MEASURING RISK APPETITE WITH MICRO-CAPS -- RUSSELL 2000 ISHARES RE-CAPTURES ONE BREAK -- CONSUMER DISCRETIONARY AND INDUSTRIALS SECTORS LEAD THE REBOUND -- ITB FORMS A BIG REVERSAL ON BIG VOLUME -- OIL SERVICE ETF FIRMS AFTER SELLING CLIMAX

MEASURING MICRO-CAPS FOR RISK APPETITE... Link for today's video. The Russell Micro-Cap iShares (IWC) is an important ETF to watch because it represents the appetite for the riskiest stocks in the market. Small-cap stocks are deemed riskier than large-caps and micro-cap stocks are deemed riskier than small-caps. Micro-caps are less diversified, less liquid and generally more volatile. Chart 1 shows IWC in a downtrend for most of the year and this reflects a risk-averse market for most of 2014. This decline could be just a correction after the prior advance, but the immediate trend is clearly down. The red trend lines define the falling channel and a break above the early August high is needed for a full reversal. There are swings within the channel that traders can watch for faster signals. A move above the early October high (70.2) would be short-term bullish and open the door for a test of the bigger resistance zone. The indicator window shows IWC underperforming SPY since March. This price relative surged in early October, but remains short of a breakout that would signal a return to relative strength.

(click to view a live version of this chart)
Chart 1

RUSSELL 2000 ISHARES RE-CAPTURES ONE BREAK... Chart 2 shows the Russell 2000 iShares (IWM) breaking two support levels recently and showing relative weakness since March. The ETF rebounded with a move back above 108, but I would not negate this support break unless we see a weekly close above the early October high (110.10). The indicator window shows the IWM:SPY ratio hitting a new low and then bouncing last week. Follow through is needed to turn this oversold bounce into a breakout that would suggest a return to relative strength for small-caps.

(click to view a live version of this chart)
Chart 2

CONSUMER DISCRETIONARY AND INDUSTRIALS SECTORS LEAD THE REBOUND... After breaking their early August lows and 200-day moving averages, the Consumer Discretionary SPDR (XLY) and Industrials SPDR (XLI) surged back above these levels with strong moves the last five days. Was the early October decline an excessive overshoot? Is this rebound a excessive overshoot? Or, is this just the new normal for volatility? While volatility could remain high for the next few weeks, I am impressed with this surge and market leadership over the last five to six days. The Retail SPDR (XRT) is up over 4% and the Home Construction iShares (ITB) is up over 10%. Among the sectors, the XLI is up almost 6% and XLY is up around 4%. These are the rebound leaders and the groups we should be watching going forward. Chart 3 shows XLY moving back above broken support and above its 200-day moving average. The indicator window shows the price relative breaking above its resistance zone as well. Chart 4 shows XLI moving above its support break with a gap last week and challenging its 200-day moving average today. The indicator window shows the price relative breaking the June trend line with a sharp advance.

(click to view a live version of this chart)
Chart 3

(click to view a live version of this chart)
Chart 4

ITB FORMS A BIG REVERSAL ON BIG VOLUME... Chart 5 shows the Home Construction iShares (ITB) forming a big bullish engulfing with the second highest volume week of the year. A bullish engulfing forms when the open is below the prior close and the close is above the prior open. The weekly high and low also exceeded the prior week's high and low. This means we also had a weekly outside reversal. ITB is following through this week with another gain, but the overall trend since March remains down. A break above 24.5 is needed to fully reverse the downtrend. The indicator window shows ITB relative to SPY. This price relative remains in a downtrend and a follow through surge above the May 2013 trend line is needed to signal a return to relative strength.

(click to view a live version of this chart)
Chart 5

OIL SERVICE ETF FIRMS AFTER SELLING CLIMAX... Chart 6 shows the Oil Service ETF (OIH) hitting a new high this summer and then plunging over 25% in just a few months. While the decline is clearly negative, it came out of the blue because OIH did not form a topping pattern. Like other energy-related ETFs (XES and XOP), OIH experienced a selling climax with massive volume the first two weeks of October. The ETF stabilized near broken resistance and the 50-62% retracements. Even though it is a bit of a falling knife, I would expect some sort of oversold bounce from current levels. Perhaps the ETF can make it back to the 50 area and RSI can make it back to the 50-60 zone.

(click to view a live version of this chart)
Chart 6

DOLLAR CORRECTS WITH FALLING FLAG/WEDGE... Chart 7 shows the December Dollar Index Contract (^DXZ14) surging from July to early October and then correcting with a falling flag. The mid September consolidation and lows mark a support zone in the 84-84.7 area. The contract hit this zone last week and firmed the last few days. I think the long-term trend is up and this falling flag is a correction within the uptrend. A break above the upper trend line would provide the first sign that the correction is ending and the uptrend is resuming. The indicator window shows the US Dollar ETF (UUP) for reference. Chart 8 shows the Euro Index ($XEU) with a rising flag in October.

(click to view a live version of this chart)
Chart 7

(click to view a live version of this chart)
Chart 8

GOLD EXTENDS OCTOBER RUN... The correction in the Dollar helped gold as the Gold SPDR (GLD) advanced over 5% from its early October low. Chart 9 shows GLD breaking the August trend line and moving back above the support break. In an interesting twist, gold is ignoring weakness in the Euro today and moving higher. While I am not sure if this will last, I would mark first support at 118 and stay positive on gold as long as this level holds. All bets are off if the Dollar breaks out to the upside.

(click to view a live version of this chart)
Chart 9

(click to view a live version of this chart)
Chart 10

Chart 10 shows the Gold Miners ETF (GDX) forming a pennant within a downtrend. Pennants are typically continuation patterns and a break below 20.5 would signal a continuation lower. However, gold is on the rise this month and GDX did form a harami on Friday-Monday. A move above 22 would break pennant resistance and be bullish.