***Executive Summary***
- Stock Market Stance Turns Bearish
- Negative Breadth Extremes
- SPY Breaks Medium-term Support
- QQQQ Gaps Down and Stays Down
- UUP Stalls Near Resistance
- Strong Dollar Weighs on GLD
- USO Continues to Firm Near Retracements
- TLT Surges as Stocks Fall
- Stock Setups Video at 8:30AM
(video link)
***Stock Market Stance*** Bearish on 15-January. The bulk of the evidence has shifted from the bulls to the bears. There were negative breadth extremes as stocks fell sharply on Wednesday. DIA, SPY and IWM clearly broke below their late December lows. Lower lows are not part of an uptrend. They are part of a downtrend. The major-index ETFs are short-term oversold and we could see some stalling over even an oversold bounce in the coming days. However, I think bounces are to be sold at this stage. With my stock market stance now bearish, I will turn to the 60-minute charts for bearish setups that offer a good risk-reward ratio. See Wednesday's commentary for details on combining daily charts (medium-term) with 60-minute charts (short-term).
Market moving events for the next few trading days:
- 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
- Wednesday: No economic reports.
-Earnings: Air Products, US Bancorp, Citrix, Ebay, F5
***Technical Highlights***
***Negative Breadth Extremes*** Selling pressure increased significantly on Wednesday with AD Net% and AD Volume Net% surging below –90% for the S&P 1500 ETF (ISI). These negative breadth extremes reverse the positive breadth extremes seen on 16-Dec. Negative momentum started building last week and Wednesday's surge broke the bull's back. The AD Line and AD Volume Line both broke below their 1-Dec trendlines. In addition, new 52-week lows expanded significantly as Net New Highs moved to –2%. Breadth is now bearish.
***Major-index ETFs***
***Another Transition Period?*** The QQQQ uptrend extended from 9-Dec to 14-Jan, while the uptrends for IWM and SPY extended from 15-Dec to 14-Jan. The mid and late December lows marked key support for all three ETFs. QQQQ, SPY and IWM closed below their mid-late December closing lows. A lower low is the first step to a trend reversal and I am now calling the medium-term trend down. The early January highs mark key resistance and I will now use the 60-minute charts to look for bearish setups, short-term overbought conditions and resistance failures. With yesterday's breakdown and negative breadth extremes, my downside targets are below the November lows. However, the target and timeframe are not that important. The trend reversal is what really matters and I will stay medium-term bearish until there is bullish evidence to the contrary.
***Short-term Oversold*** The short-term trends remain down, but the major-index ETFs are getting short-term oversold. RSI(2) on the daily charts is below 10. QQQQ, SPY and IWM are down 9-12% over the last six days. Despite these oversold conditions, the support breaks on the daily chart are fresh and oversold conditions could extend. The first gap (7-Jan) is considered a breakaway gap because it started the decline. The second gap is considered a continuation or common gap because it is in the direction of the underlying trend. The second gap zone turns into resistance and key resistance is based on Tuesday's highs. A move above Tuesday's high would fill the gap, break key resistance and reverse the short-term uptrend. While this would start an upswing, I am going to ignore an upside breakout at this stage and wait for a bearish setup to emerge. In fact, a move into the resistance zones could offer the first setup for the bears.
***Inter-Market Charts***
***Dollar*** The US Dollar Index Bullish ETF (UUP) surged above 25.5 on Tuesday and held its gains on Wednesday. The ETF is 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. It is also worth noting that the advance over the last four weeks looks like a rising flag. Should this pattern turn out to be bearish, UUP is likely to peak near current levels. It would take a break below support at 24.7 to confirm the bearish flag. On the 30-minute chart, the current swing remains up and I am marking short-term support at 25.4. For those looking to get a jump on the bearish flag, a move below 25.4 would produce the first bearish signal. The European Central Bank (ECB) meets today and we could also see a buy-the-rumor and sell-the-news scenario once the ECB makes it policy statement around 7:45 AM ET.
***Gold*** Continued strength in the Dollar and weakness in the stock market are weighing on gold. The streetTRACKS Gold ETF (GLD) closed below 80 for the first time since 10-Dec. Support in the low 80s is not holding, but GLD is trading in a key retracement zone. The decline over the last two weeks retraced 50-62% of the December advance. While there is some hope for support, the gaps remain and gold is unlikely to move higher unless the Dollar falls. On the 30-minute chart, GLD formed a falling channel or flag over the last two weeks. I elected to draw through the 9-Dec high. The gap zone around 82-83 marks the big resistance area to watch. GLD is short-term oversold, but showing now signs of strength. Look for a move above yesterday's high to show life and a break above 83 to break flag resistance.
***Oil*** The United States Oil Fund ETF (USO) is still trying to firm near its key retracements on the 30-minute chart. First, the daily chart shows four indecisive candlesticks in the last five days. These are the ones with small bodies that show little change from open to close. Even though USO gapped down on 8, 9 and 12 January, it managed to firm after each gap. Firmness continued with a small white candlestick on Tuesday and a mini-hammer on Wednesday. On the 30-minute chart, USO has been working its way lower over the last four days. The decline has clearly slowed, but we have yet to see a breakout. I am lowering key resistance to 32.5 and a break above this level would argue for a rally above the early January high. Oil could also use a little help from the stock market. Continued weakness in stocks would likely weigh on energy demand.
***Bonds*** Weakness in stocks drove money into bonds over the last three days. The iShares 20+Yr T-Bond ETF (TLT) surged off support with a move above 115 yesterday. The bigger trend is clearly up for TLT and the next upside target is the resistance zone around 120-122. With the major-index ETFs starting another leg lower, bonds are likely to remain strong. On the 30-minute chart, TLT surged above the flag trendline and the flag is no more. I am marking short-term support at 113 and this is the level to watch for a reversal that could lead to a deeper decline. The Producer Price Index (PPI) will be reported this morning 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.
