QQQ SURGES, MDY AND IJR CONTINUE TO LEAD, FOUR TECH ETFS WITH BULLISH SETUPS AND MACDS, XLU STALLS AT 200-DAY, TLT TESTS KEY SUPPORT, 10-YR YIELD HITS KEY RETRACEMENT, WHY USE RETRACEMENT ZONES?

QQQ SURGES OFF SUPPORT ZONE... Link for today's video. Chart 1 shows the Nasdaq 100 ETF (QQQ) getting another bounce off support this week and leading the major index ETFs over the last five days. Note that QQQ is up over 2% this week, which is more than SPY, IJR and MDY (as of Friday midday). Keep in mind that the big trend is up as the ETF hit a fresh 52-week high at the beginning of March. Broken resistance turns into support in the 104-105 area and there were three bounces off this level over the last five weeks. While a move below 104 would break first support and be a concern, I would not turn long-term bearish because I think long-term support resides in the 99-100 area. The indicator window shows RSI holding above the 40 level throughout March and into April. The ability to hold above 40 is testament to the mildness of this correction, which was just a sideways trading range. The bull zone ranges from 40 to 80 and a move below 40 would show enough downside momentum to suggest a deeper correction.

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Chart 1

SMALL AND MID-CAPS CONTINUE TO LEAD ... There is no change for the S&P 500 SPDR (SPY), S&P MidCap SPDR (MDY) and S&P SmallCap iShares (IJR). The trends have been up and they remain up. We can argue about the momentum behind the advance, the sideways trading range since late November and the upcoming earnings debacle, but it is hard to refute new highs and leadership from small and mid caps. A few words on earnings. This has got to be the most anticipated negative earnings season in a long time. Media outlets are chock full of reports on just how bad first quarter earnings will be and we have seen a slew of downward revisions. Despite all this "negative" news, the S&P 500 and Russell 2000 are still within 2% of 52-week highs. Do we trust price, earnings or the media? I think you know my answer.

Chart 2 shows SPY with a surge to new highs in October-November, a consolidation into January and a breakout in February. After new highs again in late February, SPY moved into another consolidation and bounced off the support zone this week. This triangle looks like a consolidation within an uptrend and this favors a continuation of the advance, not a reversal. The March-April lows mark first support in the 202.5-205 area. The December-January lows mark long-term support in the 195-197.5 area.

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Chart 2

Chart 3 shows MDY with a surge in October-November and a rising channel the last four months (and counting). MDY forged 52-week highs in November, December, February and March. This does not look like a downtrend to me and I do not see any signs of material weakness. The March low and channel trend line mark support in the 265-270 area. The indicator window shows MDY outperforming SPY since mid October. Chart 4 shows IJR with similar characteristics.

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Chart 3

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Chart 4

FDN AND IGN CORRECT WITHIN UPTRENDS... Chart 5 shows the Internet ETF (FDN) with a big breakout in mid February and a move to new highs. After becoming a bit overbought, the ETF corrected with a falling flag/wedge consolidation in March. These consolidations represent corrections that work off overbought conditions. A breakout here would signal an end to the correction and a continuation of the uptrend. The indicator window shows MACD turning up just above the zero line and on the verge of a signal line crossover.

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Chart 5

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Chart 6

Chart 6 shows the Networking iShares (IGN) with a pair of rather strange pullbacks. Instead of parallel lines for a nice flag or contracting lines for a wedge, these lines are widening to form a megaphone of sorts. Regardless of the aesthetics, I still view these as corrections or pullbacks within an uptrend. IGN hit new highs in November, December and February, and this means the big trend is up. No ifs ands or bears about it. Chartists should not expect picture perfect patterns. After all, this is a financial market and IGN has dozens of moving parts (stocks). The ETF is catching a bid the last two weeks and on the verge of a breakout. The indicator window shows MACD moving below zero in late March, flattening and starting to turn up. Chart 7 shows the Cloud Computing ETF (SKYY) with a triangle consolidation and MACD turning up. Chart 8 shows the Cyber Security ETF (HACK) with a surge, pullback and breakout sequence. It is a little short-term overbought after a surge from 27 to 29, but looking bullish overall.

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Chart 7

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Chart 8

XLU HESITATES ON BREAKOUT... Chart 9 shows the Equal-weight Utilities ETF (RYU), Utilities SPDR (XLU) and the SmallCap Utilities ETF (PSCU) on one chart. I will focus on XLU, which is in the middle window. XLU is getting a few bounces off the rising 200-day moving average over last few weeks. The breakout and bounces are holding for the most part, but I am watching this one closely for a potential failure. Notice that a small rising wedge could be taking shape. Technically, the bulls have the edge as long as it rises. A break below the wedge trend line, 200-day moving average and late March low would end this rise and be bearish. Chartists should also watch Treasury bonds because XLU and TLT have been moving in the same direction over the last six months or so.

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Chart 9

TLT TESTS KEY SUPPORT ZONE... Chart 10 shows the 20+ YR T-Bond ETF (TLT) breaking out with a move above 130 on March 18th, but then hitting resistance near the 61.8% retracement. This breakout is holding so far, but I am watching support quite closely because the ETF is testing this area for the second time in three weeks. Overall, notice that TLT declined sharply from early February to early March and then retraced around 61.8% of the prior decline with a bounce to the 132 area. If this is just a countertrend move, I would expect TLT to reverse below the prior high (138), and perhaps near the 61.8% retracement zone. A move below 128 would break support and reverse the March upswing. This would signal a continuation of the February decline and I would then target a move to the 118-120 area. Chart 11 shows the 7-10 YR T-Bond ETF (IEF) with support in the 107.5 area.

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Chart 10

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Chart 11

TREASURY YIELDS FIRM AT KEY RETRACEMENT... Chart 12 shows the 10-YR Treasury Yield ($TNX), which is a mirror image of the 10-year Treasury Note. $TNX fell sharply in March, but firmed near the 61.8% retracement and may be forming a higher low as the yield surged above 1.95% (19.5 on the chart). Follow through above the late March high would reverse the March downtrend, forge a higher low and argue for a continuation of the February surge. This would target a move to the 2.3-2.4% area, or 23-24 on the chart. While such a move may seem drastic, it would just be a step toward normalization in interest rates and the 10-yr yield would still be very low by historical standards. Chart 13 shows the 30-YR Treasury Yield ($TYX) with similar characteristics.

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Chart 12

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Chart 13

WHY ARE RETRACEMENT ZONES SO SPECIAL?... What is so special about 61.8%? It is a Fibonacci ratio and it is close to two thirds (66.67%). Together with the 50% level, it forms one of my favorite zones to watch for a reversal. But not just any reversal. I am looking for a reversal that may signal a continuation of the prior move. Let me explain. Charles Dow indicated that counter-trend moves should retrace around 50% of the prior move. This means a bounce in a bigger downtrend would typically retrace half of the prior decline. Conversely, a pullback after an advance would retrace half of the prior advance.

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Chart 14

Fibonacci users watch 38.2% and 61.8%, which are ratios based on the Fibonacci sequence. I consider 38.2% a bit shallow and prefer to combine 50% and 61.8%. Because markets often overshoot, I will simply set a "watch" zone in the 50-66.67% area. This means I go on alert when a stock, ETF or index declines sharply and then rebounds into this zone, which is happening to TLT right now. Conversely, I go on high alert when a stock, ETF or index surges and then pulls back to the 50-66.67% zone. Reversals do not always occur in this zone so it is important to wait for a signal that the counter-trend move has actually reversed. I am waiting on TLT now, but GE has already triggered. Chart 15 shows General Electric (GE) with a classic surge, retracement and breakout sequence. Note that I featured this chart in Tuesday's webinar. The stock setups section starts around the 26 minute mark. Chart 16 shows a bearish example with Chesapeake (CHK).

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Chart 15

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Chart 16

THANKS FOR READING AND ........ have a great weekend!

Arthur Hill CMT