Sunday, May 15, 2011

Technical Picture - Stocks Retreat to Low End of Range

The first chart above is a weekly chart of the SPX with the RSI superimposed. The most important element of the chart to note is divergence of the RSI. We note that when the market bottomed in March 2009, we had positive divergence of the RSI to lower prices which foreshadowed a reversal. Now we have negative divergence of the RSI to higher prices which foreshadows a reversal, or at least a correction.

This week's price action was mostly range bound, but the bears made the presence felt on Wednesday and Friday. As depicted on the 60 min. chart of the SPY above, we see a H&S topping pattern develop with in the latest price range. If we break down, I expect a gap fill. All 10 major sectors were down on Friday with Financials (-1.5%) leading the way followed closely behind by Material -1.4% and Tech -1.2%.

Overall, tech was weaker than the broader markets on Friday. Two big names that were a drag on tech were NVDA and YHOO.

SMH is still basing at recovery highs but needs to break and close above $37.00. My scans indicate that several of the old school chip names are best positioned to make this happen - ALTR, CY, INTC, MCHP, MXIM, NVLS, QCOM, XLNX.

Much of the weakness in commodities is due to strength in the $USD. As we can see on the daily above, price has bounced into a former support zone which could now act as resistance in the short-term. The RSI has moved beyond 60 which suggests this bounce is quite strong.

Keep an eye on the UUP as it trends higher within the price channel.

Ags have not performed well lately, but we could be forming a multi-month triangle pattern. I wouldn't be surprised to see a bounce here or at the 200 SMA. Note the volume spikes on up days exceeds down days over the last two weeks. We keep reading of crop delays due to excessive moisture. Over time this will affect the price of the underlying crop commodities, and in turn, the agribusiness.

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