SEMICONDUCTOR SPDR TESTS SUPPORT AS QQQ HITS RESISTANCE -- CONSUMER DISCRETIONARY SPDR STALLS AT RESISTANCE -- MATERIALS SPDR GOES FOR DIAMOND BREAKOUT -- HEALTHCARE PROVIDERS ETF BOUNCES NEAR KEY RETRACEMENT

SEMICONDUCTOR SPDR TESTS SUPPORT AS QQQ HITS RESISTANCE... Link for today's video. As noted in prior commentaries, there is a certain dichotomy at work among the ETFs and indices in the stock market. For example, the Nasdaq and Russell 2000 are bouncing off support, but the S&P 500 and Dow are consolidating near resistance. One is near its recent lows, while the other is near its recent higher. Furthering this phenomenon, the Semiconductor SPDR (XSD) fell back to its support zone last week and stalled the last six days. Meanwhile, the Nasdaq 100 ETF (QQQ) moved to resistance and at 88 and stalled the last three days. Chart 1 shows QQQ hitting resistance in the 88 area for the third time in four weeks. Notice that this area also marks a 62% retracement of the prior decline. Stalling at resistance is not necessarily bearish. It just means there is some overhead supply in the 88 area. A break though this level would be short-term bullish and open the door to the early March highs. Should the ETF fail to breakout, I would watch 86.5 for signs of a short-term breakdown that would argue for a test of the 83-84 support zone.

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Chart 1

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Chart 2

Chart 2 shows the Semiconductor SPDR hitting a new high in March and then embarking on a two month consolidation. The right half of the consolidation is starting to look like a triangle as volatility contracts. Chartists can watch these trend lines for the first directional clues. A move above 69 would break the upper trend line and signal a continuation higher. A break below the lower trend line (66) would be negative and argue for a deeper retracement of the prior advance, perhaps back to the 63 area. As astute readers may have gathered, a number of narrowing consolidations have formed on the charts over the last six weeks. Breaks to the upside would support a stronger stock market, while breaks to the downside would argue for weakness.

CONSUMER DISCRETIONARY SPDR STALLS AT RESISTANCE... The consumer discretionary sector is the most economically sensitive sector in the stock market and the one that chartists should watch for clues on the economy. Chart 2 shows the Consumer Discretionary SPDR (XLY) in a long-term uptrend because it recorded a new high in early March. Things can't be that bad if XLY hit a new high just two months ago. The ETF then fell back and tested the top of its big support zone in mid April. Nothing much has been happening since mid April because XLY has simply consolidated. It is possible that a triangle is taking shape and a break below the lower trend line would signal a continuation of the March-April decline. On the upside, the ETF met resistance near 65 over the last few weeks and a breakout here would be bullish. Relative weakness is the main concern right now because the price relative (XLY:SPY ratio) has been falling all year, which is in sharp contrast to the second half of 2013. Chart 3 shows the Equal-Weight Consumer Discretionary ETF (RCD) forming a small rising wedge as it bounces near the June trend line. The bulls still have the edge on this price chart, but a move below 76 would break wedge support and argue for further weakness.

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Chart 3

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Chart 4

MATERIALS SPDR GOES FOR DIAMOND BREAKOUT... The Materials SPDR (XLB) broke out to new highs in late February and then moved into a consolidation over the last two months. Chart 5 shows the ETF forming a diamond pattern from early March to early May. The left half looks like a broadening formation, while the right half looks like a symmetrical triangle. The ETF is challenging the upper trend line now and a move above 48 would trigger a convincing breakout. Keep in mind that XLB recorded a 52-week high in early April and the long-term trend is up. A consolidation within an uptrend, therefore, is viewed as a bullish continuation pattern. Chartists can watch support at 46.5 for the first signs of a break down. The indicator window shows the AD Line for the Materials SPDR. This breadth indicator hit a new high in late April and remains near this high. Breadth remains strong with the April low marking first support for the AD Line. Chart 6 shows the Equal-Weight Materials ETF (RTM) with similar characteristics.

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Chart 5

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Chart 6

HEALTHCARE PROVIDERS ETF BOUNCES NEAR KEY RETRACEMENT... The HealthCare Providers ETF (IHF) pulled back rather sharply in April, but bounced off a long-term trend line and could be poised to resume the advance. Chart 7 shows IHF with a steady advance from June to January and then a sharp surge in February-March (90 to 100). After hitting a new high in early April, the ETF abruptly pulled back to the 92-94 area. The new high means the long-term trend is up and this pullback has so far held above the early February low. IHF is showing signs of life again with a gap up and move above 94. The indicator window shows the Commodity Channel Index (CCI) dipping below -200 to become very oversold in mid April and then climbing back above -100 the past week. A break into positive territory would turn momentum bullish again.

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Chart 7

UNITED HEALTH AND EXPRESS SCRIPTS RETURN TO BREAKOUT ZONES... United Health (UHN) and Express Scripts (ESRX) are the top two holdings for the HealthCare Providers ETF (IHF) and these two account for around 24% of IHF. Both stocks declined in April and gapped down on high volume. Despite these declines, I am putting them on my radar because both are at long-term support zones. Chart 8 shows United Health breaking out in March and hitting a new 52-week high. The stock subsequently declined back to the breakout zone and stalled in the 74-76 area the last two weeks. Notice that this decline retraced around 62% of the prior advance and the stock stalled on high volume right after the gap. This is an interesting area because support is at hand and the bigger trend is up.

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Chart 8

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Chart 9

Chart 9 shows Express Scripts hitting a new high in early March and then falling quite sharply over the last two months. The stock underperformed the market from early March to late April and an earnings miss triggered a big gap down last week. The stock is interesting because it is in a support zone from broken resistance and the 62% retracement. In addition, notice how ESRX firmed on high volume after the gap. A big gap down is certainly negative, but it does not always imply lower prices in the future. Notice how the stock gapped down in October and then embarked on an advance from 60 to 78.