few weeks, but the Home Construction iShares (ITB) is showing signs of life with an attempt to fill last week's gap. Chart 3 shows the ETF gapping down last week, firming for a few days and then surging above 22 on Wednesday. A higher low could be forming as the ETF holds above the October low. Notice that there are four swings within this triangle: two up and two down. Even if ITB fills the gap, I would still consider the current swing down. A break above the three week trend line (call it 22.5) is needed to reverse this downswing. Despite today's move, I am still concerned with relative weakness because the price relative moved to a new low last week. A break above the late October high is needed to turn relative performance around. Chart 4 shows Toll Brothers (TOL) holding well above its October low and firming in the 50-62% retracement zone.

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Chart 3

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Chart 4

HOME DEPOT LIFTS XHB OFF KEY RETRACEMENT... Chart 5 shows the Home Builders iShares (XHB) surging off a key retracement zone. ITB focuses on homebuilders and related industries. XHB is a little more diversified because it includes some retailers, such as BBBY, HD and LOW. Homebuilders and retailers are part of the consumer discretionary sector. Turning back to the chart, XHB surged in October and fell back to the 30 area last week. A falling flag of sorts formed as the ETF retraced around 62% of the prior advance. Today's surge is the first indication that the correction could be ending and the October surge could be resuming. XHB, however, remains just shy of a breakout and the price relative remains in a downtrend. Chart 6 shows Home Depot (HD) with a five day reversal that resembles a morning doji star. Notice that there is a sharp decline with a gap, a two day stall and a gap surge over the last two days.

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Chart 5

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Chart 6

TRIANGLE TAKES SHAPE FOR DJ AUTO INDEX... Auto manufacturers are also part of the consumer discretionary sector. Like ITB, the DJ US Automobiles Index ($DJUSAU) has been lagging the market recently. This could be changing as chart 7 shows the index getting a bounce the last three days and holding the October low. Overall, the bigger trend is up and a triangle consolidation could be taking shape. A break above triangle resistance would end the consolidation and signal a continuation higher. The indicator window shows the price relative moving lower the last six weeks. A break above the early November high is needed for autos to start showing relative strength again. Chart 8 shows the Global Auto ETF (CARZ) finding support near broken resistance.

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Chart 7

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Chart 8

GM LEADS WITH NEW HIGH AS FORD BOUNCES... Chart 9 shows General Motors (GM) hitting a new high today with good volume. Trading turned quite volatile the last three weeks, but the overall trend is clearly up with a new high. Chart 10 shows Ford (F) holding above its early October low with a bounce today. The three week trend, however, remains down and follow through above Monday's high is needed to reverse this slide. You can find a list of automobile stocks by using our sector summary

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Chart 9

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Chart 10

PANDORA MEDIA CONFIRMS CONTINUATION PATTERN... Chart 11 shows Pandora Media (P) taking a leadership role with an inverse head-and-shoulders breakout and a new high. First, note that the big trend is up. Second, note that the stock basically consolidated from late September to early November. A consolidation within an uptrend usually represents a rest in preparation for a continuation. The stock hit resistance in the 27-28 area and formed three lows. The most recent low was well above the October low and the stock broke out with a three day surge this week. In fact, the right two thirds of the pattern could be considered a cup-with-handle, which is also a bullish continuation pattern. Regardless of the pattern name, the breakout affirms the long-term uptrend and chartists can mark key support at 25.

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Chart 11

Volume is an important part to bullish patterns, especially the inverse head-and-shoulders pattern. Volume surged in September as the stock surged from 18 to 27. Volume subsided a bit after this surge and picked up again in early November. Notice how the stock gapped up and surged with big volume on November 5th. Chartists can also quantify volume with one of our many volume indicators. The indicator window shows On Balance Volume (OBV) moving to a new high in mid October and again this week. These new highs indicate that upside volume is consistently outpacing downside volume. See our ChartSchool for more volume indicators.