STOCKS RALLY INTO THE CLOSE -- QQQQ REMAINS RANGE BOUND -- SEMIS WEIGH ON TECHS -- EARNINGS SEASON PRODUCES BIG GAPS -- BONDS REMAIN STRONG -- USING THE RYDEX SECTOR FUNDS CARPET

STOCKS RECOVER AFTER EARLY LOSSES... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor

After starting the day weak and remaining weak into the afternoon, stocks surged in the final two hours and cut most of their losses by the close. The S&P 500 ETF (SPY) dipped below 149 intraday, but rallied to close above 151 with a late surge. On the chart below, SPY has support around 150 from broken resistance and the 50-day moving average. In addition, the rising 200-day moving average offers support at 147.31. The ETF dipped below 150 twice over the last three days and recovered to close above this important level both days. There is a support zone around 148-150 and a break below 148 would signal a continuation lower.

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QQQQ HOLDS SUPPORT ... The Nasdaq 100 ETF (QQQQ) remains one of the strongest ETFs and continues to hold support. While SPY tested its 50-day moving average today, QQQQ has yet to even come close to its 50-day and continues to show good relative strength. The ETF surged above 52 the first week of October and then consolidated the last three weeks (yellow box). The consolidation has been one choppy affair, but key support at 52 continues to hold. Even though upside momentum is waning, a support break is required to signal the start of a correction.

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CHIPS TAKE A HIT... Semiconductor stocks took a hit on Wednesday and this weighed on the Technology sector. The Semiconductor HOLDRS (SMH) and Semiconductor PowerShares (PSI) both dropped over 2% and moved below their 200-day moving averages. On the first chart below, SMH broke support at 35.5 with a sharp five day decline. The ETF has some support around 34 from the May-August lows and key resistance is set at 37.2. On the second chart, PSI broke wedge support and the 200-day moving average over the last four days. Even though PSI is holding up better than its cousin (SMH), it needs to break above resistance at 19 to reverse this downtrend.

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MIND THE GAPS... The semiconductor ETFs have been hit with a number of big gaps and sharp declines in the past week as earnings season takes its toll. Sandisk (SNDK) gapped down and declined over 15% last Friday. Texas Instruments (TXN) gapped down and declined over 8% on Tuesday. Broadcom (BRCM) and Altera (ALTR) both gapped down and lost over 15% today. Amazon (AMZN) is not part of the semiconductor group, but it does feature in the Nasdaq 100 ETF (QQQQ) and some tech related ETFs. After a gap and close above 100 on Tuesday, the stock gave it all back with a gap down and close below 90 on Wednesday. Talk about a wild ride. Earnings season is a dangerous time to trade and these gaps prove it. When looking at these charts, notice that SNDK, ALTR and TXN broke down before these gaps and there were warning signs on the charts. The BRCM and AMZN gaps came without much warning.

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BONDS CONTINUE HIGHER... The iShares 20+ Year TBond ETF (TLT) surged today and rates moved lower. TLT moved to a new high for the year and this shows two things. First, money is moving into relative safety. Treasury bonds are backed by the U.S. government and represent a relatively risk-free asset. Second, the fall in interest rates increases the chances of another rate cut from the Fed next Wednesday. The bond market often leads the Fed and the decline in rates over the last four months points to lower interest rates. The second chart below shows the iShares 1-3 Year TBond ETF (SHY) and this bond fund represents short-term rates. SHY also broke resistance with a surge over the last two weeks and this implies lower short-term rates. Rates move down when bonds move up.

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LONG-TERM RATES MOVING LOWER... The long-term charts for the 10-Year Note Yield ($TNX) show patterns that point to lower rates in the coming weeks and months. The weekly chart sports a large double top and TNX broke back below support at 44 (4.4%) this week. This confirms the double top and the downside target is around 37.5 (3.75%). The height of the pattern (52.5 -- 44 = 8.5) is subtracted from the support break for a target (44 -- 8.5 = 35.5 or 3.55%). The monthly chart shows a rising wedge from 2003 until 2007. Notice that this rising wedge formed as the S&P 500 moved higher. In other words, there was a positive correlation between interest rates and the S&P 500 over the last four years. The 10-Year Note Yield met resistance near the 62% retracement and broke wedge support over the last four months. This call for a continuation of the prior decline and this is bullish for bonds.

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RYDEX SECTOR FUNDS CARPET... Even if you do not trade or invest in the Rydex Sector Funds, they can be useful for sector analysis to separate the leaders from the laggards. There are 18 Rydex Sector Funds, which is twice the number of sector SPDRs. Here are the steps involved in creating the carpet below. First, click on "market carpet" under "tools" in the left navigation bar. Second, scroll down the list of available carpets and click the "Rydex Fund Carpet" link. Third, move the cursor to the "Sector Funds" box and it will turn yellow. Click on the yellow box to isolate the sector funds. To display the symbols, click the right mouse button and choose "Show Ticker Symbol". Finally, you can set the number of days by moving the left end of the time bar until it displays 10.

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The S&P 500 peaked on 10-Oct and this was 10 days ago. I wanted to know which Rydex Sectors were the weakest and which were the strongest during this market decline, hence 10 days on the time bar. First, notice that all 18 are down over the last 10 days. This is clear because the top performer, which is the Rydex Internet Fund (RYIIX) is down .29%. If the top performer is down, then the others are down even more. The top performing funds cover internet, transports, consumer products, biotechnology and precious metals. The worst performing funds cover banking, real estate, financial services, retail and energy services. I want to avoid stocks associated with the laggards and focus on stocks associated with the leaders.