STOCKS FIRM AFTER SHARP DECLINE -- SPY AND IWM REMAIN WITHIN CONSOLIDATIONS -- QQQQ SHOWS GAIN FOR 2009 -- TWO KEY FINANCIAL ETFS FORM INSIDE DAYS

LARGE TRIANGLES CONTINUE TO EVOLVE... Today's Market Message was written by Arthur Hill. - Editor

Last week I featured a chart of the S&P 500 ETF (SPY) with a rather large triangle over the last few months. Chart 1 shows this pattern still at work with an important support test at hand. First, notice that SPY has gone nowhere since 10 Oct. SPY crossed the blue dotted line at 85 over 10 times since October and five times in 2009. Second, support in the low 80s is keeping the big triangle alive. A break below 80 would argue for a continuation of the Sep-Nov decline. The first downside target would then be a test of the late-November lows. Chart 2 shows the Russell 2000 ETF (IWM) with a similar pattern at work.

Chart 1

Chart 2

SMALLER TRIANGLES ALSO TAKING SHAPE... Charts 3 and 4 focus on price action within the triangles. Moving from left to right, SPY and IWM broke rising wedge support with sharp declines in January. This bearish development reversed the uptrend from late November to early January. After the support break, both became oversold from the steep January declines. Oversold conditions can be alleviated with a bounce or a consolidation. Triangle consolidations are taking shape with two failed rally attempts above the 50-day moving average. Tuesday's sharp decline forged a reaction high just below the late-January high. Adding a couple of trend lines reveals a triangle consolidation taking shape over the last 3-4 weeks. Triangle support breaks would also signal a continuation of the January decline and target a move to the late-November low. Frankly speaking, these smaller triangles look like bearish continuation patterns. Tuesday's sharp decline was the warning shot across the bow. Downside follow through to Tuesday's decline would clearly break support. Should support hold, look for a break above the early-February highs to revive the bulls.

Chart 3

Chart 4

QQQQ STILL SHOWS RELATIVE STRENGTH ... Among the major-index ETFs, the Nasdaq 100 ETF (QQQQ) remains the clear leader for 2009. In fact, QQQQ is the only major-index ETF with a gain for the year. Chart 5 shows that QQQQ is up just over 1% for 2009. In comparison, the S&P 500 ETF, Dow Industrials ETF and Russell 2000 ETF are all down over 5% on the year. Chart 6 shows QQQQ with a triangle breakout last week and a sharp pullback this week. After meeting resistance from the early-January high, the ETF declined back to the 50-day moving average, which it has been battling all year. QQQQ has gone nowhere since early December as it oscillates above and below 29. A break from this range is needed to establish direction.

Chart 5

Chart 6

FINANCIALS FIRM... After a walloping on Tuesday, the Financials SPDR (XLF) and the Regional Bank HOLDRS (RKH) firmed with inside days. Charts 7 and 8 show both forming long red candlesticks on Tuesday. These candlesticks are filled and red because the open was above the close and the close was below the prior close. Wednesday's small white candlestick is completely within the boundaries of Tuesday's red candlestick. This makes it an inside day that shows indecision. Sellers were pretty decisive with Tuesday's decline, but buyers stepped back in today and recovered some of the losses. Inside days can sometimes foreshadow a short-term reversal. Both XLF and RKH are trading near support from their February lows. A surge off support and a break above the February highs would be quite positive. Such a move would also provide a confidence boost for the broader market. Let's see it happen first.

Chart 7

Chart 8