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It's do-or-die time for the Dow

Can the Dow stay afloat? 03:41

Once again, the bulls took the Dow Jones Industrial Average up to challenge overhead resistance near the 16,600 level. And once again, they were turned back. This area has constrained the index for six months now and has replaced 2013's easy rise with the churning, sideways volatility we've seen throughout 2014 so far.

The question now is: Can the bulls push the Dow up and over this level? Or will the bears reassert themselves here?

A few positive catalysts have emerged to fuel this latest breakout attempt. For one, the first-quarter earnings season has taken a more positive tone after initial disappointments caused by soft results from the banks.

Also, recent economic data has turned higher, suggesting that the softness seen early this year was indeed a result of severe winter weather. And although it remains unresolved and unpredictable, the situation in Ukraine appears to have calmed a little.

But other points suggest the Dow will once again be turned away here.

Mainly, the selling pressure that's hitting the small-cap stocks in the Russell 2000 cannot be ignored. Thursday's losses pushed that index into official correction territory, down 10 percent from its recent highs as it now trades near six-month lows. The Russell 2000 also recently closed below its 200-day moving average, ending an 18-month long uptrend.

The last two times the Russell 2000 dropped into 10 percent corrections (in 2010 and 2011) it didn't stop falling until the losses deepened to 20 percent.

Moreover, the way small-caps have separated from large-caps is happening on a scale that hasn't been seen since 2007 and 1999 -- both of which were rather inauspicious periods to be in stocks as bear markets appeared shortly thereafter.

Market breadth has also been narrowing as buyers use fewer and fewer stocks to hold the Dow near its highs. You can see this in the way one-time highflying momentum favorites like Twitter (TWTR), Pandora (P), Tesla Motors (TSLA) and indeed the entire biotech sector as represented by the iShares Biotech (IBB) are now tumbling.

At the same time, a clear and sustained bid has been coming into U.S. Treasury bonds, suggesting investors are seeking out safe-haven assets instead of getting excited about the Dow's latest challenge of the 16,600 level.

Another failure here by the Dow to push over this resistance range could result in an avalanche of selling pressure, pushing the index down to join the Russell 2000 below its 200-day moving average. That would bring a 4.2 percent drop from current levels.

I might sound like a broken record, but I continue to recommend investors play it defensively here -- especially with the Ukraine situation poised to blow up again heading into planned independence referendums over the weekend. I'm telling them to focus on Treasury bond funds, including the leveraged DIrexion 3x Treasury Bond Bull (TMF), which is up 11 percent since I added it to my Edge Letter Sample Portfolio back in February.

Disclosure: Anthony has recommended TMF to his clients.

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