***Executive Summary***

• Stock Market Stance Remains Bullish
• Breadth Hits Trendline Support
• RSI(2) Becomes Oversold for IWM and SPY
• QQQQ Shows Less Weakness
• UUP Extends Bounce off Flag Support
• GLD Gaps to Daily Chart Support
• USO Edges Lower
• TLT Surges With Weakness in Stocks
• Stock Setups Video at 8AM (video link)

***Stock Market Stance*** Bullish on 8-December. I remain bullish on stocks, but am getting nervous as the decline extends and earnings season approaches. This decline is four days old and SPY is down 7%. The prior downswing (17-23 Dec) lasted five days and SPY lost 5.3%. This swing is quickly wearing out its welcome as the major-index ETFs near their late December lows (key support). Pullbacks should last 2-5 days and the prior lows should hold. With short-term oscillators showing oversold conditions, it is time to hold above the late December low and continue the uptrend. The alternative is to break support and start another leg lower. Financials are bearing the brunt of this decline with XLF down over 13% in four days. This sector is weighing on SPY and IWM, but QQQQ has held up better. Can techs pull the market out of its funk? I will also be watching the intermarket developments because these have been negative for stocks. Oil is falling, bonds are bouncing, gold is sinking and the dollar is rising. Look for changes to reinforce any reversal attempts in the stock market.

Market moving events for the next few trading days:

• 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
• Monday: Market Closed
  -Earnings: Market Closed

***Technical Highlights***

***Deep Breadth Pullback*** AD Net% and AD Volume Net% for the S&P 1500 ETF (ISI) pulled back rather sharply over the last four days. Negative breadth was quite strong three of the last four days, but did not register a negative breadth extreme (below –90%). This is mildly positive, but it could also represent death by a 1000 cuts. The AD Line and AD Volume Line both declined to their rising trendlines (black). This is the make-or-break point for the breadth pullback. Note that I redrew the trendlines from the 1-Dec low. These trendlines are not as steep as a trendlines drawn from the late November low. More importantly, the AD Line and AD Volume Line both remain above their late December lows. A break below these lows would be bearish.

***Turnaround Tuesdays?*** Rob Hanna, at Quantifiable Edges, tested Tuesday's reversal potential after 1, 2 and 3 day declines from 1960 to 2008. According to Hanna:

In all cases Tuesday shows by far the best potential for a turnaround. The results are even better recently than if you look back 58 years. It appears Turnaround Tuesdays are real…and they’re not just for old folks.

So there you have it. This does not guarantee a reversal today, but it does improve the odds of a reversal.

***Major-index ETFs***

***Short-term Oversold Conditions*** QQQQ, SPY and IWM remain in a bear market with a bear market rally underway. With the bigger trend down, the bulls face a strong headwind and this could make pullbacks deeper than normal. Buyers are not as eager to step back into the market and require further discounting. The major-index ETFs remain with zigzag advances and the current pullback is still above the late December low (key support). This means that the series of higher highs and higher lows remain in place. It is an arduous affair, but the medium-term trend is still up.

Yesterday I featured RSI(2) and noted that this short-term indicator becomes oversold below 10. With further weakness on Monday, RSI(2) dipped below 10 for IWM and SPY. RSI(2) reached 11 for QQQQ. With the highest RSI(2) reading, QQQQ shows the least weakness. With RSI(2) essentially oversold for all three, the odds of an oversold bounce are above average. Will this bounce have legs or will it be a dead-cat bounce? We need to see strong breadth and expanding volume to validate a bounce. Otherwise, it could be a dead-cat bounce that foreshadows a medium-term trend reversal.

***Testing Key Support*** The decline over the last four days was deeper than I expected, but all three ETFs remain above the late December lows. IWM is the closest and shows relative weakness. QQQQ is the furthest and shows relative strength. Should the stock market reverse today, I would expect QQQQ to lead the way higher because it shows relative strength. Also notice that QQQQ had a pretty good pop in the last hour. A trendline break would be the first step towards a swing reversal. However, trendline resistance levels (red lines) are a bit far away, especially for IWM. This means it might be more appropriate to pick a bottom and anticipate a swing reversal. Going long now is risky with earnings season around the corner. It is important to set a stop-loss before you enter the trade and adhere to that stop-loss.

***Inter-Market Charts***

***Dollar*** The US Dollar Index Bullish ETF (UUP) moved higher again on Monday and remains in an uptrend. Even though this advance looks like a rising flag, the flag is clearly rising and I am marking support at 24.7. The Dollar seems to thrive on weakness in stocks, especially the financial sector. On the 30-minute chart, UUP gapped up and this gap is holding. The gap zone and lower flag trendline mark the first support area. As noted in detail yesterday, the European Central Bank (ECB) meets on Thursday with a rate decision expected around 6:30AM ET. This will affect the Euro/Dollar (FXE) and UUP.

***Gold*** Strength in the U.S. Dollar Index ($USD) and weakness in the United States Oil Fund ETF (USO) are weighing on gold. Gold offers a safe-haven from the decline in stocks, but investors are also turning to the Dollar as a safe-haven. The UK (Pound) is worse off than the US and European Central Bank (Euro) is way behind the curve. This makes the Dollar the most appealing of a bad lot. On the price chart, the streetTRACKS Gold ETF (GLD) gapped down for the second Monday running and is now testing support around 80-82. This latest gap is negative as long as it remains unfilled. On the 30-minute chart, GLD broke below the late December lows and gold is suddenly showing relative weakness in the inter-market arena.

***Oil*** The United States Oil Fund ETF (USO) sank further on Monday with a close below 31. The market is concerned that weakening demand will not be offset by production cuts. In addition, the propensity for OPEC members to cheat is as high as ever. Low prices and falling demand translate into lower revenues. Even a war in Gaza has failed to push prices higher. Despite the decline over the last three days, the ETF formed three indecisive candlesticks. USO is trying to firm, but cannot reverse course. On the 30-minute chart, USO is working its way lower with a channel the last three days. Look for a channel breakout and move above resistance at 33 to reverse this down swing.

***Bonds*** The iShares 20+Yr T-Bond ETF (TLT) opened weak with a gap below 112 and then recovered with a surge to 114. Weakness in stocks, the financial sector and oil are all contributing to strength in bonds. Support on the daily chart is holding and the ETF remains with a rising flag on the 30-minute chart. I will lower flag support to 111.5 and a break below this level would be short-term bearish for bonds. As noted yesterday, the Producer Price Index (PPI) is schedule for Thursday and the Consumer Price Index (CPI) is due on Friday. The bond market will be watching these key inflation measures closely. Consensus expectations are for PPI to decline 2% and CPI to decline 1%. Core-PPI and Core-CPI are expected to remain unchanged. The Fed focuses on Core-CPI and an unexpected rise in this number would be bearish for 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.