***Executive Summary***
- Stock Market Stance Remains Neutral
- Negative Breadth Extremes
- Volume Expands
- QQQQ Hits Resistance at January High
- IWM and SPY Form Triangles
- UUP Bounces off Support
- GLD Surges in Flight to Safety
- USO Falls as Dollar Bounces
- TLT Gaps Up and Holds the Gap
(video link)
***Stock Market Stance*** Neutral on 29-January. I am tempted to turn bearish, but trading remains erratic and trend-less. At this point, the bulk of the medium-term evidence favors the bears. First, there were double negative breadth extremes on 14-Jan, 20-Jan and 10-Feb. A double negative breadth extreme occurs when both AD Net% and AD Volume Net% exceed –90% for the S&P 1500 ETF (ISI). Second, eight of nine sectors were down more than 3% on Tuesday and volume expanded on the downside. Broad selling pressure on expanding volume is not bullish. Third, IWM, SPY and DIA are in downtrends and show relative weakness – especially DIA. QQQQ and techs shows relative strength, but you cannot ride a one legged bull. There are three things that keep my stock market stance neutral. First, the major-index ETFs have gone nowhere since 10-Oct. Trading remains very choppy and treacherous. Second, buyers continue to be enticed by the parade of rescue packages. Third, yesterday's decline could have been an overreaction as emotions were running high. My trading remains focused on the swings because we are seeing swings greater than 3% every few days. The current swing is down and I have marked swing resistance levels on the 60-minute charts. However, 10-minute charts and an intraday watch are required to catch these swings in a timely manner.
Market moving events for the next few trading days:
- Wednesday: Crude Inventories
-Earnings: Agrium, Level3, PF Changes, Cymer
- Thursday: Retail Sales, Jobless Claims
-Earnings: Aetna, Borg Warner, Marriott, Dryships
- Friday: Consumer Sentiment
-Earnings: Abercrombie, PepsiCo, Cognizant Tech
- Monday: Presidents Day Holiday
-Earnings: --
- Tuesday: Empire State Manufacturing Index
-Earnings: Agilent, Fossil, Medtronic, Wal-Mart,
***Technical Highlights***
***Negative Breadth Extremes*** There were three surges from 21-January to 6-Feb and not one of them produced a positive breadth extreme. With broad selling pressure on Tuesday, AD Net% and AD Volume Net% for the S&P 1500 both dipped below –90%. Once again, the downside forces are proving stronger than upside forces. A sustainable uptrend is unlikely as long as this persists. The inability to produce positive breadth extremes showed hesitation. He who hesitates is lost. The bears showed little hesitation with negative breadth extremes on Tuesday.
***Volume Surges*** NYSE volume surged to its highest level since late November. Nasdaq volume was above average, but below the level seen on last Thursday's reversal day. In any case, an expansion of volume to the downside is negative. Bullish pullbacks normally occur on lower volume.
***Major-index ETFs***
***Medium-term Trend*** I started with blank charts for a clean perspective today. QQQQ remains in a medium-term uptrend, but the ETF hit resistance from the early January high with a sharp decline on Tuesday. The rising wedge and key support at 28.5 define the medium-term uptrend. A break below these support lines would reverse the uptrend and signal a continuation of the Sep-Nov decline. SPY and IWM are in medium-term downtrends. After breaking the rising wedge trendlines, both clearly broke support from the late December lows. More importantly, the Jan-Feb bounce has been feeble with triangles taking shape over the last three weeks. These triangles formed after oversold conditions from the sharp January decline. With yesterday's sharp decline, triangle resistance was affirmed and it would take a break above the triangle highs to reverse the medium-term downtrends. More likely, we will see a break below triangle support to signal a continuation lower. This would set up a test of the November lows.
***Short-term Trend*** The 60-minute charts focus on the rising channel for QQQQ and the triangles for IWM and SPY. QQQQ is much stronger than SPY and IWM. All three surged in late January to forge higher highs (green arrows). After a sharp pullback, all three forged higher lows in early February (blue arrows). QQQQ went on to a new high, but SPY and IWM met resistance just below their late January highs. Non-techs are lagging. With the sharp decline on Tuesday, the swings within the triangles and the channel are down. However, all three are nearing support zones from the trendline extending up from 20-Jan. After 4-5% declines, all three are also short-term oversold and this could produce a bounce or consolidation before the next move. Such gut-wrenching declines usually don't reverse overnight and I think a period of consolidation (heeling) is needed before considering a bounce. At this point, I would also consider an advance to be an oversold bounce that is destined to fail below minor resistance levels (red lines). A break above these minor resistance lines would show resilience and warrant a reassessment.
***Inter-Market Charts***
***Dollar*** The US Dollar Index Bullish ETF (UUP) surged in a flight to safety on Tuesday. There is no change in the basic analysis. The medium-term trend remains up as UUP consolidates with a triangle formation. The ETF bounced off support for the third time in five weeks, but has yet to follow through with a resistance breakout. On the 30-minute chart, the noose is tightening as the triangle narrows. Look for a break above 26 to signal a continuation higher and a break below 25.3 to reverse the bigger uptrend. The Euro Trust ETF (FXE) could be in the spotlight as Fortis shareholders vote today on the proposed takeover by BNP Paribas. Should shareholders vote against the takeover, this would put the onus on the Belgian government to rescue Fortis, which may require 6 billion Euros to remain solvent. A "no" vote could weigh on the Euro.
***Gold*** Gold also benefited from a flight to safety as the streetTRACKS Gold ETF (GLD) surged back above 90. This does not change the medium-term uptrend. GLD remains within a rising channel and is currently consolidating in the middle of this channel. This means GLD could go either way. There could be a continuation breakout towards the upper channel trendline or a minor support break towards the lower channel trendline. On the 30-minute chart, GLD formed a triangle over the last few weeks and broke above the upper trendline yesterday. I am now marking a minor support zone around 87-88. A break below this level would argue for a deeper pullback.
***Oil*** What is the deal with these failed surges? For the third day running, the United States Oil Fund ETF (USO) surged during the day, but fell back and closed weak. A new low on the daily chart simply affirms the current downtrend. This also negates the double bottom. On the 30-minute chart, the ETF has been drifting lower since 28-Jan with a series of lower lows and lower highs. There is a ton of resistance around 29-30. Look for a break above 30.3 to reverse this slide. The rising Dollar and falling stock market are not helping oil and other commodities. Look for help from these two before taking a bounce in oil seriously.
***Bonds*** The iShares 20+Yr T-Bond ETF (TLT) also benefited from a flight to safety on Tuesday. TLT gapped up, held its gains and closed near 105. The surge reinforces the support zone around 101-104. Overall, the medium-term trend remains down by virtue of the falling channel and key resistance at 110. On the 30-minute chart, TLT broke the wedge trendline on Monday and short-term resistance on Tuesday. This is a start, but traders need to be careful that this is not going to be another 1-2 day pop that fails. The gap offers the first support zone to watch. A move back below 102.5 would fill the gap and call for a reassessment. The future of bonds could depend on the stock market. Further weakness in stocks could extend the flight to safety and push money into bonds.
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.
