***Executive Summary***

• Stock Market Stance Remains Neutral
• Technical Overview
• Inverted Hammers Form
• Short-term Downtrends Overextended
• UUP Remains in Uptrend
• GLD Looks Vulnerable to Further Weakness
• USO Moves into Resistance Zone
• TLT Fails to Follow Through on Gap
• ETF Stock Setups by 8AM ET (video link)

***Stock Market Stance*** Neutral on 29-January. No change from Monday. 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. 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:

• Tuesday: Bernanke Speaks at 8:30AM
  -Earnings: Dick's Sporting, Stage Stores, Boston Beer
• Wednesday: 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
• Monday: No economic reports.
  -Earnings: Six Flags, Schawk, 3Com, eDiets

***Technical Highlights***

***Bullet Point Run Down*** Here is a summary of the technical situation so far: - The medium-term and long-term trends are down - Breadth is bearish with 6 negative breadth extremes this year - SPY, IWM and DIA broke their November lows - QQQQ is holding above its November low – for now - SPY, IWM and DIA are oversold after a four week decline - SPY declined over 4.5% each of the last four weeks (capitulation?) - Investor Sentiment is extremely bearish - The Put/Call Ratio and VIX have yet to reach bearish extremes With the SPY down over 20% in the last four weeks and oversold, the time for new shorts has passed. It is tempting to pick a bottom here, but that is also a risky proposition. There is evidence of firming as the decline slows. However, firming is not the same as buying pressure. Firming just shows less selling pressure. At best, firming reflects a standoff between supply (sellers) and demand (buyers).

The swiftness of bear market rallies also presents a challenge. Making money off the November low required a quick entry because two-thirds of the rally was over after the first five days. SPY bottomed at 74.34 on 21-Nov and closed at 90.09 on 28-Nov. The ETF was up over 20% in five trading days. This bear market rally subsequently peaked at 94.45 in early January. The post-surge gain from 28-Nov to 6-Jan was less than 5%. Bear market rallies are tough to play. It is either pick a bottom by watching the market intraday or wait for the first surge to pass and then use a pullback.

And therein lies another challenge. Does the market bottom with a selling climax and big intraday reversal or does the market bottom quietly as apathy sets in? After a sharp four week decline, we have had some sort of capitulation. Down over 20% in four weeks is not as dramatic as being down 20% in two weeks. However, the amount of selling pressure is probably equivalent. Perhaps we have seen a slow capitulation already. My guess is that lot of people are looking for a selling climax. The more people that look for it, the less likely it is going to happen. Therefore, my gut tells me that we may see a stealth bottom that isn't realized until after the fact. No, I am not calling the end of the bear market. I just think the odds favor a bear market bounce.

***Major-index ETFs***

***Medium-term Trend*** QQQQ, SPY and IWM formed inverted hammers on Monday. These candlesticks look like, well, upside down hammers. They have small bodies with long upper shadows. There was strength intraday, but it faded and the major-index ETFs closed near their opening levels. The ability to rally intraday is a sign of strength. However, follow through is required to confirm these short-term reversal candlesticks. With turnaround Tuesday up to bat, we could see confirmation today. The red rectangles mark my first target for an oversold bounce. Also note that 14-day RSI is oversold for SPY and IWM.

***Short-term Trend*** There is not much change in the short-term picture. QQQQ, SPY and IWM moved to new lows on Friday. There was a bounce in the final our on Friday, but the major-index ETFs edged lower on Monday. Even though the short-term downtrend is affirmed, it is clearly overextended and ripe for a bounce. SPY held up the best on Monday by forming a small falling flag. A flag breakout at 69 would be positive and argue for a resistance challenge in the low 70s. I would not expect SPY to move alone. It is pretty much one for all and all for one. If SPY breaks flag resistance and challenges resistance, then IWM and QQQQ will follow suit. As far as the robustness of any bounce, we will have to judge breadth and volume.

***Inter-Market Charts***

***Dollar*** The US Dollar Index Bullish ETF (UUP) could suffer if the stock market bounces. The greenback has been the safe-haven currency lately. Money moved out of Euros and Yen as the stock market declined sharply in 2009. Should a bear market bounce materialize, we could see a pullback in the Dollar. The US Dollar Index Bullish ETF (UUP) remains in an uptrend with a support zone around 25.9-26.2. This zone stems from broken resistance and the late February low. A break here would reverse the current uptrend. The Euro Trust ETF (FXE) continues to firm around 125-126. Support in this area stems from the Oct-Nov-Feb lows. The ETF has yet to hold a bounce and breakout though. Look for a move above 129 to reverse the downtrend.

***Gold*** Gold has also benefited from the flight-to-safety trade, but succumbed to some serious selling pressure the last two weeks. Should stocks and the Euro bounce, we could see downward pressure on gold. Furthermore, I am not impressed with recent price action in the Gold SPDR (GLD). The ETF bounced off support last Thursday, but there was no follow through on Friday or Monday. On the 30-minute chart, the wedge breakout failed to hold as GLD moved below 90 yesterday. While the ETF remains above its 4-March low, the depth of this pullback is disconcerting. A strong breakout should have held and this breakout did not. Gold is suddenly looking vulnerable and could correct back to the mid 80s.

***Oil*** While gold is looking vulnerable to further weakness, oil is looking poised for further strength. Bloomberg reports: "Saudi Arabia told Asian refiners it will cut supply next month, reinforcing analysts’ views that OPEC output constraints are draining inventories." Saudi Arabia is the single biggest producer in OPEC, which cut supply three times since September. OPEC is due to meet on 15-March in Vienna and another supply cut could be forthcoming. On the price chart, the long-term trend for the United States Oil Fund ETF (USO) remains down, but the ETF is clearly in the midst of a countertrend bounce. The 28-30 area marks the first resistance zone. Above this, we have key resistance at 35. This makes the 30-35 area one big resistance zone. On the 30-minute chart, USO broke wedge/pennant resistance on Friday and extended its gains on Monday. I will leave support at 26.5 for now. The breakout is solid as long as this level holds.

***Bonds*** Bonds came under pressure on Monday as supply concerns gripped the market. From Bloomberg: "The government is set to sell a record $34 billion of three-year notes today…“The auction calendar is so packed there will be six auctions every month in the six different benchmarks,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp." Supply, supply, supply. There is the risk that Bernanke may try to jawbone rates lower (bonds higher) in his speech this morning. However, there is no debating the supply overhang. TLT gapped up on Thursday, but there was no follow through. Even though the gap is positive, we need follow through for a trend reversal. I consider the medium-term trend down as long as key resistance at 107 holds. On the 30-minute chart, TLT moved into the gap zone with a sharp decline below 103.5. The ETF firmed with a rising wedge/pennant the rest of the day and break below pennant support would signal a continuation lower.

Good day and good trading -Arthur Hill

---------------------------------------------------------------
Click here to post a comment, suggestion or question.

Breadth Charts ---------------------------------

---------------------------------------------------------------
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.