***Executive Summary***

• Stock Market Stance Remains Bullish
• Bear Market Retracements
• Analysis of Two Bear Wedges
• QQQQ, SPY and IWM Stall After Surge
• Swing Support for QQQQ-SPY-IWM
• Gold Holds Up Well
• USO and OIH Getting Overbought
• TLT Firms at Support (video link)

***Stock Market Stance*** No change. Bullish on 8-December. After last week's surge, a little rest on Monday-Tuesday 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:

• 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
• Tuesday: No economic reports.
  -Earnings: State Street, HB Fuller, Linear Tech

***Technical Highlights***

***Bear Market Retracements*** The current rally is considered a bear market rally that will retrace 38-62% of the prior decline. The chart below shows the prior bear market with three bear market rallies. The first rally retraced 50% (Mar-01), the second 62% (Sep-01) and the third 38% (Jul-02). This bear market lasted 30 months with SPY loosing around 50%.

The second chart shows SPY and the current bear market. The current bear market is 15 months old (Oct-07 to Jan-09). From high to low, SPY lost around 50%. Perhaps most disconcerting, SPY lost 50% in half the time of the previous bear market. Turning to the retracements, the first leg down bottomed in March 2008 and the first bear market rally retraced 50% of the prior decline. The second leg down was massive with a bottom in November. The second leg down can be measured from the May or August highs. Measuring from the May high, a 38-62% retracement would extend to the 102-117 area. I am looking for a rally into the lower end of this retracement zone. After which, we could see some sort of choppy trading range and then another leg lower.

***A Tale of Two Wedges*** The next two charts show rising wedge advances from March 2001 and March 2008. These bear market wedges can be divided into two parts. The first half features a surge or two that gets the rally moving. The second half features choppy trading as the wedge unfolds. The first wedge lasted seven weeks, while the second lasted 8-9 weeks. Both ended with trendline breaks on increasing downside volume. The major-index ETFs could be forming rising wedge patterns right now. However, these wedges are still rising and we have yet to see a high volume trendline break. Until then, I expect a choppy advance into the latter part of January.

***Major-index ETFs***

***Stalling After Breakout*** After breaking above their December highs last week, QQQQ, SPY and IWM stalled with indecisive candlesticks on Monday and Tuesday. Indecision is the first step to a reversal and stocks are looking vulnerable to a pullback. With the medium-term trends up, any weakness from here would be considered a mere pullback, provided it occurs on modest volume and modestly negative breadth. A sharp decline on big volume and sharply negative breadth would warrant a reassessment. The gray trendlines show a rising wedge on the SPY chart. This pattern is tentative for now. We are currently in the sixth week of this rising wedge. The prior wedge patterns lasted 7-9 weeks and we could be nearing the end of this advance. At the very last, I think we are in the choppy second half of the advance. As long as the bulk of the evidence remains bullish and the trend remains up, I will stick with my upside target around 100-105.

***Holding the Breakout*** On the 60-minute charts, QQQQ, SPY and IWM broke resistance from their December highs and these breakouts are holding. However, as noted in the wedge examples, I think we are in the choppy stage of the wedge advance. This increases the risk of a pullback after a new high or breakout. For now, the breakouts are holding and short-term swing remains up. I marked swing support on all three charts and this is the first level to watch for a swing reversal. A break below swing support would argue for a pullback that could retrace around 50% of the prior advance (29-Dec to 2-Jan).

***Inter-Market Charts***

***Dollar and Euro*** After big moves the last five days, the U.S. Dollar Index ($USD) touched resistance and the Euro Trust ETF (FXE) hit its support zone. $USD formed a shooting star candlestick, while FXE formed a small white candlestick as it firmed at support. For now, I think the short-term breakout in the U.S. Dollar Index remains bullish and there is now lots of support around 81-82. This area should hold on a pullback. A move below 81 would call for a reassessment. It is also possible that at rising flag or wedge is taking shape. These are potentially bearish patterns, but the trend is up as long as the lower trendline holds. FXE now has resistance around 138-140. With the ETF becoming short-term oversold after the five day plunge, we could see some choppy trading or even a small bounce.

***GLD and GDX*** Considering Dollar strength, the streetTRACKS Gold ETF (GLD) held up surprisingly well over the last few days. The U.S. Dollar Index ($USD) rose from 78 to 83 since 17-Dec. Despite this advance, GLD is trading just a few cents below its 17-Dec close. GLD is holding up quite well in the face of Dollar strength. Yesterday, GLD opened weak and closed strong to form a white candlestick. I expected a pullback towards the low 80s, but GLD may have other ideas. The Gold Miners ETF (GDX) remains hostage to gold. GDX gapped down on Monday and this gap is holding. In fact, GLD also gapped down on Monday and this gap is also holding. The gaps are short-term bearish and argue for a pullback over the next few days.

***USO and OIH*** After a 28% advance the prior five days, the United States Oil Fund ETF (USO) took a breather with a consolidation on Tuesday. The big trend for oil remains down. Even though, oversold bounces or bear market rallies are still possible. USO broke the September trendline with the most recent surge and my upside target remains the 40-45 area. With the ETF a few points from this target zone, the risk-reward ratio for new long positions is not palatable. The Oil Service HOLDRS (OIH) extended its gains yesterday and is now up 28.7% in seven days. It too is short-term overbought and nearing its resistance-target zone around 90-100.

***Bonds Firm at Support*** After a rather hair raising decline from 122 to 112 (8%), the iShares 20+Yr T-Bond ETF (TLT) firmed with an indecisive candlestick on Tuesday. This candlestick features a small white body with small upper and lower shadows. There was a gap down on the open, but TLT firmed after the weak open and found support. This could set the stage for a bounce. The UltraShort T-Bond ETF (TBT) stalled at resistance with an indecisive candlestick. This ETF is up 17% in four days and short-term overbought, just as TLT is oversold. With TLT looking ripe for an oversold bounce, TBT looks vulnerable to an overbought pullback.

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.