***Executive Summary***

• Stock Market Stance Remains Bullish
• Non-Cyclicals Feeling the Heat
• SPY Zigzags Higher
• QQQQ Firms at Key Retracements
• UUP Surges off Flag Support
• GLD Remains Below Monday's Gap
• USO Remains Under Pressure
• TLT Forms Rising Flag at Support (video link)

***Stock Market Stance*** No change. Bullish on 8-December. I remain bullish on stocks, but am getting nervous as Wednesday's gap down holds and earnings season approaches. Last week saw warnings from stocks that were considered relatively insulated from the economic woes (WMT, CVS, CVX). If these non-cyclical companies are warning, then times must really be tough for more cyclical retailers. The current rally in the stock market was always viewed as a bear market rally. I expected further gains towards the Oct-Nov highs – and I still do. After the pullback over the last three days, the major-index ETFs are nearing their moment-of-truth. Pullbacks should last 2-5 days and the prior lows should hold. It is time to hold above the late December low and continue the uptrend or fold and start another leg lower. Oil is falling again, bonds are firming and the Dollar is finding a bid. These developments are negative for stocks and I will be watching price action closely for the next few days.

Market moving events for the next few trading days:

• 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
• Thursday: Initial Claims, PPI, Philly Fed
  -Earnings: Blackrock, Merrill Lynch, Intel, Teekay
• Friday: CPI, Industrial Production, Michigan Sentiment
  -Earnings: Johnson Controls, LaBranch, Sony

***Technical Highlights***

***Consumer Staples Hit Too*** Bad earnings and reduced outlooks were expected for the consumer discretionary sector. However, warnings were not limited to the consumer discretionary sector. Wal-Mart (WMT), which actually carries a mix of consumer staples and consumer discretionary products, warned last week and the stock got clobbered. CVS (CVS), which operates pharmacies, also warned and got slammed last week. Chevron (CVX), a major integrated oil company that operates of number of downstream gas stations, warned because of falling oil prices. The fall in gasoline prices did not spark an increase in consumption at the pump. These three companies sell items we need in good times and bad. The warnings from these three show just how dire conditions are in the economy. Earnings season gets underway this week and kicks into high gear next week. Even though expectations in the consumer discretionary have been greatly reduced, a number of stocks are trading well above their November lows and look vulnerable to a downside surprise (KSS, TGT, HD, ANF).

***Major-index ETFs***

***Zigzagging Higher*** QQQQ, SPY and IWM remain in uptrends as they zigzag higher. Each "zig" exceeds the prior high, while each "zag" holds above the prior low. As a result, the major-index ETFs are working their way higher within rising channels or wedges. Trend reversals occur once this series of higher highs and higher lows is broken. Technically, a downtrend would start after a break below the late December lows. Despite the gap down and decline over the last three days, the medium-term trends remain up.

RSI(2) is shown in the indicator windows. This short-term indicator was featured by Larry Connors in his book, Short Term Trading Strategies That Work: A Quantified Guide to Trading Stocks and ETFs. You can also read up on the indicator at the Market Sci Blog. As with all indicators, it is not a stand alone indicator and it needs to be used in conjunction with other analysis techniques. With the medium-term trend up, I am interested in short-term oversold conditions that might signal the end of a pullback. RSI(2) becomes oversold when it dips below 10. The indicator reached 21 for QQQQ and 11-13 for IWM and SPY. Short-term oversold conditions are fast approaching and this may foreshadow a bounce.

***Hitting Key Retracements*** The gap down and swing support breaks held on Wednesday. As a result, the three day trend (swing) is clearly down as QQQQ-SPY-IWM formed falling wedges or channels over the last three days. While RSI (2) nears oversold levels on the daily charts, the major-index ETFs are trading near retracement support on the 60-minute charts. QQQQ firmed at its 50% retracement mark and shows the least weakness (most relative strength). IWM broke below its 62% retracement and shows the most weakness. With the major-index ETFs at retracement support, the moment-of-truth is nigh. A normal pullback should end in the next day or two. As far as a swing reversal, I am marking minor resistance at the Friday afternoon highs. A move above these levels would also break the trendlines extending down from Wednesday. I would then expect a continuation of the prior advance (29-Dec to 6-Jan) and a move above the early January highs.

***Inter-Market Charts***

***Dollar*** The US Dollar Index Bullish ETF (UUP) bounced on Friday with a gap and strong close. It looks like the negative employment report took a back seat to safety. Relative to the other currencies, the Dollar is still viewed as a safe-haven in uncertain times. On the daily chart, UUP remains within a rising flag pattern. Even though this pattern could end up being bearish, the flag is currently rising and the bulls have control as long as support at 24.6 holds. On the 30-minute chart, the index broke falling wedge resistance with a gap up. The gap is bullish as long as it holds with an upside target north of 25.5.

On a fundamental note, the European Central Bank (ECB) meets on Thursday with a rate decision expected around 6:30AM ET. The Bank of England and Fed currently have zero-interest-rate policies in force. However, the European benchmark rate is at 2.5% and the ECB is expected to cut rates by 1/2 percent. The ECB is clearly not as aggressive as the Bank of England and the Fed. A lot depends on the language of the ECB statement. The Euro could hold strong if the ECB remains relatively hawkish. However, should the ECB turn dovish and hint at a move towards zero-interest rate policy, then the Euro (FXE) would likely decline sharply.

***Gold*** It was a wild ride for gold on Friday. The streetTRACKS Gold ETF (GLD) opened weak with a gap down, surged above 85 and then fell back to close down on the day. On the daily chart, the rising price channel remains in play with support in the low 80s. More pressing, the ETF gapped down on Monday and this gap held the entire week. Filling this gap is the first step to a renewed move higher. On the 30-minute chart, GLD attempted to break channel resistance on Friday, but failed with a weak close. Even though the 8-Jan gap up is holding, the 5-Jan gap is proving more troublesome. Gold is looking vulnerable to further weakness towards the low 80s. A fall in the Euro would also weigh on gold.

***Oil*** The United States Oil Fund ETF (USO) firmed on Thursday and flopped on Friday. The gap down and break below Thursday's low show just how weak the bulls are. On the daily chart, the overall trend is clearly down, but I was looking for an oversold bounce. The first half of that bounce occurred with the move above 36 early last week. After a pullback to retracement support, USO looked ripe for a continuation bounce into the 40-45 area. With Friday's weakness, I can now establish short-term resistance at 33.50. Look for a break above this level to reverse the short-term downtrend and argue for a continuation of the oversold bounce. Without a breakout, USO could head back for a test of the December lows.

***Bonds*** The iShares 20+Yr T-Bond ETF (TLT) opened weak, but recovered with a strong close on Friday. The post-gap rebound can be attributed to weakness in the stock market and possibly strength in the Dollar. Bonds are likely to move counter to stocks and I will be watching this consolidation for clues. On the daily chart, TLT is trading at support from the early December consolidation. This is a good spot for a bounce, which would be negative for stocks. On the 30-minute chart, the consolidation looks like a rising flag. The rising part shows a slight uptrend over the last four days. However, flags are potentially bearish consolidations and a break below 112 would signal a continuation lower. Bonds will be on the hot seat this week with the Producer Price Index (PPI) on Thursday morning and the Consumer Price Index (CPI) on Friday morning. Deflation is the order of the day currently. This is bullish for bonds. Any hints at inflation would weigh on bonds.

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.