10-YR TREASURY YIELD FAILS AT RESISTANCE -- 7-10 YR T-BOND ETF SURGES OFF WEDGE TREND LINE -- SMALL-CAPS AND TECHS LEAD MARKET LOWER -- RSP AND SPY STILL HOLDING UP -- BREATH INDICATORS SHOW NO DIVERGENCE

10-YR TREASURY YIELD FAILS AT RESISTANCE... Programming Note: Chip, Greg, John and I are at the MTA Symposium on Thursday and Friday. Today's Market Message will not include a video because I am on the road. Also note that I will be taking a family vacation from April 7th to April 18th. The next Market Message from Arthur Hill will be on Monday, April 21st. Thanks for your understanding.

Treasuries surged and Treasury yields fell after the labor department reported a 192,000 increase in non-farm payrolls. Obviously, the bond market expected a bigger gain and took this as a miss. Nevertheless, 192,000 new jobs is not too shabby. Chart 1 shows the 10-YR Treasury Yield ($TNX) hitting the resistance zone on Wednesday and falling sharply on Friday. Overall, it looks like a sharp decline and a big rising flag, which is a bearish consolidation. A break below the support zone would signal a continuation lower and target a move to the 22 area (2.2%). Such a move would be bullish for bonds and negative for stocks. The indicator window shows the Aroon oscillators falling below 30 in parallel fashion. The low value and parallel decline occur during a consolidation. The first to break above 50 will trigger the next signal.

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Chart 1

7-10 YR T-BOND ETF SURGES OFF WEDGE TREND LINE... Chart 2 shows the 7-10 YR T-Bond ETF (IEF) hitting resistance on the first days of February and March, and then correcting with a falling wedge. "Correcting" is the key word because a breakout would signal a continuation of the January advance and project higher prices for IEF, and other Treasuries. Taking a step back, notice that the ETF is also forming a big cup-with-handle, which is a bullish continuation pattern. A break above rim resistance would also be bullish and argue for a move to the 105 area. The height of the cup is added to the breakout zone for a target. The indicator window shows MACD falling just below zero the last few weeks. A break above the red trend line would turn momentum bullish.

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Chart 2

SMALL-CAPS AND TECHS LEAD MARKET LOWER... A breakout in IEF would be negative for stocks for several reasons. First, stocks and Treasuries have been negatively correlated for the most part. Second, money flowing into Treasuries is money that is not available for stocks. Third, Treasuries rise as the outlook for the economy falls. Fourth, strength in Treasuries reflects a certain risk aversion in the market. This risk aversion is also reflected in the stock market because small-caps and techs are bearing the brunt of today's selling pressure. Chart 3 shows the Russell 2000 ETF (IWM) breaking the 50-day moving average with a plunge in late March, bouncing back with a surge above 118 and then falling sharply the last two days. While I am not ready to turn long-term bearish, IWM is in a downtrend since early March and underperforming the S&P 500 SPDR. The rising 200-day marks the next potential support zone in the 109 area. The indicator window shows the price relative falling sharply over the last three weeks as IWM severely underperforms SPY. Relative weakness in small-caps is not a good sign for the market overall because small-caps have higher betas, which means they represent the riskier end of the market. Also note that small-cap companies are more domestic and vulnerable to changes in the US economy.

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Chart 3

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Chart 4

Chart 4 shows the Nasdaq 100 ETF (QQQ) peaking in early march and moving lower the last 4-5 weeks. While I would not consider this a long-term problem, the ETF is clearly in corrective mode after plunging back below its 50-day line. The red trend line zone and this week's high now mark the first resistance level to watch. A breakout here would end the correction and resume the bigger uptrend. Until such a breakout, the ETF could continue to work its way lower and test support in the 83-84 area. The indicator window shows the price relative (QQQ:SPY ratio) peaking in February, moving lower in March and hitting a new low for 2014 today. This means QQQ has underperformed the entire year.

RSP AND SPY STILL HOLDING UP... Despite weakness in small-caps, techs and other risk groups, the broader market is still holding up pretty well. Chart 5 shows the S&P 500 SPDR (SPY) hitting a new high with today's opening surge and falling after the open. Despite this intraday reversal and failed breakout, the new high is long-term bullish and the ETF remains above its first support zone. Broken resistance from the pennant trend line turns first support to watch on this throwback. The March lows mark key support for now. A break below these levels would indicate that selling pressure is spreading to the broader market. Chart 6 shows the Equal-Weight S&P 500 ETF (RSP) with similar characteristics.

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Chart 5

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Chart 6

BREATH INDICATORS SHOW NO DIVERGENCE... The AD Line and AD Volume Line for the S&P 1500 both hit new highs this week and have yet to form bearish divergences. These new highs indicate broad strength in the market and should be considered long-term bullish. Lower highs in the indicators would form bearish divergences and this would be cause for concern. Despite the lack of bearish divergences, we could still see a pullback or trading range to digest the gains from early February to early March. Chart 7 shows the S&P 1500 AD Line ($SUPADP) confirming the new high in the S&P 1500. Chart 8 shows the S&P 1500 AD Volume Percent ($SUPUDP) also hitting a new high. The March lows mark first support for these two indicators.

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Chart 7

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Chart 8

XLY FAILS TO HOLD BREAKOUT AS XRT FORMS LOWER HIGH... Even though the AD Line, AD Volume Line, SPY and RSP look fine, there are concerns because the Consumer Discretionary SPDR (XLY) and Retail SPDR (XRT)** continue to underperform. Chart 9 shows XLY failing to hold the breakout and plunging back below 65.5 on Friday. This means a lower high formed this week and we can use this high to mark first resistance. Even though I still think this is a correction within a bigger uptrend, there may be further downside towards the October trend line before this correction runs its course. The indicator window shows the price relative in a downtrend the entire year (2014).

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Chart 9

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Chart 10

Weakness in the consumer discretionary sector stems from weakness in the retail group. Chart 10 shows the Retail SPDR surging back to 87 earlier this week and failing to exceed the prior high. This means the ETF still has a string of lower highs working since late November. Even though XRT remains fairly close to its 52-week high, these lower highs reflect underperformance and a downtrend could be starting. Relative weakness in XRT remains a concern because retail spending drives some two thirds of GDP. The indicator window shows the price relative in a downtrend since November.