-- LONG-TERM UPTREND AND SHORT-TERM DOWNTREND, FINANCE AD LINE, XLF BEAR TRAP, OIL BREAK DOWN, XLE NEAR NEW LOW, CORRELATIONS TO THE DOLLAR (OIL, STOCKS, BONDS, GOLD), KEY NEW HIGHS AND LOWS --

LONG-TERM UPTREND AND SHORT-TERM DOWNTREND... Link for today's video. Stocks did the old pop and drop on Thursday and Friday. With Thursday's gain dissipating, this means the short-term trend is still down and stocks remain in corrective mode. Financials and healthcare showed some strength this week, while energy and technology weighed on the market overall. Chart 1 shows the S&P 500, which acts as my benchmark for the stock market. The index hit new highs in February and then declined in March. The new highs affirm the long-term uptrend and this pullback is still viewed as a correction within that uptrend. Notice that the index is above the rising 200-day moving average and well above the support zone in the 1975-2000 area. Let's talk bear when and if the index breaks 1975. At this point, I do not see a major topping pattern in the works. In addition, the AD Line for the S&P 500 hit a new high in late February and I do not see a bearish divergence brewing in this key breadth indicator.

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Chart 1

If we want to know when the current correction will end then we have to focus on the current decline. Chart 2 shows 30-minute bars for the S&P 500. The index peaked on February 25th and remains in a downtrend, which will be 160 periods by the close today. I added the cycle lines tool to count the periods. I used this number to set StochRSI and will consider this momentum oscillator bearish until a surge above .80. The price chart shows the Raff Regression Channel extending from the high to the low of the move. The upper trend line and Thursday's high mark a resistance zone in the 2065-2075 area. A break above 2075, therefore, is needed to reverse the current decline and signal an end to the correction. There is a live demo on period counting in today's video.

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Chart 2

ONE SECTOR AD LINE HITS NEW HIGH... Chart 3 shows the AD Lines for the S&P 1500 and the nine sector SPDRs. The chart extends back six months, but my focus is on the last two to three months. First, note that four of the nine AD Lines hit new highs in March (finance, healthcare, consumer discretionary and technology). Three of the nine hit new highs in late February (industrials, materials and consumer staples). This means seven of the nine sector AD Lines hit new highs within the last four weeks. That shows broad participation and reinforces the long-term uptrend in the broader market. The green arrows show these new highs.

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Chart 3

The finance AD Line is the strongest of the group because it hit a new high this week. The healthcare AD Line is the second strongest because it held up the best in March. The energy AD Line is by far the weakest of the nine and near a new low. This confirms the long-term downtrend in XLE and this is a sector to be avoided. The utilities AD Line peaked in early February and has trended lower for five weeks.

HIGH-LOW PERCENT STAYS BULLISH FOR FINANCE ... John Murphy wrote about the big move in banks on Thursday and I would like to revisit the chart for the Equal-weight Finance ETF (RYF), which was featured in Tuesday's webinar. Chart 4 shows RYF hitting a new high in December and then consolidating with a triangle into March. A consolidation within an uptrend is typically a bullish continuation pattern and a close above the upper trend line would break triangle resistance. With today's decline in RYF, this suggests that we need upside follow through to produce a breakout.

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Chart 4

The breadth indicators for RYF are bullish and this increases the chances for a breakout. Note that the Finance SPDR (XLF) and the Equal-weight Finance ETF have the same components so we can use XLF-based indicators for RYF. The middle window shows the XLF AD Line ($XLFADP) forming a small bullish divergence over the last two weeks and breaking out to new highs. A bullish divergence occurs when the indicator forms a higher low and the ETF forms a lower low. This bullish divergence showed some underlying strength during the March pullback and provided a clue to Thursday's surge. Hindsight is certainly 20-20, but we can learn from past setups. Regardless of the bullish divergence, the new high in the AD Line shows broad participation in the sector.

The bottom window shows High-Low Percent turning bullish with a move above 5% on 22-Oct and remaining bullish. I love this indicator because it keeps me from thinking too much. It is bullish above 5% and remains bullish until a move below -5%. Not all signals work, but this simple methodology keeps me on the right side of the trend. The indicator almost went below -5% in late January, but ultimately held and exceeded +5% in early February again. Even though it is below the levels seen in November-December, the indicator favors an uptrend as long as new highs outpace new lows. Note that StockCharts users can create these same breadth lines for the other nine sector SPDRs. Simply substitute XLF for another sector SPDR symbol ($XLFHLP --> $XLVHLP).

XLF SPRINGS A BEAR TRAP... Chart 5 shows the Finance SPDR (XLF) breaking support at 24 and immediately rebounding to set a bear trap. This is a short-term bullish development as long as it holds. Failure to hold Thursday's surge and another close below 23.9 would call for a reassessment. Chart 6 shows the SmallCap Financials ETF (PSCF) breaking out to new highs in October and December. The ETF formed a triangle into March and broke the upper trend line this week. Again, this looks like a consolidation within an uptrend and follow through above the early February high would complete the breakout.

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Chart 5

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Chart 6

OIL BREAKS DOWN AGAIN... Oil came under selling pressure again this week as the USO Oil Fund (USO) broke triangle support with a sharp decline the last four days. Chart 7 shows USO hitting a new low in January, surging in early February and then moving sideways into March. This was a mere consolidation within a downtrend and the triangle break signals a continuation lower. The indicator window shows RSI hitting momentum resistance in the 50-60 zone from early February to early March. Note that RSI favors a downtrend when stuck between 20 and 60. A break above 60 would have been positive, but it never happened. The indicator window shows Spot Light Crude ($WTIC) hitting resistance in the 52-53 area and turning down again. Before leaving this chart, I would like to ask one thing: what is the single most important feature on this chart? In my opinion, the 52-week low is the single most important chart feature because it tells us the long-term trend is down and this is the path of least resistance.

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Chart 7

ENERGY ETFS NEAR NEW LOWS... Chart 8 shows the Energy SPDR (XLE) staying good on the big head-and-shoulders reversal pattern. The ETF broke support in November-December, and broken support then turned into resistance. The ETF is down sharply the last four weeks and this solidifies resistance in the 80-82.5 area. The indicator window shows the price relative moving to a new low as XLE continues to underperform SPY.

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Chart 8

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Chart 9

Chart 9 shows the Oil & Gas Equip & Services SPDR (XES) falling around 7% this week and testing the January lows. The ETF is down around 50% from its summer highs, but showing no signs of a base or support. The indicator window shows XES relative to XLE using the price relative (XES:XLE ratio). This indicator hit a new low as XES continues to underperform XLE. If the energy sector is going to turn around, I would expect XES to start showing relative strength first. So far it has not.

LONG-TERM CORRELATIONS TO THE DOLLAR (OIL, STOCKS, BONDS, GOLD)... The chart below shows monthly prices for the S&P 500 (red) and the Dollar Index (green) over the last thirty years. The four indicator windows show correlations between the Dollar Index and the S&P 500, US Treasury Bonds, Light Crude and Gold. I am using 12-month correlations with a 60-period moving average in red. This moving average smooths out the data series to give us an idea of the big underlying tendency. The red areas show when this long-term moving average is negative and the green areas show when it is positive.

First, note that stocks and bonds flip between periods of positive correlation (green) and negative correlation (red). Stocks are currently negatively correlated to the Dollar, and bonds are currently positively correlated to the Dollar. Keep in mind that these are monthly charts and very long-term perspectives.

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Chart 10

The correlations between Dollar-Oil and Dollar-Gold are much stronger, and negative. The 12-month Correlation Coefficients fluctuate above and below the zero line, but the 60-month moving average is mostly negative. Oil and the dollar were positively correlated from 2000 to 2004, but this did not last long as the negative correlation returned. The relationship between gold and the Dollar is by far the strongest, and a strong Dollar is clearly hurting gold.

SIGNIFICANT NEW HIGHS AND LOWS ... The lists below show some key ETFs that are hitting new 52-week highs and lows this week (on a closing basis). The new high list is thin after the March decline, but notice that IAI and XRT made the cut. The new low list is littered with commodity-related stocks and ETFs. Several energy-related ETFs are also close to new lows (XES, XLE and FCG). Groups that are at or near new lows should be avoided because the long-term trend is clearly down.

New Highs

Small-Cap HealthCare ETF (PSCH)
Retail SPDR (XRT) - all time high
Broker-Dealer iShares (IAI)
HealthCare Providers ETF (IHF)
Biotech SPDR (XBI)
US Dollar ETF (UUP)

New Lows

Euro ETF (FXE)
Bloomberg Commodity Index ($DJP) - all time low
Gold Miners Junior (GDXJ)
Metals & Mining SPDR (XME)
Steel ETF (SLX)
Silver Miners ETF (SIL)
Silver Miners Junior (SILJ)
Coal ETF (KOL)
Platinum ETN (PLTM)
Aluminum ETN (JJU)
Base Metals ETF (DBB)
Nickel ETN (JJN)
Sugar ETN (SGG)