DOW DROPS OVER 200 ($INDU,$TRAN) - MATERIALS SECTOR LEADS MARKET LOWER (XLB) - STEEL, METALS AND MINING PACE MATERIALS LOWER (SLX,XME) - BIG BANKS HIT HARD (XLF) - KEY INVESTMENT BANKS GIVE UP JANUARY GAINS (JPM,GS,MS)

DOW DROPS OVER 200... Link for todays video. Stocks moved broadly lower on Thursday with the Dow loosing over 200 points. All major indices and sectors finished lower on the day. Chart 1 shows the Dow Industrials closing above 10700 on Tuesday and 10400 today. This two day decline was the sharpest since June 2009, which is when the last correction occurred (mid June to early July). The depth and breadth of the current two day decline indicates that we may see more before this correction ends. On the price chart, the Dow has support around 10200 from the consolidation lows, the September trendline and the 50% retracement. This is the first area to watch for support. Chart 2 shows the Dow Transports loosing over 200 points in the last seven sessions. The Average is nearing its first potential support area from broken resistance (4050). Below this level, there is potential support around 3900 from the flag lows and the 50% retracement area.

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MATERIALS SECTOR LEADS MARKET LOWER... Stocks were lower for the second day running with the materials sector pacing the decline. Chart 3 shows the Materials SPDR (XLB) plunging below 33 with a sharp decline on Thursday. Materials stocks are reeling from the prospects of slower growth in China, which would dent demand for raw materials. Despite this sharp decline, the medium-term trend remains up for XLB. The ETF broke resistance in mid November, consolidated into mid December and continued to new highs in late December. Broken resistance from the Sep-Oct highs and the consolidation lows combine to mark support around 32. Todays decline pushed XLB into this support zone for the first test of bullish resolve.

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STEEL, METALS AND MINING PACE MATERIALS LOWER... Within the materials sector, there was pervasive weakness in the Market Vectors Steel ETF (SLX) and the Metals & Mining SPDR (XME). Chart 4 shows SLX gapping down last week and falling sharply on Thursday. Chart 5 shows XME with a reversal day above 60 last week and sharp decline on Thursday. Despite such sharp declines, both ETFs remain in medium-term uptrends. Both forged new 52-week highs just two weeks ago and remain well above their prior reaction lows from early November. Broken resistance turns into support that is confirmed by the July trendlines. The yellow areas mark consolidations that formed in late November and early December. These consolidations also mark a support zone. Both ETFs are near the top of these support zones and the first important test looms.

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FINANCE SECTOR HIT HARD... Large financial stocks came under pressure after President Obama proposed limits on their size and risk-taking activities. Specifically, the proposals would forbid banks from engaging in trading activities, which would affect profits at large investment banks. These guidelines are becoming known as the Volcker Rules, after former Fed Chairman Paul Volcker (appointed by Carter in 1979 and reappointed by Reagan in 1983). Volcker is a tough one - just ask anyone who went through the 81-82 bear market. Unsurprisingly, news of the Volcker rules hit the largest investment banks the hardest. Chart 6 shows the Financials SPDR (XLF) falling sharply on Thursday to negate the falling flag (which was pointed out yesterday). Since moving above 14 in early August, the ETF has essentially traded flat the last 5-6 months. There is a resistance zone around 15.5 and a support zone around 13.5-14. With a higher low in December and lower high in January, a large triangle is also taking shape. A move above 15.5 would break triangle resistance, while a move below 14 would break triangle support.

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The indicator window shows the price relative (XLF:SPY ratio) moving lower over the last few months. Relative performance perked up in early January as the price relative moved above the blue trendline, but stalled over the last few weeks. A break above the new trendline (dotted red) is needed to show relative strength in XLF again.

KEY INVESTMENT BANKS GIVE UP JANUARY GAINS... Large financial stocks feature prominently in the Financials SPDR (XLF). In particular, JP Morgan (JPM) weighs 11.42%, Goldman Sachs (GS) accounts for 5.76% and Morgan Stanley (MS) makes up 2.78%. These three investment banks were among the hardest hit on Thursday. Chart 7 shows JP Morgan leading the market higher in early January and dragging the market lower over the last two weeks. JPM is now back in a support zone from the August-December lows. Chart 8 shows Goldman Sachs failing to hold its January breakout and falling back to support from the August lows. It will be interesting to see how support plays out when cooler heads prevail in the coming days. Chart 9 shows Morgan Stanley (MS) failing to hold its January surge and moving to its lowest level of the year.

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REGIONAL BANKS RULE THE ROOST... Big is out and small is in as the Regional Bank SPDR (KRE) surged to a new 52-week high today. Chart 10 shows KRE breaking wedge resistance in December and moving to a new high in January. The ETF shows both absolute and relative strength. After a run from 19.5 to 25 since early November, the ETF is getting a bit overbought.

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The bottom indicator window shows the price relative comparing KRE to the S&P 500 ETF (SPY). Regional banks were lagging the market from August to November. The price relative bottomed in November, edged higher in December and shot up in January. Regional bank relative strength is accelerating as money moves from big money center banks to smaller regional banks.

I featured KRE and a number of regional bank stocks last Thursday. In addition, I provided a complete list of the 50 stock tickers in the ETF. With todays big move in KRE, a number of stocks within the ETF are surging and breaking to new 52-week highs. Chart 11 shows Community Bank (CBU) forging a new 52-week high with above average volume today. Chart 12 shows Texas Capital (TXBI) surging with good volume over the last three days.

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