Not a positive look here

Financial and Consumer Discretionary sectors lead the way lower.

XLF (Financial Select Sector SPDR ETF) looks to be rolling over. Multiple indicators confirm the XLF is running out of steam (MACD, RSI, Relative Strength, ADX).

Our entry into the SKF (UltraShort Financials ProShares) looks poised to deliver great returns going into the fall.

Small cap leaders overbought

The IWM (iShares Russell 2000 Index Fund ETF) is showing signs of being overbought as it challenges the June highs.  This level is significant long term support/resistance as shown here.  A negative divergence has developed in the MACD histogram as the MACD itself is approaching levels that have marked previous tops.

A pause in the rally here is likely.  We are looking at downside support in the area of 68-72.  Maintaining the trend in relative strength is crucial to any further rallies.

We are also rapidly approaching the September – October washout period that has historically provided excellent entry opportunities.  Small caps maintaining relative strength and holding support throughout this typically volatile period would be a major positive for the market as a whole.

The smaller they are, the faster they rise

Great action in the Russell 2000 Small Cap Index. Leading the market higher and looking to challenge the June highs.

Here is a chart of IWM (The iShares Russell 2000 Index Fund ETF). Notice the building bullish volume and increasing relative strength on the breakout.

This, plus strength in technology, is very encouraging for US stocks.

The Death of Crude Oil and the Commodity Rally?

The current correction in crude oil (and most commodities) has developed into more than just a normal pullback, taking out several primary support levels. The last major drop like this was in the summer of 2006, when crude dropped 36.1% from almost $80 to just above $50. A similar drop this time would take crude all the way back to $94.51; but we think the real battle will take place at the all important, round number $100 level. It took 5 attempts and much media hype to break $100 on the upside, and this was immediately followed by 5 weekly tests from above as support. Crude then rallied 50% in four months (eventually almost tripling from the lows) before topping out just under $150 at the beginning of July. A similar rally from the lows this time would put crude near the high level target of $250 on its next leg up.

Confirming this support are the commodity indices themselves. These show very similar targets to the one suggested by crude. First, the CRB, the most widely watched commodity index; with a heavy energy weighting. The daily chart shows the various support levels including the key retracement levels and the moving averages. First retrace support at 38.2% held for a while and we even had a minor bounce. Next up was the 200 day which held for two days before falling on Friday thanks to a strong showing by the dollar (see this chart below). We closed Friday right on the 50% retrace level, but we think we may ultimately be headed for the 61.8% retrace (the last support level in a bullish correction) because of what we see on the other charts including crude above and those below.

Citi, Merrill returning billions to investors, paying fine in deals over auction securities

Thursday August 7, 8:05 pm ET
By Marcy Gordon, AP Business Writer

WASHINGTON (AP) — Citigroup Inc. will buy back more than $7 billion in auction-rate securities and pay $100 million in fines as part of settlements with federal and state regulators, who said the bank marketed the investments as safe despite liquidity risks.

Citigroup will buy back the securities from tens of thousands of investors nationwide under separate accords announced Thursday with the Securities and Exchange Commission, New York Attorney General Andrew Cuomo and other state regulators. The buybacks from nearly 40,000 individual investors, small businesses and charities are not expected to cause significant losses for Citigroup; they must be completed by November.

Similar steps to buy back auction rate securities from customers are expected to be taken by other financial institutions. Bank of America Corp. revealed that it has received subpoenas and requests for information about its sale of the investments. Merrill Lynch & Co. said it will offer to buy back an estimated $12 billion in auction rate securities, though the company has already been actively reducing that amount.

Citi, the nation’s largest financial institution, said also will pay $50 million each in civil penalties to New York state and the North American Securities Administrators Association, which represents securities regulators in the 50 states and the District of Columbia.

The SEC also will consider levying a fine on Citigroup, the agency’s enforcement director Linda Thomsen, said at a news conference.

New York-based Citigroup agreed to reimburse investors who sold their auction-rate securities at a loss after the market for them collapsed in mid-February. Also under the SEC accord, Citigroup agreed to make its best efforts to liquidate by the end of next year all of the roughly $12 billion of auction-rate securities it sold to retirement plans and other institutional investors. Cuomo said his office will monitor that effort for three months and then decide on a timeframe.