QQQQ GAPS DOWN AND STAYS DOWN -- SPY FORMS RISING WEDGE PATTERN -- FINANCIALS LAG BROADER MARKET -- JP MORGAN BREAKS TRIANGLE SUPPORT -- WELL FARGO LEADS LOWER -- GOLD FALLS DESPITE WEAK DOLLAR -- OIL PLUNGES

QQQQ GAPS DOWN ... Today's Market Message was written by Arthur Hill. - Editor

Led by weakness in the technology sector, the Nasdaq 100 ETF (QQQQ) gapped down and stayed down on Wednesday. Chart 1 shows daily candlesticks over the last four months. QQQQ has been working its way higher since late November with a rising wedge formation. While today's gap is short-term negative, it is not enough to reverse the medium-term uptrend. Don't forget that the ETF recently broke above its December highs. More importantly, QQQQ has yet to break the wedge trend line or key support around 28. Volume has been low throughout most of the wedge advance, which detracts from the advance. On the plus side, however, volume on today's decline was also low. Chart 2 shows 60-minute candlesticks with an island reversal. QQQQ gapped up on Monday, consolidated and then gapped down on Tuesday. Buyers on Monday are now trapped on the island with losing positions. This gap should be considered short-term negative as long as it holds (remains unfilled).

Chart 1

Chart 2

FINANCIALS UNDERPERFORMING... The financial sector came under pressure today after comments from Meredith Whitney, a banking analyst with Oppenheimer. Whitney thinks banks will need to raise more cash to cover bad debts throughout 2009 and this will ultimately lead to credit downgrades. This news may not be so new to the market because the Financials SPDR (XLF) has been underperforming the broader market for a few weeks now. Using the S&P 500 ETF (SPY) as the broad market proxy, the Financials SPDR has been lagging since mid December. Chart 3 shows SPY moving above its December highs and its 50-day moving average with a big move on 2 Jan. In contrast, Chart 4 shows XLF forming lower highs in mid December and early January. In addition, the ETF did not cross above its 50-day moving average. Relative weakness in the financial sector is negative for the market overall.

Chart 3

Chart 4

Turning back to the price chart, SPY has a rising wedge working over the last few weeks. These are potentially bearish patterns, but the trend is clearly up as long as the wedge rises. A break below the lower trend line would be negative. A move below 85 would break support from the late-December lows. Such breaks would call for a continuation of the prior decline and target a move below the November lows.

XLF surged with two big moves, but then met resistance around 13 over the last 3-4 weeks. A triangle consolidation is taking shape as the ETF moves sideways. A break above the early January highs would be bullish for XLF. This would also have positive ramifications for the broader market. Conversely, a break below the late-December lows would argue for a test of the November lows.

BANKS UNDER PRESSURE AGAIN... Chart 5 shows the Regional Bank HOLDRS (RKH) with similar signs of relative weakness. The bottom indicator shows the price relative, which plots the RKH:SPY ratio. This ratio rises when RKH outperforms SPY and falls when RKH underperforms it. There was a brief period of outperformance from late November to early December, but this faded by mid December. The price relative is now trading near its Nov-Dec lows as RKH shows relative weakness. On the price chart, RKH consolidated the last 3-4 weeks with a flat trading range, much like XLF. Look for a range break to trigger the next signal. Given relative weakness, the odds favor a break to the downside.

Chart 5

FOUR KEY FINANCIAL STOCKS... The next four charts show some key financial stocks. All four peaked in early December and did not come close to their early December highs with last week's surge. All four show relative weakness and look vulnerable to further weakness. Chart 6 shows Wells Fargo (WFC) breaking below its late December lows with a sharp decline in the last three days. Chart 7 shows JP Morgan with a triangle consolidation over the last 3-4 weeks. The stock is testing support from the mid-late December lows. Chart 8 shows US Bancorp (USB) with a gap down on 11 Dec. This gap is holding as the stock failed to bounce over the last few weeks. Chart 9 shows Sun Trust Banks (STI) with a flat consolidation over the last 3-4 weeks. Watch the consolidation boundaries for the next direction clues.

Chart 6

Chart 7

Chart 8

Chart 9

GOLD AND DOLLAR DIVERGE... Despite a drop in the US Dollar Index Bullish ETF (UUP), the streetTRACKS Gold ETF (GLD) declined sharply on Wednesday. This is a bit strange because gold and the dollar usually enjoy an inverse relationship. In other words, a decline in the dollar usually triggers an advance in gold. Perhaps gold had its eye on the United States Oil Fund ETF (USO), which fell over 10%. Chart 10 shows the US Dollar Index Bullish ETF in a long-term uptrend. The ETF is trading above its rising 200-day moving average, and its 50-day SMA is above its 200-day SMA. UUP fell sharply in December, but found support just above its 200-day moving average. Even though today's gap down is negative and trading has been erratic the last few weeks, I think it is in the context of a bigger uptrend.

Chart 10

GOLD HITS LONG-TERM RESISTANCE... Chart 11 shows the streetTRACKS Gold ETF (GLD) hitting long-term resistance around 87.5. This resistance zone stems from the Sep-Oct highs, the July trend line and the falling 200-day moving average. Also notice that the 50-day moving average is trading below the 200-day moving average. Even though the rally from the November lows was quite impressive, the long-term trend for GLD remains down. The ETF failed to exceed its Sep-Oct highs and a lower high is forming. A move above 87.5 is needed to break this long-term resistance barrier. A corresponding break below 24 in the US Dollar Index Bullish ETF would further reinforce a bullion breakout.

Chart 11

USO HITS SHORT-TERM RESISTANCE... While gold hit long-term resistance, the United States Oil Fund ETF (USO) was turned back at short-term resistance. The ETF surge over 28% in six days (green arrow) and then fell back with a 10.68% drop today. USO broke above the September trend line, but hit resistance just below the mid-December high. In addition, the falling 50-day moving average marks resistance just above 40. The long-term trend for oil remains down. USO was simply way oversold and ripe for a bounce after the plunge below 30. It now looks like 40 is the next resistance hurdle for USO.

Chart 12