***Stock Market Stance*** Neutral on 29-January. QQQQ, SPY and IWM broke down on Thursday and Friday to extend their downtrends. With the futures pointing to a sharply lower open and the world markets down sharply, we could see an acceleration lower this week. As noted in detail below, an acceleration is the first step towards capitulation that could establish a tradable low. For now, the major-index ETFs remain in the falling knife category – and the blade is pointed down.
Medium-term Recap: The bulk of the medium-term evidence still favors the bears. First, the S&P 1500 forged 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%. Second, volume on up days has not been impressive. Third, the decline started in early January and we have yet to see a high volume capitulation or selling climax. Most bottoms form after some sort of capitulation or selling climax. Fourth, 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: ISM Mfg Index
-Earnings: Tower Group, Ferro, Kenneth Cole, TiVo
Tuesday: Pending Home Sales, ISM Index
-Earnings: Autozone, Chicos, Tech Data, Virgin Mobile
Wednesday: Durable Goods, Crude Inventories, New Home Sales
-Earnings: Costco, Big Lots, Toll Bros, PetsMart
***Breadth Remains Bearish*** Today I will start with an indicator run down covering the key medium-term indicators. First up is breadth for the S&P 1500 ETF. This ETF/Index serves as my proxy for "the market" because it consists of the S&P 500, S&P 400 MidCap Index and S&P 600 SmallCap Index. It is also features 1000 stocks from the NYSE and 500 from the Nasdaq. It is as good a proxy for the stock market as you will find. AD Net% favors small and mid-cap stocks because there are far fewer large-caps (especially now!). An advance counts as +1 and a decline counts as –1, regardless of market cap or volume. This levels the playing field between small-caps and large-caps. AD Volume Net% favors large-caps because these behemoths dominate trading volume.
There are three reasons breadth remains decidedly bearish. First, AD Net% and AD Volume Net% recorded negative breadth extremes four times in the last two months. We have yet to see a positive breadth extreme this year. Positive breadth extremes occur when one or both indicators exceed +90%. So far, downside breadth is clearly stronger than upside breadth. Second, the AD Volume Line moved to new lows last week. Significant bottoms are often preceded by large positive divergences in the AD Line or AD Volume Line. There are no positive divergences working now. Third, Net New Highs moved deeper into negative territory as new 52-week lows expand again. Even though the Net New Highs indicator remains above the November lows, a sustainable advance will not occur as long as new 52-week lows outnumber new 52-week highs.
***Sentiment Not Bearish Enough*** Despite bad news all around, sentiment as measured by the Put/Call Ratios is simply not that bearish. The chart below shows the CBOE Total Put/Call Ratio ($CPC) as a Percentage Price Oscillator (PPO). This is simply the 10-day SMA less the 200-day SMA. The difference is divided by the 200-day SMA to get a percentage. The indicator is positive when the 10-day is above the 200-day, and negative when the 10-day is below the 200-day. I am looking for extremes. A reading above +15% shows excessive bearishness that can foreshadow a stock market bottom. A reading below –15% shows excessive bullishness that can foreshadow a stock market top. Readings between these extremes suggest that the current market trend remains in force. There were two dips below –15% this year to show excessive bullishness (red dotted lines). As you can see, these dips foreshadowed (or coincided with) stock market weakness. Despite a bounce the last few weeks, the indicator has yet to reach positive territory and remains well below its bearish extreme. This suggests that the stock market has further room to run on the downside. Further weakness in stocks would increase put volume and this causes the Put/Call Ratio to rise.
***Lack of Capitulation*** Significant lows often form after a selling climax or some sort of capitulation. This is when bulls throw in the towel and sell indiscriminately. There are three things to watch for: an accelerating decline, surging volume and an intraday reversal. SPY is down around 15% in the last 13 trading days. However, we have yet to see an acceleration lower. The last two occurred on 7-9 October and 19-20 November. Volume spiked during these accelerations to reflect capitulation. The red arrows show declines when volume was over 100% above its 200-day SMA. This means that volume levels were double the 200-day SMA. After an acceleration lower on surging volume, support is established with a big reversal. This can be an intraday reversal like a large hammer with a spike low or a 3-4 day reversal (green ovals). As SPY now stands, we have yet to see an acceleration lower or a significant surge in volume. We may not see a significant low until this occurs.
***Band-aids for Heart Attacks*** The government provided more funds for Citigroup on Friday and AIG over the weekend. Both are clearly insolvent, but the government will not let them fail. There are probably a few other big banks that are insolvent. These bailout funds do not make them solvent and thus do not solve the underlying problem. A bottom in the financial sector, and by extension the stock market, is unlikely until we deal with the underlying problem. Insolvent institutions must be allowed to fail. Keeping them on life-support will only prolong the problem. Unfortunately, it is probably politically infeasible to let them fail, regardless of who is president. Here are a few snippets from around the internet:
dealbreaker.com: Oppenheimer is dropping coverage of the U.S. banks and brokers sector. How's that for confidence.
WSJ.com: BRUSSELS -- European Union leaders, led by German Chancellor Angela Merkel, rejected a call by Hungary for a sweeping bailout of Eastern Europe, as the bloc struggled to find consensus on an approach to the spiraling financial crisis at a summit Sunday.
baselinescenario.com: My point is not that Europe is in big trouble, with no plausible regional rescue mechanisms in place. This is completely obvious - the debate among prominent Europeans is now whether or not to send distressed eurozone members to the IMF, and on what basis. Focus on this instead: the European banking and fiscal fiasco is a dagger pointed at the heart of major US banks, which have a great deal of exposure - one way or another - to much of Europe. Ask any U.S.-based ”global bank”.
Jim Rogers on the banks (Business Week): I'd like to see them let these people go bankrupt, let the bankrupt go bankrupt, stop bailing them out. There are plenty of banks in America that saw this coming, that kept their powder dry and have been waiting for the opportunity to go in and take over the assets of the incompetent. Full Interview
Renegade Economist Interview with Dr. Michael Hudson (9.5 minutes):
***Major-index ETFs***
***Medium-term Trend*** QQQQ, SPY and IWM broke down further on Friday with all three closing near their lows for the week. SPY closed below its November low, while QQQQ closed below its mid January low. After a one-day recovery on Tuesday, all three fell back over the last three days. This reinforces resistance from last week's high and this is the first level to watch for any kind of a reversal. For now, I expect this decline to end with some sort of selling climax or capitulation that could carry SPY to 68-70, IWM to 34-35 and QQQQ to 24-25.
***Short-term Trend*** QQQQ and SPY broke rising wedge supports to signal a continuation lower on Thursday afternoon. IWM broke consolidation support on Thursday as well. Even though all three opened weak on Friday, they managed to consolidate after the open. Post-gap trading was essentially flat. Nevertheless, the wedge breaks held and the overall trend is clearly down. Friday's highs mark the first resistance level to watch for some resilience. However, I would not take a bounce seriously unless all three can break above last week's highs (key resistance). Of course, I also expect expanding volume and good breadth to validate any breakout.
***Inter-Market Charts***
***Dollar*** The US Dollar Index Bullish ETF (UUP) continues to benefit from its status as a safe-haven, especially relative to the Euro. Eastern Europe is causing problems for European banks and the European Union. In addition, Europe has it own problems with banking and economic problems in Ireland, Belgium, Italy, Spain and Greece. Even with its own set of headaches, the Dollar does not look so bad compared to other currencies.
On the price chart, the US Dollar Index Bullish ETF continues to advance within a rising wedge. While this pattern may be potentially bearish, it is currently bullish because it is still rising. Only a break below the lower trendline and the late February low would warrant a reassessment. The Euro Trust ETF (FXE) is testing support from its Oct-Nov lows. The ETF attempted a reversal on 20-Feb with a long white candlestick, but there was NO follow through. With a pullback on Friday, FXE reinforced resistance at 129 and the trend is down as long as this level holds.
***Gold*** The SPDR Gold ETF (GLD) is firming at the upper end of its support zone on the daily chart. Actually, GLD is firming just above the support zone. The medium-term trend is firmly bullish with GLD now trading in the middle of the rising channel. Last week's pullback is the minimum expected in an uptrend and GLD could be preparing for another assault on 100. On the 30-minute chart, retraced 62% of the prior advance with a decline to around 92. Support is this area was confirmed by broken resistance and the consolidation. GLD broke the flag trendline early Friday, but pulled back rather sharply as the Euro bounced and stocks firmed intraday. This pullback established resistance just below 94 and a break above 94 would resume the short-term uptrend.
***Oil*** The United States Oil Fund ETF (USO) became short-term overbought on Thursday as RSI(2) moved above 90. The ETF managed to stall on Friday, but oil futures are trading sharply lower this morning. Oil has little chance at a rally as long as stocks are weak and the Dollar is strong. On the price chart, USO hit resistance just below its broken supports. While the rally back above 27 was big in terms of percentage gains, it was still a bear market rally. With resistance at hand and the trend down, a test of the February lows is expected.
***Bonds*** The medium-term trend remains down for bonds, but the iShares 20+Yr T-Bond ETF (TLT) is trading near support from the February lows. Even though there are plenty of fundamental reasons to be bearish on bonds, there could still be counter-trend bounces or even rallies, especially if stocks fall apart. I am marking key resistance on the daily chart at 107. A break above this level is needed to reverse the medium-term downtrend. On the 60-minute chart, TLT broke below its mid February lows and traded down to its early February lows. While the break below the support zone is negative, TLT is short-term oversold and the stock market remains weak. This could give way to an oversold bounce.
---------------------------------------------------------------
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.
