***Executive Summary***

• Stock Market Stance Remains Neutral
• Put Volumes and Volatility Contained
• Negative Breadth Extremes
• IWM Tests November Low
• UUP Remains Safe Haven Bet
• GLD Falls Despite Weakness in Stocks
• USO Gaps Down From Resistance
• TLT Bounces off Short-term Support
• ETF and Stock Setups Video by 8AM (video link)

***Stock Market Stance*** Neutral on 29-January. The market is getting knee deep in negativity, but continues lower all the same. The S&P 500 broke below its 2002 lows and the Dow broke below 7000. Weakness in the stock market is now on everybody's lips. Downside targets of Dow 4000 and SPX 600 are gaining traction. Jeffrey Saut of Raymond James notes the following:

In Tuesday’s comments we also opined that a potential downside inflection might be near, providing we were not in crash mode, since our proprietary oversold indicator is about as oversold as it was at the November 2008 low. We further noted that we were getting “hate mail” for trying to stay somewhat constructive on stocks for various reasons….Ladies and gentlemen, in my 38 years at this perch, such a string of “hate mail” has typically been associated with downside inflection points. Moreover, the 12-month Relative Strength Index (RSI) on the S&P 500 (SPX) is below 15. Since the 1930s such a reading has only occurred six times and has almost always marked a bottom, even if only a short/intermediate-term bottom.

Unbelievable. A reputable analyst gets hate mail for considering the possibility of a bottom. I know its bad out there, but these are the kind of conditions that lead to market lows. Even though I expect further weakness, I also think we are closer to the end than the beginning or middle for this current decline. The decline accelerated over the last two days and volume surged on the NYSE. The combination points to capitulation that could lead to a selling climax. Elsewhere, the Demark Sequential triggered a buy signal on the daily, weekly and monthly timeframes for the S&P 500. This indicator measures exhaustion. While it attempts to catch falling knives (pick bottoms), the multiple timeframe readings reinforce current oversold conditions. I am not ready to pick a bottom just yet, but I think we are getting close to some sort of bounce.

Market moving events for the next few trading days:

• 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
• Thursday: Factory Orders, Jobless Claims
  -Earnings: K-Swiss, MGM Mirage, Six Flags, Urban Outfitters
• Friday: Employment Report
  -Earnings: HR Block, Tasty Baking
• Monday: No economic reports.
  -Earnings: Schawk, Force Protection, Bronco Drilling

***Technical Highlights***

***Negative Breadth Extremes Monday was a throw the baby out with the bath water day. All sectors and industry groups were down. Grocery stores held up the best with the smallest decline. No matter what happens, we still need the grocery store. For the S&P 1500 ETF (ISI), AD Net% plunged to –92% and AD Volume Net% hit –98%. Monday marked the fifth negative breadth extreme this year. Both the AD Line and the AD Volume Line moved to new lows. Net New Highs plunged to –30%. While still above the October-November lows, the indicator remains decidedly bearish.

***A Bull Market in Negativity*** I showed the CBOE Total Put/Call Ratio ($CPC) yesterday and noted that it had yet to reach a bearish extreme. This suggests further room for downside. In other words, a bottom would not be signaled until the CBOE Total Put/Call Ratio reaches a bearish extreme.

The S&P 500 Volatility Index ($VIX) is also moving higher, but remains below its January high. With SPY breaking below its January and November lows, I would have expected the VIX to be much higher. Is this a sign of complacency? It does show less fear. In addition, this seems to jibe with the relatively low readings in the Put/Call Ratio. Put volume is not surging and this is keeping put premiums contained, which could explain the relatively low reading for the VIX, which is based on the implied volatility for options. Demand pushes put prices and implied volatility higher. Despite a relatively low VIX, the indicator has been trending higher since late January and this is bearish for stocks. A break below 40 is needed to show confidence that would facilitate a rally.

***Major-index ETFs***

***Medium-term Trend*** The medium-term trends are clearly down, but QQQQ, SPY and IWM are at different stages. SPY is trading below its November low, IWM is trading at its November low and QQQQ is trading above its November low. Even though QQQQ held up the best, all three are in bear mode and further weakness is expected. With a fresh breakdown over the last two days, last week's highs become the first resistance levels to watch for some sort of reversal. For now, I will leave key resistance levels where they are. Even though the medium-term trends are down, all three are short-term oversold as RSI(2) moved below 2. With turnaround Tuesday on deck, we could see a one day bounce or consolidation before resuming the medium-term downtrend.

***Short-term Trend*** QQQQ, SPY and IWM are in short-term downtrends on the 60-minute charts. After 7-10% declines the last three days, the short-term downtrend is getting long in tooth. This increases the chances of an oversold bounce or a consolidation. Broken supports turn into the first resistance zones to watch (red rectangles). A move back to broken supports would be considered a mere oversold bounce. I would expect a reaction high to form around these resistance zones. Key resistance remains at last week's highs and will likely be lowered in the coming days.

***Inter-Market Charts***

***Dollar*** No change. 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*** Despite weakness in the stock market and the Euro, the SPDR Gold ETF (GLD) moved sharply lower on Monday. It is disconcerting when securities move down in the face of bullish news. Something is not right with gold right now. Dennis Gartman (The Gartman Letter) suggested that gold would move lower because of margin calls. In other words, hedge funds would need to sell gold to raise cash. On the price chart, the ETF opened strong, but strength soon faded and it closed below 91 for the first time since 10-Feb. At this point, GLD remains short-term oversold and in corrective mode. RSI(2) has been below 10 for four days. Four of the last five candlesticks were black and this shows selling pressure after the open each day. At this point, GLD needs to finish strong with a higher close and white candlestick. On the 30-minute chart, GLD overshot the 62% retracement with yesterday's decline. There is still some support from broken resistance around 91. However, the short-term trend is down with resistance at 93. A close above this level would break resistance and call for a resumption of the uptrend. Separately, but somewhat related, Gartman publishes a list of trading rules every year (click here)

***Oil*** The United States Oil Fund ETF (USO) became short-term overbought on Thursday as RSI(2) moved above 90. The ETF stalled on Friday and moved sharply lower on Monday. Oil has little chance at a rally as long as stocks are weak and the Dollar is strong. Falling stock prices suggest a prolonged recession, which weighs on demand. 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 Monday's gap down, a test of the February lows is expected.

***Bonds*** Bonds got a feeble bounce from the flight to safety trade on Monday. With the stock market down around 10% in 3-4 days, the iShares 20+Yr T-Bond ETF (TLT) should have broken through resistance at 107. The ETF is not even challenging resistance. Even though TLT is trading near support from the February low, the medium-term trend is clearly down and bonds are not attracting buyers when they should. This is bearish. 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. On the 30-minute chart, TLT got an oversold bounce off its February lows. The gap and close above 103 are impressive from a short-term standpoint. In fact, a small inverse head-and-shoulders is taking shape over the last three days (blue arrows). A break above the 3-day high would be short-term positive and argue for a move towards 105. Further weakness in the stock market could facilitate such a bounce.

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.