Stocks closed higher yesterday, breaking a three-day decline, but almost 120 Dow points were lost from the highs of the day when Fed Chairman Ben Bernanke warned of a “deflationary threat” but promised no help from “QE3.” Financial stocks again led the broad market’s selling.

The financial sector via the Financial Select Sector SPDR (NYSE: XLF) is having a difficult time holding above the all-important upward slanting support line at $15 after failing to follow through on its breakout from $15.24. This is mostly due to the euro zone crisis that every day takes a new twist.

But yesterday, it was the AAA rating ofU.S.debt that was put into question when Moody’s put it on “credit watch” stating the “rising possibility that the statutory debt limit will not be raised on a timely basis.”

Note the squeeze now put on the XLF after it failed to successfully break the barrier at $15.24 and the new Moving Average Convergence/Divergence (MACD) sell signal. This should be a warning to politicians on both sides of the aisle that they are playing with fire. If the financials continue to fall, they could pull the entire stock market down with them, and we could see the Dow Jones Industrial Average and Dow Jones Transportation Average slice through their major support zones as we discussed in yesterday’s Daily Market Outlook.

Despite the threat from the financial sector, investors are still buying small-cap stocks. Note the broad consolidation of the iShares Russell 2000 Index (NYSE: IWM). There is not only solid support at the 50-day moving average, but the 20-day moving average is about to issue a buy signal, and its MACD is flattening for what could be a higher move by the index.

The retail sector continues to outperform many others, and analysts are generally predicting a solid second half for the group. The Retail HOLDRs (NYSE: RTH) chart shows considerable strength in the last five days as volume drove the exchange-traded fund (ETF) close to a new high following a trading gap. Gaps like this are often quickly covered by profit-taking, and the occurrence of the close of the gap this week could result in a new round of buying and an opportunity to enter the sector with the expectation that the double-top at $114/$113.50 will give way. The objective could be $116 to $118.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

• See Serge Berger’s Daily Market Outlook: Defensive Market Suggests Wait-and-See Approach
• See Sam Collins’ Trade of the Day: Dillard’s Stock Will Have You Looking Sharp
• See Serge Berger’s Trade of the Day: Coinstar Should Deliver More Than Chump Change