DOW LAGS SMALL-CAPS AND MID-CAPS - SURGING EURO WEIGHS ON THE GREENBACK - FALLING DOLLAR BOOSTS MATERIALS SECTOR - STEEL ETF FORMS GRAVESTONE DOJI - YIELDS HIT SUPPORT AS BONDS HIT RESISTANCE

DOW SPDR LAGS OTHER INDICES... Link for todays video. It is a tale of two markets. Small-caps and mid-caps show relative strength, but large-caps show relative weakness. Chart 1 shows the Russell 2000 ETF (IWM) hitting a new 52-week high intraday on Wednesday. IWM exceeded the 50-day moving average and 62% retracement in the process. Notice that the ETF surpassed the 100% mark on the Fibonacci Retracements Tool. This means it retraced the entire prior decline. Chart 2 shows the S&P 400 MidCap ETF (MDY) exceeding its January high on Tuesday and moving higher again on Wednesday. Even though both IWM and MDY closed up on the day, they also formed doji, which signal indecision. Doji look like a plus sign (+). The open-close are near the middle of the days trading range and there is little change from open to close. Indecision after an advance sometimes foreshadows a short-term reversal. Keep in mind that candlestick patterns are only valid for a few days.

Chart 1

Chart 2

In contrast to IWM and MDY, chart 3 shows the Dow SPDR (DIA) well below its January high and showing relative weakness. While it is positive to see relative strength in small-caps and mid-caps, such blatant underperformance from DIA detracts from the overall market. The speculative end of the market is off to the races, but the nifty 30 of the Dow are not impressed. DIA is meeting resistance in the 104-105 area. This zone also marked resistance in late November and early December. The current swing is up as DIA established support at 102 last week. Failure to hold these gains and a break below last weeks low would be quite negative.

Chart 3

DATA BLOG... As reported in the data blog at StockCharts.com, the State Street Global Advisors changed the name of the Dow Diamonds to the SPDR DJ Industrial Average ETF Trust. The ETF itself remains unchanged and keeps the same symbol (DIA).

SURGING EURO WEIGHS ON THE GREENBACK... The Dollar fell sharply on Wednesday as the Euro surged to a 10 day high. Chart 4 shows the DB Dollar Bullish ETF (UUP) declining over the last two days. The ETF met resistance around 23.75 as RSI became overbought in early February. Despite this decline, the overall trend since December remains up. In fact, UUP could hit support quite soon. Broken resistance and the December trendline combine to mark the first support zone around 23.25. Also notice that RSI is moving into the 50-60 zone, which marked support in early January.

Chart 4

Strength in the Euro was the main reason for weakness in the Dollar. The Euro accounts for some 57% of the DB Dollar Bullish ETF (UUP) and the US Dollar Index ($USD). Euro strength stemmed from news of another new austerity plan for Greece. Chart 5 also shows that the Euro ETF (FXE) was deeply oversold and ripe for some sort of bounce. John Murphy and I have been writing about this for two weeks. In fact, John noted yesterday that the bounce in commodities put the Dollar rally on thin ice. Turning back to the chart, FXE found support near the 62% retracement in mid February as RSI flirted with oversold levels. Even though todays bounce is impressive in percentage terms, the overall trend since December remains down as the ETF falls within a steep channel. The December trendline marks the first resistance level to watch. Also watch for RSI to hit resistance in the 50-60 zone.

Chart 5

FALLING DOLLAR BOOSTS MATERIALS SECTOR... The Materials SPDR (XLB) stood out on Wednesday as the sector with the biggest gain. Chart 6 shows XLB surging over the last four days. The Fibonacci Retracements Tool is overlaid on the price chart to capture the range of the last five months. The 50% level is highlighted with the yellow oval. With todays move, the ETF is trading just above the mid point of its five month range. More importantly, the swing within this range is up. The blue dotted trendlines show the last three swings. XLB broke resistance with a gap up in mid February and moved above its February high today. There are, however, some concerns at current levels. CCI is overbought and the current rally is nearing the 62% retracement mark. As far as the upswing is concerned, a break below the February trendline would be negative and a break below last weeks low would fully reverse the upswing.

Chart 6

Chart 7 shows the Market Vectors Steel ETF (SLX) with a similar pattern overall. Even though the ETF is up sharply on Wednesday, it closed off its high and formed a gravestone doji. With an overall upswing underway the last five days, I would consider this candlestick similar to a shooting star. These are short-term reversal candlesticks that require confirmation with further downside. Shooting stars and gravestone doji convey the same intraday information. Prices surged after the open as the bulls showed strength, but the bears took over and drove prices back down by the close. The end result is a failed intraday rally with little change from open to close.

Chart 7

YIELDS HIT SUPPORT AS BONDS HIT RESISTANCE... Long-term rates and bonds are at an interesting crossroads. Chart 8 shows the 10-Year Treasury Yield ($TNX) breaking above its October-November highs with a surge in December. Broken resistance from these highs turned into support and held this year. This is a classic tenet of technical analysis: broken resistance turns into support. After a sharp decline last week, the 10-Year Treasury Yield firmed just above support this week. The trend for rates is clearly up as long as support holds. A break below the February low would suggest otherwise.

Chart 8

Chart 9 shows the 20+ Year Treasury ETF (TLT) with a mirror image. I realize that the 7-10 Year Treasury ETF (IEF) is a closer bond/yield match to the 10-Year Treasury Yield ($TNX). I chose the 20+ Year Treasury ETF because it is more sensitive to interest rates and it trades seven times more volume. TLT averages 3,600,000 shares per day, while IEF averages 486,000 shares per day. On the price chart, TLT broke support with a sharp decline in December and broken support turned into resistance. This area held in January and early February. With a surge last week, resistance is getting another challenge. A break above the February highs would reverse the five month downtrend for the long bond ETF.

Chart 9