COMMODITY ETF SCORES BIG - WHEAT LIFTS AGRICULTURE ETF - METALS ETF HITS NEW HIGH - MATERIALS LEAD THE MARKET - INVESTOR SENTIMENT SURVEYS HIT EXTREMES - SPY AND DIA EDGE ABOVE KEY RETRACEMENTS - QQQQ AND IWM EXCEED KEY RETRACEMENTS

COMMODITY ETF SCORES BIG GAINS... Link for todays video. An array of positive factors boosted commodity related ETFs on Wednesday. Commodities benefited from weakness in the Dollar over the last two weeks and energy-related commodities benefited from the cold weather. In particular, oil surged over 10% in the last two weeks. Oil related commodities account for almost 50% of the DB Commodity Index Tracking ETF (DBC). Of the 14 commodities with the ETF, Light Crude weighs 11.98%, Heating Oil accounts for 11.98%, Brent Crude comes in at 11.96% and RBOB Gasoline rounds it out with 12.01%. Chart 1 shows DBC breaking above last years high with a big surge over the last three days. After breaking triangle resistance in October, the ETF settled into a consolidation for a couple months. Support held around 23.5 and the ETF broke resistance with a solid move.

Chart 1

Chart 2 shows the DB Dollar Bullish ETF (UUP) with a falling flag over the last two weeks. Even though falling flags are bullish consolidations, the flag is falling as long as resistance from late weeks high holds. A flag breakout would put a damper on this commodity rally, but it has yet to happen.

Chart 2

WHEAT AND CORN LIFT AGRICULTURE ETF... Gains in corn and wheat lifted the DB Agriculture ETF (DBA) above its December high. Chart 3 shows DBA breaking resistance around 25.5 and broken resistance turning into support. After a triangle consolidation throughout November-December, the ETF broke resistance with a surge over the last three days. The next resistance zone resides around 28-28.5.

Chart 3

METALS ETF HITS NEW HIGH... Chart 4 shows the DB Base Metals ETF (DBB) continuing its surge with another new 52-week high on Wednesday. Even though this ETF looks overextended and ripe for a correction, there is no questioning the underlying uptrend. For those keeping score at home, the ascending triangle breakout was covered in the Market Message on October 21st. DBB consists of just three base metals: aluminum, copper and zinc. They are roughly equally weighted and all were sharply higher on Wednesday. You can find commodity quotes at barchart.com, but stick to stockcharts.com for your charts! Aluminum quotes can be found at the LME (London Metal Exchange).

Chart 4

MATERIALS LEAD THE MARKET ... The broader market was largely mixed on Wednesday, but the energy and materials sectors were decidedly strong. This is hardly surprising considering strength in commodities today. XLE and OIH were featured on Monday. Chart 5 shows the Materials SPDR (XLB) surging to a new 52-week high over the last three days. XLB broke its Sep-Oct highs in mid November and then consolidated around this resistance level. Even though follow through took a while, the ETF managed to hold its gains with the consolidation around 32-33. The July trendline and December lows mark the first support level to watch for signs of a trend reversal. Chart 6 shows the Gold Miners ETF (GDX) helping out the materials sector with a surge over the last three days. Chart 7 shows the Market Vectors Steel ETF (SLX) surging to a new 52-week high on Wednesday.

Chart 5

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INVESTOR SENTIMENT SURVEYS HIT EXTREMES... Before looking at these sentiment surveys, lets review how sentiment indicators work. Sentiment indicators are contrarian in nature. Excessive bullish sentiment points to an impending top in the stock market, while excessive bearish sentiment points to a bottom. The rational is that bullish investors have already bought and there is little money left to fuel additional gains. Bears, on the other hand, have already sold and are sitting on cash, which is fuel for a future rally. Sentiment indicators should be used in conjunction with other indicators and analysis techniques.

Having said that, two key sentiment surveys show extremes that could foreshadow a market top or correction. First, the American Association of Individual Investors (AAII) publishes a weekly sentiment survey of its members. There are three options: bullish, bearish or neutral. Chart 8, from sentimenttrader.com, shows the AAII Bearish Percent moving to its lowest level in years. In fact, the decline below 25% pushed the indicator over 2 standard deviations below its 52-week moving average. Also note that the AAII Bullish Percent is nearing 50%. The combination of low bearish sentiment and high bullish sentiment is a bearish indication for the stock market.

Chart 8

Investorsintelligence.com publishes a weekly sentiment survey for advisors. Like the AAII survey, the percentage of bearish advisors hit a multi-year low at the end of December. Over 50% of advisors surveyed were bullish, but only 15.6% were bearish. Even though the trend for stocks is clearly up, such high readings in bullish sentiment and low readings in bearish sentiment could foreshadow weakness in the coming weeks or months.

SPY AND DIA EDGE ABOVE KEY RETRACEMENTS... The trend since March remains up as the S&P 500 ETF (SPY) and Dow Diamonds (DIA) edged above their 62% retracement marks in recent weeks. Note that these retracements are based on the prior decline from May-08 to Mar-09. Because the trend since March 2009 is clearly up, I view these retracement levels as potential resistance. The underlying uptrend still holds more influence. The trend is actual, while resistance is potential. Chart 9 shows the 62% retracement for SPY around 111 and SPY trading near 113.50. The next potential resistance level is broken support around 120. The bottom indicator shows RSI edging towards 70. RSI was last above 70 (overbought) in May 2007. However, notice that SPY did not actually peak until October 2007, over four months later. Tops sometimes take time to evolve.

Chart 9

Chart 10 shows DIA moving above the 62% retracement mark in November. This coincided with RSI exceeding 70 for the first time since May 2007. DIA has been stalling around 105 the last 7-8 weeks with a relatively tight range (101-106). Even though upside going has been tough since mid November, DIA has yet to give up its gains. With gains holding, the glass is still half full, not half empty. Broken supports mark the next resistance level around 112.

Chart 10

QQQQ AND IWM EXCEED KEY RETRACEMENTS... In contrast to DIA and SPY, the Russell 2000 ETF (IWM) and Nasdaq 100 ETF (QQQQ) exceeded similar retracement levels in September. Chart 11 shows IWM near potential resistance from broken support. In addition, notice that a rising price channel has taken shape the last 6-8 months with support around 55. The trend is clearly up, but potential resistance is near and RSI is hovering just below overbought levels.

Chart 11

Chart 12 shows QQQQ with the sharpest advance of the four major index ETFs (thanks to Google and Apple). QQQQ blew through the 62% retracement and broken support, which marked potential resistance. A rising price channel has also taken shape here with support around 40. The indicator windows show a potentially interesting parallel happening with RSI. Notice that RSI became overbought in July 2007 and again in October 2007 (three months later). This second overbought reading foreshadowed the October peak. RSI became overbought in August 2009 and again in December, three months later. Even though the trend for QQQQ is up, a second overbought reading in three months could foreshadow an overdue correction in the coming weeks.

Chart 12