DOW ETF FIRMS NEAR SUPPORT (DIA) - PULLBACK HITS FIRST TEST ($COMPQ,$NYA) - LESS THAN 50% OF STOCKS ABOVE THEIR 50-DAY SMAS - COMMODITIES REMAIN UNDER PRESSURE (DBC,DBA,DBB) - AMGEN AND GILEAD LIFT BIOTECHS (BBH,AMGN,GILD)

DIA FIRMS NEAR SUPPORT ... Link for todays video. After becoming oversold with last weeks decline, stocks firmed over the last three days. Important support levels are coming into play for a number of key indices and ETFs. Chart 1 shows the Dow Diamonds (DIA) hitting support around 101-102. This support zone stems from three items. First, the decline from 107 to 101 retraced 50-62% of the advance from 96 to 107 (early November to mid January). Second, the late November and early December lows mark support here. Third, the September trendline extends to this area in late January. In addition to support, the bottom indicator window shows 5-period RSI becoming oversold for the fourth time since early September. The combination support and oversold conditions could give way to a bounce. Failure to bounce and a break below 101 would put the medium-term uptrend in jeopardy.

Chart 1

NASDAQ AND NY COMPOSITE TEST SUPPORT... The Nasdaq and NY Composite charts confirm a moment-of-truth for the stock market. Is this just a short pullback or the start of an extended correction? Chart 2 shows the Nasdaq declining to broken resistance from the October-November highs. This broken resistance zone turns into a support zone around 2200-2225. The Nasdaq entered this support zone with last weeks sharp decline and then stalled early this week. Should the other shoe drop, the next support level resides around 2125-2150 from the late November lows. Should a full-fledged correction unfold, it is possible that the Nasdaq tests its rising 200-day moving average, currently around 2000. At current levels, this would entail another 10% or so lower.

Chart 2

Chart 3 shows the NY Composite declining all the way to its late November lows. While last weeks decline (~4%) was less than the Nasdaq (~4.3%) in percentage terms, it was more in chart terms. While the Nasdaq retraced around half of the advance from late November to early January, the NY Composite retraced the entire advance. The NY Composite has nothing to show since the middle of November. Blame it on the finance sector, which is the single largest sector (~20%) in the NY Composite. Also note that the NY Composite is at its moment-of-truth as it stalls at support around 7000. Further weakness below 7000 would break the September trendline and a key support level. This would open the door to the rising 200-day moving average, currently around 6540. This would entail another 7% or so lower.

Chart 3

LESS THAN 50% OF STOCKS ABOVE THEIR 50-DAY SMAS... Last week I showed the charts for the percent of Nasdaq and NYSE stocks above their 50-day simple moving average. With a weak close last Friday, more than 50% of Nasdaq and NYSE stocks are now trading below their 50-day moving average. 50% is an important threshold to watch. Even though past corrections in June-July and October ended shortly after this indicator plunged below 50%, we need to see an actual rebound above 50% to put this indicator back on bullish footing. Chart 4 shows the indicator for the NYSE bottoming around 30% in early July and late October. Chart 5 the indicator for the Nasdaq moving back above 50% quite quickly in July, but recovering much more slowly after the October plunge.

Chart 4

Chart 5

BRIC ETF BREAKS SUPPORT ... Asian and Emerging market stocks were rocked again Thursday as China furthered its efforts to curtain economic growth. John Murphy showed the Xinhau China 25 ETF (FXI) underperforming the Dow Jones World Stock Index on Tuesday. Chart 6 shows the MSCI BRIC ETF (BKF) breaking its second support level in as many weeks. BRIC stands for Brazil, Russia, India and China. These are the big emerging markets. China and Hong Kong account for around 35% of this ETF. Brazil also weighs in around 35%. BKF broke below the December low last week and continued below the early November low this week. The bottom indicator shows the price relative comparing BKF to the S&P 500. This indicator formed a lower high in January and broke to new lows this week. BKF is weak relative to the S&P 500.

Chart 6

COMMODITIES REMAIN UNDER PRESSURE... The combination of slower growth prospects in China and strength in the Dollar put more pressure on commodities Wednesday. Chart 7 shows the DB Commodity Index Tracking ETF (DBC) breaking below its November-December lows over the last few days. DBC failed to hold its breakout in early January and gave back all of its December gains. Admittedly, the ETF is getting quite oversold after a 10% decline in three weeks. However, it remains in a steep 3-week downtrend with no signs of support yet.

Chart 7

Within the commodity group, chart 8 shows the DB Agriculture ETF (DBA) breaking triangle support with a sharp decline in January. The trend since July remains up as the ETF heads for a test of the July trendline. Chart 9 shows the DB Energy ETF (DBE) breaking below its early December low with a sharp decline in January.

Chart 8

Chart 9

Chart 10 shows the DB Base Metals ETF (DBB) falling over 12% in the last three weeks. The indicator window compares DBB with the Xinhau China 25 ETF (FXI) in red. Both rose from July to November. FXI peaked in mid November, formed a lower high in January and broke below its December low. Weakness in Chinese stocks is now weighing on industrial metal prices.

Chart 10

AMGEN AND GILEAD LIFT BIOTECHS... Chart 11 shows the Biotech HOLDRs (BBH) surging to its highest level of the year today. With the S&P 500 trading near its low for the year, BBH is showing relative strength in 2010. On the price chart, BBH broke resistance in early January, pulled back last week and surged back above 101 on Wednesday. There is a lot of resistance coming into play around 102-103 from the July-September highs. The bottom indicator window shows the price relative flattening in November-December and turning up in January. The breakout over the last few days confirms that BBH is outperforming the S&P 500 this year.

Chart 11

Chart 12 shows Gilead (GILD) breaking above its September-November highs with a surge above 48 on Wednesday. Volume surged to its highest level in over eight months. Gilead reported earnings after the close on Tuesday. Looks like investors liked what they saw. Chart 13 shows Amgen (AMGN) challenging resistance at 58 with a bounce over the last two days. Resistance in this area stems from the August trendline and the December-January highs.

Chart 12

Chart 13