WEAKER GROUPS ARE TESTING IMPORTANT SUPPORT LEVELS -- THAT INCLUDES SMALL CAPS AND TRANSPORTS WHICH ARE TESTING THEIR SPRING LOWS -- AND FINANCIALS -- HOW THEY HANDLE THAT TEST OF SUPPORT COULD EFFECT MARKET DIRECTION
SMALLER STOCKS TEST IMPORTANT SUPPORT LEVEL...Yesterday's message showed the Dow Industrials and a handful of sector SPDRS testing potential support at their 200-day moving averages. Today's message will show three stock groups that are testing even more important support along their spring lows. Starting with small cap stocks. Chart 1 shows the S&P 600 Small Cap Index trading below its moving average lines. More importantly, the SML is sitting just above its previous low formed at the end of May/start of June. That's a very important test for smaller stocks and rest of the market. A chart breakdown in smaller stocks isn't a good sign for the rest of the market. A rebound in smaller stocks from here could be an encouraging sign for both.
DOW TRANSPORTS ALSO TEST SUPPORT...Chart 2 shows the Dow Transports also testing previous support formed in late May/early June. The transports are trading below their moving average lines. But the test of their spring low is much more important. The Dow Transports need to find support around current levels to prevent them from slipping into a chart downtrend. Which would also widen their distance below the Dow Industrials. Their ability to find support from here would be a positive sign for both.
SO DO FINANCIALS...Chart 3 shows the Financial Sector SPDR (XLF) also testing potential chart support formed during the spring. Financials have been hit hard by falling bond yields, and have been one of the market's weakest sectors. Which makes their current test important for them and rest of the market. They say that a chain is only as strong as its weakest link. These are three of the stock market's weakest links. So their ability to find support along their spring lows could give us a clue as to overall market direction. Technical odds usually favor support levels holding. That's because it's easier to continue an existing trend than to reverse one. That makes their spring lows a good spot for those three weak links to make a stand. That could help strengthen the entire market chain.
