***Executive Summary***

• Stock Market Stance Remains Neutral
• Breadth Surges Lower
• VIX Bounces off Support
• SPY Fails to Hold Gap
• QQQQ Start Short-term Downswing
• UUP Extends Bounce
• GLD Surges Despite Strong Dollar
• USO Forms Descending triangle
• TLT Hits Key Retracement (video link)

***Successful Operation*** Many thanks for your support and emails. The hernia operation went off without complications and I am now in recovery phase. At this point, I just have a stiff abdomen with minimal discomfort, provided I stay off the tennis court for a month!

***Stock Market Stance*** Neutral on 29-January. As noted last Thursday morning, Wednesday's surge was not impressive enough to warrant a bullish stance on stocks. Nasdaq, NYSE, SPY, QQQQ and DIA volume levels were uninspiring. AD Net% and AD Net% did not reach positive breadth extremes to cancel out prior negative breadth extremes. Wednesday's rally was concentrated in the financial sector and not spread evenly throughout the market. Bullish resolve quickly faded as stocks moved sharply lower on Thursday and Friday. While the medium-term trends are still considered up, I do not have a lot of confidence in the bulls right now. Moreover, trading has been flat since mid October (four months) and this is a swing traders market, hence the neutral stance overall. The current swing is down and I will expect further weakness until this swing reverses.

Market moving events for the next few trading days:

• Monday: Construction Spending, ISM Index
  -Earnings: Humana, Mattel, Sandisk, Sysco
• Tuesday: Auto-Truck Sales, Pending Home Sales
  -Earnings: Avon, Cummins, DR Horton, Tyco, UPS
• Wednesday: ISM Services, Crude Inventories
  -Earnings: Kraft, Clorox, Lazard, Novellus, THQ
• Thursday: Initial Claims, Factory Orders
  -Earnings: Bunge, Cigna, JDS Uniphase, Verisign
• Friday: Employment Report!
  -Earnings: Biogen Idec, Hillenbrand, Weyerhaeuser

***Technical Highlights***

***Breadth Remains Bearish*** There were a couple of positive breadth pops on 21-Jan and 28-Jan, but these were not enough to overcome the negative breadth extremes witnessed the prior week. Selling pressure kicked in again as AD Net% and AD Volume Net% both dipped below –70% over the last two days. New 52-week lows expanded as Net New Highs moved to –5%. Breadth remains on a bearish signal as these negative breadth extremes (red arrows) have yet to be overruled. We need to see a pair of positive breadth extremes to reverse this bearish breadth signal.

***A Bottoming VIX*** The S&P 500 Volatility Index ($VIX) found support around 40 with a hammer on Wednesday. With stock market weakness on Thursday-Friday, the VIX bounced off this support area and fear is on the rise. The blue lines show the up and down swings for the VIX over the last two months. There was a big downswing in December that facilitated a rally in SPY. The January upswing coincided with SPY weakness until 20-21 January. It looked like a rally in SPY was starting as the VIX turned down on 26-Jan, but the recent bounce off support puts the VIX back on the upswing. This is bearish for stocks.

***Major-index ETFs***

***Medium-term Trend*** While the medium-term trends remain up as a matter of reference, it is clear that the stock market has been directionless since mid October. QQQQ, SPY and IWM established supports in October and have been trading around this level the last four months (blue dotted lines). There is a upward bias sine the November low, but this "uptrend" is not strong. The major-index ETFs surged on Wednesday with big gaps, but gave it ALL back on Thursday-Friday. Some sort of pullback could have been expected. However, the gains were completely negated and the propensity to sell remains strong. All three are trading near key support levels on the daily charts. Further weakness would break the November trendlines and reverse the current uptrends.

***Short-term Trend*** On the 60-minute chart, QQQQ, SPY and IWM gapped down on Thursday and continued lower to break upswing support. The swing is currently down with the January lows marking the next support levels. Using SPY as an example, the ETF surged over 8% on the prior upswing, which was five days. The current downswing is just two days old and the ETF is already down over 5% from its high. The swings are the only way to play right now. For IWM and SPY, broken support and Friday's highs turn into resistance zones (red boxes). For QQQQ, Thursday's gap and the Friday morning high mark the resistance zone. Look for a break above these resistance zones to reverse the current downswing and start yet another new swing.

***Inter-Market Charts***

***Dollar*** The Euro is under pressure this morning as focus turns to Euro zone inflation, economic weakness and relatively high interest rates. As in the US, inflation is expected to reflect falling prices and give the European Central Bank (ECB) more room to cut rates. The benchmark Euro zone rate remains at 2%, which is still much higher than the Fed Funds rate in the US or the benchmark rate in the UK, both of which remain near zero. The Euro could remain under pressure until Euro rates fall in line with those in the UK and US. Further weakness in the Euro would be bullish for the US Dollar Index Bullish ETF (UUP). On the daily chart, UUP firmed with a big intraday reversal on Wednesday and continued higher Thursday-Friday. The medium-term trend is up and an assault on the Oct-Nov highs looks likely. Converse to the Dollar, the Euro Trust ETF (FXE) fell sharply the last three days. On the 30-minute chart, UUP broke the wedge trendline and resistance at 25.7. Broken resistance turns support and this is the first level to watch for signs of weakness in the greenback.

***Gold*** Despite a surging Dollar, gold moved higher over the last two days. This could be a flight to safety as money moved out of bonds and stocks on Thursday-Friday. Bloomberg is also reporting that gold is becoming a cash alternative. Imagine if the Chinese central bank starts buying gold instead of US Treasuries. The medium-term trend for the streetTRACKS Gold ETF (GLD) is clearly up, but the ETF is short-term overbought and at resistance. Buying with such overbought conditions risks a pullback towards the mid 80s. On the 30-minute chart, GLD broke flag resistance on Thursday and continued above 90 on Friday. I am going to raise my short-term support zone to 85-87. This is based on broken resistance and the flag lows. A pullback into this zone may provide a second chance to buy bullion.

***Oil*** The United States Oil Fund ETF (USO) gapped down on Tuesday and remained under pressure the entire week. The ETF even failed to rise as the stock market surged on Wednesday. While a double bottom is still possible, I don't see oil rising in the face of stock market weakness and Dollar strength. This means a descending triangle could be taking shape and a break below support would signal a continuation lower (magenta lines). At this point, the odds favor a support break and further weakness. On the 30-minute chart, the pattern since 20-Jan looks like a continuation head-and-shoulders. There is a consolidation, a failed surge and another consolidation. Watch the consolidation boundaries for the next directional break. A move below 28.5 would be bearish. A move above 31 would be bullish. However, I would also look for strength in stocks and weakness in the Dollar to confirm a break above 31.

***Bonds*** The iShares 20+Yr T-Bond ETF (TLT) gapped down and stayed down on Thursday. The decline slowed on Friday, but the ETF still finished weak on the day. Despite a sharp three day decline last week, TLT is trading at its 62% retracement mark with a falling channel. If the bigger uptrend is going to reassert itself, then this is a good spot to find support. RSI(2) is trading at 11.65, which is just above oversold (10). The indicator was actually oversold last Monday and bounced on Tuesday. With an oversold test over the last few days, a small positive divergence has formed and TLT looks ripe for a bottom picking bounce. On the 30-minute chart, TLT firmed somewhat on Friday to establish resistance at 105. A break above this level would provide the first showing of strength. Continued weakness in stocks could benefit bonds at some point.

Good day and good trading -Arthur Hill

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Breadth Charts ---------------------------------

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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.