Leaders starting to crack

Large technology stocks in the QQQQ (PowerShares NASDAQ 100 Index ETF) had an awful day on the largest volume since bottoming in mid July.  All of the short term indicators are on sell signals and the relative strength against the S&P 500 is in danger of turning down.  If support at the July lows fails, a move back to the March lows is almost guaranteed and there is a significant chance they will not hold either.  These stocks are already oversold so a bounce from support is possible, but the heavy selling we have seen since returning from the holiday does not bode well for the worst month of the year.  Losing support from the leading sectors of tech and small caps would suggest the bear market has more room to go on the downside.  The NYSE Composite Index (NYA) found new lows today and is the first major index to do so.  The action in the techs and small caps will go a long way in deciding if the other major averages are to follow the lead of the NYA.

The small caps as represented by the IWM (iShares Russell 2000 Index Fund ETF) are holding up a little better.  This is more than likely a result of the strong dollar, but we have to consider this a small positive for the moment.  After failing at the June highs in early August, IWM pulled back and tested first support in the 71-72 area.  After a second attempt to rally fell short on low volume, we have returned to the 71-72 level again.  Volume has been lower in distribution than that of the rally off of the July lows, and both the 50 and 200 day moving averages have provided support so far.  Relative strength against the S&P 500 has also been maintained unlike the big techs above.  The negative divergence signaled by the MACD histogram in our last note did in fact foreshadow weakness at the old highs and this indicator has yet to change.  In addition, the MACD itself has followed the histogram by producing a sell signal of its own.

These ETFs must strengthen soon to keep their leadership status intact.  Without their help and guidance, the market as a whole could be in for another bloody September/October.

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.