***Executive Summary***
- Stock Market Stance Remains Bullish
- Dissenting the Mar-May Wedge
- Using Daily and 60-minute Charts
- SPY Stalls Near Medium-term Support
- QQQQ Establishes Short-term Resistance
- UUP Is Getting Short-term Overbought
- GLD Firms After Gap Down
- USO Holds Retracement Support
- TLT Remains with Rising Flag
(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 lasted four days with SPY loosing 7%. The prior downswing (17-23 Dec) lasted five days and SPY lost 5.3%. This downswing 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 becoming oversold on Monday, it is time to hold above the late December low and continue the uptrend. Failure to hold and a support break would signal the start of another leg lower.
Market moving events for the next few trading days:
- Wednesday: Retail Sales, Crude Inventories
-Earnings: AMR, Lecroy, Clarcor, Xilinx
- Thursday: Initial Claims, PPI, Philly Fed
-Earnings: JP Morgan, Blackrock, Intel, Teekay
- Friday: CPI, Industrial Production, Michigan Sentiment
-Earnings: Johnson Controls, LaBranch, Sony
- Monday: Market Closed
-Earnings: Market Closed
- Tuesday: No economic reports.
-Earnings: Bank of America, J&J, State Street, IBM
***Technical Highlights***
***Dissecting a Wedge*** The first chart below shows daily candlesticks for SPY and a rising wedge from March to May 2008. The other charts show 60-minute candlesticks and bearish setups after the 23-May support break. The wedge lasted 8-9 weeks as SPY advanced with higher highs and higher lows. The medium-term trend was up as long as the higher highs and higher lows prevailed. The first lower low (trend reversal) occurred with the support break on 23-May (red arrow). Once the medium-term trend reversed, it was time to turn to the 60-minute charts for bearish setups. The first setup occurred with the gap and trendline break on 2-June. The second occurred with the small wedge and gap in mid June.
I use the daily charts to determine the medium-term trend and my trading stance. My trading stance is bullish when the trend is up and bearish when the trend is down. With a bullish trading stance, I will look for bullish setups such a pullbacks, short-term oversold situations, support tests and reversals on the 60-minute charts. When my trading stance is bearish, I will look for bounces, short-term overbought situations, resistance challenges and reversals on the 60-minute chart. In essence the trading stance tells me what to look for on the 60-minute chart.
This system works until it doesn’t work. Short-term pullbacks can be bought in uptrends, but one pullback will go too far and result in a medium-term trend reversal. This is when the trading stance changes from bullish to bearish. Notice that SPY formed a doji on 22-May, which was just before the support break on 23-May. Because the medium-term trend was still up, this doji at support was viewed as a chance to buy at support with a good risk-reward ratio. However, SPY broke support the very next day and the trade did not work. This marked a transition from medium-term bullish to medium-term bearish. Losses and bad trades are all part of the game. The key is to limit losses and improve reward potential with good entries.
***Major-index ETFs***
***Another Transition Period?*** The daily charts for QQQQ, SPY and IWM show shades of May 2008. Yes, we could be at a transition point from medium-term uptrend to medium-term downtrend. The major-index ETFs have rising wedge type advances over the last 7-8 weeks. After a sharp pullback the prior four days, the major-index ETFs firmed near their late December lows yesterday. This reminds me of the 22-May doji just before the 23-May support break. While the risk-reward ratio for new long positions is good at current levels, a break below the late December lows would forge the first lower low. A lower low means the start of a medium-term downtrend and it would then be time to look for bearish setups on the 60-minute charts. This truly is a critical juncture for the stock market.
***Five Day Downtrend*** Yesterday I focused on support and short-term oversold conditions as a potential bottom picking opportunity. Stocks opened strong, but the bounce quickly faded and there was no follow through. Boo hiss. This is not bullish. Moreover, it is time to call a spade a spade. With the current decline running five days, the short-term trends are down for QQQQ, SPY and IWM. Am I really late to the party or just fashionably late? That depends on key support from the late December lows. A break below these levels could accelerate this downtrend. In fact, I think a break below the Monday-Tuesday lows would significantly increase the chances of a medium-term support break and downside acceleration. With a little bounce early Tuesday, the major-index ETFs established resistance levels based on the morning highs. It would take a break above these levels to reverse the short-term downtrend.
***Inter-Market Charts***
***Dollar*** The US Dollar Index Bullish ETF (UUP) gapped up and closed above 25.5 with a big move on Tuesday. For a currency, the surge over the last three days has been huge. The ETF is getting short-term overbought now and ripe for a pullback or consolidation. In addition, retracement resistance and resistance from broken support are coming into play around 25.6-26. The European Central Bank (ECB) meets tomorrow and we could also see a buy-the-rumor and sell-the-news scenario once the ECB makes it policy statement.
***Gold*** Despite a big surge in the U.S. Dollar Index ($USD), the streetTRACKS Gold ETF (GLD) held firm and ended the day with a small gain. However, the inverse relationship between the Dollar and gold remains in place since mid December. GLD has been moving lower the last 3-4 weeks, while the Dollar has been moving higher. On the price chart, GLD formed a doji at support on Tuesday. Doji signal indecision that can sometimes foreshadow a short-term reversal. With GLD trading at support, this is something to watch for as the Dollar becomes overbought. On the 30-minute chart, GLD consolidated below its support break. The first bullish signal would be a break above 82.
***Oil*** The United States Oil Fund ETF (USO) finally got a bounce and retracement support on the 30-minute chart is holding. The medium-term trend remains down, but USO became severely oversold in late December and ripe for a rally. As witnessed in SPY, bear market rallies can last 8 weeks or more. The current rally is USO is less than three weeks old. A continuation breakout on the 30-minute chart would target further strength towards the next resistance zone around 40-45. On the 30-minute chart, USO moved back into the retracement zone with a bounce back above 31.5. This is positive and a break above 33 would be short-term bullish.
***Bonds*** The iShares 20+Yr T-Bond ETF (TLT) is holding support on the daily charts and the ETF remains with a rising flag on the 30-minute chart. While rising flags are traditionally bearish patterns, the bulls deserve respect as long as the flag rises. After all, TLT has a series of higher highs and higher lows working over the last six days. A break below 112 would forge a lower low and reverse this short-term uptrend. Keep in mind that the Producer Price Index (PPI) will be reported Thursday and the Consumer Price Index (CPI) is due on Friday.
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.
