RSP AND SPY BOUNCE OFF CONSOLIDATION SUPPORT -- QQQ AND IWM BREAK 50-DAY LINES -- XLI, XLK AND XLF HOLD UP THE MARKET -- RUSSELL 2000 AND NASDAQ SERIOUSLY UNDERPERFORM -- TREASURIES START OUTPERFORMING STOCKS

RSP AND SPY BOUNCE OFF CONSOLIDATION SUPPORT... Link for today's video. Even though selling pressure hit small-caps and momentum names over the last few weeks, the S&P 500 SPDR (SPY) and the Equal-Weight S&P 500 ETF (RSP) held up quite well and did not break short-term support levels. This suggests that the stock market, as a whole, remains in good shape. Chart 1 shows SPY breaking resistance in the 183-184 area and this breakout zone turning into support. The ETF consolidated with a pennant (small triangle) this month and bounced off support on Friday. This move affirms support and provides the first sign of a continuation higher. A pennant breakout would complete the signal and open the door to new highs. The indicator window shows the Commodity Channel Index (CCI) moving below -100 to become oversold on Thursday and bouncing back above -100 on Friday. The green arrows show prior oversold bounces in CCI. Chart 2 shows the Equal-Weight S&P 500 ETF (RSP) for reference.

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Chart 1

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Chart 2

QQQ AND IWM BREAK 50-DAY LINES... Among the major index ETFs, weakness in March has been largely confined to the Nasdaq 100 ETF (QQQ) and the Russell 2000 ETF (IWM). QQQ represents large-cap tech stocks and the momentum names, while IWM represents small-caps. These three groups represent the high-beta end of the market because small-caps, techs and momentum stocks are riskier than the average stock. Even though relative weakness in these groups suggests a certain risk aversion in the stock market, note that QQQ and IWM remain in long-term uptrends and the March declines are still considered mere corrections. Chart 3 shows QQQ breaking first support with a sharp decline the last five days and testing its next support zone. The 62% retracement and broken resistance mark potential support in the 86 area. The support break in the 88.5-89 area turns into the first resistance zone. Also notice that the 50-day moving average resides at 88.26. As with early February, a move back above 89.1 would negate this support break and suggest an end to the correction.

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Chart 3

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Chart 4

Chart 4 shows IWM breaking the 50-day moving average with a sharp decline this week. Before getting too bearish, notice what happened on the last "break down". IWM consolidated after the late January break and then continued lower in early February. Despite a 7.5% decline in three weeks, the ETF firmed the first week of February and surged back above the 50-day in mid February. With IWM well above the rising 200-day moving average, a break below the 50-day signals a pullback within a bigger uptrend. The pullback, however, has yet to reverse. Broken support turns first resistance in the 116-117 area, and chartists should watch this level for a short-term reversal.

XLI, XLK AND XLF HOLD UP THE MARKET... The Consumer Discretionary SPDR (XLY) move sharply lower over the last three weeks, but the other three offensive sectors held and did not break short-term support levels. Chart 5 shows the Technology SPDR (XLK) with a pair of long filled (black) candlesticks as the ETF opened above 36.5 twice and then moved lower. Despite these intraday reversals, the ETF never followed through with a break below the support zone. Even though XLK stalled this month, selling pressure has been limited and chartists should watch the support zone (34.4-35.9) for the first signs of weakness. Chart 6 shows the Industrials SPDR (XLI) holding support in the 51.51.3 area over the last two weeks. Chart 7 shows the Finance SPDR (XLF) holding above first support with a bounce on Friday. Chartists should watch these three support levels for clues on the broader market. Support breaks by two of the three would likely signal broad market weakness and defensive action would then be warranted.

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Chart 5

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Chart 6

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Chart 7

RUSSELL 2000 AND NASDAQ SERIOUSLY UNDERPERFORM... Chartists can see the move away from risk by using ratio charts to plot price relatives. Chart 8 shows the Russell 2000 relative to the S&P LargeCap 100, which is small-caps relative to large-caps. Small-caps led large-caps in February as this ratio surged to a new high in early March. The price relative gave it all back in March as the ratio fell back to the February low. This shows a clear shift away from small-caps. Further weakness below the green zone would put this ratio at its lowest level of the year and this would be negative for the broader market. Chart 9 shows the Nasdaq relative to the NYSE Composite. This ratio also fell sharply as the Nasdaq underperformed the NYSE Composite. Obviously, the Nasdaq is home to higher-beta names that carry more risk than the average NYSE stock. Also note that the listing requirements on the NYSE are stricter than those on the Nasdaq. Relative weakness in the Nasdaq further confirms a move away from risk.

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Chart 8

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Chart 9

TREASURIES START OUTPERFORMING STOCKS... As noted on Tuesday, I was watching the 20+ YR T-Bond ETF (TLT) and the 7-10 YR T-Bond ETF (IEF) for breakouts that would be bullish for Treasuries. TLT broke out of its flag to signal a continuation higher, but IEF remains within its consolidation. It is a split decision that will likely hinge on next week's employment report. Either IEF follows TLT higher or TLT fails to hold the breakout. For now, the breakout in TLT is potentially negative for stocks because stocks and Treasuries are negatively correlated for the most part. Chart 10 shows the TLT:SPY ratio forming a lower high over the last two weeks and an even more pronounced lower high over the last three months (blue dotted line). These lower highs indicate that SPY is underperforming TLT, which implies that money prefers Treasuries over stocks this year. The red dotted lines show prior periods when SPY underperformed TLT. The green vertical lines show when relative weakness ended and stocks started outperforming again. At this point, a move above the red dotted line is needed for a short-term improvement in the SPY:TLT ratio and a move above the blue dotted line is needed to signal a long-term improvement. This week's support break is negative and could lead to further weakness, as it did in the second half of January. Chart 11 shows the SPY:IEF ratio for reference.

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Chart 10

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Chart 11

TWO STOCKS GETTING OVERSOLD BOUNCES WITHIN UPTRENDS... A basic trading strategy is to look for bullish setups when a stock becomes short-term oversold within a long-term uptrend. First, the long-term uptrend insures that you are trading in harmony with the bigger trend. Second, waiting for an oversold condition increase the reward-to-risk ratio. The trigger is the final piece of this puzzle. The next two charts show stocks that are in long-term uptrends and recently became oversold. The long-term trend is up because they are above their rising 200-day moving average. Oversold conditions were present because the Commodity Channel Index (CCI) moved below -100 for all three. Chart 12 shows Cognizant Technology (CTSH) hitting a new high in early March and falling below 48 on Thursday. The stock opened strong today and moved above the short-term trend line to reverse the three week slide. Chart 13 shows Comcast (CMCSA) hitting a new high the second week of February and correcting the last six weeks with a falling wedge. A break above wedge resistance and CCI break into positive territory would be bullish.

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Chart 12

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Chart 13

SCAN CODE SNIPPET ...
Here is the scan code that can be copied and pasted into the advanced scan workbench.

[type = stock] AND
[country = US] AND
[Daily SMA(20,Daily Volume) > 40000] AND
[Daily SMA(60,Daily Close) > 20] AND
[Daily Close > Daily SMA(200,Daily Close)] AND
[Daily CCI(20) crosses -100]