S&P 500 AND DOW CONSOLIDATE AT RESISTANCE -- RUSSELL 2000 AND THE NASDAQ TRIANGULATE NEAR SUPPORT -- JP MORGAN FOLLOWS BANK OF AMERICA WITH A GAP DOWN -- FINANCE SECTOR TESTS WEDGE TREND LINE -- INSURANCE ROCKS, WHILE REGIONAL BANKS FAIL

S&P 500 AND DOW CONSOLIDATE AT RESISTANCE... Link for today's video. The S&P 500 and Dow Industrials are the two strongest indices in the stock market, but both are hitting resistance and stalling the last few days. Chart 1 shows the S&P 500 moving back to the 1880-1900 area, stalling last week and falling back on Monday. This zone has marked resistance since early March and a breakout at 1900 is needed to signal a resumption of the existing uptrend. Even though resistance is holding, the bigger trend remains up and the index remains well above its first important support level. The mid April low and the trend line extending up from June 2013 mark first support in the 1810-1820 area. The indicator window shows Aroon Up (green) and Aroon Down (red) falling below 30 in parallel fashion. Parallel lines and relatively low levels confirm that the index is consolidating. The first Aroon line to break above 50 will trigger the next directional signal. Chart 2 shows the Dow Industrials hitting resistance in the 16600 area as a bullish cup-with-handle takes shape. The March-April lows mark support in the 16000 area.

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Chart 1

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Chart 2

RUSSELL 2000 AND THE NASDAQ TRIANGULATE NEAR SUPPORT... It has clearly been a tale of two markets over the last two months. While the S&P 500 and Dow consolidate near resistance from their recent highs, the Russell 2000 and Nasdaq are consolidating near support from their recent lows. Something needs to give here. Either the S&P 500 and Dow break down and join the Russell 2000 and Nasdaq, or the latter two hold support and breakout to join the S&P 500 and Dow. Chart 3 shows the Nasdaq falling around 10% from early March to mid April. The index found support in the 3950-4000 area for the third time since mid December. Notice that a contracting consolidation (triangle) is taking shape the last four weeks. This triangle holds the key to the next short-term move, and perhaps even the next medium-term move. A triangle support break would argue for a bigger support break at 3950 and this would have medium-term consequences. Conversely, an upside breakout would suggest an end to the correction and a resumption off the bigger uptrend. The indicator window shows the price relative ($COMPQ:$SPX ratio) falling as the Nasdaq underperformed since early March. Watch for a break above the late April high to signal some relative strength in the Nasdaq again. Chart 4 shows the Russell 2000 triangulating near support over the last four weeks.

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Chart 3

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Chart 4

JP MORGAN FOLLOWS BANK OF AMERICA WITH A GAP DOWN... The Finance SPDR came under pressure on Monday after JP Morgan, its third biggest holding (7.77%), fell over 2%. JPM warned the trading revenue in the second quarter would be down around 20%. This warning comes on the heels of negative news out of Bank of America (BAC) last week. Chart 5 shows JP Morgan gapping down and testing support in the 54-55 area. This is the second gap down in four weeks. Even though support is at hand, a move above 56.5 is needed to fill this gap and suggest a successful support test. Chart 6 shows Bank of America gapping down last week and hitting a potential support zone. Despite support, the bearish gap rules as long as it remains unfilled and I will mark first resistance at 16.

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Chart 5

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Chart 6

FINANCE SECTOR TESTS WEDGE TREND LINE... Despite down gaps in key components, the Finance SPDR (XLF) remains in an uptrend overall and the AD Line for XLF hit a new high on Friday. Chart 7 shows XLF hitting a new high in mid March and falling back towards the June trend line in mid April. The ETF got a bounce off this trend line today, but the three week advance is looking like a rising wedge, which is potentially bearish. A break below wedge support would signal a continuation of the April decline and project a trend line break. The indicator window shows the XLF AD Line ($XLFADP) in a clear uptrend and hitting a new high. A new high in this breadth indicator shows underlying strength in the sector and suggests that the Finance SPDR will move to new highs.

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Chart 7

INSURANCE ROCKS, WHILE REGIONAL BANKS FAIL... Like all sectors, the finance sector can be broken down into different industry groups. REITs and insurance-related stocks are performing well, but banks are not. Chart 8 shows the Insurance SPDR (KEI) trading near its 2014 highs as an inverse head-and-shoulders pattern takes shape. A break above neckline resistance in the 63 area would signal a continuation of the larger uptrend. Chartists can watch support at 60 for the first signs of a break down. The indicator window shows the Price Momentum Oscillator (PMO) turning positive in early March and moving back above its signal line last week. Momentum remains bullish as long as the PMO holds above the zero line.

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Chart 8

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Chart 9

Chart 9 shows the Regional Bank SPDR (KRE) peaking in late March and falling throughout April. Despite this sharp decline, the bigger trend is still up because KRE hit a new high in late March and has yet to break the early February low. KRE will, however, need to reverse soon to keep this uptrend alive. The recent decline formed a falling wedge and the immediate trend is down as long as the wedge falls. Notice that KRE surged to 39.18 on Friday and then fell back by the close. Chartists can use this high for first resistance. A breakout here would provide the first clues that the correction is ended and the bigger uptrend is resuming. The indicator window the PMO dipping below -1 and remaining below its signal line. An upside signal-line crossover would provide the first sign of improving momentum.

A BULLISH VORTEX CROSS FOR THE BIOTECH ISHARES... Biotechs bore the brunt of selling pressure when the market punished stocks with high PEs and valuations, but the long-term trend for the Biotech iShares (IBB) is still up and long-term support is at hand. Chart 10 shows the ETF surging some 230% from August 2011 to February 2014. With the decline back below 220, the ETF fell around 25% and returned to broken resistance and the October 2011 trend line. This is the first support level to watch for a bounce.

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Chart 10

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Chart 11

Chart 11 shows a medium-term reversal building as IBB broke channel resistance and this breakout held last week. Notice how IBB fell back to the 220 area and then rebounded last week. The ETF has resistance in the 235 area and a breakout here would complete the reversal. Such a move would argue for a retracement of the 25% decline or a resumption of the long-term uptrend. The indicator window shows +VI (green) breaking above -VI (red) for the first time since early March. As the plus and minus signs suggest, the Vortex indicators are designed to capture upside and downside price movement. Upside price movement is getting the edge when +VI crosses above -VI. You can read more about this indicator in our ChartSchool.