STOCKS FAIL TO HOLD EARLY GAINS - THE BATTLE FOR SUPPORT - FINANCE SPDR CLOSES WEAK - UTILITIES SPDR TESTS SUPPORT - DOLLAR MOMENTUM REMAINS BEARISH - EURO ETF HOLDS 50-DAY LINE - INFLATION PROTECTED BONDS SHOW STRENGTH

STOCKS ERASE EARLY GAINS... Video Link (click here) The Fed left rates and its policy statement unchanged. Stocks were up heading into the announcement and just after the announcement, but selling pressure drove the major indices lower in the final hour. Chart 1 shows the Major Indices Market Carpet without any green. The S&P 500 and Nasdaq 100 eked out miniscule gains, but the Russell 2000 and S&P SmallCap Index lost over 1%. Once again, small-caps showed relative weakness and this is negative for the market overall. Note: This Market Carpet shows the percentage change for the actual index.

Chart 1

Chart 2 shows the S&P Sector Carpet with five sectors up and four down. The readings on this Market Carpet show the average percentage change for each stock in the sector. Notice that the healthcare, utilities and consumer staples sectors finished positive. These are the defensive sectors that benefit when the market is weak overall. Despite a preference for defense, the technology sector also finished positive with big gains coming from Xerox (XRX) and Affiliated Computer (ACS). On the downside, the finance sector led the way lower with the biggest average loss (1.5%). Relative weakness in this key sector is negative for the market overall.

Chart 2

BATTLE AROUND SUPPORT CONTINUES... The four most popular major index ETFs capture the current battle underway on Wall Street. The Dow Diamonds (DIA) and the S&P 500 ETF (SPY) represent large-caps. Charts 3 and 4 show these two currently trading above their early October lows and holding relatively well. The Nasdaq 100 ETF (QQQQ) represents technology. Chart 5 shows QQQQ trading near support from the early October low. The Russell 2000 ETF (IWM) represents small-caps. In addition, the financial services sector accounts for over 20% of the Russell 2000 and is the biggest sector. Chart 6 shows IWM trading below its October lows. As the only one to break support, IWM and small-caps show relative weakness. With QQQQ declining to its October low, this tech-laden ETF shows more weakness than SPY and DIA, both of which held above their October lows. In a nutshell, small-caps and techs show relative weakness over the last few weeks. This is not a good combination because these two groups represent high-beta or higher risk stocks. Relative weakness shows a diminished appetite for risk. Bull markets thrive when the appetite for risk is strong, but flounder when the market shuns risk.

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It is also possible to take a page from Dow Theory when looking at these major index ETFs. In other words, we can look for confirmations and non-confirmations. First, notice that DIA, SPY and QQQQ all moved comfortably above their September highs in mid October. Even though IWM managed to eke out a higher high in mid October, it barely managed to forge a higher high and showed relative weakness a few weeks ago. IWM forged a lower low with the decline over the last few weeks, but the other three ETFs have yet to confirm with corresponding support breaks (lower lows). Even though IWM is flashing a warning sign, corresponding support breaks in the other ETFs are needed for confirmation.

XLF AND XLU ALSO TESTING SUPPORT... John Murphy and I have also been talking about key sectors and industry groups battling support. The Industrials SPDR (XLI) and the Materials SPDR (XLB) were featured with double top formations last week. The Financials SPDR (XLF) and the Utilities SPDR (XLU) are perilously close to breaking support. Chart 7 shows XLF falling to 14 after an island reversal in mid October. The ETF firmed with a spinning top on Monday and recovered from a weak open on Tuesday, but formed a long red candlestick today with a lower close. This long red candlestick reflects a strong open and weak close. Also note that XLF closed below the October closing low. There is still a chance support holds, but XLF needs to hold and close above todays high to revive the bulls.

Chart 7

Chart 8 shows the Utilities SPDR declining to support with high volume over the last few weeks. To be fair, there is a support zone based on the August-October lows (yellow area). XLU firmed on Tuesday and surged above 28.75 intraday on Wednesday. However, this gain failed to hold and XLU is back battling support. A close above Wednesdays high is needed to revive the bulls.

Chart 8

DOLLAR HITS ITS OLD NEMESIS... The DB Dollar Bullish ETF (UUP) surged last week, but RSI hit a familiar resistance zone and the ETF fell back this week. John Murphy showed UUP testing its 50-day line on Tuesday. With the decline over the last two days, the Dollar ETF failed this resistance test. In addition, notice that the March trendline confirmed resistance at the 50-day line. In chart 9, the bottom indicator window shows 14-period RSI meeting resistance in the 50-55 zone since June. In fact, RSI has not been above to break back above 60 since first becoming oversold in March. Oversold is a sign of weakness, not strength. At this stage, a trend reversal depends on RSI breaking 55 and UUP breaking resistance around 23.

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Chart 10 shows the Euro ETF (FXE) with the opposite chart features. With a clear uptrend in progress, FXE held its 50-day moving average over the last few months. Notice how the 50-day and the March trendline combined to mark support this week. Also notice how RSI bounced off the 45-50 zone numerous times since June. A break below 145 in FXE and 45 in RSI is needed to reverse this uptrend.

Chart 10

BONDS SINK AS FED LEAVES POLICY UNCHANGED... The Feds decision to keep rates low for the foreseeable future weighed on bonds this week. Low rates are normally bullish for bonds, but the bond market may have its eyes on inflation, especially after the surge in gold this week. Chart 11 shows the 20+ Year Treasury ETF (TLT) falling back into the support zone this week. TLT broke resistance in August and this broken resistance zone turned into support. Last weeks bounce affirmed support and looked promising, but the ETF is once again testing support this week. Overall, a falling wedge is taking shape in October-November. I am marking wedge resistance based on last weeks high. A move above this level would break resistance and argue for a continuation of the August-September advance.

Chart 11

Chart 12 shows the Inflation-Protected Bond ETF (TIP) moving higher over the last seven days. In fact, notice that TIP is up since early October, but the 20+ Year Treasury ETF is down. Money is moving out of normal bonds and finding its way into inflation-protected bonds. TIP has been trending higher since early August. Broken resistance around 102 turns into the first support zone to watch.

Chart 12