***Executive Summary***

• Stock Market Stance Remains Neutral
• Five Stages of Death
• Defining Capitulation
• SPY Remains Below November Low
• UUP Hits New High for the Move
• GLD Enters Medium-term Support Zone
• USO Firms after Gap
• TLT Forms Bear Flag on 30-minute Chart(video link)

***Stock Market Stance*** Neutral on 29-January. The bulk of the medium-term evidence remains bearish, but stocks are very oversold and ripe for a consolidation or a bounce. In addition, the level of negativity remains high with stock market weakness featuring on the front pages of the NY Times, Washington Post and other newspapers. I am not calling for an end to the bear market, but we may be entering a period of flat trading – both short-term and long-term. Short-term resistance zones are marked on the 30-minute chart and this is the first area to expect a bounce to end.

Market moving events for the next few trading days:

• 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
• Tuesday: No economic reports.
  -Earnings: Dick's Sporting, Stage Stores, Boston Beer

***Technical Highlights***

***Five Stages of Grief*** At the risk of getting morbid, I was thinking of how the five stages of grief might relate to the current market environment. See Elisabeth Kübler-Ross on Wikipedia.org for more details. Here is the opening paragraph:

The Kübler-Ross model first introduced by Elisabeth Kübler-Ross in her 1969 book "On Death and Dying", describes, in five discrete stages, a process by which people allegedly deal with grief and tragedy, especially when diagnosed with a terminal illness or catastrophic loss. The stages are known as the Five Stages of Grief.

The stages are: denial, anger, bargaining, depression and acceptance. These stages also fit with loosing positions. As far as the stock market and banking crisis are concerned, the denial phase seems to last the longest. Once the plunge hits, the anger rises as investors lose money and everyone blames the bankers (and with good reason!). The government then tries to bargain with the stimulus and bailout packages. Investors also bargain by telling themselves they will sell if the market bounces. Bargaining offers hope and hope gives way to depression when the bargaining does not work. The stimulus and bailouts offered hope, but did not fix the underlying problems (namely insolvency among the major banks). I am not looking for an economic depression, but we are clearly in a recession and the outlook is clearly pessimistic. Listening to Bernanke, Geithner, Congressional leaders and the Obama adminstration, I get the feeling that we could be entering the acceptance phase. No, I don't think the US is going to die. Instead, there is acceptance that AIG is a fraud, Citigroup is insolvent and the road to recovery will be long. Without trying to sound too new-age-ish, accepting realities is the first step towards healing. This could give way to a long basing period for the stock market in the coming months. Such a basing period would feature a consolidation with choppy trading. An eight month consolidation formed after the 2000-2002 bear market.

***Defining Capitulation*** A capitulation phase fits with the depression phase mentioned above. This is when investors throw in the towel. The S&P 500 ETF (SPY) has been down 12 of the last 16 trading days. Three of those four advancing days were less than 1%. Except for a one day wonder rally on 24-Feb (Tuesday), February has been nothing but selling. With such extended selling pressure, I wonder if the market can even produce a selling climax or capitulation. Perhaps sellers are already exhausted. The chart below shows weekly candlesticks for SPY. The ETF declined over 4% three weeks in a row and this is a record. Going back over 10 years, I cannot find three consecutive weekly declines greater than 4%. I am not counting this week because the week is not yet finished. However, SPY is currently down over 4% this week and one more would simply extend the record. Volume was also above the 104-week average (two year average) the last four weeks. While volume levels are still well below the levels seen from September to November, they are above the June levels and comparable to the July levels. In a nutshell, SPY is down 7 of eight weeks on above average volume. Maybe the bottom pickers (buyers) from September to November are now selling. After all, there is a buyer for every seller. Here's the main point. There are different methods to measure capitulation and the selling pressure over the last 4-8 weeks sure looks like a form of capitulation.

***Major-index ETFs***

***Medium-term Trend*** We all know that the trend is down and the stock market is short-term oversold. Current conditions favor an oversold bounce or consolidation, not a major trend reversal. So far, we have yet to see a reversal day such as a hammer, bullish engulfing or a piercing pattern. A hammer forms with a spike low and intraday recovery. A bullish engulfing forms with a weak open and strong close. The subsequent long white candlestick engulfs the prior black candlestick. A piercing pattern also forms with a weak open and strong close. The white candlestick falls short of an engulfing pattern, but closes above the mid point of the prior black candlestick. The bulls need to win a day before considering an oversold bounce.

***Short-term Trend*** No change. QQQQ, SPY and IWM are in short-term downtrends on the 60-minute charts. After 7-12% declines the last five 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*** There is no change in the analysis, but I am removing the rising wedge because the U.S. Dollar Index ($USD) is trading above its Oct-Nov highs. On the price chart, the US Dollar Index Bullish ETF (UUP) continues to advance at the expense of the Euro and Yen. There are plenty of reason to be bearish on the Dollar, but perhaps more reasons to be bearish the Euro and the Yen. 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) moved into its support zone on the daily chart and formed a small reversal candlestick on Tuesday – and I do mean small. The ETF dipped below 89 intraday, but managed to rebound and close above 90. With the medium-term trend up, we should remain on guard for a short-term reversal that would signal a continuation of this uptrend. RSI(2) remains oversold for the fifth straight day. This also increases the odds for a short-term reversal. On the 30-minute chart, the decline over the last seven days looks like a falling wedge with resistance at 93. A move above this level would break the wedge's fall and call for a continuation higher. I remain concerned that gold fell in the face of bullish news over the last few days. Both the Euro and the stock market declined over the last five days, but gold failed to rally.

***Oil*** After a gap down on Monday, the United States Oil Fund ETF (USO) firmed with a small recovery on Tuesday. The ETF became way oversold in mid February and the first bounce met resistance near broken support (28-30). It looked like oil would continue lower after Monday's gap, but Tuesday's little reversal could foreshadow another bounce. On the 30-minute chart, USO could be forming a higher low as a triangle takes shape. There is lots of support around 24-25 and USO could conceivably advance into the resistance zone. It would still be a bear market rally. Look for strength in the stock market to boost the prospects for a rally in oil.

***Bonds*** The medium-term trend remains down for the iShares 20+Yr T-Bond ETF (TLT). Even though the ETF is finding support from the February lows, there is absolutely no sign of strength that would suggest an impending breakout. In addition, bonds have not been able to rally in the face of serious stock market weakness this year. Investors see little safety in US bonds because of the upcoming financing needs of the US government. On the 30-minute chart, TLT firmed at support and formed a rising flag. This is a potentially bearish pattern that would be confirmed with a move below 101.5. Such a move would signal a continuation of the prior decline and argue for a break below 100.

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.