STOCKS GIVE UP TUESDAYS GAINS (QQQQ, IWM) - FINANCE SECTOR HOLDS UP RELATIVELY WELL (XLF, BAC, STT) -DOLLAR SURGES AS EURO PLUNGES (UUP) - EURO BREAKS 200-DAY SMA (FXE) - GLD ETF BREAKS BELOW 110 (GLD) - CHINESE STOCKS FALL SHARPLY ($SSEC)

STOCKS GIVE UP TUESDAYS GAINS... Link for todays video. Stocks came under pressure in early trading and closed lower. All major indices were down with small-caps and large techs leading the way lower. These two groups led the major indices higher on Tuesday, but the tables were turned on Wednesday. Even with pretty good declines, the Russell 2000 ETF (IWM) and the Nasdaq 100 ETF (QQQQ) are still trading above short-term support. Chart 1 shows the Russell 2000 ETF consolidating throughout January. The ETF has crossed 64 at least nine times this year alone. Overall, a trading range formed with support just above 63 and resistance near 65. The bulls still get the benefit of the doubt as long as consolidation support holds. A break below 63 would be short-term negative and argue for a correction of the December-January run (57 to 65). Such a correction could return IWM to the low 60s. Yesterday I showed the Nasdaq 100 ETF (QQQQ) within a three week consolidation. Chart 2 shows the ETF declining today, but closing above consolidation support. It aint broken until its broken.

Chart 1

Chart 2

FINANCE SECTOR HOLDS UP RELATIVELY WELL... All sectors were down on Wednesday, but the Financials SPDR (XLF) was down the least and showed some relative strength. Financials were in the spotlight with recent earnings reports from Bank of America, Citigroup, Morgan Stanley, State Street, US Bancorp and Wells Fargo. Earnings season often increases volatility, and hence uncertainty. Chart 3 shows XLF breaking triangle resistance with a surge in early January and then consolidating with a falling flag. These bullish consolidations form after a sharp surge. A break above flag resistance would signal a continuation higher. Behind information technology, finance is the second biggest sector in the S&P 500. A breakout in XLF would benefit the overall market. In the indicator window, the price relative (XLF:$SPX) ratio turned up at the end of December and XLF is actually showing relative strength this year. This is also a positive sign. Chart 4 shows State Street (STT) forming a higher low and surging above 46 with above average volume. Chart 5 shows Bank of America (BAC) with a surge in early January and falling flag the last two weeks, which is similar to XLF. A flag breakout would be bullish.

Chart 3

Chart 4

Chart 5

DOLLAR SURGES AS EURO PLUNGES... A double dose of positives pushed the DB Dollar Bullish ETF (UUP) to its highest level of the year (2010). First, press reports indicated that Chinese bank regulators want to reduce lending, which would put a damper on Chinese growth. Obviously, such measures could adversely affect the global economy. This news brought back the risk-averse trade as money moved into the greenback. Second, Greek bonds fell sharply and the concern over Greek debt continues to weigh on the Euro. Keep in mind that currencies trade in pairs. The Dollar is not valued on its own, but rather relative to other currencies (Euro, Yen, Pound and Canadian Dollar). Despite problems in the US financial system and economy, the Dollar can rise due to problems affecting other currencies. Chart 6 shows the DB Dollar Bullish ETF surging above 23 with a big move on Wednesday. UUP broke the trendline extending down from the late December high and this signals a continuation of the December surge. Chart 7 shows weekly candlesticks for a long-term perspective. UUP is trading near resistance from the Sep-Oct-Dec highs. Given todays breakout on the daily chart, I would expect the Dollar ETF to break these highs. The next resistance area resides around 24.5, which is about the mid point of the 2009 range.

Chart 6

Chart 7

EURO BREAKS 200-DAY SMA... With another sharp decline on Wednesday, the Euro ETF (FXE) broke below its 200-day moving average for the first time since early May. Chart 8 shows the Euro breaking flag support last week and the decline accelerating this week. Chart 9 shows weekly candlesticks for some long-term perspective. Notice that the Euro ETF formed a rising wedge that peaked below the 2008 high (lower high). The ETF broke wedge support with a sharp decline in December and the next support zone resides around 137.5. In the indicator window, we can see how closely gold and the Euro track. Both advanced from October 2008 to October-November 2009 and both declined in December-January. Gold obviously benefits when the Dollar declines (Euro rises). With risk-aversion returning to the market, and especially the Euro zone, the Euro is likely to remain under pressure and this could further weigh on gold.

Chart 8

Chart 9

GLD ETF BREAKS BELOW 110... With the Euro falling and Dollar rising, it is little surprise to see gold falling sharply on Wednesday. Chart 10 shows the Gold ETF (GLD) peaking in a key retracement zone and falling below last weeks low. I wrote about this retracement zone last Thursday. After a sharp decline in December, GLD retraced 50-62% with a bounce back above 112. If another leg lower was expected, this was the area to expect resistance. The retracement zone did indeed mark a reversal zone as GLD plunged to 110 last week and then below 110 this week. The next support zone resides around 98-100. Chart 11 shows weekly candlesticks for a long-term perspective. GLD broke neckline resistance in October and broken resistance turns into support. An extended advance in the Dollar could push bullion back to this breakout zone around 98-100.

Chart 10

Chart 11

CHINESE STOCKS FALL SHARPLY... Chart 12 shows the Shanghai Composite ($SSEC) falling almost 3% on Wednesday. Lending cutbacks would likely slow growth and this affected trading in Shanghai today. On the daily chart, SSEC broke the wedge trendline with a sharp decline in December. There was a bounce at the end of the month, but a lower high formed around 3300. Todays sharp decline from 3300 reinforces resistance and a break above this level is needed to revive the bulls. Chart 13 shows weekly prices for a rather ominous long-term perspective. First, notice that SSEC only retraced 38% of its prior decline (6000 to 1675). This retracement seems rather shallow for the worlds economic engine. Second, notice how the Shanghai Composite bottomed ahead of the S&P 500 in October 2008 (green arrows) and has now peaked ahead of the S&P 500 in July 2009 (red arrows). The S&P 500 took its cues from the Shanghai Composite at the bottom and a breakdown in the Shanghai Composite would be negative for the S&P 500.

Chart 12

Chart 13