QQQ AND MDY FORM BEARISH CONTINUATION PATTERNS -- HOUSING STARTS AND BUILDING PERMITS TICK HIGHER -- A VOLATILITY SQUEEZE HITS THE HOME CONSTRUCTION ISHARES -- PLUNGE IN YIELDS WEIGHS ON REGIONAL BANKS AND BROKERS

QQQ AND MDY FORM BEARISH CONTINUATION PATTERNS... Bearish wedges are appearing on some key charts and chartists should watch these closely for directional clues. A bearish wedge is typically a continuation pattern that forms after a decline. Like a bear flag, bearish wedges slope up and represent a corrective bounce after the decline. A break below wedge support signals a continuation of the prior decline and a move below the prior low is then expected. Chartists can also use the measured move technique for targets. Measure the distance of the prior decline and then subtract this distance from the high of the wedge. The distance can be measured as a percentage move or in points.

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Chart 1

Chart 1 shows the Nasdaq 100 ETF (QQQ) rising within a wedge the last five weeks. The immediate trend is up as long as the wedge rises. A break below the green support zone would reverse this five week uptrend and signal a continuation of the March-April decline, which was 8.8%. Using the measured move technique, an 8.8% decline from the wedge high would extend to the 81 area. The indicator window shows the Percentage Price Oscillator (PPO) just above the zero line and just above its signal line. A break below the signal line would turn short-term momentum bearish. Chart 2 shows the S&P MidCap SPDR (MDY) on the verge of a wedge break as MACD turns negative. Wedges are also taking shape in the Finance SPDR (XLF), the Consumer Discretionary SPDR (XLY) and Nasdaq 100 Equal-Weight ETF (QQEW).

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Chart 2

HOUSING STARTS AND BUILDING PERMITS TICK HIGHER... The Commerce Department reported housing starts and building permits for April, and both exceeded expectations. Chart 3 shows housing starts surging above the 1 million mark for the first time this year. While this is still down from the 1.1 million level seen at the end of 2013, the overall trend in housing starts is up. The uptrend, however, has slowed over the last 12-15 months. Notice how housing starts exceeded the 1 million mark in early 2013. With the current number around 1 million, housing starts have not increased much in the past twelve months. The cup, however, still appears to be half full because the overall trend is positive. A print below 900,000 would break this upward trajectory and be cause for concern. Chart 4 shows building permits hovering around the 1 million mark the last twelve months as well.

Chart 3

Chart 4

A VOLATILITY SQUEEZE HITS THE HOME CONSTRUCTION ISHARES ... The Home Construction iShares (ITB) did not have much of a reaction to today's housing news. In fact, ITB has not reacted much at all these days. Chart 5 shows daily bars over the last eleven months with the Bollinger Bands overlaid. The indicator window shows BandWidth, which is at its lowest levels since January. Overall, BandWidth is at the low end of its multi-year range and this indicates that volatility has contracted. John Bollinger theorized that a volatility contraction gives way to a volatility expansion and this means we could see a significant price move soon.

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Chart 5

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Chart 6

Chart 6 shows weekly candlesticks for some perspective. ITB fell over the last few months with a falling wedge. This decline, however, stalled over the last five weeks as the ETF stalled in the 23-24 area. Should this week's candlestick hold, a large spinning top would form and this shows indecision. A move above this week's high would turn this indecision into a reversal and break wedge resistance. The indicator window shows the Percentage Price Oscillator (5,35,5) moving into negative territory. A move above the signal line is needed to signal an upturn in momentum.

PLUNGE IN YIELDS WEIGHS ON REGIONAL BANKS AND BROKERS... John Murphy noted that the 10-YR Treasury Yield fell to a seven month low on Wednesday and that small-caps were falling along with bond yields. While the Finance SPDR and Equal-weight Finance ETF are holding up relatively well over the last few months, the Broker-Dealer iShares (IAI) and the Regional Bank SPDR (KRE) are well below their early March highs. Falling bond yields are clearly negative for the broker-dealers and regional banks. Chart 7 shows IAI with bars and the 10-YR Treasury Yield as the red dotted line. Notice how these two rise and fall together. The indicator window confirms this positive correlation because the Correlation Coefficient ($TNX,IAI) has been positive for most of the last three years. Chart 8 shows the Regional Bank SPDR with similar characteristics.

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Chart 7

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Chart 8

10-YR TREASURY YIELD HITS BIG SUPPORT ZONE... With banks and brokers at the mercy of bond yields, which dictate interest rates, chartists need a view on the 10-YR Treasury Yield ($TNX) and 30-YR Treasury Yield ($TYX). Chart 9 shows the 10-year yield falling to the October 2013 lows and hitting the lower end of its twelve month range. Support is at hand and RSI is at the bottom of its support zone. This puts the 10-year yield at a very interesting juncture, but the trend this year is still down. At this point, we need an upside catalyst to suggest that support will ultimately hold and the long-term uptrend will continue. Yes, I still think the long-term trend is up and the twelve-month consolidation is simply a rest within this uptrend. The January trend line and this week's high mark resistance. A move above 27 (2.7%) would reverse this year's downtrend and put the 10-YR Treasury Yield back on the upside track. Chart 10 shows the 10-YR Treasury Yield hitting the 62% retracement and broken resistance in the 33 area (3.3%). A break above 35.5 (3.55%) is needed to reverse this decline.

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Chart 9

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Chart 10

SMALL-CAP SECTORS SEVERELY UNDERPERFORM LARGE-CAP COUNTER PARTS... We are all aware that the Russell 2000 is down around 10% from its early March high and is underperforming the S&P 500. This is also true of most small-cap sectors, which are down and underperforming their large-cap counter parts. Let's take a look at three sector PerfCharts to compare. Chart 11 shows the market-cap weighted sector SPDRs and the S&P 500 SPDR. Chart 12 shows the equal-weight sector ETFs and the Equal-Weight S&P 500 ETF. Chart 13 shows the small-cap sector ETFs and the Russell 2000 ETF. The sector SPDR and equal-weight sector ETF charts are pretty similar. Most of the sectors are up year-to-date and the consumer discretionary sector (blue) is the big loser. Notice that healthcare (black), utilities (purple) and energy (cordovan) are leading with the biggest gains. As John and Greg have noted several times, these sector PerfCharts reflect a defensive stock market because the defensive sectors are outperforming the offensive sectors, which are consumer discretionary, technology, finance and industrials.

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Chart 11

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Chart 12

The weak spots in the market become clear when we look at the small-cap sector ETFs from PowerShares. First, note that eight of the nine small-cap sectors are down with consumer discretionary, technology, finance and industrials leading the way. These four offensive sectors are down over 5% year-to-date. Second, notice that the Small-Cap Energy ETF (PSCE) is the only gainer, which makes energy the strongest sector across the board. Even the Small-Cap Utilities ETF (PSCU) is down, as is the Small-Cap Consumer Staples ETF (PSCC).

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Chart 13

HERE ARE THE SYMBOLS FOR THESE THREE PERFCHARTS:... Equal-weight Sectors: RSP,RCD,RYF,RYT,RGI,RYH,RHS,RYU,RTM,RYE
Sector SPDRS: SPY,XLY,XLF,XLK,XLI,XLV,XLP,XLU,XLB,XLE
Small-Cap Sector ETFs: IWM,PSCD,PSCF,PSCT,PSCI,PSCH,PSCC,PSCU,PSCM,PSCE