MATERIALS SPDR BACKS OFF RESISTANCE - RISK-AVERSION TRADE RETURNS AS DOLLAR BOUNCES - EURO ETF RETURNS TO BROKEN TRENDLINE - ENERGY SPDR ALSO HITS RESISTANCE - OIL SERVICE HOLDRS FORMS LARGE DIAMOND

MATERIALS SPDR BACKS OFF RESISTANCE ZONE... The Materials SPDR (XLB) is running into resistance on both the daily and weekly charts. First, chart 1 shows a long-term resistance zone from broken supports and the 62% retracement mark. Also note that XLB is up around 100% from its March 2009 low.

Chart 1

Chart 2 reinforces resistance as XLB challenges the January high. XLB is one of four sector SPDRs that did not record new highs for 2010 over the last few weeks. The others are the Energy SPDR (XLE), the Healthcare SPDR (XLV) and the Utilities SPDR (XLU). In addition to resistance, XLB is up over 20% from its March 2010 low, which was just seven weeks ago.

Chart 2

The bottom indicator window shows the Commodity Channel Index (CCI) moving above zero in mid February and holding in positive territory the last two months. Momentum favors the bulls as long as CCI remains positive. After all, the two month advance occurred with CCI holding in positive territory. CCI dipped below zero on Monday and we should watch this area for signs of weakness in momentum. As with the 50 line in RSI, the zero line for CCI can sometimes act as support when the trend is up. A clear break below zero would be negative for momentum.

RISK-AVERSION TRADE RETURNS AS DOLLAR BOUNCES... Even though the materials sector is not directly affected by the Goldman Sachs probe, XLB declined sharply on Friday and broke below short-term support. Blame it on the Dollar, which was affected by the Goldman Sachs investigation. Fear spread throughout the finance sector and the risk-aversion trade returned over the last two trading days as money moved into the Dollar. Consequently, a bouncing Dollar is weighing on commodities and commodity related stocks. Chart 3 shows the Dollar Bullish ETF (UUP) bouncing off support the last 3-4 days. Support in the 23.4 area extends back to mid February with at least four reaction lows. There is also a rising price channel taking shape. UUP broke below the lower trendline last week, but rebounded over the last few days. Another trendline break and move below 23.4 would reverse the 4-5 month uptrend in the Dollar. As John Murphy noted last week, weakness in the Dollar would be positive for commodities and commodity related stocks. A breakdown in the Dollar could trigger an upside breakout in XLB.

Chart 3

Chart 4 shows the Euro Trust (FXE) pulling back from resistance over the last few days. Resistance in the 136-138 area extends back to the February-March highs. FXE broke the upper trendline of a falling price channel, which is positive, but pulled back as the risk-aversion trade returned. Notice that FXE is now trading near the upper trendline extension, which now becomes potential support. A strong bounce from here could start a move that breaks resistance.

Chart 4

ENERGY SPDR ALSO HITS RESISTANCE... A bouncing Dollar weighed on oil and oil-related stocks the last few days. Chart 5 shows the Energy SPDR (XLE) hitting resistance from broken supports. XLE broke support at 60 with a sharp decline in September 2008. With a sharp rally in 2009, XLE returned to broken support in October 2009. This time, however, 60 acted as resistance with reaction highs in October and January. XLE is testing this resistance level for the third time with the advance over the last two months. John Murphy showed XLE hitting resistance on Tuesday and Chevron breaking out on Wednesday. XLE pulled back from resistance with market weakness on Friday, but the ETF remains close to resistance. A breakout would forge a 52-week high and be bullish for the sector as a whole. Again, watch the Dollar for clues on oil and oil-related stocks.

Chart 5

Chart 6 shows the Oil Service HOLDRS (OIH) with a large Diamond pattern forming. These are consolidation patterns that require a break for directional clues. Notice that the right half of the pattern is essentially a symmetrical triangle. More recently, OIH has been consolidating around the upper trendline of the symmetrical triangle. A consolidation breakout would be bullish.

Chart 6