STOCKS FIRM AFTER WEAK OPEN -- FINANCIALS LEAD THE RECOVERY -- FALLING RATES COULD BE HELPING FINANCIALS -- DIA REMAINS IN LONG-TERM DOWNTREND -- QQQQ BREAKS TRIANGLE ON THE WEEKLY CHART -- IWM FORMS BIG BEARISH ENGULFING AT RESISTANCE

STOCKS FIRM AFTER EMPLOYMENT REPORT... Today's Market Message was written by Arthur Hill. John Murphy will return next week. - Editor

The Labor Department reported that 84,000 jobs were lost in the month of August. Non-Farm Payrolls have declined for eight straight months now. Incidentally, the S&P 500 ETF (SPY) peaked in October 2007 and has been moving lower for 11 months (including Sept 08). SPY peaked 3 months ahead of Non-Farm Payrolls. Getting back to today's action, stocks opened weak after the employment report, but the bulls found their footing late morning and rallied for a mixed close. While it may seem positive that stocks firmed after bad news, keep in mind that stocks priced in a lot of bad news with Thursday's sharp decline. In any case, a little firmness was welcome after Thursday's plunge. Chart 1 shows the Dow Industrials ETF (DIA) firming just below 112.5 and closing with a small gain on Friday. Despite Friday's firmness, the rising wedge break and support break remain in play. Also notice that CCI (20) moved below --100 to turn momentum bearish. In general, a move above +100 reflects bullish momentum that stays in effect until a move below --100. While this is not meant as a stand-alone trading system, I consider the move below --100 to be bearish and it confirms the bearish signals on the price chart.

Chart 1

FINANCIALS SHOW LEADERSHIP... I spoke about relative strength in the finance-related ETFs on Wednesday and this sector continues to show relative strength. While the major indices ended mixed on Friday, the Financials SPDR (XLF) and Regional Bank HOLDRS (RKH) ended the day with sharp gains. Charts 2 and 3 show XLF and RKH in trading ranges with support from the July-August lows and resistance from the July-August highs. Both gapped up last week and this gap provided support today. Also notice that volume expanded the last five days. Improving volume and relative strength argue for further gains. Those looking for a reason can turn to the 10-Year Note Yield ($TNX). Chart 4 shows the 10-Year Note Yield declining from 4.3% to 3.6% over the last 2 and a half months. Financials appear to be benefiting from the decline in interest rates. Needless to say, a rally in financials would complicate the bearish outlook for the market overall. Mr. Market sure likes to keep it interesting.

Chart 2

Chart 3

Chart 4

A LARGE FALLING CHANNEL FOR DIA... When it comes to the long-term picture, weekly charts are good for trend identification and monthly charts are good for targets (IMHO, of course). Weekly charts provide the detail needed to identify the long-term trend. However, an even longer perspective is often necessary for a target forecast. The next three chart groupings show weekly charts for trend identification and then monthly charts for the target forecast. Once a downtrend has been identified, I work under the assumption that it will continue until proven otherwise (reversed). With this "continuation" assumption, I look out a bit further to see where the decline may end up in the next 3-6 months.

Chart 5 shows the Dow Industrials ETF (DIA) with a falling price channel that extends back to the October high. This channel denotes a clear and present downtrend. DIA established support around 116-118 earlier this year and broken support turned into resistance in August-September. With a big move down this week, DIA looks poised to continue its long-term downtrend. MACD bounced with DIA in August, hit the signal line and rolled over this week. Both momentum and the trend point to further weakness in the coming weeks and months. Chart 6 shows monthly candlesticks over the last seven years. I went back this far to capture the entire bull run from October 2002 to October 2007 (five years). There are two tools I am using to forecast the downside target. First, a 50-62% retracement of this advance would carry DIA back to the 94-103 area (9400-10300 on the Dow). Second, there is potential support from broken resistance around 103. Taken together, I would guesstimate a downside target around 100-103.

Chart 5

Chart 6

QQQQ BREAKS TRIANGLE SUPPORT... Chart 7 shows weekly candlesticks for the Nasdaq 100 ETF (QQQQ). The ETF formed a big triangle over the last 10-11 months and broke triangle support with a sharp decline this week. Perhaps more telling, QQQQ formed lower highs in March and again in August. MACD stalled around the zero line over the last few weeks and moved below its signal line this past week. Momentum is turning down into negative territory again. This bearish sign points to lower prices over the next few weeks and months. Chart 8 shows monthly candlesticks with the Fibonacci Retracements Tool overlaid. A 50-62% retracement of the prior advance would extend to the 33-37 area. There is also support around 37 from the 2004-2005 consolidation. Taken together, I would guesstimate a downside target around 35-37.

Chart 7

Chart 8

IWM FORMS BEARISH ENGULFING AT RESISTANCE... Chart 9 shows weekly candlesticks for the Russell 2000 ETF (IWM). The ETF broke support with a sharp decline in December-January. This broken support zone turned into a resistance zone over the last 4-5 months. IWM was turned back in early June and again in September. Notice that a huge bearish engulfing pattern formed this week to affirm resistance around 74-76. Look for a move above the June-August to break resistance. Needless to say, such a breakout would call for a serious re-evaluation of my bearish stance. Also notice that MACD remains in an uptrend. It is, however, at the zero line and this is the moment of truth. A move below the signal line would be negative for momentum. Chart 10 shows monthly candlesticks with the Fibonacci Retracements Tool. IWM has support at 64-65 from the 2008 lows. Below that, the next support area is around 58 from the 50% retracement and broken resistance. I would guesstimate a downside target around 55-58.

Chart 9

Chart 10