DIA FORMS INSIDE DAY AT CHANNEL RESISTANCE - BONDS FALL SHARPLY ON RECORD TREASURY AUCTION - EURO EXTENDS DOWNTREND WITH SHARP DECLINE - DOLLAR ETF SURGES TO EIGHT MONTH HIGH - SURGING DOLLAR PUSHES GOLD BELOW 1100

A STRANGE DAY INDEED... Link for todays video. Before getting to todays gap, I would like to start with an overview and observation. Stocks started the day weak and remained weak throughout the day. Eight of the nine sectors were down with healthcare and utilities leading the way lower. These were the only two sectors down over 1% - and not the sectors one would expect leading a broad decline. The finance sector managed a fractional gain with strength in banks. Overall, I would say it was a rather strange day. Chart 1 (image) shows a cutout from the Free Charts page and the Market Summary. All major indices were down on the day, but 8 of the 10 most active NYSE stocks were up. The active list also features three advancers from the finance sector.

Chart 1

GAPS VISIBLE ON INTRADAY CHARTS... Even though todays gap down is not obvious on the daily charts, it is on the intraday charts. Chart 2 shows 10-minute candlesticks for the S&P 500 ETF (SPY). The ETF opened with a gap down and did not fill the gap. There was a failed attempt to fill in the early morning, but a lower high formed and the ETF worked its way lower throughout the day. This same pattern evolved with QQQQ, IWM and DIA.

Chart 2

DIA FORMS HARAMI IN OVERBOUGHT TERRITORY... Chart 3 shows the Dow SPDR (DIA) forming an inside day at channel resistance. An inside day is also a harami and shows sudden indecision. The uptrend was clearly underway with the prior two long white candlesticks, but DIA suddenly stopped with todays inside day. Also notice that this sudden stop occurred at potential resistance. For the big channel, I first drew the lower trendline first and then drew the upper trendline parallel from the January high. It extends to around 108.7 to mark resistance. We all know that stocks are overbought after an incredible seven week run. The next question is when and where will we see resistance and then a pullback. The bottom indicator shows MACD still above its signal line (27 days now). No sign of weakening momentum yet.

Chart 3

BONDS FALL SHARPLY AS TREASURY AUCTIONS TIE RECORDS... Bonds fell sharply on Wednesday as the Treasury entered the second day of a record-tying three day auction. After auctioning $44 billion of 2-year notes on Tuesday and $42 billion of 5-year notes on Wednesday, the US Treasury will finish with $32 billion of 7-year notes on Thursday. Bonds were under enormous pressure with so much supply hitting the fan. Chart 4 shows the 20+ Year Treasury ETF (TLT) hitting resistance in the 91-92 area this year and plunging below the triangle trendline today. This signals a continuation of the downtrend. Chart 5 shows the 7-10 Year Treasury ETF (IEF) hitting resistance near the 62% retracement mark and breaking support with a sharp decline today.

Chart 4

Chart 5

With the decline in bonds comes a rise in interest rates. Remember, interest rates move opposite of bonds. Chart 6 shows the 10-Year Treasury Yield ($TNX) breaking triangle resistance with a surge above 37 today (3.7%). Prior to todays move, $TNX broke resistance around 36 and this breakout held in 2010. Wednesdays triangle breakout signals a continuation of the Oct-Dec advance and projects higher rates. The December surge was from 32 to 39 (3.2% to 3.9% of .7%). A corresponding surge from the February low would project a move to around 42.5 (4.25%). This could weigh on interest rate sensitive issues like home-builders and utilities.

Chart 6

EURO PLUNGES AFTER PORTUGAL DOWNGRADE... Fitch Ratings downgraded Portuguese debt and this triggered a round of selling pressure in the Euro. Another potential problem is flaring just as it looks like France and Germany will find a compromise over Greece. Here is the interesting thing: Even though Greece and Portugal are relatively small players in the Euro zone, the currency continues to get pummeled. Perhaps there is another fear lurking out there. Chart 7 shows the Euro ETF (FXE) with a Raff Regression Channel (blue). This channel consists of a linear regression with two equidistant, and parallel, trendlines. The distance is based on the high or low that is furthest from the linear regression. In this case, the recent March high is the furthest high-low from the linear regression. The upper trendline is drawn parallel touching that high. The lower trendline is then set the same distance from the linear regression. This creates a channel that defines the trend. We can also use the channel trendlines to establish a downside target and upside resistance. A move above 137 would break the upper trendline and further strength above the March high would reverse this downtrend. Click here for the chart school article on the Raff Regression Channel.

Chart 7

Chart 8 shows weekly candlesticks for the perspective needed to see a downside target. The green dotted line shows the April 2009 low and the orange area shows the 2008-2009 lows. I drew extensions with the blue dotted lines to project a downside target that that coincides with the 2008-2009 lows in April. Admittedly, this is a rather steep downtrend, but stranger things have happen.

Chart 8

WEAK EURO LIFTS DOLLAR ETF TO EIGHT MONTH HIGH... With a sharp decline in the Euro, the DB Dollar Bullish ETF (UUP) surged above 24 for the first time since early July. Because the Euro accounts for around 57% of the ETF, it is hardly surprising to see a big jump when the Euro is down. Chart 9 features UUP with Andrews Pitchfork, which is another channel tool. Users select three points to draw the Pitchfork. The first point is usually based on the reaction low (or high), such as the late November low (blue arrow). However, selecting this point would draw a Pitchfork that is way too steep. Keep in mind that the middle line extends from point 1 and bisects the line between points 2 and 3. The outer lines start from points 2-3 and run parallel to the middle line. The blue dotted lines show alternatives that do not capture the current trend. By selecting point 1 around 22.25, the line bisects the other two points and captures the current uptrend quite well. The uptrend remains firmly in place as long as the lower trendline holds. Click here for the chart school article on Andrew's Pitchfork.

Chart 9

SURGING DOLLAR PUSHES GOLD BELOW 1100... Strength in the Dollar was too much for gold as the yellow metal fell to its lowest level of the month. Chart 10 shows the Gold ETF (GLD) breaking below the mid March low and the late February low. These lows combined to mark a support zone after the wedge breakout. With the decline below support over the last four days, the breakout failed and it is back to the drawing board for bullion. The indicator window shows GLD with the DB Dollar Bullish ETF (UUP), which is largely to blame here. UUP bottomed in late November and the current 5-day advance is the sharpest of the advance so far. Gold was holding up pretty well in mid March, but the most recent 5-day surge in the Dollar has taken its toll. Even though gold can tolerate a flat Dollar, gold cannot hold up with a surging Dollar.

Chart 10

Chart 11 shows weekly candlesticks for the Gold ETF (GLD). The big inverse head-and-shoulders breakout remains the dominant long-term pattern, but GLD is undergoing a correction of the prior surge, which started from the right shoulder low. It is conceivable that GLD could correct back to the 100 area. Support here stems from broken resistance and the 50-62% retracement zone. The indicator window shows weekly MACD below its signal line. Notice that the MACD histogram has been negative since the end of 2009. A MACD move back above signal line would turn the histogram positive again and get upside momentum going again.

Chart 11