***Executive Summary***

• Stock Market Stance Remains Neutral
• SPY Stalls at Triangle Trendline
• IWM Turns Back at Short-term Resistance
• QQQQ Turns Back at Last Week's High
• Employment Report Preview
• UUP Forms Triangle Near Resistance
• GLD Stalls In Resistance Zone
• USO Gets Hit by Rising Supply
• TLT Waits for the Employment Report
• Stock Setups at 7AM (video link)

***Stock Market Stance*** Neutral on 29-January. The major-index ETFs remain within large triangle formations and trading ranges over the last 3-4 months. There are swings within these triangles, but the medium-term trends are flat at best. Outside the trend, the bulk of the evidence remains bearish for the medium-term. Negative breadth extremes on 14 and 20 January have yet to be countered with positive breadth extremes. Positive breadth was not inspiring on Monday and Tuesday. In addition, upside volume has been weak and buyers remain hesitant. The VIX (fear factor) is back on the rise and this is traditionally negative for stocks. Perhaps most importantly, we are still in a primary bear market and any advance from here would still be deemed a countertrend rally. Despite these negatives, the market simply refuses to buckle as investors salivate over TARP, the Bad Bank idea and the stimulus package. The very fact that we need these things is testament to the fragility of the economy – and the long road to recovery. In any case, progress on bank rescues and the stimulus package could keep buyers interested and bears frustrated as the market simply churns. This will make it difficult for both bulls and bears to make money.

Market moving events for the next few trading days:

• Thursday: Initial Claims, Factory Orders
  -Earnings: Bunge, Cigna, JDS Uniphase, Verisign
• Friday: Employment Report!
  -Earnings: Biogen Idec, Hillenbrand, Weyerhaeuser
• Monday: No economic reports.
  -Earnings: Beazer, Whirlpool, Sohu, Vodafone
• Tuesday: Wholesale Inventories
  -Earnings: Elan, MolsonCoors, NVIDIA, Web.com
• Wednesday: Crude Inventories
  -Earnings: Agrium, Level3, PF Changes, Cymer

***Technical Highlights***

***Major-index ETFs***

***Medium-term Trend*** There is not much change in the daily chart analysis. QQQQ, SPY and IWM have been flat since October with triangles taking shape since November (blue trendlines). In addition, there are two other bearish patterns at work. The first is the rising wedge advance from late November to early December. The second is the rising wedge advance in late January. These are shown with the pink trendlines. QQQQ, SPY and IWM broke rising wedge support with the January decline. After becoming oversold on 20-Jan, the major-index ETFs formed smaller rising wedge consolidations. These wedges peaked with the big surge last Wednesday (28-Jan). That surge failed miserably as the major-index ETFs declined sharply late last week. Even though triangle support from the late January lows is still holding, the failure to hold Wednesday's gains and last week's breakdown increase the chances of a support break.

***Short-term Trend*** The major-index ETFs went their separate ways yesterday. QQQQ surged to its 28-Jan high, but SPY and IWM hit resistance at their 62% retracements. Even though QQQQ showed relative strength, the non-confirmations from IWM and SPY detracted from strength in technology. QQQQ failed to hold its morning gains above 30.5 and declined sharply in the afternoon. This failure at resistance is bearish and further weakness would fully reverse the three day upswing. IWM and SPY also moved higher in early trading and reversed in the afternoon. Both met resistance at levels previously set (red lines). IWM broke the rising flag trendline and shows relative weakness. SPY finished at the rising flag trendline. Further weakness today would signal a continuation of last week's decline and a new leg lower could start - a new leg lower on the daily chart. This means a move below the November lows.

***Inter-Market Charts***

***Employment Report*** Before moving on to the inter-market charts, I would like to preview Friday's employment report and the possible implications. The chart below shows the monthly change in Non-Farm Payrolls. Over 400,000 jobs were lost in each of the last four months. This is much worse than in 2001. Notice that the first negative month (January 2008) coincided with a trendline break in SPY. Even though employment statistics are supposed to be lagging indicators, it is hard to see the economy climbing out of this hole anytime soon. It is bloody deep. Another 524,000 job losses are expected on Friday. Even though this news is already priced into the market, it does not make the recovery process any easier.

The second chart shows Non-Farm Payrolls with the 10-Year Note Yield ($TNX). In general, yields rise during periods of job creation and yields fall during periods of job depletion. You can also see a positive correlation between SPY and the 10-Year Note Yield. This is because yields rise when the economy is strong and fall when the economy is weak.

Normally, another deeply negative employment report would push rates lower and lift bonds. However, these are not normal times. The Fed already has a zero interest rate policy in force and cannot lower its benchmark rates much lower. This makes Friday a tricky day for bonds, the Dollar and gold. At this point, I think only a serious decline in the stock market would push money towards bonds. Should the 10-Year Note Yield fall and bonds rise, I would then expect downward pressure on the Dollar. This in turn could put upward pressure on gold.

The employment report has a habit of producing sizable gaps on Friday morning. The key, as always, is to watch what happens after the gap. If bonds gap up after the employment report, then this gap should hold. Failure to hold this gap would be most bearish for bonds. Conversely, if the U.S. Dollar Index ($USD) gaps down, it should hold that gap. Failure to hold the gap and a strong rebound would be bullish for the greenback.

***Dollar*** The US Dollar Index Bullish ETF (UUP) firmed on Wednesday with a modest advance. Overall, I consider the medium-term trend to be bullish for the greenback. The ETF met resistance around 26 and stalled the last two weeks as a triangle consolidation took shape. Trading within the triangle can be treacherous. The uptrend keeps the bulls strong, but resistance is at hand. A break above 26 would signal another continuation higher. With the medium-term trend still up, the odds favor an upside breakout.

 

On the 30-minute UUP chart, I am showing a line chart to eliminate the gaps. There is a lot of support around 25.3-25.4 from the January lows. The decline on Monday-Tuesday retraced 62% and found support at 25.6. A mini breakout occurred with yesterday's surge above 25.8. This mini breakout is bullish as long as 25.6 holds. The Euro Trust ETF (FXE) fell back after a one day advance. The falling channel remains the dominant chart feature. A move above 131 is needed to break the channel trendline and consider a trend reversal.

***Gold*** The streetTRACKS Gold ETF (GLD) is stalling near resistance, but the ETF is holding its gains and this is positive. In addition, the medium-term trend is firmly up as GLD remains within rising channel (blue trendlines). Despite this uptrend, trading could be tricky in the coming days. The blue box shows a choppy trading range in the second half of December. This range started after GLD broke above its November high and became overbought. On the 30-minute chart, GLD formed a flag on 2-3 February and broke flag resistance yesterday. This breakout is short-term bullish as long as it holds. Look for a move below 88 to throw cold water on the breakout.

***Oil*** The United States Oil Fund ETF (USO) came under pressure after the energy department reported a sharp rise in US oil inventories. Weak demand is pushing oil into storage and this is bearish for prices. There is no real change on the daily chart. USO continues to trade near support from the late December low. The ETF gapped down seven days ago and never recovered from this gap. At the very least, a move above 31.2 is needed to affirm resistance and consider a double bottom. On the 30-minute chart, USO broke triangle support on 2-Feb and neckline support on 3-Feb. There is simply no sign of strength. Moreover, each rally attempt fails within a day or two. Look for a break above the 30-Jan high to break this downward cycle.

***Bonds*** As noted above, Friday will be an important day for bonds. The iShares 20+Yr T-Bond ETF (TLT) remains in a downtrend on the daily chart. However, there is potential support from broken resistance and the 62% retracement. I have been expecting support for a few days now, but TLT just keeps sinking lower. Something is rotten in the kingdom of bonds. After a 7% decline in six days, I would also consider TLT oversold on a short-term basis. This does not guarantee a bounce, but it does improve the odds. On the 30-minute chart, TLT remains within a falling wedge with key resistance at 106. A move above this level would break the upper wedge trendline and 2-Feb high. This would be the first start towards a bigger trend reversal on the daily chart. My gut tells me that TLT will gap higher after the employment report on Friday morning. Unless positioned before the gap, I would wait and see what happens after the gap.

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.