BATTLING SUPPORT AND CONSOLIDATING -- S&P MIDCAP CONSOLIDATES NEAR HIGHS -- SMALL AND MICRO CAPS PERK UP -- GROWTH OUTPERFORMS VALUE -- CONSUMER DISCRETIONARY HOLDING UP WELL, FINANCE NOT -- HOUSING AND RETAIL SPDRS BOUNCE ABOVE SUPPORT

STILL BATTLING SUPPORT AND CONSOLIDATING... Link for today's video. The major stock indices remain range bound since early November, but these ranges still look like consolidations or corrections within bigger uptrends. Chart 1 shows the S&P 500 breaking out in late October on its way to a 14.3% advance, and new highs. Since this big surge, trading has turned choppy with a least four tests of the 2000 area, which marked resistance back in September. If we add a couple lines to the December-January consolidation, we can see a triangle taking shape, which is typically a continuation pattern. The January lows and lower line mark the first support zone in the 2000 area. A break below the January lows would be negative, but the December low and rising 200-day moving average are around 1975. I suspect that we will see a break below 1975 before this correction is over. The S&P 500 has a habit of baiting the bears and then recovering. Keep in mind that this is a rogue opinion and there are no guarantees.

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Chart 1

The indicator window shows the fast Stochastic Oscillator (125,3). This indicator tells us where the current price is in relation to its high-low range over the last six months. The S&P 500 is in the upper half when the 125-day Stochastic Oscillator is above 50 and in the lower half when below 50. This is a way to measure if the cup is half full or half empty. The cup is half full right now and it would take a close below 1975 to push the indicator below 50. Chart 2 shows the S&P 500 Equal-Weight Index ($SPXEW) with similar characteristics and a rising 125-day EMA (6 months). The long-term trend is up as long as this EMA rises.

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Chart 2

S&P MIDCAP CONSOLIDATES NEAR HIGHS... Chart 3 shows the S&P MidCap 400 bouncing between 1400 and 1480 since late November. The two big bullish patterns remain. First, there is a large inverse head-and-shoulders, which is a bullish continuation pattern. This pattern is a continuation of the advance from November 2012 to June 2014. Second, the right two thirds of the pattern could also be interpreted as a cup-with-handle, which is also a bullish continuation pattern. Even though the index is having some trouble with resistance, I think the long-term bias is bullish as long as the 1380-1400 zone holds. The indicator window shows the Fast Stochastic Oscillator (125,3) at 89.05, which is much higher than the S&P 500 and a sign of relative chart strength. Chart 4 shows the S&P Small-Cap 600 with support in the 650-660 area.

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Chart 3

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Chart 4

SMALL AND MICRO CAPS PERK UP... At this point, I still have a bullish bias on stocks because I have yet to see break downs that would suggest otherwise. Now I am going to dive into the Relative Rotation Graphs (RRG) to determine the leaders and laggards. This process will start with the major index ETFs, dive into the styles and end with the sectors.

Chart 5 shows the Relative Rotation Graph comparing the major stock indices to the S&P 500 Equal-Weight Index. I chose this index as the benchmark because it hits a sweet spot between large-caps and small-caps. The Russell 2000, Dow Jones Microcap Index and S&P Small-Cap 600 are the three leaders. The S&P 500 is the laggard of the group and the only one in red. As earnings season revealed, the strong Dollar is having an effect on multinationals, as is weakness in the European economy. Small-caps are more domestic and have less exposure to currency swings.

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Chart 5

GROWTH IS OUTPERFORMING VALUE... We can also break down the stock market by styles. Chart 6 shows a Relative Rotation Graph with six styles and the S&P 500 Equal-Weight Index as the benchmark. Notice that the S&P Small-Cap Growth Index ($CKG) and the S&P MidCap Growth Index ($MGD) are leading. They are the only two in green. This is positive for the stock market for two reasons. First, small and mid cap stocks have higher betas and, therefore, higher risk. Relative strength suggests a good appetite for risk. Second, growth stocks also have higher betas than value stocks. Relative strength in growth also points to a stronger appetite for risk. The stock market is still in corrective mode overall, but I would expect the groups showing relative strength during the correction to lead when the correction ends. Here is a list of equivalent ETFs: IVE, IVW, IJJ, IJK, IJT, IJR, IWO, IWP.

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Chart 6

CONSUMER DISCRETIONARY HOLDING UP WELL, FINANCE NOT... Now let's dive into the sectors to find the leaders and the laggards. Chart 7 shows a Relative Rotation Graph with 23 sector ETFs and the S&P 500 Equal-Weight Index as the benchmark. I left out the three energy sectors and SmallCap Materials ETF (PSCM) because they are by far the weakest and skew the graph to the lower left. The actual graph looks quite crowded so I included the table to sort things out. There is no surprise at the top because utilities, consumer staples and healthcare are the clear leaders.

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Chart 7

Elsewhere, I am seeing relative strength in the consumer discretionary sectors (SPDR, equal-weight and small-cap). They are marked with the green boxes on the table above. In addition, the SmallCap Technology ETF (PSCT) and Equal-weight Technology ETF (RYT) show relative strength. Overall, I would be watching these five closely in the coming days and weeks (XLY, RCD, PSCD, PSCT, RYT).

On the downside, I am seeing relative weakness in the Equal-weight Finance ETF (RYF) and Finance SPDR (XLF), and would avoid the finance sector overall. Also notice that XLF, the Technology SPDR (XLK) and the Industrials SPDR (XLI) are in the weakening quadrant. These three sector SPDRs are important to large-cap performance and relative weakness is negative for the S&P 500. Chart 8 shows that XLI, XLK and XLY are still above their December-January lows and break downs in these three could be quite negative.

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Chart 8

HOUSING AND RETAIL SPDRS BOUNCE ABOVE SUPPORT... The Home Construction iShares (ITB) and Retail SPDR (XRT) represent two of the most important parts of the consumer discretionary sector. As with the broader market, trading in these two ETFs turned choppy the last two months, but the support zones are holding. Chart 9 shows XRT falling around 2% in early trading on Friday and this means an important test is at hand.

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Chart 9

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Chart 10

REGIONAL BANK SPDR REMAINS BELOW SUPPORT BREAK... Chart 11 shows the Regional Bank SPDR (KRE) breaking down in early January and broken support turning into resistance in the 38.5 area. This week's decline reinforces the resistance zone. The indicator window shows the 5-year Treasury Yield ($FVX) falling sharply in early January and again this week. The relentless decline in Treasury yields is taking is toll on banks because the yield spread is narrowing.

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Chart 11

FINANCE SECTOR WEIGHS ON LARGE-CAPS... Chart 12 shows the Finance SPDR (XLF) in a downtrend since late December, but an uptrend since March. The green dotted line is a linear regression I drew from the Raff Regression Channel and it is still sloping up. XLF shows relative chart weakness because it broke its mid December low and SPY did not. At this point, the correction dominates as long as XLF remains below resistance at 24.25. The finance sector is the second largest sector in the S&P 500 and this short-term downtrend is weighing on large-caps.

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Chart 12

SIGNIFICANT NEW HIGHS AND LOWS THIS WEEK ... The following is a partial list of key ETFs hitting new highs and new lows this week. A regular review of this list tells us what is working in the market and what is not. Biotechs, utilities and bonds continue strong. Steel, metals and oil continue weak. Note that I will have a basic review of all these charts in today's video.

New 52-week Highs:

Biotech SPDR (XBI)
Utilities SPDR (XLU)
7-10 YR T-Bond ETF (IEF)
Financial Preferred ETF (PGF)
Aggregate Bond ETF (AGG)
Investment Grade Bond ETF (LQD)
PIMCO Muni Bond ETF (MUNI)

New 52-week Lows:

Steel ETF (SLX)
Metals & Mining SPDR (XME)
Copper Miners ETF (COPX)
Coal ETF (KOL)
Natural Gas ETF (FCG)
Global X Uranium ETF (URA)
Light Crude ($WTIC)
Copper ETN (JJC)
Natural Gas ($NATGAS)