***Executive Summary***

• Stock Market Stance Remains Bearish
• SPY Forms Extended Harami
• QQQQ Traces Out A Triangle Consolidation
• UUP Consolidates After Big Gains
• GLD Surges Along with Dollar
• USO Fails to Follow Through on Surge
• TLT Hits Retracement Support
• Could China Swap Bonds for Gold? (video link)

***Stock Market Stance*** No change. 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:

• 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
• Thursday: Initial Claims, Durable Goods, New Home Sales
  -Earnings: 3M, Colgate, Amazon, Juniper, Sunpower
• Friday: NAPM Chicago, Consumer Sentiment
  -Earnings: Exxon, Chevron, P&G, Arch Coal

***Major-index ETFs***

***Medium-term Trend*** Stocks churned yesterday as the major-index ETFs stayed within the range of Tuesday's long black candlestick. With the harami patterns still in play, there is no change in the daily analysis. A strong upside breakout would target a move above the January highs. That is a possibility. However, current conditions remain 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 five days. Extended harami patterns, or inside days, formed on Wednesday and Thursday. These patterns show 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*** On the 60-minute chart, triangle consolidations are taking shape over the last three days. There was a sharp decline from 7-Jan to 15-Jan and then a consolidation to work off oversold conditions. Triangles are neutral patterns. However, the prior decline and medium-term downtrend argue for a bearish bias. Triangle support breaks would signal a continuation of the prior declines. Should the major-index ETFs hold the triangle lows, a break above triangle resistance would argue for at least a retracement rally. Should this breakout occur with strong volume and breadth, it could even signal the start of a 1-2 month advance.

***Inter-Market Charts***

***Dollar*** The Euro is under renewed pressure this morning after Fortis Bank announced big losses. With the Pound (UK) still reeling from the nationalization of a Royal Bank of Scotland and a manufacturing slump, the Dollar does not look so bad after all. The US Dollar Index Bullish ETF (UUP) is still consolidating near resistance from broken support and the 62% retracement. While this may look like a good spot to pick a top, don’t forget that both the long-term and medium-term trends are up. I would not be surprised to see UUP exceed last year's highs on this current move. On the 30-minute chart, UUP consolidated with a falling wedge of sorts. I am marking upswing support at 25.7. A move below this level would argue for further weakness towards the next support at 25.3.

***Gold*** In early trading this morning, the Dollar is up, the Euro is down and Gold is up. We saw both gold and the Dollar surge on Tuesday. I did not consider this one-day event enough to change the inverse relationship between the Dollar and gold. However, another joint surge today would argue for a reassessment. Gold would show some serious strength if it starts moving higher in the face of Dollar strength. On the daily chart, the streetTRACKS Gold ETF (GLD) surged above 84 on Tuesday morning and then stalled the last three days. The gains are holding and this is bullish. However, there is a lot of resistance in the 85-90 area. On the 30-minute chart, GLD is holding it’s the breakouts at 81 and 83. Broken resistance at 83 turned into support and as the ETF bounced on Wednesday. While a move below 83 would be negative, I am going to allow room for a deep pullback by setting my key support zone at 81-82. A move below 80.5 would totally negate the prior breakouts and put gold back in bear mode.

***Oil*** The United States Oil Fund ETF (USO) found support near the December lows and stalled over the last 4-5 days. A double bottom is certainly possible, but that is in the future. The current trend is down as USO forged new 52-week low in late December. It would take a break above the early January high to forge a higher high. With the overall trend down, betting on a bounce is akin to picking a bottom. The reward is big if you get it right, but traders need to employ stops in case they are wrong. With the stock market failing to follow through on Wednesday's big advance, we could see more downward pressure on oil. In addition, the stock and oil futures are down sharply this morning. Be on guard for a support break and continuation lower in USO. On the 30-minute chart, USO is consolidating with resistance around 31 and support at 28.4. After the surge above 31 on Wednesday, USO pulled back immediately on Thursday morning. Buyers remain very skittish and this consolidation could foreshadow a continuation breakdown.

***Bonds*** Yesterday's decline in bonds was attributed to comments from Gheitner at his confirmation hearing. Gheitner suggested that China was manipulating its currency. These comments sparked fears of retaliation in the bond market because China is the biggest holder and biggest buyer of US Treasuries. Hmmm…where is China going to put its money if it does not buy US Treasuries? Perhaps some of this money may find its way into the gold market. This is something to keep in mind down the road.

With stock futures moving sharply lower this morning and bonds becoming short-term oversold, we could see a bounce in bonds. First and foremost, the long-term trend for bonds remains up. TLT became overbought after the surge above 120 and ripe for a pullback or consolidation. The ETF has now retraced 50% of its prior advance and this puts it at the top of its retracement support zone. My initial target was 104-105, but weakness in the stock market could push money into bonds as a safe haven. On the 30-minute chart, TLT gapped down three times and then moved below 110. I am marking short-term resistance at 113 and a break above this level would reverse the four day slide.

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.