SPY CONTINUES THE BIG STALL -- QQQQ SHOWS RELATIVE STRENGTH -- SEMIS LEAD THE TECH SECTOR HIGHER -- TXN SURGES ON GOOD VOLUME -- INTEL SURGES ON LACKLUSTER VOLUME -- DOW TRANSPORTS LAG -- DOW UTILITIES LEAD

SPY REMAINS RANGE BOUND... Today's Market Message was written by Arthur Hill. - Editor

Indecision continues to grip the stock market as the S&P 500 ETF (SPY) trades within a tightening range. Chart 1 shows SPY trading on either side of 85 since 10-Oct (blue dotted line). The ETF has crossed 85 at least 10 times in the last four months. After some relatively wide swings in November, the ETF settled down as the range narrowed in December and January. With a triangle taking shape, the boundaries will provide the next directional clues. SPY got a bounce off the lower trendline over the last 2-3 days. This bounce reinforces support in the lows 80s. A break below 80 would be bearish and argue for a continuation lower. The upper trendline and January high combine to mark a resistance zone around 92-95. A move above this level is needed break the four-month stalemate between bulls and bears. Until there is a convincing break either way, trading could remain treacherous, choppy and directionless.

Chart 1

QQQQ SHOWS RELATIVE STRENGTH... Chart 2 shows the Nasdaq 100 ETF (QQQQ) with characteristics similar to SPY. First, QQQQ established support around 29.5 with the 10-Oct low. Since then, the ETF has crossed this level at least 10 times. The most recent cross occurred with a surge over the last two days. Second, QQQQ also formed a triangle as its consolidation narrowed in December and January. The January low marks key support around 27.5. A break below this level would signal a continuation lower. For now, QQQQ is showing relative strength with a surge above 30 in early trading on Wednesday. The bottom indicator window shows the relative strength comparative, which shows QQQQ performance relative to SPY. After trading flat throughout November-December, the relative strength comparative broke resistance in the second week of January. QQQQ is outperforming SPY at this stage. The reason is pretty obvious. SPY has been weighed down by the financial sector recently. Conversely, QQQQ benefits from having no financial stocks.

Chart 2

SEMIS LEAD TECH SECTOR... The Semiconductor HOLDRS (SMH) is showing leadership within the technology sector. Chart 3 shows SMH establishing support around 16-17 from mid December until early February. With the surge over the last three days, SMH moved above last week's high. Even though the big trend remains down, SMH could be poised for a counter-trend advance that retraces a portion of the prior decline. Such a move could even extend to the falling 200-day moving average around 24. Be careful though. Counter-trend rallies can be difficult to trade. Failure to hold this week's surge and a break below 16 would signal a resumption of the larger downtrend. The bottom indicator window shows the relative strength comparative (SMH:SPY). As with QQQQ, SMH is showing relative strength as the relative strength comparative broke above its December-January highs this week.

Chart 3

TXN LEADS WITH VOLUME... Chart 4 shows Texas Instruments (TXN) leading the semiconductor stocks with a break above its December-January highs. The stock established support around 14 from late November to late January. Notice that upside volume started picking up in late January as the stock moved off support. On Balance Volume (OBV) is shown behind the price plot (pink line). This cumulative indicator adds volume on up days and subtracts volume on down days. While TXN tested its late November lows, OBV held up well in December and January. With the surge over the last three days, the indicator moved to new highs as volume led price higher. Even though volume appears to validate this breakout, the stock is getting short-term overbought after a 20% surge in nine days. This makes it vulnerable to a pullback or consolidation.

Chart 4

INTEL BOUNCES WITH FLAT VOLUME... Intel (INTC) is also showing some upside leadership in the semiconductor group, but lacks the volume for validation. Chart 5 shows the stock finding support around 12-12.5 in November, December and January. While the stock was testing its November lows in January, On Balance Volume moved to a new low. The stock bounced off support the last two weeks, but On Balance Volume remained well below its December high. In contrast to TXN above, volume did not validate or foreshadow the surge in Intel. Perhaps volume will come later. However, lack off volume on the initial surge undermines from this advance.

Chart 5

TRANSPORTS LAGGING - UTILITIES LEADING... Looking at the three Dow Averages, I was struck by relative weakness in the Dow Transports and relative strength in the Dow Utilities. Newfound relative strength in QQQQ and technology may be positive, but there is still reason for concern with relative weakness in the Dow Transports. Chart 6 shows the Dow Transports closing below the November closing low on 2-Feb. The Average rebounded over the last two days, but the new closing low was recorded nonetheless. Chart 7 shows that the Dow Industrials has yet to confirm this new low with a new low of its own. However, both forged new lows in late November and Dow theory remains on a sell signal. The Dow Industrials is currently battling support around 8000. A move below 7900 would be most detrimental to this key Average -- and the rest of the market.

Chart 6

Chart 7

Chart 8 shows the Dow Utilities holding up much better than the Dow Industrials and Dow Transports. While the latter two are closer to their November lows, the Dow Utilities remains well above these lows as it challenges resistance just above 380. The bottom indicators show the relative strength comparative. Both moved to new highs over the last few weeks. This confirms that Dow Utilities is clearly leading the Dow Industrials and Dow Transports. Utility companies are considered defensive. They have nice dividends and their services are required regardless of economic conditions. Transports, on the other hand, provide more discretionary services. Consumers and businesses can cut back on travel when times are tough. In addition, demand for trucking and shipping falls as the economy shows. This make transports one of the most cyclical industry groups.

Chart 8