SPY BREAKS KEY SUPPORT LEVEL -- MDY AND XLF TRIGGER CONTINUATION SIGNALS -- XLY EXTENDS DECLINE AND RELATIVE WEAKNESS -- AUTOS AND RETAILERS WEIGH -- NIKKEI 225 CORRECTS TO FIRST SUPPORT ZONE -- EURO BREAKS KEY LEVEL AS MOMENTUM REMAINS BEARISH

SPY BREAKS KEY SUPPORT LEVEL ... Link for today's video. After a big decline in mid January, stocks consolidated last week with flags and pennants forming in several ETFs. Flags and pennants are short-term continuation patterns that form after a sharp move. Chart 1 shows the S&P 500 SPDR (SPY) falling around 3% (184 to 177), finding support near the mid December lows and forming a flat flag last week. SPY was clearly oversold after the decline and ripe for a bounce. There were two attempts with small gains on Tuesday and Thursday, but these attempts failed as the ETF fell back each time. At this point, SPY worked off some of its short-term oversold condition and this reduced the chances for an oversold bounce. As a continuation pattern, the flag has a bearish bias because the prior move was down. Today's break below flag support signals a continuation lower and targets a move to the next support zone in the 172 area.

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Chart 1

The indicator window shows the Percentage Price Oscillator (PPO) moving below -1% for the first time since late August. The PPO is a percentage, or normalized, version of MACD. The PPO equals the MACD value divided by the longer moving average (usually the 26-period). I am using PPO(5,35,5) instead of the default PPO(12,26,9) to increase sensitivity, which is better suited for short-term swings. Even though the PPO is near a level that produced the early September upturn, we have yet to see an upturn in momentum as the PPO remains below its signal line and in negative territory. A move above the signal line would be the first step to an upturn in momentum.

MDY AND XLF TRIGGER CONTINUATION SIGNALS... Chart 2 shows the S&P MidCap SPDR (MDY) with a rising flag because prices edged higher last week. A rising flag is typically a bearish continuation pattern that represents a small counter-trend bounce after a sharp decline. Technically, this rising flag could be interpreted as a short-term uptrend because prices were slightly rising. Today's move below Friday's low broke flag support and signaled a continuation lower. This move targets a decline to the 227.5-228 area. Chart 3 shows the Finance SPDR (XLF) with a rising flag last week and a break below flag support today. This break signals a continuation lower and targets a move to the 20.25-20.50 area.

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Chart 2

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Chart 3

XLY EXTENDS DECLINE AND RELATIVE WEAKNESS... As noted on Friday, relative weakness in the Consumer Discretionary SPDR (XLY) is perhaps the biggest negative in the stock market right now. Not only does XLY show relative weakness, but this key sector also shows absolute weakness with a 7% year-to-date decline, which is the most of any sector. Chart 4 shows XLY falling over 1% today and nearing the next potential support zone in the 61-62 area. Support here stems from broken resistance and the early November low. Despite potential support, I think the five week downtrend dominates this chart with resistance marked at 64. The indicator window shows the price relative (XLY:SPY ratio) breaking down in early January and falling to its lowest level since September.

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Chart 4

AUTOS AND RETAILERS WEIGH ON CONSUMER DISCRETIONARY SECTOR... Chart 5 shows the Retail SPDR (XRT) moving to another new low for the year and continuing to show relative weakness. The ETF is now down around 10% year-to-date and is one of the weakest industry group ETFs. Retail spending accounts for around two thirds of GDP and relative weakness in this key industry group could foreshadow negative news on the economy. Perhaps this is why bonds are so strong in 2014. At this point, XRT is oversold and in a bit of a free fall. The indicator window shows the price relative breaking down in early January and moving sharply lower the last few weeks.

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Chart 5

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Chart 6

Chart 6 shows the DJ US Auto Index ($DJUSAU) forming a lower high in January and breaking support with a sharp decline below 210. Auto stocks are under pressure after reporting disappointing sales for January. Also not that there were seven different auto manufacturers advertising during the SuperBowl. This pattern looked like a big correction within an uptrend in mid January, but the support break totally negated this bullish setup. The indicator window shows the index underperforming the S&P 500 since September. The price relative ($DJUSAU:$SPX ratio) hit its lowest level since June with today's decline.

NIKKEI 225 CORRECTS TO FIRST SUPPORT ZONE... An uptick in the Yen over the last few weeks weighed on the Nikkei 225 ($NIKK) as the index fell back to the triangle apex. First, note that chart 7 shows the Nikkei in a clear uptrend overall. The decline in 2014, while steep in percentage terms, still pales relative to the 2013 advance. The index broke triangle resistance with a surge in early November and the triangle apex marks a consolidation zone that may offer support. The indicator window shows the Yen ETF (FXY) with support breaks in February 2012, November 2012 and November 2013. These downside breaks corresponded with upside breakouts in the Nikkei as the index moved higher on the prospects of a weaker Yen. There is a high negative correlation between the Yen and the Nikkei 225, which means they move in opposite directions.

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Chart 7

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Chart 8

Chart 8 shows daily bars for more granularity on the triangle. Notice that the 50% retracement is also in the triangle apex and marks potential support in the 14350 area. The indicator window shows the Yen Index ($XJY) turning up this year and rising around 2.5% year-to-date. Even though this bounce in the Yen looks like a bear market bounce, the Nikkei is likely to remain under pressure as long as the Yen rises.

EURO BREAKS KEY LEVEL AS MOMENTUM REMAINS BEARISH... In contrast to 2013, this year has been rough for the Euro ETF (FXE) as the ETF peaked in late 2013 and broke a key trend line in 2014. This is important for the US Dollar ETF (UUP) because the Euro accounts for around 57% of this ETF. A bounce in the Dollar could also weigh on gold and other commodities. Chart 9 shows FXE hitting resistance in the 136-137 area in October and December. The ETF fell below 134 last week and broke the September trend line. The rising 200-day moving average is the next level to watch. The indicator window shows MACD moving into negative territory just after the New Year and remaining in negative territory the last few weeks. MACD needs to break above zero to turn momentum positive again.

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Chart 9

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Chart 10

Chart 10 shows the Euro Index ($XEU), which represents the Euro/Dollar cross. Long-term, it looks like a large rising wedge is taking shape. Notice that this wedge retraced around 62% of the prior decline and did not come close to the 2011 high. This makes the rising wedge a bear market rally and a break below wedge support would signal a continuation of the prior decline (149 to 120). Fundamentally, note that the Fed is tapering its quantitative easing program and the European Central Bank (ECB) is under pressure to loosen monetary policy.