***Executive Summary***

• Stock Market Stance Remains Bullish
• Breadth Makes up for Low Volume
• QQQQ-SPY-IWM Exceed December highs
• QQQQ, SPY and IWM Stall After Surge
• Dollar Breaks Resistance
• Gold Falls as Dollar Surges
• USO and OIH Extend Gains
• TLT Falls as Rates Surge
• Stock Setups Video by 7:30AM (video link)

***Stock Market Stance*** Bullish on 8-December. After last week's surge, a little rest on Monday is understandable for the stock market. I remain bullish on stocks for the same technical reasons. Breadth remains strong. The surge off the November lows held and the major-index ETFs broke their December highs. Small-caps and techs are showing leadership as the appetite for risk increases. There are also a few more positive developments to add to the mix. Oil finally found support and bounced over the last five days. Bonds crumbled as money moved out of this safe-haven. The Yen tumbled over the last 11 days and this is normally positive for stocks. Throw in some bullish seasonal patterns and conditions are ripe for further strength in the stock market. I still view this as a bear market rally, but will ride the rally until there is evidence to the contrary.

Market moving events for the next few trading days:

• 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
• Monday: No economic reports.
  -Earnings: Adtran, Schwab, Alcoa, Infosys

***Technical Highlights***

***Breadth Remains Strong Overall*** Even though overall volume was low on last week's surge, strong breadth validated the move. The chart below shows the 5-day simple moving averages for AD Net% and AD Volume Net% (S&P 1500). I use the S&P 1500 for broad breadth stats because provide an excellent cross section of "the market". There are around 1000 stocks from the NYSE and 500 stocks from the Nasdaq. In addition, the index consists of the S&P 500, S&P 400 MidCap Index and S&P 600 SmallCap Index. Please review the education videos on breadth for more details (click here).

The 5-day SMAs first surged above +40% in late November to kick start the current advance. There was another surge in early December and then a pullback just before Christmas. AD Volume Net% suffered more as its 5-day SMA dipped to –34% on 23-Dec. Despite this pullback, breadth recovered quite well last week as both 5-day SMAs moved back above +40% after Friday's surge. At this point, I would not become concerned with the health of this advance unless the 5-day SMAs move below –40%.

***Major-index ETFs***

***Stalling After Breakout*** No change. QQQQ, SPY and IWM broke above their December highs with a surge on Friday and then stalled on Monday. This breakout to new highs for the move shows strength. Looking at price action since late November, the major-index ETFs surged (21-Nov to 8-Dec) and then consolidated (9-Dec to 29-Dec). IWM was the strongest during the consolidation phase because it held well above its 12-Dec low. In contrast, SPY and QQQQ tested support from their 12-Dec lows later in the month. With a move above their December highs on Friday, all three are showing uniform strength. My upside targets remain in place. I expect a move towards the Oct-Nov highs over the next few weeks. With Friday's big surge, the major-index ETFs are now over half way there. I am also raising key support on the daily charts. Failure to hold the mid December lows would be bearish.

***Resistance Turns Support*** QQQQ, SPY and IWM broke above their December highs and then consolidated on Monday. After 7-10% advances last week, all three became short-term overbought and ripe for a consolidation or a pullback. The resistance breakouts turn into support now. The red rectangles mark the prior resistance zones, while the green rectangles mark current support zones. The bulls are firmly in control as long as these support zones hold. A move below these support zones would argue for a deeper pullback or retracement of last week's advance. We might then see a 50% retracement of the prior advance (29-Dec to 2-Jan). Because I am medium-term bullish and expect a move higher over the next few weeks, a decline from current levels would be viewed as pullback or mere correction. I would expect support well above the late December lows. The thin green lines midway between the late December lows and early January highs mark a potential reversal area.

***Inter-Market Charts***

***Dollar and Euro*** The U.S. Dollar Index ($USD) broke minor resistance with a big move on Monday. This breakout is at least short-term bullish and targets further strength towards the 84-85 area (broken supports). Despite December's sharp decline, the long-term trend for the greenback is also up and a bullish tailwind could push the index back towards its prior highs. The Dollar is also benefiting from the surge in the 10-Year Note Yield ($TNX). Higher interest rates make Dollar denominated bonds more appealing. The Euro Trust ETF (FXE) dropped sharply as Euro zone inflation fell below 2%. This paves the way for further cuts in European interest rates (lower bond yields). FXE could hit my downside target (132-135) today. While on currencies, I would also like to point out weakness in the Japanese Yen Trust ETF (FXY). The Yen surged in the first half of December, but fell sharply over the last 11 trading days. Weakness in the Yen has been bullish for stocks in the past and this could further fuel a rally.

***GLD and GDX*** Strength in the U.S. Dollar Index weighed on the streetTRACKS Gold ETF (GLD) on Monday. There is no real change in the technical picture here. GLD hit long-term resistance around 85-90 in late December. This resistance stems from the Sep-Oct highs and the Jul-08 trendline. The trend since late October remains up and I am marking support around 80-82. Let's see what happens if/when GLD reaches this zone. With GLD under pressure, the Gold Miners ETF (GDX) is also going to remain under pressure. The ETF gapped down on Monday and looks vulnerable to further weakness.

***USO and OIH*** In addition to severe oversold conditions, the United States Oil Fund ETF (USO) is benefiting from a number of fundamental factors. Middle East tension, Russian supply issues and OPEC cuts are keeping the bid in energy. In addition, heavy snows and cold are keeping demand strong. USO is up 28% in five days. This is the largest 5-day advance in the history of the ETF (March 2006). For West Texas Intermediate Crude ($WTIC), this is the largest 5-day advance in over 10 years. The initial target zone for USO remains the 40-45 area. After such a surge, the ETF is closer to the target than support. The Oil Service HOLDRS (OIH) followed USO higher with another advance on Monday. OIH is meeting some resistance from the December highs and getting short-term overbought after a 22% surge in 6 days. My upside target remains the 90-100 area, but we may see some backing and filling along the way.

***Bonds Crumble*** The iShares 20+Yr T-Bond ETF (TLT) tumbled for the third day running with gap down. A gap down from new highs could be a breakaway gap that signals the start of a significant move. My initial target was the support zone around 110-112. However, this move would extend to the 62% retracement around 105, especially if stocks and oil rally. The 10-Year Note Yield ($TNX) surged back towards 2.5%. The next resistance is at 2.8% and then at 3.3-3.5%. An extended decline in bonds and rise in rates would be bullish for stocks and the Dollar. The bottom chart shows the UltraShort T-Bond ETF (TBT) surging over the last three days with big volume. The first resistance (target) zone resides around 43-45 and the second around 54-55.

Good day and good trading -Arthur Hill

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Breadth Charts ---------------------------------

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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.