***Executive Summary***
- Happy New Year to All!
- Stock Market Stance Remains Bullish
- Two Day Rally on Strong Breadth
- Holiday Volume Remains Low
- IWM Shows Relative Strength
- QQQQ Forms Falling Flag
- FXE Breaks Flag Support
- Gold Finishes the Year Strong
- USO Ends with Biggest Advance of the Year
- TLT Stalls After Big Gap
(video link)
***Stock Market Stance*** Bullish on 8-December. It will soon be time for truth or consequences. Stocks ended the year with a two day surge. as a few bulls tried to get a jump on January. Friday's trading could still be tricky because most of Wall Street remains in holiday mode. The real fireworks will likely start next week when volume returns. For now, I think the bulk of the medium-term evidence remains bullish and this favors further gains. Breadth remains bullish overall. The majority of the Nov-Dec gains are holding. Small-caps are showing relative strength. Until some bearish evidence to the contrary emerges, my price and time targets remain. For the major-index ETFs, I expect an advance towards the Oct-Nov highs over the next 3-4 weeks. With the major-index ETFs trading between their November lows and these targets, the rally is half way there. Keep in mind that I still think this is a corrective rally within a bigger downtrend. In other words, it is considered a bear market rally.
Market moving events for the next few trading days:
- Friday: ISM Mfg Index, Money Supply
-Earnings: Piedmont, Mosaic
- Monday: Construction Spending
-Earnings: Finish Line, Global Payment
- Tuesday: Factory Orders
-Earnings: American Greetings
- Wednesday: Crude Inventories
-Earnings: Constellation Brands, Bed Bath Beyond, Monsanto, Wd-40
- Thursday: Initial Claims
-Earnings: Helen of Troy, Texas Industries, Apollo Group
- Friday: Employment Report
-Earnings: KB Home, Emmis Comms, AZZ Inc
***Technical Highlights***
***Nice Breadth*** The bulls stepped up to the plate over the last two days and pushed the stock market higher on good breadth. Looking at the S&P 1500 ETF (ISI), AD Net% reached +87% (Tue) and +73% (Wed). AD Volume Net% hit +86% (Tue) and +59% (Wed). These are pretty strong readings that show broadness in the rally. Combined with the positive breadth extremes on 16-Dec, overall breadth remains medium-term bullish. I would not call breadth exceptional strong, but positive breadth has outpaced negative breadth on a consistent basis since late November. The down days are relatively mild, while the up days are relatively strong. Looking more short-term, the AD Line and AD Volume Line both corrected most of December and then surged over the last two days. The AD Net% broke above its December high and this shows relative strength in small-caps. The AD Volume Line remains below its December highs, but a mini-breakout occurred on Tue-Wed and it looks like the bulls are wading back into the water. Hope they can swim!
***Low Volume*** As expected, volume was below average on the NYSE and Nasdaq over the last five trading days. Volume did surge a bit on Wednesday, but was still below average on the day. In an interesting twist, NYSE volume was relatively stronger than Nasdaq volume on Wednesday. Perhaps money is finding its way into the financial sector and avoiding pockets of the tech sector. While low volume advances are suspect, we should keep in mind that volume is supposed to be low during holiday season. In addition, price action is first and foremost. Volume plays second fiddle to price action. A move below this week's lows on expanding volume would be negative. Until then, the bounce over the last two days should be taken as positive as long as it holds.
***Major-index ETFs***
***IWM Shows Relative Strength*** QQQQ, SPY and IWM remain in medium-term uptrends on the daily charts, but trading remains quite choppy. There were two surges: late November and early December. The major-index ETFs are trading much closer to their December highs than their November lows. In fact, all three are trading well above the mid point (Nov Low to Dec High). The gains are largely holding and this is bullish. SPY and QQQQ formed flat consolidations and bounced off their 12-Dec lows this week. IWM held well above its 12-Dec low and formed a small ascending triangle. Also notice that IWM pushed above its December highs on Wednesday. The ability to hold well above the 12-Dec low and push to new highs shows relative strength in small-caps, which I consider bullish for the market overall. My upside targets remain in place. These are based on the 50% retracement of the Aug-Nov decline and the red resistance zones.
***A Range, A Flag and A New High*** The 60-minute charts magnify post-surge trading to reveal three different patterns taking shape. QQQQ is the weakest with a falling flag over the last three weeks. Technically, the lower highs and lower lows qualify as a downtrend. However, the Tue-Wed surge reinforces support and the swing within this flag is clearly up. As noted on the daily chart, IWM forged higher highs in mid December and late December. In addition, the ETF forged a higher low by finding support above the mid December lows. A sort of ascending triangle is taking shape as this ETF remains the strongest of the three. SPY is somewhere in the middle with a trading range over the last three weeks. As with QQQQ, the swing within this trading range is up as the ETF surged off support on Tue-Wed. The thin green lines show swing supports and the thin red lines show swing resistances. So far, there were four swing reversals within this range (blue arrows). The last signal was the upside breakout at 87.4. The bulls are firmly in charge as long as SPY holds above 87. A move below 87 would negate the swing breakout and call for a reassessment. A throwback towards 88 might provide a low risk entry point for aggressive long positions.
***Inter-Market Charts***
***Dollar and Euro*** The U.S. Dollar Index ($USD) remains a tough call right now. After plunging below 78 in mid December, the index rebounded and then stalled around 80-82. This was my original target area in early December. Perhaps the plunge below 78 was an overshoot. Trading turned quiet the last two weeks with resistance at 82. A break above this level would be short-term bullish and the next target would be broken supports around 84-85. The Euro Trust ETF (FXE) formed a rising flag over the prior seven days and broke flag support with a decline on Wednesday. This calls for a continuation of the mid December decline and targets further weakness towards the 135 area.
***GLD and GDX*** The 2-3 month advance in the streetTRACKS Gold ETF (GLD) is quite impressive, but the ETF is trading near long-term resistance around 85-90. With long-term resistance at hand and the ETF still a bit overbought, it looks vulnerable to a pullback or further consolidation. A rising channel has taken shape since late October. The lower trendline, broken resistance and the late December low combine to mark a support zone around 80-82. A pullback to this area could offer a chance to partake on the long side. The Gold Miners ETF (GDX) also finished the year strong with a nice gain on Wednesday. As with GLD, this ETF is overbought and near resistance, which makes it vulnerable to a pullback or consolidation. If gold corrects 7%, I would expect GDX to correct at least double and it could pullback towards support around 25-26.
***USO and OIH*** The United States Oil Fund ETF (USO) finally got a decent bounce with a surge above 33 on the last day of the year. USO surged on Monday with a break above the December trendline. The ETF stalled on Tuesday and then surged again on Wednesday with an even bigger move. Believe it or not, Wednesday's advance was the biggest percentage advance in 2008. After a decline from 90 to 28, the ETF is certainly ripe for an oversold bounce. A 50% retracement of the Sep-Dec decline would carry USO back to around 60. Somehow, I just don't see a bear market rally moving this high and would expect resistance in the 40-45 area. A bounce in oil could lift the Oil Service HOLDRS (OIH). OIH sank further before Christmas, but ultimately held the 8-Dec gap and surged over the last four days. The decline looked like a falling wedge (blue) and this mini-breakout could foreshadow an oversold bounce towards the 90-100 area.
***Top Heavy or Merely Consolidating?*** The iShares 20+Yr T-Bond ETF (TLT) stalled over the last 10 days with a consolidation around 120. Is this a top or a flag consolidation? A move above last week's high would break flag resistance and signal a continuation higher. As long as these highs hold, the ETF looks vulnerable to a pullback towards support around 110-112. Bonds will likely move opposite of stocks. A decline in stocks would be bullish for bonds, but a New Year rally in stocks would likely trigger selling in bonds. The UltraShort T-Bond ETF (TBT) is anticipating a pullback in bonds with a big bullish engulfing pattern on Friday. Also notice that volume surged. The ETF broke its two week consolidation and the upside target is the resistance zone around 43-45. Failure to hold the bullish engulfing and a move below last week's lows would be bearish for TBT.
Good day and good trading -Arthur Hill
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Disclaimer: Arthur Hill is not a registered investment advisor. The analysis presented is not a solicitation to buy, avoid, sell or sell short any security. Anyone using this analysis does so at his or her own risk. Arthur Hill and TD Trader assume no liability for the use of this analysis. There is no guarantee that the facts are accurate or that the analysis presented will be correct. Past performance does not guarantee future performance. Arthur Hill may have positions in the securities analyzed and these may have been taken before or after the analysis was present.
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About: The Daily Swing is posted every trading day around 6AM ET and focuses on short-term strategies for QQQQ, SPY and IWM. In addition, at two stock setups are featured every day with a detailed trading strategy. As warranted, coverage extends to broad market topics, key sectors and industry groups and inter-market securities (gold, bonds, the Dollar and oil).
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Sources: Data from Bloomberg.com, CBOT.com, Kitco.com and ino.com; Charting from Metastock (equis.com). Closing data from Reuters.com, eSignal.com, MS QuoteCenter and Yahoo! Finance.
