***Executive Summary***

• Stock Market Stance Remains Bearish
• Strong Breadth, but Not Extreme
• NYSE Volume Expands
• XLF and RKH Get Oversold BOunce
• SPY Forms Harami
• QQQQ Remains in Short-term Downtrend
• UUP Hits Resistance Zone
• GLD Holds Its Gains
• USO Bounces off December Low
• TLT Gaps Down for Third Day
• Stock Setups at 8:30AM (video link)

***Stock Market Stance*** Bearish on 15-January. Wednesday's recovery was impressive, but not enough to overturn my bearish stance. Even though NYSE volume and S&P 1500 breadth were impressive, this bounce comes from oversold levels. Big bounces can be expected after sharp declines. Follow through is what separates oversold bounces from extended rallies. I am lowering key resistance levels for the major-index ETFs. Follow through breakouts with big volume and breadth would argue for a bullish trading stance. This is something to consider for the future. Currently, the bulk of the medium-term evidence is bearish. There were negative breadth extremes on 14 and 20 January. QQQQ, SPY and IWM broke their late December lows. Fear is rising as the VIX turns up. Defensive sectors, like healthcare, utilities and consumer staples, are outperforming. Offensive sectors, like consumer discretionary, financial, industrials and technology, are underperforming. And finally, earnings season remains in full gear.

Market moving events for the next few trading days:

• 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!
• Wednesday: FOMC Policy Statement, Crude Inventories
  -Earnings: Boeing, Pfizer, Tyco, Citrix, Novellus

***Technical Highlights***

***Strong Breadth, but Not Extreme*** The stock market surged with a broad advance on Wednesday. For the S&P 1500 ETF (ISI), AD Net% finished at +84% and AD Volume Net% ended at +82%. These are strong readings, but not enough to warrant a positive breadth extreme, which requires a surge above +90%. Moreover, a one day surge above +80% is not enough to offset the negative breadth extremes from 14-Jan and 21-Jan.

***Volume Returns*** Stocks opened with a gap on Wednesday, tested Tuesday's lows around 11AM and then moved higher the rest of the day. It was a solid day with steady buying pressure for 5 1/2 hours. This means that most of the volume can be attributed to buying pressure. NYSE volume surged to its highest level of the year as money moved into the financial sector (+14.73%). Nasdaq volume was less inspiring and finished just average. The NYSE recovery on above average volume is impressive, but I would like to see follow through above 5500 on big volume. Similarly, I would like to see the Nasdaq follow through with a move above 1550 on big volume. Yesterday's bounce from oversold levels was not enough to reverse the 10-day slide.

***Financial Sector Surge*** Yesterday's big news was of course the big surge in the Financials SPDR (XLF), the Regional Bank HOLDRS (RKH) and other banks. After falling into the abyss on Tuesday, XLF and RKH surged over 10% on Wednesday. XLF volume was the highest since November, while RKH volume was the highest since September. Is this "the" bottom? Given the depth of the problems and the time required to heal, I do not think this is the big bottom. Both XLF and RKH hit fresh lows this week and became oversold after 10 day declines that exceeded 40%. Big declines give way to big oversold bounces. In addition, keep in mind that its takes a 100% advance to recover a 50% decline. Broken support levels turn into resistance and this oversold bounce could extend further. However, I think a long period of basing is required before we can expect an extended advance. At best, I would look for a basing period with choppy trading over the next few months.

***Major-index ETFs***

***Medium-term Trend*** Current conditions are bearish as QQQQ, SPY and IWM broke wedge support and pierced their late December lows. As long as current conditions remain bearish, future prospects are for further downside. At this point, my concern is what will it take to change (reverse) current conditions. First, notice that the major-index ETFs are trading near their 10-Oct lows. There have been six swings greater than 10% since 10-Oct, but no real change from 10-Oct to 21-Jan. The current downswing started with the gap down on 7-Jan and remains down. With such large swings, I am going to focus on these swings to improve the risk-reward ratio. There is no sense turning bullish on a break above the January highs. The decline over the last 10-11 days retraced 50-62% of the Nov-Jan advance. The major-index ETFs have been trying to firm the last four days. Harami patterns, or inside days, formed on Wednesday. These patterns show sudden indecision that can sometimes foreshadow a swing reversal. As such, I am lowering key resistance and will turn bullish on follow through above Friday's highs.

***Short-term Trend*** Despite a big bounce on Wednesday, the short-term trends remain down for QQQQ, SPY and IWM. SPY and IWM forged lower lows on Tuesday afternoon and remain well short of breakouts that would forge a higher high. QQQQ tested last weeks low around 28, but also remains short of a breakout that would fully reverse the short-term downtrend. At this stage, I am going to play a wait-and-see game. First, I want to see follow through and breakouts on good volume and breadth. Once this occurs, I will change my trading stance to bullish and then look for bullish setups.

***Inter-Market Charts***

***Dollar*** The US Dollar Index Bullish ETF (UUP) surged to resistance around 26 and stalled the last two days. Resistance stems from a 62% retracement and broken support. I pointed this area out last week, but removed it after Tuesday's surge. With a stall over the last two days, the resistance area is back in play. Despite this resistance, the trend for UUP is clearly up. It may be overbought and ripe for a pullback, but it would take a break below support at 25.3 to consider a trend reversal. While UUP hits resistance, the Euro Trust ETF (FXE) is finding support with a falling wedge working. The decline overshot the 62% retracement mark and FXE has yet to recover from Tuesday's plunge. I would look for a break above 133 to show a full recovery and reverse the 4 week downtrend.

***Gold*** Gold is holding strong. The streetTRACKS Gold ETF (GLD) surged over the last three days and these gains are holding. The bounce off support at 80 looks strong and has yet to be proven otherwise. I am focusing on the 30-minute chart for signs of a breakout failure. The first gap and resistance breakout turn into support around 81-82. A move below this support zone would reverse the breakout and point to lower prices.

***Oil*** The United States Oil Fund ETF (USO) found support near its December low and surged with a big advance on Wednesday. It is possible that a double bottom is forming, but that pattern would not be confirmed unless USO breaks above 40. Even though a break above 40 would be quite positive, I still think it would be within the context of a bigger downtrend. On the 30-minute chart, USO closed above Tuesday's high to forge its first higher high. The falling channel has been broken and this is the first step towards a rally. In fact, I view the breakout as short-term bullish with the first target around the early January high.

***Bonds*** The iShares 20+Yr T-Bond ETF (TLT) gapped down and stayed down on Wednesday. This is the first black candlestick since 5-Jan. Black candlesticks form when the close is below the open. On the daily chart, it looks like TLT is in the midst of a pullback with a downside target around 104-105. The UltraShort T-Bond ETF (TBT) formed a falling flag last week and broke flag resistance with a surge over the last three days. This breakout is bullish and targets a move towards the low 50s. A move below 40 would fill Wednesday's gap and negate the flag breakout. On the iShares 20+Yr T-Bond ETF (TLT) 30-minute chart, I am also watching the last gap. A move above 115 would fill this gap and be short-term bullish for TLT.

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.