MAJOR INDEX ETFS FIND SUPPORT -- MOMENTUM TURNS BEARISH FOR SPX -- ANALYZING A PRIOR CORRECTION -- SPX SUPPORT AND TARGETS -- SPRINT-NEXTEL BOUNCES BACK -- STEEL STOCKS SHOW STRENGTH

STOCKS FIRM AFTER BIG DECLINE... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor

A day after the biggest decline in years, the S&P 500 ETF (SPY), Nasdaq 100 ETF (QQQQ) and Russell 2000 ETF (IWM) firmed on Wednesday. SPY and QQQQ found support near their December-January lows, while IWM managed to firm above its January low. Tuesday's decline created short-term oversold conditions and today's consolidation represents a rest after the decline. Despite a day of firmness, big gaps and big declines still loom large. All three ETFs reached new reaction highs last week and suddenly gapped down this week. After an extended advance, these gaps should be considered bearish breakaway gaps as long as they remain unfilled. Further weakness below this week's lows would forge important support breaks for QQQQ and SPY. IWM has a bit of a buffer and it would take a break below 76 to forge a lower low and argue for a downtrend.

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A MOMENTUM BREAKDOWN FOR THE S&P 500... On 24-January I spoke of using RSI for trend identification. RSI fluctuates between 0 and 100 with 50 as the centerline. In general, momentum favors the bulls when RSI is above 50 and momentum favors the bears when RSI is below 50. In addition, RSI often establishes support levels in uptrends and resistance levels in downtrend. Support and resistance breaks can be used to identify changes in momentum and anticipate trend reversals in the underlying index.

On the S&P 500 chart, RSI established support around 50 during the entire advance from July to February. The indicator peaked in October and formed negative divergences in November, December and January. These negative divergences were a concern, but RSI held support around 50-55 eight times over the last seven months - until Tuesday that is.

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With Tuesday's sharp decline, RSI moved below 50 and broke support that extends back to 8-August. RSI had been largely above 50 since late July and this level captured the entire advance. Now that RSI broke below support and below 50, momentum now favors the bears. What's more, 50 now turns into resistance for RSI. This level acted as support in an uptrend and will now act as resistance in a downtrend.

LEARNING FROM THE PAST... To paraphrase Mark Twain: "History doesn't always repeat itself, but it sure does rhyme". With that in mind, I would like to take a step back and look at the May-June correction. Dissecting this decline may offer some clues on what to look for over the coming weeks and months. The S&P 500 surged in October-November (2005) and then began a slow zigzag higher from December to early May (2006). Notice that momentum waned and RSI fluctuated between 40 and 65 from December to May. In addition, RSI established support at 40 with five bounces during this advance. The break down started with a sharp decline and break below the April low. SPX fell around 55 points in five days and RSI broke below support at 40. This decline started a correction that retraced 62% of the Oct-May advance. Keep 62% in mind.

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APPLYING PAST LESSONS TO THE PRESENT... Now let's see how a correction might unfold if the S&P 500 follows the May-June 2006 script. The index declined around 50 points on Tuesday. This decline took one day and the index found support around 1400. In contrast, the initial decline in early May 2006 occurred over a two week period. A support break at 1400 would make Tuesday's decline more than just a one day wonder and call for a trend reversal. Now let's measure for a potential downside target. The prior advance extended up from July to February and a 62% retracement of this advance would carry the index back to around 1317. A 50% retracement would extend to around 1345. Taking the middle ground, the downside correction target is around 1330 and this represents a 9% decline from the February high and a further 5% decline from current levels.

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SPRINT-NEXTEL REBOUNDS... Sprint-Nextel (S) was not spared during Tuesday's route, but the stock recouped its losses today with a 5% gain on above average volume. The shares are getting a lift after a positive earnings report. The stock is no stranger to volatility and had a rough ride over the last 12 months. In contrast, the Amex Telecom Index ($XTC) was one of the top performers from June to July. Sprint-Nextel suffered setbacks with big gaps in August and January, but may be ready to make up for lost ground. The stock managed to firm soon after the January gap and held above its August low. More importantly, it filled the gap with a surge over the last two weeks and broke both the 50-day and 200-day moving averages.

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WORTHINGTON INDUSTRIES LEADS STEEL GROUP... Steel stocks caught a big bid today after Japan's Mitsui offered to buy Steel Technologies (STTX). The Dow Jones US Steel Index ($DJUSST) jumped 3% and Steel Technologies surged almost 60%. Worthington Industries (WOR) caught my eye as the stock recovered all of yesterday's losses with a big move on high volume. The stock has been quite volatile over the last three months, but the ability to fill yesterday's gap on big volume shows some serious buying interest.

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