***Executive Summary***
- Stock Market Stance Remains Neutral
- Yamada, Rukeyser and the Daily Show
- Capitulation Volume Mixed
- SPY Accelerates Lower
- UUP Awaits the Employment Report
- GLD Surges off Support Zone
- USO Forms Bullish Wedge
- TLT Surges on Siren Songs (video link)
***Stock Market Stance*** Neutral on 29-January. And now for the employment report. I have to take the "under" today. Everything has been worse than expected so far and the employment report is hardly likely to be any different. With the stock market decline accelerating and volume increasing on the NYSE, the employment report could setup a selling climax or the big capitulation day. News this week has been atrocious. The falling stock market is on everybody's mind. People are getting scared. Blue chips have turned into penny stocks. It can't get any worse. Well, if that's the case, then the market should be close to a bottom. The market finds support once the worst has been fully discounted. I am not looking for a final bear market bottom. In fact, I have a feeling that there will be some sort of test after the first big bounce. This is what makes bottoming a process. There is really no hurry to catch the falling knife, especially when the blade is still pointing down.
Market moving events for the next few trading days:
- 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
- Wednesday: Bernanke Speaks, Crude Inventories
-Earnings: Bon-Ton, Staples, Hot Topic, Jo-Ann Stores
- Thursday: Retail Sales, Jobless Claims
-Earnings: Imax, Con Ed, Aeropostale, Pacific Sunwear
- Friday: Consumer Sentiment
-Earnings: Compass Group, SkillSoft
***Technical Highlights***
***Weekend Viewing and Listening*** Perhaps it is time to lighten up with some humor, step back with some history and get back to basics with some traditional technical analysis.
Link One: A podcast from Bloomberg on the Economy. Tom Keane talks in depth with Louis Yamada on technical analysis and the current market. Click here to download or listen streaming.
Link Two: Wall Street Week with Louis Rukeyser – before and after the 1987 crash. His wit and insights were second to none. Incidentally, Marty Zweig predicted the crash on the 16-Oct show, just before the actual crash. See Part 1 of Before the Crash. Zwieg comes in at the 7 minute mark. Simply amazing. Click here to for the Youtube links.
Link Three: Jon Stewart of The Daily Show takes Rick Santelli and CNBC to task. Despite being comedy and satire, Stewart makes a great point. Be careful who you listen to on CNBC. Click here for a link to Comedy Central.
***Mixed Volume*** The Nasdaq and NY Composite declined sharply over the last seven days. In fact, I would even suggest that the rate of descent qualifies as capitulation quality selling pressure. However, the volume picture is mixed. While the NYSE shows high volume that qualifies as capitulation, Nasdaq volume is relatively muted. The blue dotted lines mark the volume spikes in October-November – scene of the last capitulation. NSYE Volume reached these levels last week, but Nasdaq volume fell well short of its prior capitulation levels. The Nasdaq has a lot fewer banks than the NYSE and tech companies typically have lower debt levels. This could explain limited selling in the Nasdaq. However, technology is still cyclical and prone to economic fluctuations. Even though techs show relative strength overall, they have yet to show any absolute strength. Techs are just going down at a slower rate than non-techs right now.
***Major-index ETFs***
***Medium-term Trend*** With the decline accelerating, we could be getting close to a capitulation or selling climax. However, we have yet to see a really big volume spike or an intraday reversal that would indicate a true washout. Even if we get such a spike or intraday reversal, it may not mark the exact bottom. As Louis Yamada noted in her Bloomberg interview, bottoming is a process that takes time. Moreover, the more severe the injury, the longer the healing process. The market is injured badly and needs time to heal. This means a period of flat choppy trading will likely precede the next bull market. As the market stands right now, we have yet to even find support to start the bottoming process. SPY has lost around 21% in 18 days. This decline is longer than the November decline, which saw SPY lose around 25% in 13 days. There were a couple of one-day wonder rallies in November and the bottom did not occur until there was a reversal-with-follow-through (sharp rally). Picking the exact spot for such a reversal is a dangerous game. However, I think we are getting close as the decline accelerates and volume expands on the NYSE. Here is what I said on Monday: 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. SPY and IWM are at their targets, but QQQQ remains above. It is the moment-of-truth time.
***Short-term Trend*** IWM and SPY moved to new lows to affirm the current downtrend. QQQQ also moved lower, but finished near the Monday-Tuesday lows. Once again, QQQQ shows less weakness than the other two. The broken support zones turn into resistance zones. Key resistance is based on Friday's high (27-Feb). Unfortunately, these resistance zones are over 10% higher for IWM and SPY. I could set resistance at Wednesday's high, but I do not want to call for a trend reversal on the first oversold bounce. As we have seen the last four weeks, one day bounces can be big and still fail. We need follow through before considering even a short-term trend reversal.
***Inter-Market Charts***
***Dollar*** The Dollar is sharply lower ahead of this morning's employment report. Currencies traders are moving out of the Dollar in anticipation of a worse-than-expected employment report. Can't says I blame them. The Dollar has been strong and the odds favor a worse-than-expected employment report. I am not ready to call for a trend reversal in the Dollar or Euro, but we could see a pullback in the Dollar and oversold bounce in the Euro. Except for a long black candlestick on 20-Feb, the US Dollar Index Bullish ETF (UUP) has been rising steadily since early February. The move from 25.5 to 26.8 may seem small relative to equities, but it is sizable for the currency markets. There is a lot of support around 26 and I would not call for a trend change unless UUP breaks the late February low. The Euro Trust ETF (FXE) is testing support from the Oct-Nov lows. There is a bottom picking opportunity here with a stop-loss just below 125. As far as the trend is concerned, a break above the late February high (129) is needed for a full reversal.
***Gold*** The SPDR Gold ETF (GLD) finally got its bounce off the support zone. Thursday's gain was the biggest percentage gain since 23-January. Moreover, GLD opened strong and close strong as buying pressure remained steadfast throughout the day. The move reinforces support around 88-90. Also notice that RSI(2) moved above 50 to end its oversold condition. On the 30-minute chart, GLD broke wedge resistance and surged above 91. A strong breakout should hold and a move back below 90 would call for a reassessment.
***Oil*** Despite a big decline in the stock market and modest gains in the Dollar, the United States Oil Fund ETF (USO) held its gain and firmed just below the resistance zone. The big trend is still down, but USO has an island reversal working over the last 4-5 days. This means we could see follow through into the resistance zone. Perhaps even into the low 30s. On the 30-minute chart, USO consolidated with a falling wedge over the last 1-2 days. These are bullish consolidation patterns. A break above wedge resistance would signal a continuation higher and target further strength towards 29-30.
***Bonds*** What a move for bonds! I am not sure of the exact reason, but I do not think it was a mere flight-to-safety trade. Sure, the sharp drop in stocks pushed some money into Treasuries. However, both bonds and stocks have been falling sharply this year. Here's what a Merrill Lynch analyst told Bloomberg:
Treasuries will surge in a “siren song” rally this month before falling in the second quarter, Merrill Lynch & Co. said in a report…Ten-year yields, which move inversely to prices, will decline to 2.75 percent by March 31 from 2.84 percent today because of concerns the U.S. recession is deepening, according to the report. The figure will climb to 3.25 percent by mid-year as the Treasury Department increases debt sales and the economy improves, Merrill said.
Perhaps the bond market hears the siren song of the Fed. Consider these four items. First, Gordon Brown was just here on a visit with Obama. Second, the Bank of England cut its benchmark rate today and announced a new plan to purchase sovereign and corporate debt. Third, the Fed is running out of options. Four, there has been speculation before that the Fed might purchase Treasuries. In fact, Bernanke himself even mentioned this on 1 Dec and this sparked a huge rally in TLT the next few weeks. Putting two and two together, the bond market appears to be speculating that the Fed may follow the Bank of England's lead. Whatever the reason, buying or selling will show up on the charts. Right now, the gap up and trend line break are positive. Resistance from the February highs remains and a break above this level would be bullish. Below the charts, I have included a paragraph from Bloomberg quoting a Merrill Lynch analyst.
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.
