***Executive Summary***

• Stock Market Stance Remains Bullish
• Downside Breadth Expands
• Volume Remains Low
• Short-term Rates Get Feeble Bounce
• QQQQ Gaps Down
• SPY Breaks Swing Support
• Gold Drops with Dollar
• USO Gets Hammered
• TLT Firms Ahead of Employment Report
• Stock Setups Video by 8AM (video link)

***Stock Market Stance*** Bullish on 8-December. While I would have preferred a pullback on modest breadth, I still consider Wednesday's decline as a short-term pullback within a medium-term uptrend. This means I expect the major-index ETFs to find support above their late December lows. After a big surge last week, a pullback that retraces 50-62% is quite normal. The employment report looms on Friday and this could further spook traders. I would not be surprised to see a negative reaction and gap down on Friday AM. However, the medium-term trends are up and there is a good chance that this gap does not hold. In other words, the major-index ETFs could firm after a gap and rally on Friday.

Market moving events for the next few trading days:

• 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
• Wednesday: Retail Sales, Crude Inventories
  -Earnings: AMR, Lecroy, Clarcor, Xilinx

***Technical Highlights***

***Broad Selling Pressure*** After a sharp advance last week, the major-index ETFs pulled back with a fairly broad decline on Wednesday. For the S&P 1500 ETF (ISI), AD Net% and AD Volume Net% both plunged below –70%. However, they did not surpass –80% and did not come close to their negative breadth extremes (-90%). While selling pressure was broad, I still think it was a pullback within a bigger uptrend. The AD Line and AD Volume Line both surged above their December highs last week. These two indicators were also overbought for the short-term and ripe for a pullback. I have now drawn trendlines extending up from the November lows to define the uptrends in the AD Line and AD Volume Line. I would expect support at or just above these trendlines.

***Low Volume*** If there is a silver lining in yesterday's decline, then it would be low volume. NYSE and Nasdaq volume levels were below average for the 11th day in a row. In addition, volume on yesterday's decline was actually lower than on Tuesday's advance. This is mildly positive, but not consequential enough to write home about. We will likely see volume return on Friday or Monday. The dreaded employment report is on Friday.

***Short-term Rates Edge Higher*** The 13-week TBill Yield ($IRX) edged higher over the last few days. This stems from the massive decline in bonds over the last few days. It's a start, but more is needed. $IRX moved from near zero to .10%, which is still pretty close to zero. This incredibly low level reflects a credit market in crisis mode. There are two levels on the chart: pre-crisis (Lehman defaults) and post-crisis. The market has yet to recover from the Lehman debacle and risk aversion remains.

***Major-index ETFs***

***Pullback After Surge*** In yesterday's commentary, I featured two rising wedge advances. These are choppy affairs with pullbacks after new reaction highs. A 2-4 day pullback is now possible. Even though bearish wedges or channels may be taking shape, the medium-term trends for QQQQ, SPY and IWM remain up. All three broke their December highs with big moves last week. These advances created short-term overbought conditions and yesterday's decline is viewed as a pullback, not the start of a medium-term trend reversal. As a pullback, I would expect the major-index ETFs to find support somewhere above their late December lows. Ideally, the trendlines extending up from the November lows will offer support.

***Swing Support Broken*** On the 60-minute charts, QQQQ, SPY and IWM gapped down and closed weak to break swing support. The short-term trends remain up, but the swing within these uptrends is now down. These gaps are also short-term negative. In fact, QQQQ formed an island reversal with the gap up on Tuesday and gap down on Wednesday. Even so, I still view this as a pullback within a bigger uptrend. The green boxes mark the 50-62% retracement zones. This is where we might find support on the pullback.

***Inter-Market Charts***

***Dollar and Euro*** After a shooting star candlestick on Tuesday, the U.S. Dollar Index ($USD) declined rather sharply on Wednesday. Even so, this decline is within a rising flag or wedge formation. There is lots of support around 81-82 and a break below this support zone would be Dollar bearish. Keep in mind that rising wedges and flags are bearish consolidation patterns. However, the trend is firmly up as long as the lower trendline holds. In addition, I still consider the long-term trend up for the index. While the Dollar weakened, the Euro Trust ETF (FXE) bounced off its support zone. At this point, I consider this a dead-cat bounce. The ETF was oversold after the decline from 142 to 135. There is also lots of resistance just ahead in the 138-140 area.

***GLD and GDX*** The streetTRACKS Gold ETF (GLD) did not take advantage of Dollar weakness and declined rather sharply on Wednesday. This was a bit of a surprise. Looking for a reason, I would hazard that the big decline in oil weighed on gold. Despite this one-day anomaly, I would not dismiss the inverse relationship between gold and the greenback just yet. On the GLD price chart, the gap down from Monday remains in place and gold remains in corrective or consolidation mode. The support zone in the low 80s marks a potential reversal area on this pullback. The Gold Miners ETF (GDX) was hit hard with a long black candlestick on Wednesday. As with GLD, the gap down from Monday remains and GDX looks vulnerable to further weakness.

***USO and OIH*** The United States Oil Fund ETF (USO) took it on the chin Wednesday with a sharp 10.68% decline. The depth of the decline may seem drastic, but it should be viewed against the backdrop of a 28% surge the prior six days. Big surges merit big pullbacks. I am not turning long-term bullish on oil, but I think USO could firm in the next few days and mount another move higher into the 40-45 area. Despite the sharp decline in oil, the Oil Service HOLDRS (OIH) held up pretty well on Wednesday. Even so, the ETF is near its resistance zone around 90-100 and further upside is likely to be more laborious. A lot will depend on oil and its ability to rebound.

***Bonds Firming at Support*** The iShares 20+Yr T-Bond ETF (TLT) firmed for the second day running with another indecisive candlestick. There is a lot of support around 110-112 and the employment report looms on Friday. This report could lift bonds. On Wednesday, ADP reported that nonfarm-nongovernment payrolls fell 693,000 in December, which was much worse than consensus (493,000). Given these numbers, I would expect Friday's employment report to also show big job losses. Traders need to position themselves today because the employment report often produces a sizable gap (Friday AM). The big trend for TLT remains up. With the ETF trading at support and the employment report looming, we could see a move back towards resistance around 120.

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.