LARGE-CAPS DO THEIR PART -- HERE'S WHAT TO WATCH IN SMALL AND MID CAPS -- BROAD MARKET HIGH-LOW LINE CONTINUES HIGHER -- SMALL-CAP HIGH-LOW INDICATOR REMAINS IN CORRECTIVE MODE -- SEMICONDUCTOR ETF BREAKS DOWN

LARGE-CAPS CONTINUE TO DO THEIR PART... Link for today's video. The S&P 500 SPDR (SPY) continued its uptrend with a move above the upper trend line of a pennant and a new high this week. Technically, a pennant within an uptrend is a bullish continuation pattern and this breakout is bullish until proven otherwise. Failure to hold the breakout would provide the first sign of weakness. A follow through break below support at 195-196 and an Aroon signal would show the first material selling since April. Note that Aroon turned bullish when Aroon Up moved above Aroon Down and hit 100 in early May. This coincided with a consolidation breakout at 188. Also note that Aroon Down has not been above 30 since the first week of May and this just how non-existent downside price action has been. I am using 20-period Aroon because 20 days captures around one month.

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Chart 1

HERE'S WHAT TO WATCH IN SMALL AND MID CAPS... In contrast to large-caps, mid-caps and small-caps held back in July and remain in corrective mode. Chart 2 shows the S&P MidCap SPDR (MDY) falling in the first half of the month and then breaking the wedge trend line on Tuesday. The breakout is positive, but we have yet to see follow thru with a break above the mid July highs. Follow thru is important because it separates a mere oversold bounce from a valid breakout. Failure to follow thru would indicate that buying pressure remains weak and this could foreshadow a deeper correction, perhaps back to the 248-250 area. The indicator window shows Aroon Down moving above Aroon Up and hitting 100 last week to turn bearish.

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Chart 2

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Chart 3

Chart 3 shows the S&P SmallCap iShares (IJR) hitting a support zone in the 107-108 area last week and opening above 109 on Tuesday. That was it for the surge because the ETF consolidated for a few days and fell back below 109 today. IJR did not follow through with a convincing breakout (close) above 110. This failure means the July downtrend remains in play. The indicator window shows Aroon Down moving above Aroon Up and hitting 100 in mid July. This indicator remains firmly bearish as long as Aroon Down is above Aroon Up.

BROAD MARKET HIGH-LOW LINE CONTINUES HIGHER... The High-Low Line for the S&P 1500 continues to filter out market noise and define the overall uptrend in stocks. Chart 4 shows the S&P 1500 High-Low Line ($SUPHLP) in the main window and High-Low Percent in the first indicator window. The High-Low Line is in an uptrend because it has held above the 10-day EMA the entire year. In fact, the High-Low Line has been above its 10-day EMA since November 2012. How's that for a steady trend indicator? I have no idea how long this trend will last, but it is bullish until proven otherwise and we should trade accordingly. As long as this indicator remains bullish, potential buying opportunities will emerge when High-Low Percent dips into negative territory, as it did in late January, early February, mid April and mid May. I would not become concerned for a larger trend reversal unless new lows expand and High-Low Percent exceeds -2%.

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Chart 4

SMALL-CAP HIGH-LOW INDICATOR REMAINS IN CORRECTIVE MODE... Unsurprisingly, chart 5 shows the S&P SmallCap High-Low Line ($SMLHLP) in corrective mode and it has yet to trigger a bullish resumption signal. First, I think the overall trend is still up for the S&P Small-Cap 600 because High-Low Percent has yet to break below -4%. A break below -4% would signal a material expansion in new lows and this would be quite negative. Note that I am using a slightly higher threshold (4% versus 2%) because small-caps are more volatile than the broader market. High-Low Percent dipped into negative territory this month and remains in corrective mode until we see a move above +4%. Such a move would signal that new highs are expanding within the S&P Small-Cap 600 and this would be positive.

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Chart 5

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Chart 6

Chart 6 shows the S&P MidCap High-Low Line ($MIDHLP) in an uptrend the entire year. The indicator window shows High-Low Percent dipping into negative territory a few times this year. As the name suggests, mid-caps are in the middle and I am using 3% for my threshold in High-Low Percent. A correction is underway when High-Low Percent turns negative. This correction ends when High-Low Percent moves above +3%. Notice that High-Low Percent did not turn negative yet in July and this suggest that we have not seen a correction in breadth.

SEMICONDUCTOR ETF BREAKS DOWN... Intel hit a new 52-week high on Tuesday and shows upside leadership, but the semiconductor group as a whole came under selling pressure and is underperforming the broader market. Chart 7 shows the Semiconductor SPDR (XSD) peaking in mid June and forming lower highs in July. I like to use XSD because it is a broad-based semiconductor ETF with around 50 stocks. Notice that the top ten components account for 25.21% of the ETF and Intel weighs in at 2.72%. On the price chart, it looked like a bull flag was taking shape over the last five weeks, but XSD never broke out and underperformed. Relative weakness turned to absolute weakness as the ETF broke support with a sharp decline the last three days. Relative weakness in semis is not a good sign for the technology sector.

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Chart 7

MARKING KEY LEVELS FOR INTERNET AND NETWORKING ETFS... Outside of Apple, the omnipotent, the Internet ETF (FDN) and the Networking iShares (IGN) hold the other keys to the technology sector. Chart 8 shows FDN within an uptrend since mid May. The ETF got hit hard in early July, but rebounded with strength in Facebook this week. The internet group is getting hit today with a sharp decline in Amazon, the profitless wonder. The July bounce gives us a support zone to watch for a trend reversal in FDN. A move below these lows would put in a lower high at the 62% retracement and signal a continuation of the March-April decline. It has not happened yet, but such a break down would be most negative for the tech sector and high-beta stocks.

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Chart 8

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Chart 9

Chart 9 shows the Networking iShares stalling just below the March high. The ETF got a nice bounce in late May and early June, but then moved sideways over the last few weeks. Overall, I would mark consolidation resistance at 35.5 and support in the 34-34.5 zone. A break below the support zone would be most negative for IGN and the technology sector. As long as IGN holds, an upside breakout would signal a continuation higher. The indicator window shows the price relative moving lower the last five weeks as IGN lags the broader market.