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As mentioned in yesterday’s report, the relative strength in the small-cap Russell 2000 ETF ($IWM) is impressive, as it has already established a new closing high for the year, while the S&P 500 and NASDAQ Composite struggle to reclaim the 50-day MA. A short-term pullback to or near the rising 10-week MA would present us with a low risk entry point, around the $98.50 – $99 level.

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e positive element of recent market action has been the relative strength in small-cap stocks. Unlike the rest of the main stock market indexes, each of which are still trading well below resistance of their May 2013 highs, the small-cap Russell 2000 index has already rallied back to test its recent highs. The index also set a fresh ALL-TIME closing high last Friday. This is shown on the daily chart of iShares Russell 2000 index ETF ($IWM) below

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Stocks sold off into the close once again, with the S&P 500 stalling at the 50-day MA for the third time in four sessions. Total volume picked up, but losses were limited to to less than -0.1% on the S&P 500 and NASDAQ, so it was not a clear cut distribution day (but an ugly day nonetheless). After multiple days of stalling action in the major averages, we expect some sort of pullback to develop by next week. Because leadership stocks have held up, we believe that any pullback will be short lived. However, if leading stocks begin to crack with the market, then we will begin to test the waters on the sort side. Multiple days of stalling action at resistance does not look good

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Several weeks ago, we pointed out the potential trend reversal that was shaping up in US Crude Oil Fund ($USO), an ETF that tracks the price of crude oil futures. At the time, the trade failed to trigger for buy entry, but it has held up well since then. As mentioned above, a commodity ETF like $USO is not directly affected by the day-to-day volatility of the broad market. Take a look at the weekly chart pattern of $USO.

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Although stocks managed their third straight round of gains yesterday, it is risky and probably a bit too early to establish new long positions right now. This is because several of the major indices are now running into new overhead resistance of their 20 and 50-day moving averages (remember that a prior level of support technically becomes the new level of resistance after the support is broken). One such example can be seen in the ETF proxy for the benchmark S&P 500 Index ($SPY):

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Note the relative strength line on the daily chart of $KBE below. The black line at the bottom of the chart measures the daily strength of $KBE vs $SPY. When the line is going up, $KBE is outperforming $SPY (when the line is going down, $SPY is outperforming $KBE). Notice how the relative strength line has broken out to new highs ahead of the price action, which is still trading in a tight range. This is bullish divergence, which suggests that if/when market conditions improve, then $KBE could be one of the first ETFs to breakout ahead of the market.

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After a strong thrust up in April and May, the Claymore/MAC Global Solar Index ($TAN) has pulled back on light volume to the 10-week moving average. The first pullback to the rising 10-week MA (almost the same as the 50-day MA on the daily chart) is often a low risk entry point in a strong uptrend. Note the light volume last week on the pullback to the 10-week MA on the weekly chart below. A dry up in volume during the base is a good sign, indicating that investors are looking to put their money to work elsewhere.

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With all major averages now below the 50-day MA, the timing model is on a clear sell signal. While many IPOs have held up, current market conditions are simply too volatile to produce reliable buy setups. When volatility increases it becomes very hard to control risk due to gaps and wild trading action. As far as the short side is concerned, it is simply too late to locate low risk short entries. Ideally, we’d like to see a decent bounce in the broad based averages to produce low risk short setups. One potential short setup down the road is in the Market Vectors Steel ETF ($SLX), which has broken a clear support level and $40 and could possibly sell off to or near the lows of 2009

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