***Executive Summary***

• Stock Market Stance Remains Neutral
• QQQQ Breadth Takes a Hit
• VIX Moves Higher
• Put/Call Ratio Heading towards Extreme
• QQQQ Breaks Medium-term Support
• IWM and SPY Extend Oversold Streak
• UUP Forms Harami
• GLD Stalls at Channel Trendline
• USO Wilts as Dollar Rebounds
• TLT Remains in Consolidation
• ETF and Stock Setups by 8:30AM (video link)

***Stock Market Stance*** Neutral on 29-January. Why remain neutral? One word: volatility. There have been 22 swings of at least 5% since 10 October. 17 of these occurred from 10-October to 29-December. Six occurred from 30-Dec to 23-Feb. The swings are getting fewer, but volatility remains high and volatility equates to overall risk – for both bulls and bears. The current swing is clearly down and my bias remains bearish. The medium-term evidence points to further weakness in the coming weeks, but the major-index ETFs are short-term oversold. President Obama addresses the nation tonight and this could produce more volatility on Wednesday.

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:

• 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
• Monday: ISM Mfg Index
  -Earnings: Tower Group, Ferro, Kenneth Cole, TiVo

***Technical Highlights***

***QQQQ Breadth Leads Lower*** QQQQ and techs held up relatively well this year, but started showing relative weakness last week. This culminated with a support break in QQQQ and a negative breadth extreme in AD Net% on Monday. The chart below shows QQQQ closing below its January low with a sharp decline. AD Net% moved below –90% for its third negative breadth extreme in February. Even though the ETF is short-term oversold, the medium-term evidence is bearish and favors a test of the November low.

***Put/Call Ratio Moving Higher*** The next chart shows the Percentage Price Oscillator (PPO) for the CBOE Total Put/Call Ratio ($CPC). This is the 10-day SMA less the 200-day SMA. The result is then divided by the 200-day SMA. This is a percentage version of MACD. The Percentage Price Oscillator essentially de-trends the data series to better reflect high and low extremes. Excessive bearishness occurs when the indicator moves above +15. Excessive bullishness occurs when the indicator moves below –15. Periods of excessive bearishness lead to market bottoms, while periods of excessive bullishness lead to market tops. There have been four signals since May. The red dotted lines show periods of excessive bullishness and a market top. The green dotted line shows a period of excessive bearishness and a market bottom. The last two signals (excessive bullishness) were bearish for the market. It would take a move above 15 for this indicator to show excessive bearishness and foreshadow a market bottom. With the indicator still below 0, it has a way to go before hitting a bearish extreme and this opens the door for further weakness in the stock market.

***VIX Breaks Out*** The S&P 500 Volatility Index ($VIX) broke above 50 on Monday. Even though this is the highest level of the month, it is still below the January high and the Oct-Nov highs. SPY, in contrast, is trading near its November low. The VIX would be trading closer to 80 if it were keeping pace with SPY. The "fear factor" in February is much less than it was in Oct-Nov. Despite this mild positive, the VIX is rising and this is bearish for stocks overall. I am also showing the Percentage Price Oscillator (10,50) for the VIX. The indicator bottomed in early January and moved back above its signal line in February. VIX is on the rise as long as the PPO holds above its signal line (10-day EMA).

***Major-index ETFs***

***Medium-term Trend*** QQQQ joined the downtrend club with a break below the January lows on Monday. As noted above, the ETF was holding up quite well in early February, but suddenly joined the rest of the market with a sharp move lower the last two weeks. Like the rest of the market, QQQQ is short-term oversold as RSI(2) trades below 10. Even though this could give way to a short-term bounce, I would expect a bounce to fail in the gap zone and QQQQ to ultimately test its November lows.

IWM and SPY opened strong with another bailout announcement pending, but early gains quickly faded and both moved sharply lower. Both ETFs are short-term oversold as RSI(2) spent its fifth day below 10. SPY is testing the November low, while both are testing the lower trendline of the falling price channel. The settings are ripe for an oversold bounce at this stage, but not a medium-term trend reversal. I would not expect a bottom until we see a high-volume decline that culminates in a selling climax of sorts. I suspect that SPY could spike to the upper 60s and IWM could hit 35 on a selling climax. A tradable bottom would not be confirmed until we see a surge on expanding volume and positive breadth extremes.

***Short-term Trend*** The short-term trends are down and even more oversold. While oversold conditions can extend in strong downtrends, the odds of a consolidation or oversold bounce are increasing. I am basing short-term resistance levels on the blue trendlines extending down from the February highs. A move above these trendlines and key resistance would reverse the short-term downtrend. These resistance levels are over 5% above yesterday's close so it would take a pretty strong move to reverse the downtrend.

***Inter-Market Charts***

***Dollar*** The US Dollar Index Bullish ETF (UUP) opened firm and ended the day with a small gain. Weakness in the stock market pushed money into the safe-havens. Despite this small gain, a potentially bearish harami formed over the last two days and a potential bearish wedge evolved over the last two months. A trendline break would be the first negative and a break below the February low (key support) would fully reverse the medium-term uptrend. On the 30-minute chart, the broken resistance zone from early February turns into a support zone. UUP pulled back over the last 2-3 days and found support in the upper area of this zone. Minor support is set at 25.8 and a break below this level would be the first negative sign. This would also confirm the bearish engulfing and break the rising wedge trendline.

***Gold*** No change. Gold hit $1000 on Friday 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 streetTRACKS Gold ETF (GLD) remains short-term overbought as it trades near 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 strong and closed weak to forge a long black candlestick on the day. There is no real change on the daily chart. USO remains in a downtrend, but became oversold after last week's gap down. An oversold bounce back towards broken support (28-30) is possible. However, USO needs some help from the stock market (move up) and the Dollar (move down). Stocks moved sharply lower on Monday, while the Dollar moved modestly higher. This did not help oil at all. On the 30-minute chart, the bounce over the last few days looks like a rising flag and the ETF broke flag support with yesterday's decline. While USO may seem to oversold for further weakness, further downside is expected now and the ETF could become even more oversold.

***Bonds*** Bond benefited from weakness in stocks, but not as much as one would have thought. SPY declined over 3.5%, but TLT only managed a 1% gain. Even though bonds are not as volatile as stocks, I would have expected a bigger move from a flight to safety. 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 and did not exceed Friday's high on Monday. The two day bounce looks like a rising flag or wedge. With the bigger trend down on the daily chart, I think resistance will hold and TLT will move below the February lows. There is one caveat. Continued weakness in the stock market could put a floor in the bond market.

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.