DOW HOLDS SUPPORT -- A LOOK AT PRIOR RATE CUTS -- FINANCE LEADS THE WAY -- CITIGROUP GETS OVERSOLD BOUNCE -- STATE STREET SHOWS RELATIVE STRENGTH -- QQQQ RALLIES OFF SUPPORT

DOW SURGES FOR SECOND DAY RUNNING... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor

The market moved sharply higher on Wednesday as hopes of a rate cut spurred the bulls into action. First, let's review some of the economic highlights from today. The Fed's beige book showed signs of weakness in the economy. Durable Goods Orders fell for the third month in a row. Existing Home Sales fell for the eighth month in a row. This negative news took a back seat to dovish comments from Fed Vice Chairman Donald Kohn though. Kohn's remarks ignited a rally by providing hope for a rate cut at the 11 December policy meeting.

The prospect of further rate cuts lifted the Dow Industrials over 300 points. Before we get too excited, let's see how prior rate cuts affected the Dow. The gray dotted lines on Chart 1 correspond to the rate cuts. The August rally started with the first rate cut on 17 August. The second rate cut occurred in the middle of the August-October advance. The Dow peaked with the third rate cut on Halloween and then declined back to its August lows in November this week. As of Tuesday's close, the Dow was trading below the 17 August close and had nothing to show for three rate cuts. That is not a very good track record. Today's surge carried the Dow above 13200. The Dow now has something to show for these three rate cuts, but not much.

Chart 1

Even though reaction to rate cuts has not been inspiring, the Dow is holding long-term support. On Monday, John Murphy indicated that Dow support was around 12800 and there was a good chance for a rally off the August low. This two-day surge reinforces support in this area. More importantly, the ability to hold support keeps the bears at bay for now.

Chart 2

FINANCIAL STOCKS LEAD THE REBOUND... The finance sector has been a major drag on the market over the last few months. That changed today as the Finance SPDR (XLF) led the sector SPDRs higher. Chart 3 shows daily candlesticks for XLF. The ETF formed a harami on Monday-Tuesday and then gapped higher on Wednesday. The harami is a potentially bullish candlestick reversal pattern that requires confirmation. This confirmation came with today's long white candlestick. Despite impressive two-day gains, the overall trend is still down because the ETF remains within a Raff Regression Channel. The middle line is a linear regression. The outer lines are equidistant and parallel to the linear regression. In addition to this downward sloping channel, XLF has a series of lower lows and lower highs working. At this point, I consider today's surge an oversold bounce and would expect resistance around 32. This stems from broken support and the 14 Nov high.

Chart 3

Chart 4 provides a better example of why I think this is just an oversold bounce for XLF. The trend here is clearly down as XLF broke its 21-month trend line and key support at 34 this summer. The decline over the last eight weeks created oversold conditions. There are two ways to work off oversold conditions. A stock can either trade flat or bounce. XLF is currently trying to bounce and I would expect resistance around 32.

Chart 4

CITI AND STATE LEAD FINANCE ... Citigroup (C) led the finance sector with a big surge above 32. As Chart 5 shows, the move is certainly impressive on its own, but pales in comparison to the prior decline. The stock broke support at 44 in October and dipped below 30 this week. With the overall trend clearly down, advances are considered corrective in nature. This means they are counter-trend rallies. Broken support turns into resistance at 44. However, I doubt the stock will make it back this far-at least not on the first attempt. More likely, C will meet resistance at or below the mid November high.

Chart 5

State Street (STT) remains immune to the recent problems in the banking system. While Citigroup wallows well below its 200-day moving average, State Street is trading above its 200-day moving average and challenging its highs. The stock surged in September-October and then consolidated in November. The Finance SPDR (XLF) swooned in November, but State Street held up the entire month and simply consolidated. This shows relative strength. Notice the price relative (STT:XLF Ratio) in the bottom window. It kept moving higher as STT traded flat.

Chart 6

QQQQ STILL SHOWING LEADERSHIP ... While the finance sector stole the show today, the Nasdaq 100 ETF (QQQQ) has been stealing the show since August. Chart 7 shows the performance of SPY, DIA, IWM and QQQQ since 31 July (four months). Even though QQQQ suffered the biggest percentage loss in November, it was the only ETF to maintain positive gains throughout November. QQQQ was also the only one that did not test its August lows. QQQQ held up better on the way down and this showed relative strength over the last four months.

Chart 7

QQQQ BOUNCES OFF SUPPORT ... QQQQ is bouncing off long-term support. Chart 8 shows weekly prices and the last candlestick is subject to change because the week is not finished yet. With that caveat out of the way, note that QQQQ has support around 48-49 from the July 2006 trend line and the 40-week moving average, which is equivalent to the 200-day. The ETF affirmed support by forming two indecisive candlesticks at support (blue oval). There were also signs of support with RSI trading near 50. This momentum indicator also found support around 50 in both March and August (yellow ovals). The green dotted lines show when RSI moved back above 50 to revive the uptrend. If today's gains hold for the week, RSI will produce a signal similar to those seen in March and August (green arrows).

Chart 8

MIND THE GAP ... In addition to the reasons outlined on the weekly chart, there were two reasons to expect support around 49 on the daily chart. First, the decline retraced 62% of the August-October advance. Second, resistance from the August high and early September high turned into a support zone (yellow bar). QQQQ firmed for two weeks and then surged today with a big gap. This is strong price action that merits attention. A strong ETF should hold its gap and not look back. A move back below 50 would be cause for concern. A break below the November lows would be outright bearish.

Chart 9