***Executive Summary***
- Stock Market Stance Remains Neutral
- Put/Call Ratio and VIX
- AAII Sentiment Gets Extreme
- SPY Stalls on Friday
- UUP Opens Weak, but Closes Strong
- GLD Holds Short-term Breakout
- USO Breaks Wedge Resistance
- TLT Holds Gap on Fed Speculation (video link)
***Stock Market Stance*** Neutral on 29-January. We all know the medium-term trend is down and breadth is bearish overall. However, the major-index ETFs are oversold and some sentiment indicators are getting extreme. The combination of oversold conditions and excessive bearishness increases the chances of a bounce. Timing such a bounce is much more difficult. With the futures down rather sharply this morning, we could see another down day before getting this bounce. The last three Mondays have witnessed declines in excess of 3.5%. If betting on a turnaround day, I would choose Tuesday. While I am not predicting the end of the bear market on Tuesday, I would not be surprised to see an oversold bounce on turnaround Tuesday, especially if we see some sort of capitulation today. Medium-term, I see no evidence of a trend reversal. This means an advance would be considered a mere bounce within a larger downtrend.
Market moving events for the next few trading days:
- 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***
***Sentiment Readings*** There are many ways to measure sentiment. I use the S&P 500 Volatility Index ($VIX) and the CBOE Total Put/Call Ratio ($CPC). In addition, I keep my eye on surveys like the AAII Index and Market Vane. The Put/Call Ratios and the VIX have yet to reach extremes that show excessive levels of bearishness. The first chart shows the VIX moving higher over the last 6 weeks. However, the VIX has yet to exceed its January high. By contrast, SPY is below its January high. The lower high in the VIX shows less fear on this latest decline. It could even be interpreted as a positive divergence.
The second chart shows the Percentage Price Oscillator (PPO) for the CBOE Total Put/Call Ratio ($CPC). A bearish extreme occurs when the indicator moves above +15%, while a bullish extreme occurs when the indicator moves below –15%. There were bullish extremes in late December and early February. These foreshadowed the weakness in the market. Despite a decline to new lows in SPY, the indicator is not even close to a bearish extreme. In other words, put volume does not reflect excessive levels of bearishness to foreshadow a bottom.
I think that a subdued Put/Call Ratio and low VIX readings are both related to low put volume. While nobody know for sure, I have seen some comments that suggest inverse ETFs are to blame. Traders can now buy inverse ETFs instead of puts to profit from market weakness. Perhaps we should be looking somewhere else. In fact, many other sentiment indicators show excessive levels of bearishness. The AAII survey shows a whopping 70.3% bears. This is up from 56.7% three weeks ago. I consider this extreme and more indicative of a turning point. It may not mark the end of the bear market, but such excessive bearishness often precedes a decent bounce.
***Major-index ETFs***
***Medium-term Trend*** We all know that the trend is down and the major-index ETFs are oversold. Today I am showing 14-day RSI on all three charts. This indicator moved below 30 for IWM and SPY to become oversold last week. RSI(14) remains above 30 for QQQQ, which confirms less weakness (relative strength) in QQQQ. Oversold readings are not bullish though. Oversold readings are just evidence of selling pressure. Weak securities become oversold in downtrends, while strong securities become overbought in uptrends. These oversold readings simply affirm the medium-term downtrend. I know it sounds contradictory, but oversold readings also increase the odds of a counter-trend bounce or consolidation. The oversold readings in October led to a volatile trading range for four weeks. At this stage, I would not be surprised to see an oversold bounce towards the red rectangles. These resistance zones stem from the late February consolidations.
***Short-term Trend*** QQQQ, SPY and IWM moved to new lows on Friday to affirm their downtrends. There was a sharp surge in the final hour, but this was probably just short covering and bargain hunting. As noted on the daily charts, this downtrend is getting way overextended. It has been nothing but lower lows and lower highs since mid February. The market is definitely due for an oversold bounce. It is either pick a bottom or wait for a convincing move. I would like to see a breakout on good breadth and volume before considering a trend reversal. Only after such a breakout would I entertain thoughts of long positions. Even then, I would only look for longs on a pullback. Prior bounces were limited to 1-2 days. It is going to take more than that to produce a sustainable trend reversal.
***Inter-Market Charts***
***Dollar*** The Dollar declined as the unemployment rate surged above 8% on Friday. However, notice that the US Dollar Index Bullish ETF (UUP) rallied after a weak open. Even though it closed lower on the day, buyers stepped in after the gap down. This means there is no change in the overall trend. UUP is holding above the December trendline and support zone. This zone stems from broken resistance and the late February low. The Dollar bulls are in good shape as long as this holds. While the US Dollar Index Bullish ETF opened weak and closed strong, the Euro Trust ETF (FXE) did the opposite with a strong open and weak close. FXE found support around 125 and bounced, but we need to see follow through for an actual trend reversal. 1-2 day bounces are normal in downtrends. Key resistance remains at 129 and it would take follow through above this level for a full trend reversal. The Japanese Yen Trust ETF (FXY) broke double top support in late February and this support break is holding. Broken support turns into the first resistance level around 105.
***Gold*** The SPDR Gold ETF (GLD) bounced off its support zone on Thursday with a strong move. Follow through on Friday would have been nice, but the ETF consolidated with an indecisive candlestick. Thursday's gains are holding and the medium-term trend remains up as long as GLD holds the rising channel. On the 30-minute chart, the ETF broke wedge resistance and then stalled around 92-93. The breakout is holding and I am marking 90 as the make-or-break level. A strong breakout should hold. A move back below 90 would challenge this breakout and call for a reassessment.
***Oil*** The United States Oil Fund ETF (USO) remains surprisingly strong – short-term that is. The medium-term trend remains down, but USO appears to be in the midst of an oversold bounce. The ETF forged an island reversal last week and the gap held for three days. There is resistance around 28-30, but this bounce could conceivably extend to the low 30s. On the 30-minute chart, USO formed a falling wedge or pennant and broke resistance on Friday. The ETF even closed at its high for the day and week. When was the last time that happened? The wedge breakout is bullish and signals a continuation of the prior surge. I would mark short-term support at 26.5 for now. Failure to hold the wedge breakout and a moved below this level would be short-term bearish.
***Bonds*** The iShares 20+Yr T-Bond ETF (TLT) surged off support with a big gap on Thursday. The bond market is starting to speculate that the Fed may start buying Treasuries. In a speech on 7-Mar in Dillon, South Carolina, Bernanke reiterated that the Fed will use all means available to stimulate the economy. Long-term rates would drop sharply if the Fed announced a program to purchase Treasures. Bonds surged on 1-Dec after the Fed opened the door to the purchase of Treasuries. Thursday's gap also coincided with a sharp decline in stocks and a sharp advance in gold. This could also be interpreted as a flight-to-safety trade. Whatever the reason, the gap is positive as long as it holds. We have yet to see follow through and a resistance breakout at 107. This resistance area gave TLT trouble throughout February. I would still consider the medium-term down as long as this resistance level holds. On the 30-minute chart, TLT broke resistance at 103.5 and this area turns into support. A strong surge should hold and a move back below 103.5 would show weakness. It is possible that a post-gap consolidation is forming around 104-106.
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.
