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Sector performance is mixed for 2010

Year-to-date sector performance shows five up and four down. In a rather strange twist, the consumer discretionary and industrial sectors are up, but the technology and finance sectors are down. Performance for the S&P 500 reflects the net result for the nine sectors (down 4.28%).



SMALL CAPS AND NASDAQ SHOW RELATIVE WEAKNESS

It's usually a bad omen for the market when small caps and technology stocks are underperforming -- as they're doing at present. Chart 1 shows the Russell 2000 Small Cap Index trading closer to its July low than its July high. Its falling relative strength line also shows small-cap weakness. The same is true for the technology-dominated Nasdaq market. Chart 2 shows the Nasdaq Composite meeting resistance at its (blue) 50-day average (having never closed the overhead resistance gap formed last week). It's also dangerously close to breaking support near 2150. Its falling relative strength shows it leading the S&P 500 lower. A big reason for the Nasdaq underperformance can be seen in Chart 3 which shows the Semiconductor (SOX) Index having already broken its summer low. Notice the steep drop in its RS line since mid-August. Semiconductor weakness is usually bad for the Nasdaq which is bad for the rest of the market. That increases the odds for more stock selling.







S&P 500 FAIL AT CRITICAL RESISTANCE

With a myriad of "under the surface" problems, the S&P 500 simply ran out of gas at a very inopportune time. The bulls were on the threshold of a major breakout on the S&P 500 above its June highs near 1131. For seven consecutive days, the S&P 500 flirted with that 1131 resistance, each time setting an intraday high somewhere between 1120 and 1130. Unfortunately for the bulls, each time resulted in a failure. It's not at all surprising to me. As much as I'd love to see the market breakout in a big way to the upside, there were simply too many signals indicating that it wasn't going to happen. The Russell 2000 (small caps) were lagging, not leading. Joining the small caps as laggards were financials, technology (especially semiconductors), and consumer discretionary. That is not a recipe for higher prices. In an advancing market, these groups lead. The fact that none were leading made it very difficult for me to buy into the July market strength.

With a myriad of "under the surface" problems, the S&P 500 simply ran out of gas at a very inopportune time. The bulls were on the threshold of a major breakout on the S&P 500 above its June highs near 1131. For seven consecutive days, the S&P 500 flirted with that 1131 resistance, each time setting an intraday high somewhere between 1120 and 1130. Unfortunately for the bulls, each time resulted in a failure. It's not at all surprising to me. As much as I'd love to see the market breakout in a big way to the upside, there were simply too many signals indicating that it wasn't going to happen. The Russell 2000 (small caps) were lagging, not leading. Joining the small caps as laggards were financials, technology (especially semiconductors), and consumer discretionary. That is not a recipe for higher prices. In an advancing market, these groups lead. The fact that none were leading made it very difficult for me to buy into the July market strength.



The bulls simply didn't have enough gas in the tank. Not enough key influential sectors/industries participated in the breakout attempt. It was doomed from the beginning. The bears understand where the MAJOR resistance lies - at 1131. So now the question becomes, how low do we go? Technically, I've identified two key areas of support. The first was the July 16th close at 1064.88, while the second resides all the way back down at the July 2nd close at 1022.58. Obviously, a close beneath 1022.58 spells more trouble ahead. That's the last thing this market needs as we head into the worst historical month of the year - September.

I continue to lean to the bearish side, but I don't believe we're heading back to test 666 like many in the bearish camp. The market has a way of overdoing things during panicked times and that low came on the heels of monumental levels of panic. We'd have to see a lot more economic and technical deterioration before we'd come close to revisiting those levels. Personally, I believe a move on the S&P 500 to 950 might just do the trick, although I'll certainly keep my options open. Such a move during the historically weak month of September would make a lot of sense, both technically and fundamentally. It's a really tough and volatile market though. There are so many bullish and bearish arguments, trying to decipher which ones make the most sense is next to impossible. But I always keep one thing in mind. The market uses every bit of known information to come up with current prices. Don't believe for a minute that you have knowledge that the market hasn't considered. There's a reason it's priced where it is. So I always leave the door open on both sides - bullish and bearish.

One of my favorite relative charts is included as our Chart of the Day for Monday, August 23, 2010. The recent uptrend in this chart portends of further market weakness.

On Tuesday, August 24, 2010, we will be hosting the 5th monthly event in our very popular Online Traders Series. This month's event will delve into the Elliott Wave Theory, a form of technical analysis that forecasts trends in financial markets by identifying extremes in investor psychology. This event will be led by a long-time, very successful portfolio manager who applies Elliott Wave Theory in his analysis of the market. For more information.

US DOLLAR RALLIES

Looking at a weekly chart of the U.S. Dollar Index we can see that it entered a steep correction off the June top when it encountered long-term resistance from a declining tops line reaching back to 2006. During the correction a rising trend line drawn from the December 2009 low was violated, and it seemed likely that the index would decline all the way back to the long-term rising trend line drawn across the 2008 and 2009 lows. That may still happen, but currently a snapback rally has begun.



When a line of support is violated, shortly after the breakdown the technical expectation is that prices will snap back up toward the point of breakdown. The daily chart below gives a closer view of the action and of the bullish flag formation that has formed. We can see the sharp up move that broke through the declining tops line (flag pole), and for the last week the price index has been consolidating in a tight, downward-slanting trading range (flag).

While the expectation of a snapback rally has been fulfilled, the flag formation implies that the index will continue to rally -- today there was a breakout from the flag. The price projection equal to the length of the flag pole is about 85.

While the expectation of a snapback rally has been fulfilled, the flag formation implies that the index will continue to rally -- today there was a breakout from the flag. The price projection equal to the length of the flag pole is about 85.

Bottom Line: After over two months of decline, the Dollar Index is rallying and looking bullish for the short-term; however, there is a rising trend line above that will present resistance, and the longer-term picture on the weekly chart shows a PMO that is falling below its EMA. My best guess at this point is that the rally will continue for a time, but that it will eventually fail and that the longer-term decline will continue down to long-term support -- around 76 on the long-term rising trend line.

P&F BATTLE LINES DRAWN FOR QQQQ

The Point & Figure chart for QQQQ shows clear support and resistance lines for 2010. The ETF advanced for 9-10 months with a long column of X's in 2009 and then embarked on a consolidation in 2010. Notice that the X's started in March 2009 and continued until December. The numbers 4 through 9 represent April to September. The letters A,B and C represent October, November and December. After the ABC, we start with January 2010 by marking a red 1 on the chart.



The current P&F signal is bearish. A triangle formed from January to June and the ETF broke triangle support in late June. This break is denoted with the black "o" just above the red 7, which marks the start of July. This bearish P&F signal has yet to be negated and the current price objective is 36. It would take a move above 48 to forge a double top breakout and reverse the current bearish signal. In fact, a break above 48 would make this pattern looks like a large pennant, which is a bullish continuation pattern.

Even with a bearish price objective, QQQQ is still holding major support around 41-42. Notice how the ETF bounced off this level in February, May and July. A move below this support level would forge a quadruple bottom support break and call for a new downside price objective.. Chart annotations were done with a separate drawing program.

Seeing the "Volatility Terrain" with Overlaid Bollinger Bands



This chart clearly shows the dynamic nature of Bollinger Bands and gives you a better sense of how far away from "normal" prices get. To me it sort of resembles a topographic map so I'm calling it the "Volatility Terrain" chart.



What is a P&F triple bottom?

A Point & Figure triple bottom is just what it sounds like: three lows that form a triple bottom. Advances on P&F charts are marked with columns of X's and declines are marked with columns of O's. A triple bottom starts with two reaction lows that mark support. A reaction low forms with a column of O's followed by a column of X's. In the Mohawk chart below, the red arrows mark an evolving triple bottom with two reaction lows. These lows mark an important support level. A break below these two lows would forge a triple bottom breakdown, which is a bearish P&F signal.



In addition to an evolving triple bottom, Mohawk has a confirmed triple bottom breakdown already in play. The blue arrow shows Mohawk breaking below the prior two reaction lows. This break triggered a triple bottom breakdown alert on August 12th, which can be seen at the top of the chart (blue box). P&F signals come with price objectives based on traditional P&F analysis. The downside projection for Mohawk is 36, which can also be seen on the price scale (blue oval). Stockcharts.com provides P&F alerts everyday on the predefined scans page.

SPY fills gap on volume increase

The S&P 500 ETF (SPY) gapped up on Tuesday and then filled that gap with a long red candlestick on Thursday. The inability to hold the gap is clearly negative. Also notice that volume increased as the ETF declined last week and this week.



Financials dominate most active list



China and XLB moving together

The Shanghai Composite ($SSEC) and the Materials SPDR (XLB) have been moving together in 2010. The moves in XLB are a little more exaggerated, but the positive correlation is clear. Most recently, both bottomed in early July and moved higher the last six weeks.



Gold shines in August

Outside of gold, August has been a tough month for commodities. The PerfChart below shows performance for six commodity related ETFs. Only one is up. Metals, Oil and Natural Gas are down rather sharply. Gold, in contrast is up over 2%. In an interesting twist, notice that gold is up and silver is down.




Hindenburg Omen" Tracking Chart




What is a Hollow Red Candlestick?

With a gap down on the open and bounce to close above the open, the Nasdaq 100 ETF (QQQQ) formed a hollow candlestick on Thursday. The close was also below the prior close so the candlestick was colored red. There are two types of candlestick charts: colored or black & white. Colored candlesticks convey information on the close versus the previous close. A candlestick is red when the close is below the previous close and black when the close is above the previous close. The August 12th candlestick is both red and hollow, which means the close was below the previous close and the close was above the open.




Black & white candlesticks focus exclusively on the relationship between the close and open. All candlesticks are black, even if the close is below the previous close. There are only two types of candlesticks here: filled and hollow. Same definitions apply. A candlestick is filled when the close is below the open and hollow when the close is above the open. Candlestick analysis is mostly focused on the relationship between the open and the close. The open reflects the reaction to news overnight or pre-market. The close reflects the reaction after the open. In general, a move higher after a weak open is positive and a move lower after a strong open is negative. The pre-defined scans page features scans for filled black candlesticks and hollow red candlesticks. Thursday's results show 975 hollow red candlesticks on the NYSE and 542 on the Nasdaq. This means a lot of stocks moved higher after a weak open, but still closed below their previous close