***Executive Summary***
- Stock Market Stance Remains Neutral
- Another Bailout Bounce?
- Breadth Modestly Weak After Tuesday
- QQQQ Tests Medium-term Support
- IWM and SPY Form Indecisive Candlesticks
- Stocks Short-term Oversold
- UUP Forms Bearish Engulfing
- GLD Remains Overbought
- USO Firms within Downtrend
- TLT Consolidates within Downtrend
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***Stock Market Stance*** Neutral on 29-January. News this morning of a possible bailout for Citigroup is putting a bid in stocks, the Euro and the Yen. Bonds, gold and the Dollar are getting hit as money moves into riskier assets. We have seen these 1-2 day announcement-induced pops before and this one is not any different. Stocks were already short-term oversold and ripe for a bounce. A possible Citigroup bailout just happens to coincide with oversold technical conditions. Moreover, strength on past announcements faded after a day or two. The solutions have been, and continue to be, inadequate for the problems. Until proven otherwise with strong follow through on expanding volume and strong breadth, I would not expect anything different now.
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. Fifth, the Put/Call Ratios have yet to reach extremes that signal a medium-term bottom.
Market moving events for the next few trading days:
- 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***
***Here we go again*** With another bailout in the works, stocks are scheduled to open strong. The key is to open strong without news. In addition, news of another bailout is not good news. Good news will come when we STOP getting bailout news. Even after all the prior injections, Citigroup still needs a bailout. I think this is throwing good money (tax payers) after bad money. Citibank is simply insolvent and somebody has to loose. Unfortunately, that somebody has to be the shareholders. Depositors are insured by the FDIC. The sooner congress, the administration and the bankers accept this, the quicker we can get on with the recovery process. Otherwise, this is just going to drag on at taxpayer's expense. I can't wait to hear what Rick Santelli will have to say on this one! Rant of the year.
***Modest Selling Pressure*** The S&P 1500 ETF (ISI) gapped down on Tuesday and closed lower four days in a row. Despite consistent weakness, daily breadth was only modestly negative the last three days. We saw negative breadth extremes with Tuesday's gap and sharp decline, but selling pressure lightened up on Wednesday, Thursday and Friday. AD Net% held above +42% and AD Volume Net% held above +52%. This is not enough reason to turn bullish, but it does increase the chances for an oversold bounce over the short-term. Medium-term, there were four negative breadth extremes in January and February (red arrows). Positive breadth extremes (greater than +90%) are needed to turn medium-term breadth bullish again. In a related note, new 52-week lows expanded on Friday as Net New Highs dipped below -20%.
***Major-index ETFs***
***Medium-term Trend*** QQQQ, SPY and IWM remain in medium-term downtrends, but all three firmed on Friday. QQQQ is holding up the best as it firmed at key support on Friday. The ETF opened weak, but bounced and closed positive on the day to form a small white candlestick. An important support test is at hand for this market leader. A support break would reverse the medium-term uptrend. IWM formed a doji and SPY formed a small spinning top. Both ETFs gapped down on Friday, but firmed after the gap as trading turned choppy. Doji and spinning tops can sometimes foreshadow short-term reversals. In addition, RSI(2) is oversold (below 10) for the longest time since 9-Oct. There were some pretty sharp bounces on 10-11 October, but these bounces ultimately failed as the major-index ETFs moved to new lows. At this point, a bounce in IWM and SPY would be considered an oversold bounce within a bigger downtrend. At the very least, both need to fill Tuesday's gap before we can consider an advance as more than just an oversold bounce.
***Short-term Trend*** The short-term trends are down with the gaps and support breaks turning into resistance. From the 10-Feb high to the 20-Feb low (10 trading days), IWM is down around 13.5%, SPY is down around 12.5% and QQQQ is down around 9.5%. SPY and IWM bore the brunt of recent selling pressure. All three are short-term oversold after such sharp declines. Broken supports and the gaps turn into resistance, as do the 10-Feb trendlines. I am setting key resistance just above last week's high (Tuesday's open). A move above Tuesday's open would break the 10-Feb trendline and show some serious resilience. This would warrant a reassessment of the short-term downtrend. I say reassessment because I would like have to judge breadth and volume before considering a trend reversal robust.
***Inter-Market Charts***
***Dollar*** There is a flight to risk underway this morning as the Citigroup news lifts the Euro and weighs on the Dollar. A Citibank bailout would increase confidence in the financial system. Be care though. Ii could be another short-term fix that is not enough to stem the long-term hemorrhage. With a strong open and weak close on Friday, the US Dollar Index Bullish ETF (UUP) formed a big bearish engulfing. As the name implies, these are bearish reversal patterns and further weakness today would confirm. With a reaction high forming around 26.6, a rising wedge could be taking shape. These are bearish patterns and a break below the February low would reverse the current uptrend. This would call for a continuation of the Nov-Dec decline and target further weakness towards the 23-23.5 area. A bearish engulfing in UUP translates into a bullish engulfing for the Euro Trust ETF (FXE). Notice that this pattern formed at support and follow through above key resistance would reverse the medium-term downtrend. The Japanese Yen Trust ETF (FXY) also bounced off support with a big move on Friday. A double top may be in the works, but this bounce puts its on hold and keeps the overall uptrend alive.
***Gold*** Gold hit $1000 to grab a few headlines, but the streetTRACKS Gold ETF (GLD) fell short of the $100 mark. Such is the nature of ETFs. As derivatives, they will never move step for step with the underlying security (gold). The flight to risk and surge in the Euro triggered selling in gold this morning. Despite these fundamentals, let's not forget that the streetTRACKS Gold ETF (GLD) was also short-term overbought and nearing the upper trendline of the rising price channel. It is way overdue for a pullback within this uptrend. On the daily chart, I see a big support zone around 87-91. This stems from the late January and early February consolidation. On the 30-minute chart, broken resistance turns into support in the low 90s. This is at the upper end of the support zone on the daily chart. A pullback into the low 90s may offer a second chance to partake in the uptrend.
***Oil*** The United States Oil Fund ETF (USO) opened weak and closed strong to forge a modest white candlestick on Friday. The ETF is doing its best to firm after becoming oversold early last week. With the big trend clearly down, an advance from here would be deemed an oversold bounce. Broken support turns into resistance around 28-30. This is the first medium-term hurdle for the bulls. On the 30-minute chart, USO has yet to fill last weeks gap down. The consolidation prior to the gap marks short-term resistance around 26-26.5, an area also confirmed by the 26-Jan trendline.
***Bonds*** Bonds are trading lower this morning on news of a possible bailout for Citigroup. This possible bailout would make the financial world safety and diminish the propensity to buy bonds. Despite their safe-haven status, the iShares 20+Yr T-Bond ETF (TLT) fell sharply in January-February. During this timeframe, the S&P 500 ETF (SPY) is down almost 20%. Bonds did not offer much safety in 2009. TLT is currently consolidating within a downtrend and looks vulnerable to further weakness. The 30-minute chart focuses on this consolidation with key resistance at 107 and support around 102-103. TLT surged off support on Friday, but met resistance in the middle of this consolidation. With the bigger trend down on the daily chart, I think resistance will hold and TLT will move below the February lows.
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.
