FINANCIALS SURGE ON BAD BANK IDEA -- XLF AND RKH GAP HIGHER -- CITIGROUP, BANK OF AMERICA AND WELLS SURGE - BROKERS OUTPERFORMING BANKS - POINT & FIGURE SETTINGS -- TARGETS AND REVERSAL MARKERS FOR SPX AND NDX

FINANCIALS LEAD BROAD MARKET ADVANCE... Today's Market Message was written by Arthur Hill. - Editor

In early trading on Wednesday, financial stocks led the market higher as investors embraced the "bad bank" idea. Bloomberg reported that President Obama was nearing a deal to create a bad bank to manage toxic assets. A similar plan was developed to deal with the Saving & Loan crisis when the government created the Resolution Trust Corporation in 1989. RTC absorbed bad loans and troubled real estate assets from these institutions. Current banking problems may be bigger this time around, but the nature of the problem and the solution are essentially unchanged. Chart 1 shows the S&P Sector Carpet with lots of green. The financial sector looks the greenest with only two stocks lower in early trading. There is also strength in the materials, industrials, energy and consumer discretionary sectors. The technology sector is a bit mixed with four of the five biggest losers. Unsurprisingly, the defensive sectors are faring the worst as the appetite for risk increases. Healthcare, utilities and consumer staples have the least green.

Chart 1

XLF AND RKH GAP HIGHER... Chart 2 shows the Financials SPDR (XLF) firming for five days and then surging with a gap up on Wednesday morning. Even though a short-term reversal is clearly underway, the bigger trend remains down. As noted last week, the first resistance target is around 11 from the falling 50-day moving average and broken resistance. The indicator window shows the RSI moving from oversold levels for the second time in three months. During this downtrend, the RSI met resistance in the 50-60 area a number of times. A break above this resistance zone would show the strongest upside momentum since August.

Chart 2

CITI, BOA AND WELLS LEAD THE WAY... Charts 3, 4 and 5 show Citibank (C), Bank of America (BAC) and Wells Fargo (WFC) gapping higher on Wednesday. All three were deeply oversold last week. As with the Financials SPDR, today's gaps and short-term reversals look impressive, but these are still within the context of bigger downtrends. Broken support levels from December turn into resistance.

Chart 3

Chart 4

Chart 5

RKH CONFIRMS HARAMI... Chart 6 shows the Regional Bank HOLDRS (RKH) with a harami last week and a gap up today. The long red candlestick forged a new low, but the ETF immediately firmed with a white candlestick the next day. The body (open-close) of the white candlestick is within the body of the red candlestick. This shows sudden indecision that can foreshadow a reversal. Today's gap, provided it holds, confirms this bullish candlestick reversal pattern. As with XLF, the falling 50-day moving average and broken support combine to mark resistance in the upper 60s.

Chart 6

BROKERS OUTPEFORMING BANKS... Chart 7 shows the Broker Dealer iShares (IAI) breaking flag resistance last week and surging above 19 today. While the Financials SPDR and Regional Bank HOLDRS both moved below their November lows in January, the Broker Dealer iShares held above its November low. This display of relative strength is confirmed by the relative strength comparative, which broke resistance in early January. Also notice that IAI moved above its 50-day line with today's gap. Even with today's big advance, XLF and RKH remain well below their 50-day lines. On the price chart, IAI retraced 50-62% of its Nov-Dec advance with a falling flag. The breakout over the last few days is bullish and argues for a continuation of the Nov-Dec advance. I am marking the next resistance zone around 22-24.

Chart 7

P&F SETTINGS... Before moving on to Point & Figure analysis for the S&P 500 and the Nasdaq 100, I would like to explain some settings. Chart 8 highlights three settings in particular. First, the reversal marker is checked to identify the point at which the current P&F signal is reversed. Second, the scaling method is user defined. I chose 3 points per box for the S&P 500 and 6 points per box for the Nasdaq 100. These settings were based on trial and error to find the best fit. Third, I chose trend lines in the chart overlays section. The red lines are bearish resistance lines, while the blue lines are bullish support lines. If the last line is blue and rising, this means the trend is up and the P&F chart is on a bull signal. For more, check out Understanding Point & Figure Charts in the Chart School.

Chart 8

SPX BUILDS ON BULLISH SIGNAL... Chart 9 shows the S&P 500 on a bullish P&F signal. The blue bullish support line extends up from the January low and the green number (900) marks the P&F price objective (target). P&F charts are excellent for identifying support, resistance, upside breakouts and downside breaks. On this chart, SPX found lots of support around 800 in January with three bounces. The index broke above its 21 Jan high with the third bounce. After a pullback, the index advanced again this week and broke above its bearish resistance line. Today's surge carried the index above last week's high to reinforce the current bullish signal, which remains in force until proven otherwise. This is where the reversal marker comes in handy. A break below the reversal marker (840) would reverse the current bullish signal and trigger a fresh bearish signal.

Chart 9

NDX BREAKS RESISTANCE... Chart 10 shows the Nasdaq 100 on a bullish P&F signal as well. The index established support around 1140-1146 with three bounces in January. The third bounce triggered a triple top breakout when NDX exceeded 1188. NDX then hit resistance around 1200-1206. The index closed just below this resistance level on Tuesday and broke resistance with today's early surge. Based on P&F reversal projections, the upside target is around 1278. The reversal marker is currently set at 1182. Failure to hold a breakout and a move below 1182 would trigger a bearish signal for NDX.

Chart 10