TECHS LEAD REBOUND -- QQQQ BATTLES SUPPORT - A FEEBLE RETRACEMENT RALLY -- LONG-TERM SUPPORT FOR SPY -- EURO HITS SUPPORT AS DOLLAR HITS RESISTANCE

TECHS LEAD MARKET REBOUND ... Today's Market Message was written by Arthur Hill. - Editor

After plunging the first two hours of trading, the Nasdaq 100 ETF (QQQQ) firmed and then surged higher in the afternoon. Chart 1 shows QQQQ swing over 4% from low to high during the day. Despite this big swing, the ETF hit resistance near the trend line extending down from the January high. In addition, the gap and broken support offer resistance around 29.25-29.50. More importantly, the trend since the 7 January gap remains down. Today's surge looks like an oversold bounce. The 14-period RSI became oversold with a move below 30 early this morning. The afternoon surge certainly alleviated these oversold conditions, but we must now see if the bulls have the mettle to follow through.

Chart 1

REFUSING TO LET GO OF SUPPORT... Chart 2 shows daily candlesticks with a battle raging at support. While SPY and DIA closed below their late-December lows again today, QQQQ is putting up a fight with a spinning top candlestick. These candlesticks have small bodies that show little change from open to close. They also feature long upper and lower shadows that reflect a relatively volatile day. Spinning tops show indecision. With QQQQ at support, indecision after a sharp decline could foreshadow a short-term reversal. For now, the spinning top simply reflects a stalemate at support. Convincing upside follow-through would give the bulls a leg to stand on.

Chart 2

WEAK RETRACEMENT RALLY... With the break below the late-December lows, it appears that another leg lower is underway. First, let's review the breakdown on the daily chart. The S&P 500 ETF (SPY) serves as the proxy for "the stock market." Chart 3 shows daily bars to highlight the rising wedge. Chart 4 shows weekly bars to highlight the retracement zone. SPY formed a rising wedge that retraced around 25% of the May-Nov decline. I expected a higher retracement, but the index fell short with a sharp decline over the last seven days. Thirty-eight percent (38%) is at the low end of the retracement zone (38-62%). This relatively low retracement reflects a feeble rally. As long as the ETF was moving higher, there was a chance of hitting the 38% mark around 100. However, Wednesday's break below the lower wedge trend line and the late December lows clearly reversed the uptrend. Given the depth of the seven-day plunge, it looks like SPY is starting another leg lower. The late-November lows mark the first obvious target for SPY.

Chart 3

Chart 4

LONG-TERM OUTLOOK FOR SPY... The monthly chart is needed to get some perspective. Chart 5 goes back 10 years. With this time frame, we can see the end of a bull market in 2000, a bear market, a full bull market and now another bear market. The 2002 lows mark the next major support level around 70. With SPY trading around 84, this major support level is over 15% lower. The 18-month moving average defined the major moves quite well. Simply staying on the right side of this moving average would have captured most of the gains and avoided most of the losses. The first indicator window shows the Percentage Price Oscillator (PPO) set at (1,18,1). This shows the percentage difference between the 18-month moving average and the monthly closing prices (1-period moving average). SPY is above the 18-month EMA when this indicator is positive and below the 18-month EMA when this indicator is negative. The PPO plunged below -20 in January as SPY fell sharply over the last few months. SPY is currently some 28% below its 18-month moving average. With such a large distance, the ETF is not going back above this long-term moving average anytime soon. In fact, a period of basing is likely needed so the PPO can revert to its mean (zero). This is what happened in the second half of 2002 as SPY oscillated around 80 for 9-10 months.

Chart 5

The second indicator shows the two year Stochastic Oscillator (24 months). Notice how the Stochastic Oscillator moved to around 20 and then traded flat for around two years (2001-2002). The surge above 50 signaled the start of a bull market and the oscillator moved above 80 at the end of 2003. As the bull market extended, the Stochastic Oscillator hovered above 80 for four years. Readings above 80 may be considered overbought, but securities can remain overbought in strong uptrends. With the recent move back below 50, a bear market is now underway. More importantly, the indicator moved below 20 in August, just five months ago. If the prior basing process serves as any guide, it could be a while before this indicator moves back above 50. Judging from the recent volatility, we may even be entering a choppy consolidation similar to the second half of 2002. Hang on, it could be a bumpy ride.

EURO HITS SUPPORT ... The European Central Bank (ECB) lowered its key rate by 0.5% today. This brings their benchmark rate down to 2%, which is considerably higher than similar benchmarks in the U.S. and U.K. The Fed and the Bank of England are currently running a zero interest rate policy. Conversely, the European Central Bank has been hesitant to slash rates as fast. Even with today's big cut, European rates are still much higher than those in the U.S. The prospect of further rates cuts in Europe is weighing on the euro. Chart 6 shows the Euro Trust ETF (FXE) falling sharply ahead of today's cut. The ETF is now trading near support from broken resistance and the 50-day moving average. In addition, the decline over the last few weeks retraced 62% of the prior advance. Now that the news is out and support is nigh, the euro may be poised for a bounce.

Chart 6

DOLLAR ETF HITS RESISTANCE... Chart 7 shows the US Dollar Index Bullish ETF (UUP) with a mirror image of the euro chart. After a surge over the last few weeks, UUP met resistance near broken support and its 50-day moving average. The advance over the last few weeks looks like a rising flag, which is potentially bearish. However, the flag is clearly rising as the trend has yet to reverse. A move below the early January lows would break flag support. It should also be noted that the dollar appears to be in a long-term uptrend, while the euro is in a long-term downtrend. Notice that the dollar is trading above its rising 200-day moving average, while the euro is below its falling 200-day moving average.

Chart 7