***Executive Summary***

• Stock Market Stance Remains Bearish
• Negative Breadth Extremes
• VIX Turns Up
• Top Line Decline
• SPY Breaks Early December Low
• QQQQ Gaps Down and Stays Down
• UUP Surges in Flight to Safety
• GLD Surges for Second Day
• USO Tests December Lows
• TLT Recovers After Gap (video link)

***Stock Market Stance*** No change. Bearish on 15-January. The bulk of the evidence is currently bearish and this points to weakness over the coming weeks. QQQQ, SPY and IWM broke below their late December lows last week. The post-Christmas rally was completely erased as selling pressure returned in January. There were negative breadth extremes on 14-Jan and 20-Jan. New 52-week lows exceed new 52-week highs and new lows are expanding. The financial sector continues to show relative weakness and lead the way lower. In addition to bearish technical factors, earnings season kicks into full gear this week. If last week's reports are any guide, this is going to be one of the worst quarters on record. Even though the stock market may look past earnings we need to see a robust advance on big volume and strong breadth before considering a bullish trading stance.

Market moving events for the next few trading days:

• Wednesday: Crude Inventories
  -Earnings: Air Products, US Bancorp, Citrix, Ebay, F5
• Thursday: Initial Claims, Housing Starts, Money Supply
  -Earnings: Fifth Third, SW Air, AMD, Google, Microsoft
• Friday: Natural Gas Inventories
  -Earnings: GE, Harley Davidson, Schlumberger, Xerox
• Monday: Existing Home Sales, Leading Indicators
  -Earnings: Caterpillar, Amer Express, SanDisk
• Tuesday: FOMC Meeting Starts, Consumer Confidence
  -Earnings: EMC Corp, Nucor, Verizon, Stryker, Yahoo!

***Technical Highlights***

***Negative Breadth Extremes - Again*** For the second time in four days, AD Net% and AD Volume Net% for the S&P 1500 ETF (ISI) plunged below –90%. As the headline implies, these plunges show extreme selling pressure. An optimist might view it as an oversold situation. In reality, it is evidence of overwhelming selling pressure that is unlikely to dissipate overnight. Large-caps (financials) are leading this decline as the AD Volume Line broke below its early December lows. Net New Highs moved to –6% as new lows begin another expansion.

***VIX Turns Up - Again*** The chart below shows the SPY and the VIX with the Percentage Price Oscillator (PPO) applied (10-day EMA less 50-day EMA). This indicator is a percentage version of MACD. Notice that the SPY Percentage Price Oscillator moved below its signal line in early January while the VIX Percentage Price Oscillator moved above its signal line. A rising VIX reflects rising fear and this is bearish for stocks. Fear begets selling. Also notice that the VIX remains well below its Oct-Nov highs. Fear has further room to run on the upside.

***Top Line Decline*** Shrinking revenues reflect economic realities. Earnings are much more malleable than revenues. In other words, it is much easier to massage the numbers to meet or exceed earnings estimates. Revenues, on the other hand, are less flexible and provide a clearer picture of business conditions. Looking at earning reports over the last 1-2 weeks, it is clear that revenues are shrinking, and shrinking fast. Intel revenues fell 22.8% year-on-year, while revenues at Johnson Controls were down 22.6% year-on-year. These are not small declines. State Street warned yesterday and the shares were whacked for a 59% loss. Business conditions are bad, real bad. This means we are likely to see an "L" bottom at best. "V" and "U" bottoms are out of the picture right now. After such trauma, a period of flat trading (recuperation) is needed to build a base from which to launch a sustainable rally. In the prior bear market, SPY traded flat for some 47 weeks before breaking out and starting a new bull market. There is a silver lining in these abysmal 4th quarter 2008 reports. It makes it easier to report a rebound in the 4th quarter of 2009. This means we may see a stock market bottom in Sep-Oct 2009. A 47 week trading range based on the Nov-08 lows would target a final bottom in late September or early October.

***Major-index ETFs***

***Medium-term Trend*** SPY broke below its early December lows with a sharp decline on Tuesday. QQQQ and IWM remain above their early December lows, but also declined sharply on Tuesday. All three show rising wedge support breaks that reversed the medium-term uptrend last week. With yesterday's long black candlestick, we can set minor resistance at Friday's high. A strong recovery above Friday's highs would be quite positive and warrant a rethink. Barring such a recovery, the trend is clearly down and points to a retest of the November lows. These November lows represent the next bottom picking opportunity. This means another 7% lower for SPY, 14% lower for IWM and 9% lower for QQQQ. When (if) the major-index ETFs reach these lows, we should then be on the lookout for a hammer or strong recovery day. Let's get there first.

***Short-term Trend*** The oversold bounce was quite short as the major-index ETFs continued their downtrends with a vengeance yesterday. For the third time since 7-Jan, the major-index ETFs gapped down and stayed down. The breakaway gap on 7-Jan held. The continuation gap on 14-Jan turned into resistance. With yesterday's gap, the highs from last Thursday-Friday now mark key resistance. A move above these levels would fill the gaps and represent a remarkable recovery. Even though QQQQ, SPY and IWM are getting short-term oversold again, I am not holding my breadth for such a recovery.

***Inter-Market Charts***

***Dollar*** The US Dollar Index Bullish ETF (UUP) surged in a flight to safety on Tuesday. Remember, safety in the currency markets is a relative term. In particular, money is moving out of Pounds (UK) and Euros. Relative to these two currencies, the Dollar does not look so bad. The FX market is the largest and most liquid financial market in the world. According to the Bank for International Settlements, average daily turnover is over $4 trillion. In comparison, NYSE dollar volume was a mere $34 billion on Tuesday. On the price chart, the US Dollar Index Bullish ETF (UUP) surged above 26 and remained strong the entire day. As long as stocks remain weak, the Dollar is likely to remain strong. There is potential resistance around 26.5-27.2, but the trend is clearly up with support at 25.2 for now.

***Gold*** Despite a surge in the Dollar, gold moved sharply higher on Tuesday. Hmm… is this relationship changing? Not quite so fast. The inverse relationship is largely intact. The red box shows a recent period of Dollar weakness and gold strength. The green box shows a period of Dollar strength and gold weakness. The inverse relationship is getting a test with both surging yesterday. However, I am not ready to write off this relationship. Looking at the streetTRACKS Gold ETF (GLD) on its own merits, the surge off support at 80 is impressive, especially in the face of Dollar strength. There is still a lot of resistance around 90, but the uptrend is clearly intact. On the 30-minute chart, I am marking a support zone around 81-82 and GLD must hold this zone to keep the breakout/uptrend alive.

***Oil*** No change. The United States Oil Fund ETF (USO) continues to edge lower on demand worries. These worries stem from global economic weakness that reduces demand for energy products (less shipping, less driving, less air travel). Further weakness in oil bodes ill for the global economy and the stock market. On the daily chart, USO surged above the September trendline, but fell back below 30 this week. While there may be some support around 28-30 from the late December lows, a short-term reversal and breakout are needed to reverse the two week slide. On the 30-minute chart, USO declined sharply and then drifted lower the last six days. It is nothing but lower lows and lower highs, which denote a clear short-term downtrend. I will lower resistance to 31 and require a break above this level to reverse this slide.

***Bonds*** The iShares 20+Yr T-Bond ETF (TLT) opened sharply lower with a big gap down, but recovered in a flight to safety as stocks declined. Bonds are certainly looking toppy. However, I do not see a bottom in stocks and this could sustain buying interest in bonds (flight to safety). On the price chart, TLT formed a doji three days ago and reversed lower on Friday. I consider this reversal short-term bearish with a downside target around 104-105. On the 30-minute chart, TLT gapped down twice in the last two days. TLT also recovered after the gap both days. However, there are lower lows and lower highs over the last two days. The bond futures are pointing to another weak open today. As such, I will place resistance at 115 and require a move above this level to break the two day downtrend and call for a renewed move higher.

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.