***Executive Summary***

• Stock Market Stance Remains Neutral
• Put-Call Ratios Favor Further Weakness
• QQQQ Leads Lower on Thursday
• IWM and SPY Head toward November Lows
• UUP Recovers After Weak Open
• GLD Remains a Safe-Haven
• USO Gets A Dead-Cat Bounce
• TLT Gaps Lower After PPI Surprise (video link)

***Stock Market Stance*** Neutral on 29-January. Has the market become immune to bailout-stimulus announcements? There have been plenty of these announcements since mid-late January, but the market failed to follow through on the initial surge. In addition to failed follow through, SPY broke below its January lows and DIA broke below its late November lows. Perhaps the problems are bigger than the solutions. The short-term trends remain down for QQQQ, SPY and IWM. Even though they are oversold, they could indeed become more oversold. As noted today, the Put-Call indicators have further room to run, which means the market has further room to fall. I do not expect this decline to end until we see some sort of high volume plunge that ends with a selling climax. This would probably occur after SPY breaks its November low.

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:

• 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
• Wednesday: Crude Inventories, Existing Home Sales
  -Earnings: Garmin, Saks, Zale, Famous Dave's, True Religion
• Thursday: Durable Goods, Jobless Claims, New Home Sales
  -Earnings: GM, Rowan, Dell, Kohl's, Gap Inc
• Friday: GDP, Consumer Sentiment, NAPM Chicago
  -Earnings: Aircastle, Interpublic, Mirant, Integra

***Technical Highlights***

***CBOE Put/Call Ratio*** I use the CBOE Total Put/Call Ratio ($CPC) to identify periods of excessive bullishness and excessive bearishness. This indicator is based on option volume for both stocks and indices. I applied a 10-day SMA to smooth the data series. Readings below .90 show excessive levels of bullishness that foreshadow a market top. Once below .90, a move back above .90 acts a bearish signal for SPY. The indicator dipped below .90 in late December and this foreshadowed the market top in early January. Normally, the indicator would work its way higher as the market falls. The market did its part with a decline, but the indicator again dipped below .90 again in early February. This showed excessive bullishness, and stubbornness, on the part of option buyers (calls) in early February. A second bearish signal was triggered with the move back above .90 this week. A bullish signal is not possible until the indicator moves above 1.2, which is quite far away. This suggests that the market has further room to fall.

The second chart shows the CBOE Equity Put/Call Ratio ($CPCE). No index options feature in this indicator. To normalize the indicator, I applied the Percentage Price Oscillator (5,200,1), which shows the percentage difference between the 5-day SMA and 200-day SMA. Readings below –8% show excessive bullishness, while readings above 27% show excessive bearishness. The CBOE Equity Put/Call Ratio showed signs of excessive bullishness in late December, late January and early February. With the decline in the market over the last seven days, the indicator surged above +10%, but remains well below +27%, which would show excessive bearishness. This indicator confirms that the current decline has further room to run.

***Techs Lead Lower*** Relative strength in QQQQ and the technology sector was one of the few bright spots in the market. This appears to be changing. With a warning from HP yesterday, the Nasdaq and Nasdaq 100 led the major indices lower on Thursday. The chart below shows the year-to-date performance for the other major index ETFs. QQQQ was the only ETF in positive territory last week. With a sharp decline over the last seven days, QQQQ is now in negative territory for the year and starting to lead on the way down. This is a bearish development for the market overall.

***Major-index ETFs***

***Medium-term Trend*** No change. 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. QQQQ is currently testing support from the December trendline and Dec-Feb lows.

***Short-term Trend*** The short-term trends are down with the gaps and support breaks turning into resistance. Stocks attempted to rally in the morning, but the rally quickly failed and QQQQ led the way lower. Post-gap weakness is not excessive, but there is certainly no sign of strength. The gap and support breaks are clearly holding. The 20-Jan low around 28 marks the next potential support area for QQQQ. The November lows mark the next potential support areas for SPY (74) and IWM (38). While IWM and SPY have further room to fall, QQQQ could be poised to play some catch-up. This week's highs mark minor resistance and the first level to watch for signs of strength. While a move above minor resistance would be positive, I would not take the bullish bait on the first bounce.

***Inter-Market Charts***

***Dollar*** The flight to safety trade may resume as stocks look poised to move lower. It's all relative when it comes to currencies. The Dollar is not seen on its own. Instead, the Dollar is viewed relative to the Euro, Yen, Pound, Swiss Franc and other currencies. Comparing apples to apples, the greenback doesn't have as many worms. The US Dollar Index Bullish ETF (UUP) opened weak, but moved higher throughout the day to form a long white candlestick. Although UUP closed down on the day, post-gap price action was positive. The medium-term uptrend remains firmly in place with an upside target around 27-27.3. Key support remains at 25.3 for now. On the 30-minute chart, the triangle breakout turns into a support zone around 25.8-26.2. The bulls are in good shape as long as 25.8 holds. The Euro Trust ETF (FXE) opened strong and closed weak as selling kicked in after a small advance. FXE remains in a clear downtrend with resistance at 131.

***Gold*** Gold would also benefit from another flight-to-safety round. Weakness in the Euro and the stock market would benefit gold. Other than that, the technical assessment is unchanged. Gold remains in a strong uptrend, but is short-term overbought and ripe for a pullback or consolidation. 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*** The United States Oil Fund ETF (USO) got a bounce on Thursday as the Dollar fell. However, this is just an oversold bounce within a strong downtrend. On the daily chart, broken support turns into resistance around 28-30. This is the first level to expect trouble on the daily chart. On the 30-minute chart, resistance is even lower. The January trendline and pennant consolidation combine to mark resistance around 26.5. Even with yesterday's surge, USO remains well below short-term resistance.

***Bonds*** Bonds got the shock of their life when the Producer Price Index (PPI) showed a surprising rise in January. With stocks finding a bid in early trading, the iShares 20+Yr T-Bond ETF (TLT) opened sharply lower. The bid in stocks did not last, but TLT did not manage to fill the gap. I would have expected a rise in bonds after the fall in stocks. Perhaps bonds aren't so safe. The medium-term trend remains down with resistance affirmed at 107. Even though there is still support around 101-104, TLT needs to surge above 107 to fully reverse this downtrend. Unfortunately, such a move would likely coincide with a sharp decline in stocks. On the 30-minute chart, TLT gapped down and is testing support around 102-103. At this point, I think the future of bonds depends on the stock market and the need for safety. With a forecast for lower stock prices, this means we may see bonds grudgingly work their way higher.

Good day and good trading -Arthur Hill

---------------------------------------------------------------
Click here to post a comment, suggestion or question.

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

---------------------------------------------------------------
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.
--------------------------------------------------------
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).
--------------------------------------------------------
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.