***Executive Summary***
- Stock Market Stance Remains Bullish
- AIG, Forests and Trees
- Strong Breadth
- NDX Surges on Low Volume
- IWM and SPY Surge within Resistance Zones
- Retracement Resistance on 60-minute charts
- UUP Stalls at Support Zone
- GLD Forms Small Wedge Consolidation
- USO Breaks Triangle Resistance
- TLT Waits on the Fed Statement
(video link)
***Stock Market Stance*** Bullish on 13-March. No change. The bulk of the evidence remains bullish and points to an extended rally over the next few weeks or even months. There were positive breadth extremes on 10 and 12 March. SPX volume expanded at the beginning of the surge and the right sectors led the way higher. The VIX and VXN broke below their February lows last week. Even though I am turning bullish, the major-index ETFs are already short-term overbought and ripe for a pullback or consolidation. Chasing the market after the first oversold bounce is dangerous and I will wait for a pullback to improve the risk-reward ratio.
***Formatting Adjustment*** Rather than label the medium-term trend on the daily chart, I will now identify QQQQ, SPY and IWM as bullish, bearish or neutral. This trading stance will jibe with my stock market stance in the opening paragraph. I will also start a system of standardized labels: first resistance (R1), second resistance (R2), first support (S1) and second support (S2). When appropriate, I will also add a first target (T1) and second target (T2). The first support and first resistance zones will usually apply to the short-term, while the second support and second resistance zones will apply to the medium-term.
Market moving events for the next few trading days:
- Wednesday: FOMC Announcement, CPI, Crude Inventories
-Earnings: General Mills, Nike, Oracle, Herman Miller
- Thursday: Jobless Claims, Leading Indicators
-Earnings: FedEx, Morgan Stanley, 3Com, Palm Teekay
- Friday: Quadruple Witching
-Earnings: Kirklands
- Monday: Existing Home Sales
-Earnings: Tiffany, Walgreen, Sonic, Techtarget
- Tuesday: Chicago Fed President Evans Speaks
-Earnings: Carnival, Commercial Metals, McCormick, Talbots, Jabil Circuit
***Technical Highlights***
***AIG Bonuses*** Talk about a distraction. The government spends 170 billion to bailout AIG and the biggest uproar is over bonuses that amount to one tenth of one percent of the bailout. Here's the math: 170,000,000 / 170,000,000,000 = .001 - which is .01%. In principle, those responsible for the problem should not get bonuses. In reality, this bonus battle is preventing us from seeing the forest for the trees. AIG needs qualified people to unwind these positions, which are based on products that are incredibly complex. Moreover, we are talking billions of dollars in product. It takes detailed knowledge of the products and the industry to get the job done right – and get the right price. The right people will be worth more than these bonuses. The wrong people will cut bad deals and cost the taxpayers even more. It is a bad situation, but putting all this energy into one tenth of one percent detracts from the bigger issues at hand. It is kind of like the battle over earmarks, which accounted for less than 1% of the stimulus bill. Sure, many of these earmarks amount pork-barrel spending and have no business in the budget. However, fighting over them now prevents us from focusing on the bigger picture and more pressing issues. As an aside, AIG stock seems the like all the fuss as it more than doubled over the last three days.
***Strong Breadth*** Stocks surged with strong breadth in the S&P 1500 ETF (ISI) on Tuesday. AD Net% finished at +87% and AD Volume Net% ended at +89%. Breadth has been very strong three of the last six days. Remember, there were positive breadth extremes on 10-Mar and 12-Mar. Yesterday's big surge simply reinforces the bullish breadth signals from last week. QQQQ breadth was exceptionally strong on Wednesday as AD Net% surged to +93% and AD Volume Net% reached +96%.
***Mixed Volume Again*** S&P 500 volume was above average with over 5 billion shares traded. However, it was the lowest of the last six days. Declining volume on an advance is a negative sign. It is not enough to threaten last week's surge and bullish signals, but it does show waning enthusiasm that could lead to a pullback. Notice that SPX is approaching resistance from broken support and the falling 50-day moving average. The rally is getting overbought and ripe for a pullback or consolidation.
The second chart shows the Nasdaq 100 with declining volume and low volume overall. NDX volume was not that impressive on the initial surge and volume was below average the last three days. Yesterday's volume was the lowest since mid February. Even though traders may have been holding back ahead of the Fed meeting today, low volume detracts from the sustainability of an advance. At the very least, it argues for a pullback. On the price chart, NDX is just above the mid point of its four month trading range and looking short-term overbought.
***Major-index ETFs***
***Medium-term Trend*** After a one day pullback, the major-index ETFs were off to the races again on Wednesday. All three closed sharply higher with QQQQ breaking above its first resistance zone. QQQQ was the first to reach its resistance zone so it makes sense that it was the first to break free. IWM finished in the middle of its resistance zone, while SPY ended the day near the top of its resistance zone (R1). I am not ready to call for a direct move towards the second resistance zone (R2). I do think the major-index ETFs will eventually make it to their second resistance zones, but not in a straight line. There is likely to be a pullback or consolidation on the way up. The November surge lasted five days before there was a sharp one day pullback. This surge is now 6 days old and the pullback could come any day now. It may start right after the Fed policy statement.
***Short-term Trend*** After a very brief pullback or consolidation, QQQQ, SPY and IWM moved to new highs on Tuesday. QQQQ formed a flat consolidation, while IWM and SPY formed small wedges on Monday. These wedges are clearer on the 10-minute charts. While the mini-breakouts and new highs affirm the short-term uptrend, all three are still trading within their key retracement zones. SPY and IWM are near the 50% retracement mark, while QQQQ is near the 62% retracement mark. Each has retraced 50-62% of the prior decline, which extended from 9-Feb to 9-Mar. These retracement zones act as resistance zones that can foreshadow a short-term reversal or pullback. It is often too late to buy when a surge enters a retracement zone (38-62%). As such, I will wait for a pullback or consolidation. The green boxes mark the first support zones (S1) to watch on any pullback.
***Inter-Market Charts***
***Dollar*** The US Dollar Index Bullish ETF (UUP) is entering its zone of truth (key support). After a sharp decline the last 5-6 days, the ETF became short-term oversold as RSI(2) moved below 10 twice in the last two weeks. The indicator finished at 7.45 on Tuesday. At this point, we need to see some sort of bounce to affirm support and signal a continuation of the bigger up trend. On the 30-minute chart, UUP has been zigzagging lower since last week. A channel is taking shape and move above 26.2 would break channel resistance. The Euro ETF (FXE) remains above the resistance breakout at 129 and this breakout should be considered bullish as long as it holds. Look for a move back above 129 to call for a reassessment and likely lead to an upside breakout in the Dollar.
***Gold*** Gold is biding its time for another move. But which way? Last week's gap is still holding and I consider this bullish until proven otherwise. After a gap up on Thursday morning, the Gold SPDR (GLD) stalled over the last four days. GLD formed a bullish harami on Tue-Wed and broke trendline resistance with a gap up on Thursday. With the medium-term trend still up, this short-term gap and breakout argue for further strength. But they must hold! On the 30-minute chart, the consolidation evolved into a wedge over the last four days as GLD moved below Monday's low yesterday. Even though this is negative, the consolidation could still turn out to be bullish. After all, falling flags and wedges are bullish consolidations. Look for a break above the consolidation high to signal a continuation of last week's bounce.
***Oil*** Oil is acting quite strong as continued strength in the stock market and weakness in the Dollar help the bulls. The United States Oil Fund ETF (USO) moved further into the first resistance zone on Tuesday and closed at its highest level since 28-January. The advance over the last few weeks is starting to look like a rising flag. Even though this could turn out to be a bearish consolidation, the flag is currently rising and this is at least short-term bullish. On the 30-minute chart, USO broke triangle resistance with a gap and surge on Tuesday. The breakout keeps the short-term uptrend alive and reinforces the support zone around 25.8-26.8. USO could move into the low 30s if the stock market remains strong and the Dollar remains weak. Be careful though. The stock market is overbought and the Dollar is oversold at support.
***Bonds*** Technically, the outlook for bonds remains bearish. Fundamentally, the Fed makes its policy statement today and any talk of treasury purchases could send bonds sharply higher. The iShares 20+Yr T-Bond ETF (TLT) broke descending triangle support over the last two days. These are bearish continuation patterns and the support break signals a continuation of the downtrend. The first downside target is around 97 (T1) and the second is around 92-93 (T2). I am also watching the 10-Year Note Yield ($TNX) as an ascending triangle takes shape with resistance around 3.05%. I am a bit concerned that the 10-Year Note Yield did not confirm with an upside breakout. The small disconnect between TLT and TNX is not surprising because TLT is an ETF. As we have seen from GLD, USO and many inverse ETFs, they do not exactly track the underlying. I would like to see an upside breakout in TNX to confirm the downside break in TLT.
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.
