MARKETS OPEN DOWN 1% THEN RALLY OFF SUPPORT -- $RUT LEADS TO THE DOWNSIDE AGAIN -- C, GS, JPM STALL AT 40 WMA -- BROKER DEALER INDEX IS WEAKENING AS WELL -- THE BANKING ETF SHOWS MORE WEAKNESS FOR THE BANKS
MARKETS OPEN DOWN 1% THEN RALLY OFF SUPPORT.... The S&P500 ($SPX) opened 1% lower in the first few minutes this morning and rallied throughout the day. It bounced off the support provided by the June 9 high and the June 26th low. From Chart 1 we can see the market made its most recent high last Thursday on the � day of trading going into the long weekend. We have had a couple of big pullback days this week. It is really important to focus on the macro timing here. The first quarter had negative GDP, and any signs of weakness here could make for a larger pullback. While not predicting the move direction, some of the charts in the market point to caution. We'll look at some of those today.

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Chart 1
$RUT LEADS TO THE DOWNSIDE AGAIN... The Russell 2000 ($RUT) is considered the small cap stock index. The Russell 3000 ($RUA)- Not Shown includes the 3000 largest cap stocks. The Russell 1000 ($RUI) is made up of the largest 1000 stocks of the 3000. The Russell 2000 ($RUT) is the smallest 2000 stocks in the Russell 3000. By analyzing the behavior between the Russell 1000 and the Russell 2000 we can quickly see the change in the market that has shown up over the last 3 months. Currently, the Russell 2000 is clearly weaker than the Russell 1000 as shown in Chart 2.

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Chart 2
If the US GDP improves dramatically, this should help the Russell 2000 stock chart shown in Chart 2 as the Russell 1000 tends to be more international in scope. This would make the Russell 2000 more domestic or USA focused. The MACD shown for the Russell 2000 ($RUT) is a very strong tool. When we have consistently high MACD's like 2013 and then the market makes a much lower MACD high, it is critical for technicians to watch as the MACD tests the zero line. With the expiration of fed stimulus this quarter, this is a sensitive time and the MACD suggests the momentum is weak. Notice the December 2013 period when the MACD turned higher and kept going. That is what we need to see happen in terms of momentum. So if the $RUT can turn higher and continue to advance, the concerns we have over market divergence would dissipate. However, the failure at or just above the level as the previous high has us focused on a double top or a high-right-shoulder on a head/shoulder pattern. On a chart like the Russell 2000 ($RUT) that is sensitive to the US economy going into second quarter earnings after negative GDP in the first quarter, technicians are zoomed in on this chart for information.
C, GS, JPM STALL AT 40 WMA... On April 8, 2014 I discussed the leadership of Citi, Goldman Sachs and JP Morgan. That article can be found here. Link to Market Message April 8, 2014. Currently, Citi (C ) has been trapped under the 40 WMA since February on Chart 3. With brief attempts to breakout in March and June 2014, Citi has maintained support above $46. So Citi remains the weakest of the large banks but currently, it is holding up.

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Chart 3
Goldman Sachs (GS) recently jumped back above the 40 WMA on Chart 4, only to retest it today. It looks like the structure in Goldman is similar to the sideways structure of Citi. It would also appear that the MACD is rolling over just above zero which may suggest further weakness for Goldman Sachs.

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Chart 4
J.P. Morgan (JPM) is also building a sideways pattern on Chart 5 and testing the 40 WMA today. While C, GS and JPM made a little move higher since the April 8th article, the relative strength line (JPM:$SPX) is weakening as is the SCTR ranking. The MACD would appear to indicate this is probably breaking down next rather than higher. JP Morgan has a little support at $52.50 but since reporting it in April, it has underperformed the SP 500. All of these international banking entities appear to have lost their upside momentum for the time being.

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Chart 5
BROKER DEALER INDEX IS WEAKENING AS WELL ... The Broker Dealer Index ETF (IAI) on Chart 6 is considered a leading indicator. We can see that it has been repeatedly testing the 40 WMA. The very low MACD makes a case for a defensive posture to this industry group and perhaps a wider view of large cap stocks. This will need to be watched closely. These indicators seem to confirm that the wider industry group is having trouble, not just Goldman Sachs.

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Chart 6
THE BANKING ETF SHOWS MORE WEAKNESS FOR THE BANKS... The Banking Index ETF (KBE) is also showing weakness on Chart 7. The big names are showing weakness, and the broader ETFs that follow these industries are looking weak. it does not appear to be stock specific. While the price has not let go yet, the indicators are definitely slumping.

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Chart 7
XLI PLUMMETS ON THE SCTR RANKINGS ...
One of the sectors that was marking a strong bull trend on Chart 8 was the Industrial Sector ETF (XLI). Notice what happened in June on the SCTR ranking shown in Chart 8. It went from being one of the top performing ETF's to performing worse than 50% of the ETF's. Just using a broad brush to analyze the trend would suggest investors consider protection or raise cash in this sector as the SCTR is pointing to a significant change in price behaviour.
If we are nearing an intermediate market top, we should see late cycle sectors like Utilities outperform. XLU has been a top performing ETF since Mid January. While the large pull down last week was difficult for investors to see past, it may just indicate the increased volatility as the market moves into different leading sectors than 2013. Check Chart 9 and compare the difference between the SCTR rankings on Industrials and Utilities. When you compare the MACD slope and relative levels, you can also see the change in trend approaching.

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Chart 8

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Chart 9
$TNX GETS REJECTED AT THE 200 DMA... The 10 Year Treasury Yield ($TNX) stalled at the 200 DMA to close out last week on Chart 10. What is also important is the 200 DMA has turned down now. One of the critical points on any chart is the 200 DMA and the price action around it. So far it has failed to get back above the important level. However, when price tests a down sloping 200 DMA and fails to get back above it, more respect should be given to the failure. This chart also shows the test was on a breakout above the 2 month resistance level and did not hold on the short trading day of last Thursday. Currently we have a double top in place and it looks like the start of a progression of lower highs (LH) and lower lows (LL) on the yield which means price is rising and investors are getting more defensive. There is an opportunity right here to find support at this 24.5 � 25.0 level. This would equate to 2.45% to 2.5% yield on the ten year.

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Chart 10
If the yield breaks down through support, this can be a critical time for the equity charts to correct. On Chart 11, I have drawn significant backtests of the 40 WMA (similar to the 200 DMA) and if you look to the $SPX to represent the equity market, prices failed. When they fail at the 40 WMA as shown by a red arrow and fall past support, the evidence is pretty compelling. This current support level is critical and investors should consider the test of support today as a shot across the bow for an intermediate market top signal. If it does not break down, investors can continue to be bullish. We are only a few days from the market highs, but the weight of the evidence is that the underlying trend is changing. Arthur mentioned different leaders on some of Tuesday's charts. Arthur's Market Message on Tuesday

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Chart 11
$CRB LOSES NECK LINE SUPPORT...
I have one more chart suggesting that not all is well. After having a big run in commodities for most of this year, the Commodity Research Bureau Index ($CRB) lost support of the trend line this week on Chart 12 and closed near the lows today even though the market rallied in equities all day. This divergence of the $CRB moving down through support while stocks remain very high relative to their support levels is concerning. Having the industrial chart above show weakness on the SCTR says that this gap might start to close and the industrials that buy commodities might pull back to reflect this change.

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Chart 12
This is a battleground level and the package of charts above portray the schematic that industrials are losing favor and the Utilities are gaining favor, even in the rally of the last few weeks. The SCTR is telling us some very clear directional clues in this regard. Arthur and John both have compelling charts on pockets of strength like Autos and Gold. The bottom line is the market rallied all day today, only to end lower than yesterday. The most compelling to me is the 10 Year Yield Chart and the link to an equities market intermediate top.
I plan to publish a major article on the world market charts on the Canadian Technician page over the next week. It will add clarity why this is such a critical point on the US charts.
Good trading,
Greg Schnell,CMT