***Executive Summary***

• Stock Market Stance Remains Neutral
• Negative Breadth Extremes
• Volume Expands on Downside
• Financials Point to Failure
• IWM and SPY Break Triangle Support
• QQQQ Gaps Down and Stays Down
• UUP Gaps Up and Stays Up
• GLD Surges Towards 100
• USO Extends Downtrend
• TLT Forges Island Reversal (video link)

***Stock Market Stance*** Neutral on 29-January. Stocks represent the flight-from-risk trade. Gold, bonds and the Dollar represent the flight-to-safety trade. The Dollar and gold have been moving higher since late December, while stocks have been moving lower since early January. Bonds fell from late December to early February, but their safe-haven status is getting a revival over the last six trading days. How bad is it? So bad that the bonds of the biggest debtor nation on earth are attracting money. With Tuesday's gap down and sharp decline, QQQQ, SPY and IWM broke short-term support zones to move into short-term downtrends. All three are short-term oversold now, but these support breaks on big volume and breadth are clearly bearish. The continuous stream of bailout announcement bounces is the only thing that keeps me neutral.

The bulk of the medium-term evidence favors the bears. First, there were double negative breadth extremes on 14-Jan, 20-Jan, 10-Feb and 17-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, seven of nine sectors were down more than 3% the last two Tuesdays. Third, volume expanded on the downside for the second Tuesday in a row. Broad selling pressure on expanding volume is not bullish. Fourth, IWM and SPY broke triangle support on 17-Feb.

Market moving events for the next few trading days:

• Wednesday: Crude Inventories, Housing Starts, FOMC Minutes, Industrial Production
  -Earnings: Dollar Tree, Garmin, Toll Brothers, TJX
• Thursday: Jobless Claims, Producer Price Index (PPI), Leading Indicators
  -Earnings: GM, Hormel, MGM Mirage, Sprint, Tesoro
• Friday: Consumer Price Index (CPI)
  -Earnings: Barrick, JC Penney, Lowe's, Tim Hortons
• Monday: No economic reports.
  -Earnings: Looksmart, Nordstrom, ONEOK, The9 Ltd
• Tuesday: Home Price Index, Consumer Confidence
  -Earnings: Macy's, Target, Dycom, Papa John's

***Technical Highlights***

***Negative Breadth Extremes*** Downside breadth on the S&P 1500 ETF (ISI) continues to outpace upside breadth. For the fourth time in two months, AD Net% and AD Volume Net% both plunged below –90% for negative breadth extremes. There have been some strong upside breadth days in January and February, but there were no positive breadth extremes. Buying pressure is simply not strong enough to surpass the +90% level. On the other hand, sellers have no problem pushing AD Net% and AD Volume Net% below their negative breadth extremes. Breadth remains bearish until this situation changes. New 52-week lows expanded again as Net New Highs moved to –12%, the lowest level since late November.

***Volume Expands*** Volume expanded on both the Nasdaq and the NY Composite. Volume was also above average for SPY and DIA, but below average for QQQQ and IWM. Selling was concentrated in financials and large-caps – again. Large multi-nationals are being hurt by a strong Dollar. Financials are being hurt by the insolvency of the large banks. Overall, negative breadth extremes on expanding volume are clearly bearish. At this point, it is probably going to take a selling climax or some sort of washout before we can expect a tradable low.

***Financials Lead Lower*** With negative breadth extremes, it is little surprise that all sectors were lower. Six of the nine sectors were down more than 4%. The consumer discretionary sector declined 3.79%, while the consumer staples and healthcare sectors were down less than 2%. Once again, financials led the way lower with the Financials SPDR (XLF) and Regional Bank HOLDRS (RKH) loosing almost 10% and 11%, respectively. XLF and RKH are both close to their lows and still showing relative weakness. Judging from the market's response here, many big banks are simply insolvent and need to fail. The depositors will be fine (FDIC), but the shareholders and investors will loose out. Even Greenspan acknowledges that the government may have to nationalize some banks to fix situation.

***Major-index ETFs***

***Medium-term Trend*** SPY and IWM broke triangle supports with gaps down. These breaks signal a continuation lower and the November lows mark the next test. Key resistance is based on the late January and early February highs. The only potentially bullish point is that 2-period RSI moved below 10 to become short-term oversold. This means we could see a period of flat trading or even another bailout-inspired bounce. Such oversold bounces would be expected to fail somewhere in the gap zone. At this point, I expect a move below the November lows. In addition, I do not expect a tradable low until there is a selling climax or washout. QQQQ continues to hold up better than IWM and SPY, but QQQQ is unlikely to buck the broader market. If SPY and IWM break their November lows, then I would expect QQQQ to test the Nov-Dec lows.

***Short-term Trend*** There was no follow through to the last hour surge on Thursday and there was no follow through to yesterday's gap down. Even so, QQQQ, SPY and IWM are in short-term downtrends after yesterday's gaps and lower lows. QQQQ broke channel support, while IWM and SPY broke trading range support. After 10% declines in the last five days, all three are short-term oversold. This means we could see a consolidation or an oversold bounce back to broken supports. The gaps and support zones turn into resistance zones (red boxes). The trendlines extending down from last week's highs also confirm resistance in these areas.

***Inter-Market Charts***

***Dollar*** As the stock market gapped lower, the US Dollar Index Bullish ETF (UUP) gapped higher. This negative correlation between the greenback and stock market has been working since late December. Weakness in stocks increases uncertainty and the Dollar remains the safe-have currency. Tuesday's gap in UUP extends on last week's triangle breakout at 26. With this surge, I drew a rising price channel extending up from the December low. The upper trendline targets a move towards the 27-27.3 area. Resistance from the Oct-Nov highs is also in this area. It is a bit early to raise key support on the daily chart so I will leave it at 25.3 for now. On the 60-minute chart, UUP broke triangle resistance, stalled for 1-2 days and then surged higher. Broken resistance turns into a support zone and this breakout remains valid as long as 25.8 holds. The Euro Trust ETF (FXE) gapped down and broke the October trendline. This break follows a flag break from late last week. I am lowering key resistance to 131 and it would take a move above this level to reverse the downtrend. The Euro came under more pressure because Euro-zone banks have exposure to Eastern Europe.

***Gold*** Gold remains the other safe-haven investment right now. With a sharp drop in stocks and the Euro, the streetTRACKS Gold ETF (GLD) surged above 95 on Tuesday. The upper channel trendline is within spitting distance, as is 100, which is $1000 for gold. Even though GLD is overbought, it looks like gold will need to take out $1000 before we will see a pullback or consolidation. On the 30-minute chart, broken resistance around 90.5-91.5 turns into a support zone. A pullback to this area may offer a second chance to partake in the uptrend. For now, I will leave key short-term support at 87.

***Oil*** Just when you thought oil could not go any lower, it does. The United States Oil Fund ETF (USO) gapped down and stayed down on Tuesday. This is hardly surprising given the sharp decline in stocks and sharp rally in the Dollar. Perhaps this is an exhaustion gap, perhaps not. Filling the gap is the first step towards creating an exhaustion gap. I am lowering medium-term resistance to 35. There is also a lot of resistance around 28-30 from broken support. The first oversold surge is likely to meet resistance in the 28-30 area. On the 30-minute chart, USO is short-term oversold after a 20% decline in 5-6 days. The pennant consolidation now becomes resistance and I am setting key resistance at 27. The most I expect is an oversold bounce at this point. In addition, I would let the first bounce go and only consider longs after a pullback. Oil continues to push into storage, especially here in the US. Jeffrey Saute at Raymond James notes that storage at the Cushing facility is nearing capacity. In addition, Brent Crude (Europe) is trading at a $10 premium to West Texas Intermediate Crude. The problem appears to be mostly US based. US produced oil has nowhere to go.

***Bonds*** The iShares 20+Yr T-Bond ETF (TLT) gapped up and closed strong in another flight to quality. The medium-term trend remains down, but TLT is on the verge of a breakout at 107. This is the second surge off the support zone. Follow through above 107 would likely coincide with another drop in stocks. Should the stock market rebound, I would expect bonds to fall. Since I am bearish on stocks, I have a bullish bias for bonds. On the 30-minute chart, TLT forged an island reversal over the last three days. The 9-Feb low held and this surge reinforces support around 102-103.

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.