***Executive Summary***
- Stock Market: Medium-term Bullish, Short-term Bearish
- Put/Call Ratio Shows Excess Bullishness
- Window Dressing
- China Floats World Currency Idea
- QQQQ, SPY and IWM Form Harami
- Short-term Uptrends Remain
- UUP Forms Rising Flag
- GLD Declines as Dollar Bounces
- USO Hits Flag Trendline
- TLT Bounces within Trading Range
(video link)
***Stock Market Stance*** Medium-term Bullish and Short-term Bearish. Even though I am looking for a correction or consolidation over the next 1-3 weeks, we could see pent up demand for stocks over the next few days. Fund managers will be under pressure to show positions at the end of the quarter. In addition, the short-term trends are still up and there are no signs of weakness yet. A short-term bearish stance is risky right now and it make take another week for a pullback to unfold.
The medium-term evidence turned bullish on 13-March. There were positive breadth extremes on 10, 12, 17 and 23 March. The VIX and VXN broke support levels as confidence increased in the market. The financial, consumer discretionary and technology sectors led the way during the March surge. Fundamentally, the Fed and Treasury are throwing all kinds of money into the system and the big stimulus package is coming on board.
Market moving events for the next few trading days:
- Wednesday: Durable Goods Orders, Crude Inventories, New Home Sales
-Earnings: DSM, CKE Restaurants, Paychex, Red Hat
- Thursday: GDP, Jobless Claims, Gheithner Speaks
-Earnings: Best Buy, Conns, Fred's, Gamestop, Heelys, TIBCO
- Friday: Consumer Sentiment
-Earnings: Finish Line, KB Home
- Monday: No economic reports
-Earnings: Layne Christiansen, Oxford Industries
- Tuesday: Case-Shiller, NAPM Chicago, Consumer Confidence
-Earnings: Gigamedia, Lennar, Steelcase, BH Fuller, Sealy
***Technical Highlights***
***Put/Call Ratio*** What about this stinkin Put/Call Ratio? I showed the charts for the CBOE Total Put/Call Ratio ($CPC) and CBOE Equity Put/Call Ratio ($CPCE) a few weeks ago. Neither was close to a bearish extreme that is normally associated with stock market lows. Indicators do not work all the time. They just provide indications that need to be confirmed or refuted with other indicators. Moreover, price action and the actual price chart is the most important determinant. Having said that, notice that both Put/Call Ratios are at bullish extremes. I am showing both as the 10-200 Percentage Price Oscillator (PPO). This is a percentage version of MACD that uses the 10-day SMA and the 200-day SMA. Readings above +15% are deemed to show excessive bullishness (market bottom). Readings below –15% are deemed to show excessive bearishness (market top). The indicators are both trading well below –15% to show excess levels of bullishness. In other words, call volume (bullish speculators) is outpacing put volume (bearish speculators) by a wide margin. With both indicators showing excessive bullishness, the time for new long positions has passed and the market looks ripe for a pullback or a consolidation. Despite these extremes, both indicators remain below their 5-day EMAs (pink line). At the very least, an upturn is needed to produce an actual signal.
Before moving on, I would like to note earlier signals in the CBOE Equity Put/Call Ratio ($CPCE). The black ovals show reversals occurring around the zero line for the Percentage Price Oscillator (PPO). Most recently, the indicator moved above zero in late February and then turned down in early March to provide a bullish signal.
***Window Dressing This is something we are likely to hear a lot about in the coming days. With stocks surging over the last few weeks and the third quarter drawing to a close, fund managers will be pressured to show positions on the books. Those that participated in the rally are fine. Those that did not may look to buy in the coming days so they can show long positions in their quarterly report. Even though the major-index ETFs are overbought, this window dressing could prop up the markets for a few more days.
***Chinese Unease*** Here's is a snippet from Reuters:
BEIJING - China is calling for a new global currency to replace the dominant dollar, showing a growing assertiveness on revamping the world economy ahead of next week's London summit on the financial crisis. The surprise proposal by Beijing's central bank governor reflects unease about its vast holdings of U.S. government bonds and adds to Chinese pressure to overhaul a global financial system dominated by the dollar and Western governments. Both the United States and the European Union brushed off the idea.
It is an interesting thought, but very unlikely. It is a thinly veiled threat that China will continue to look for alternatives to the Dollar and US Treasury Bonds.
***Major-index ETFs***
***Medium-term Trend*** QQQQ, SPY and IWM opened weak and closed weak to form harami patterns over the last two days. After Monday's long white candlestick, the major-index ETFs formed smaller black candlesticks and Tuesday's range was completely within Monday's range. It is also known as an inside days. Harami show sudden indecision that can foreshadow a short-term trend reversal. We already know that the major-index ETFs are overbought after sharp advances the last 10-11 days. In addition, SPY and IWM are trading in retracement zones. The red rectangles mark a 38-62% retracement of the Jan-Mar decline. QQQQ is meeting resistance from the Jan-Feb highs. It is a tough call currently because securities can become overbought and remain overbought in strong uptrends. Moreover, we have the issue of window dressing in the coming days. I still think the March surge marks the beginning of an extended advance, but the odds favor a pullback or consolidation in the next 1-3 weeks.
***Short-term Trend*** Technically, the trend remains up on the 60-minute charts. There was a bit of profit taking yesterday with a small decline, but all three remain above the trendlines extending up from 9-March. More importantly, Monday's gap and the majority of Monday's gains are holding. A move below Friday's low would fill Monday's gap and provide the first signs of significant weakness. While I expect a pullback to unfold soon, it could be delayed by end of quarter window dressing.
***Inter-Market Charts***
***Dollar*** Jean-Claude Trichet, head of the European Central Bank (ECB), suggested that European rates had yet to bottom. This opens the door for another rate cut at the 2-April meeting. I am not sure if it is priced in or not, but lower interest rates should weigh on the Euro and help the Dollar. In addition, Economists also expect the US to lead Europe and Japan during any recovery and this could also help the Dollar. On the price chart, the US Dollar Bullish ETF (UUP) is getting a bounce off the 62% retracement mark. The ETF was quite oversold after the March plunge could reach 25.9-26 on an oversold bounce. A rising flag is taking shape over the last 3-4 days. Even though this is potentially bearish, it is currently bullish because it is still rising. A break below 25 would signal a continuation lower. The Euro ETF (FXE) sports a mirror image of the Dollar with a falling flag. Look for a break above 136.5 to signal a continuation of last week's surge. Otherwise, I think the odds favor a pullback towards broken resistance.
***Gold*** The Gold SPDR (GLD) declined as the Dollar bounced on Tuesday. The negative correlation between these two is back in force. Gold and the Dollar were positively correlated from mid January to late February (pink box). This changed suddenly with Wednesday's policy statement from the Fed. The Dollar plunged and gold surged (blue box). With the Dollar on the rebound, gold could come under more pressure. On the daily chart, GLD surged off support last week, but fell back over the last three days. A doji formed right at the Oct-Nov trendline on Tuesday. This is where GLD needs to hold. A break below 90 would negate the bullish engulfing and show medium-term weakness. On the 30-minute chart, signs of short-term weakness were emerging with the failed flag on Monday and GLD moved below 91 on Tuesday. This is not the way to follow through on a big surge.
***Oil*** There is still not much change in the United States Oil Fund ETF (USO). The ETF remains in a short-term uptrend and medium-term downtrend. The advance over the last few weeks looks like a rising flag, which is potentially bearish. USO became short-term overbought as RSI(2)moved above 90 for three days. In addition, USO is trading near resistance from the upper trendline of the rising flag. Looks like time for a pullback. On the 30-minute chart, USO has been edging higher the last four days. First support is set at 31 for top pickers.
***Bonds*** Here is what the Fed is up to:
Bloomberg: When the plan was announced last week, the Fed said it would concentrate on maturities due between two and 10 years. The central bank on March 27 will buy notes due from March 2011 to April 2012. On March 30, it will purchase securities due from August 2026 through February 2039. On April 1, the Fed will buy Treasuries due from May 2012 through August 2013. The following day it will purchase notes due from September 2013 through February 2016.
With the dates ranging from March 2011 to February 2039, the Fed will purchase maturities from 2 years to 30 years over the next few days. That doesn't help much. In fact, this may create more confusion in the bond market. The iShares 20+Yr T-Bond ETF (TLT) surged yesterday, but remains range bound on the daily chart. No definitive direction here. Chinese threats and US financing needs are pushing prices lower, while Fed purchases are pushing prices higher. The Fed may win the battle, but it will loose the war. On the 30-minute chart, TLT surged above flag/wedge resistance with big move that lasted an hour (2:30 to 3:30). Perhaps that was Bernanke doing a little front running! Bonds are a mess right now and I will just stay away.
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.
