***Executive Summary***

• Stock Market: Medium-term Bullish, Short-term Bearish
• Fed Gets Desperate as Washington Freezes
• IWM and SPY Hit Broken Support Levels
• Retracement Resistance on 60-minute Charts
• UUP Breaks Support with Long Black Candlestick
• GLD Forms Big Bullish Engulfing
• USO Holds Triangle Breakout
• TLT Remains in Trading Range
• Stock Setups by 8:30AM (video link)

***Stock Market Stance*** The medium-term evidence turned bullish on 13-March. There were three positive breadth extremes over the last two weeks. The VIX and VXN broke support levels. The financial, consumer discretionary and technology sectors led the way during the March surge. Fundamentally, the Fed is throwing all kinds of money into the system and the big stimulus package is coming on board. Even though this is all bullish for the next few months, the events of the last few days give me cause for great concern. Washington looks paralyzed and gun shy. The Fed looks desperate with its recent policy announcement. Technically, the major-index ETFs are overbought and near resistance levels. It is a recipe for weakness. My short-term outlook is bearish for the major-index ETFs and I expect a correction or pullback to unfold over the next week or two.

Market moving events for the next few trading days:

• 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
• Wednesday: Durable Goods Orders, Crude Inventories, New Home Sales
  -Earnings: DSM, CKE Restaurants, Paychex, Red Hat

***Technical Highlights***

***Something Smells Fishy*** Just when you thought we were finished with rescues packages, the Fed announces the granddaddy of them all. Remember, this all started back in August 2007 when the Fed injected $100 billion into the system. From here, the Fed started cutting interest rates dramatically and continued pouring money into the financial system. Here we are in March 2009 – 19 months later. The Fed cannot lower interest rates any more and Washington is unlikely to provide more bailout money. Desperate times call for desperate measures. If the economy was on the rebound and the banks were sound, Bernanke would not have resorted to such drastic measures. In its policy statement, the Fed announced that it will buy $300 billion in long-term Treasuries, $750 billion in agency mortgage-backed securities and $100 billion in agency debt. The grand total is $1.25 trillion dollars. That number really makes those AIG bonuses look small. 170 million is .014% of $1.25 trillion. Were are not even talking pennies here. Back to the $1.25 trillion, the stock market is not too picky about where the money comes from. Stocks just like the sound of money sloshing around the system. However, the bond and currency markets are concerned – and with good cause. Frankly, I was surprised by the scope the Fed actions, especially after all that has been done. I would be more confident if the Fed had the confidence not to act. The fact that the Fed had to act in dramatic fashion is a warning sign. In addition, Washington is caught in the AIG bonus frenzy and the appetite for further rescues will be greatly reduced. Perhaps the Fed realizes this and is getting ahead of the curve. It smacks of desperation to me. With the major-index ETFs overbought and near resistance, the odds of a sharp pullback look pretty high right now. 

***Major-index ETFs***

***Medium-term Trend*** Even though the major-index ETFs continued higher on Wednesday and I am bullish over the next 1-3 months, I still consider the short-term situation overbought and very ripe for a pullback. IWM and SPY have now retraced 50% of the Jan-Mar decline and returned to broken support. Both exceeded my first resistance zone, but it is possible that I picked the wrong resistance zone. There is still a good case for resistance near current levels. QQQQ moved higher as well, but closed relatively weak as it met resistance from the 17-Feb gap. RSI(2) is above 90 for SPY and IWM. RSI(2) finished at 89 for QQQQ. Believe it or not, QQQQ showed some relative weakness yesterday. After a steep seven day surge, all three look quite vulnerable to a pullback that could be rather sharp.

***Short-term Trend*** With the rally extending on Wednesday, SPY and IWM moved to the top of their retracement zones. QQQQ extended past this retracement zone. To recap: the advance over the last seven days retraced around 62% of the prior decline (9-Feb to 9-Mar). In addition, we have yet to see a decent pullback and this rally is getting way overextended. I am expecting a pullback to start any day. Now that the Fed meeting has past, we could see some profit taking and a pullback towards the first support zones (green boxes). At current levels, I think upside is quite limited and the chance of a 5-7% pullback is quite high. Over the last seven days, QQQQ is up 15.4%, SPY is up 17.3% and IWM is up 21.7%. After such massive gains, a 5-7% pullback would actually be normal. Even though the short-term trend is up, I am turning short-term bearish because I expect a pretty decent pullback within the next week or two.

***Inter-Market Charts***

***Dollar*** The Fed's announcement to spend over $1 trillion Dollars wreaked havoc on the Dollar. I must say that this announcement came out of left field. Sure, the Dollar was weaker heading into the Fed policy statement, but selling pressure was quite contained and within the realm of a normal pullback. That changed on Wednesday as the US Dollar Bullish ETF (UUP) broke support with a gap down and long black candlestick. It was a massive exodus from the greenback. Can't say I blame currency traders either. First, $1.25 trillion has to come from somewhere. Printing money will simply add supply and dilute the value of existing Dollars. Second, spending $1.25 trillion increases the chances of inflation down the road. Third, things must be pretty bad if the Fed is resorting to such drastic actions this late in the ball game. Suddenly, the Euro and the Yen don't look so bad. At least they are not being diluted on purpose - yet. The next support level for UUP resides around 24. The Euro ETF (FXE) extended its breakout with a long white candlestick on Wednesday. Even the Japanese Yen Trust ETF (FXY) got into the action with surge above 103.

***Gold*** Gold and the Dollar got back to their negative correlation on Wednesday. Notice how gold surged as the Dollar tanked. With the Fed set to spill $1.25 trillion into the economy, gold smells inflation down the road. In addition, gold is now one of the few remaining assets in the flight-to-safety trade. The Dollar will remain vulnerable as long as the Fed runs the printing press and this could continue pushing money into bullion. A truly hard asset. On the daily chart, the Gold SPDR (GLD) opened weak and closed strong to form a big bullish engulfing pattern. This candlestick engulfed the prior four candlesticks. Combined with last week's harami, support around 87-88 has been affirmed and I would expect gold to move higher over the coming weeks. On the 30-minute chart, GLD moved to a new low in early trading to extend the falling wedge. With the afternoon surge, GLD broke wedge resistance and exceeded the prior reaction high. This is the first surge to take out the prior reaction high and the short-term trend is up.

***Oil*** While oil is likely to benefit from weakness in the Dollar, it could suffer from weakness in stocks. In addition, weakness in the Dollar hurts export driven Asian economies and this could dampen demand. The medium-term trend remains down, but the United States Oil Fund ETF (USO) is currently in the midst of a counter trend rally. This bounce looks like a rising flag and the ETF is trading in the 28-30 resistance zone. Rising flags are bearish patterns. On the 30-minute chart, USO broke triangle support and this breakout is holding. I am raising my first support level to 28 (S1). A break below this level would negate the triangle breakout and be an early sign of weakness. Key support remains around 25.8 (S2) and a break below this level would fully reverse the short-term uptrend.

***Bonds*** I don't think I have ever seen a more mixed up market than the bond market right now. On one hand, government financing needs insure lots of supply and this is bearish over the next 3-12 months. On the other hand, the Fed is set to purchase $300 billion of long-term Treasures and this is bullish over the next 1-3 months. Once bought, the Fed cannot just throw these Treasuries away. They will sit on its balance sheet until the Fed decides to sell them. Here's the plan. The Fed wants to provide liquidity and lower short-term rates right now. Later, the Fed will need to tighten monetary policy to contain inflation. It is a delicate balancing act. When the Fed sells these Treasury bonds, it will suck liquidity back out of the market. This means we could see supply coming from the Fed and the US government at the same time. That sounds pretty bearish for bonds. Despite the big announcement, TLT did not break resistance and remains stuck in the consolidation. In fact, TLT surged above 108 and closed below 104.5. The inability to close near the high is a sign of hesitancy among the bulls. The Fed may have a short-term fix for bonds, but the long-term fundamentals are still bearish. This could keep buyers on the sidelines and limit gains.

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.