DIA FALLS AFTER FORMING SHOOTING-STAR -- CCI BREAKDOWN COULD SIGNAL AN EMERGING DOWNTREND IN SPY -- DEFENSIVE SECTORS LEAD IN FEBRUARY AND OFFENSIVE SECTORS LAG -- DOLLAR ETF SURGES TO SIX MONTH HIGH

DIA FALLS AFTER FORMING SHOOTING-STAR... Link for todays video. The Dow SPDR (DIA) was the strongest of the major index ETFs this week, but that did not stop the parade of bearish candlestick patterns. DIA was the only major index ETF to record a new high this week. The S&P 500 ETF (SPY), S&P Midcap SPDR (MDY), Russell 2000 ETF (IWM) and Nasdaq 100 ETF (QQQ) all fell short and have yet to fully recover from recent selling pressure. Even though DIA is showing relative strength and leading overall, chart 1 shows selling pressure with Thursdays shooting star candlestick and Fridays decline. First, note that DIA formed a bearish engulfing last week (Monday-Tuesday) and a bearish engulfing pattern this week (Friday-Monday). DIA ultimately held support at 138 with a surge to 141.50 on Wednesday. There was no follow through as the ETF formed a shooting star on Thursday. These are bearish candlestick reversal patterns with small bodies at the lower end of a high-low range. The upper shadow above 141 reflects a failed intraday rally. This means DIA has now formed three bearish candlestick patterns in eight days. Support, however, has yet to break for final confirmation. Another break below 138 would be bearish and argue for a correction of the November-February advance.

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Chart 1

The indicator window shows the Average Directional Index (ADX) along with Plus Directional Movement (+DI) and Minus Directional Movement (-DI). Notice that +DI crossed above DI at the beginning of January and has been above DI ever since. This affirms the current uptrend in DIA. A bearish cross, which would involve DI moving below +DI, would be negative and could be used to confirm a support break.

CCI BREAKDOWN COULD SIGNAL AN EMERGING DOWNTREND IN SPY... Momentum indicators are called leading indicators because they lead instead of lag. Even though a leading indicator sounds appealing, not all leading signals are good signals. With that disclosure out of the way, I am seeing breakdown in the Commodity Channel Index (CCI) on the S&P 500 ETF (SPY) and the S&P Equal Weight ETF (RSP). Developed by Donald Lambert to trade commodities, CCI is a momentum oscillator that fluctuates above/below the zero line. Momentum oscillators are not usually used for trend identification, but Lambert used CCI to identify when a new trend is emerging. A CCI surge from below -100 to above +100 signals a new uptrend emerging, while a CCI plunge from above +100 to below -100 signals a new downtrend emerging. Chart 2 shows the S&P 500 ETF with CCI in the indicator window. CCI signaled a new uptrend emerging on December 10th and this signal remained valid until this weeks plunge below -100. Notice that CCI did not dip below -100 during the late December decline. On the price chart, SPY established support around 149 with the February lows and a break below these lows would target a move to the 144 area. Chart 3 shows the S&P Equal Weight ETF with similar characteristics.

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Chart 2

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Chart 3

DEFENSIVE SECTORS LEAD IN FEBRUARY AND OFFENSIVE SECTORS LAG... Even though the Dow surpassed 14000 last month and the S&P 500 moved above 1500 for the first time since December 2007, the offensive sectors underperformed their defensive counterparts in February. Chart 4 shows a PerfChart with eight sector SPDRs and the Guggenheim Equal-weight Technology ETF (RYT). I opted to substitute for XLK because the SPDR is heavily weighted towards Apple (14.34%). The PerfChart shows relative performance for these nine sector ETFs for February. Note that the Consumer Discretionary SPDR (XLY) and the Guggenheim Equal-weight Technology ETF are both underperforming the S&P 500. Furthermore, note that the three defensive sectors are outperforming. The Utilities SPDR (XLU) and Consumer Staples SPDR (XLP) are seriously outperforming the S&P 500. In addition, notice that the three defensive sectors are outperforming the four offensive sectors. Relative weakness in the offensive sectors reflects a certain risk-aversion in the stock market. So while the Dow and the S&P 500 hit new highs this month, these highs did not come with confidence and relative strength from the offensive sectors. Chart 5 shows the Healthcare SPDR (XLV) and the Consumer Staples SPDR (XLP) leading all sectors year-to-date.

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Chart 4

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Chart 5

DOLLAR ETF SURGES TO SIX MONTH HIGH... The Dollar Bullish ETF (UUP) extended its move with a break above the mid November high this week and a fresh six month high. UUP is at levels not seen since August 2012 and this surge could weigh on stocks because the Dollar and stock market have been negatively correlated the last few years. Also note that a rising Dollar makes US exports less competitive. Chart 6 shows weekly bars over the last three years. It looks like UUP formed a higher low around 21.50 and the February breakout signals a continuation of an uptrend that has been in place since August 2011. The yellow area marks the next target zone in the 23.50 area. The upper trend line of the rising channel and the 50-62% retracements were used for this target.

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Chart 6

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Chart 7

Chart 7 shows the Euro Trust (FXE) breaking the July trend line and moving below support from the January low. The Euro accounts for around 57% of the US Dollar Index ($USD) and the Dollar Bullish ETF. This breakdown signals a continuation of the prior decline (May 2011 to July 2012). Next support resides in the 118-120 area. The indicator window confirms the breakdown as StochRSI broke below its November low and below .40 for the first time since July.

INDUSTRIAL METALS AND OIL EXTEND LOSSES AFTER BREAKDOWN... Strength in the Dollar is also weighing on copper and oil. Even though lower prices for raw materials may benefit the bottom line for companies, these lower prices may also reflect weakening demand, which in turn would suggest weakness in the economy. At this point, I view the dramatic declines in copper and oil as a negative for the stock market. First, these declines point to weak demand Second, stocks are positively correlated with copper and oil. Chart 8 shows the Copper ETF (JJC) breaking wedge support with a sharp decline in mid February and remaining weak. The inability to bounce after becoming oversold shows strong selling pressure.

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Chart 8

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Chart 9

Chart 9 shows the US Oil Fund (USO) breaking down in mid February and plunging below 33 this week. There was no hesitancy in this breakdown. USO broke support with a sharp move and never looked back. Broken resistance turned into the first support zone around 33, but this level was broken on Friday. The 31 area marks the next support zone from the November lows.