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#1 TTHQ Staff

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Posted 20 March 2009 - 09:38 AM

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***Executive Summary***
  • Stock Market: Medium-term Bullish, Short-term Bearish
  • Positive Breadth Extremes
  • Bearish Candlestick Reversals in XLF, RKH and IAI
  • IWM and SPY Stall at Resistance
  • Indecision on the 60-minute Charts
  • UUP Firms After Big Support Break
  • GLD Solidifies Support
  • USO Breaks Resistance Zone
  • TLT has yet to Break Resistance(video link)
***Stock Market Stance*** No change: Medium-term Bullish and Short-term Bearish. 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:
  • 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
  • Thursday: GDP, Jobless Claims, Gheithner Speaks
    -Earnings: Best Buy, Conns, Fred's, Gamestop, Heelys, TIBCO
  • Friday: Consumer Sentiment
    -Earnings: Finish Line, KB Home
***Technical Highlights***
***Positive Breadth Extremes*** Readers know that I use breadth surges to identify market turning points or affirm the underlying trend. Using the S&P 1500 ETF (ISI) has my base index, I look for AD Net% and AD Volume Net% to exceed +90 for a positive breadth extreme. This means that at least 95% of all issues are up on the day and only 5% are down (95% - 5% = +90%). For AD Volume Net%, this means that the volume of advancing stocks was at least 95% of all volume and the volume of declining volume was only 5%. Breadth surges are not infallible and should be used in conjunction with other indications.

There are a number of other breadth studies that use 9-1 up days (90% up and 10% down). This would be equivalent to +80% in AD Net% or AD Volume Net%. I used to use +80% for my extremes, but decided to tighten the criteria after breadth extremes became more commonplace. In his column today, Mark Hulbert writes about multiple 9-1 up days (more than one 9-1 breadth day in a short time frame). He concludes that multiple 9-1 days are largely bullish, but not fail-proof.

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Nothing is fail-proof. Over the last two weeks, we have seen positive breadth extremes in AD Net% and AD Volume Net% on 10 and 12 March. In addition, on 17-March AD Net% reached +87% and AD Volume Net% reached +89%. On 18-March AD Net% hit +73% and AD Volume Net% hit +83%. Basically we have strong readings for 4 of the last 10 days. This shows a buying surge that often puts in a medium-term bottom. However, such strong buying also creates short-term overbought conditions that can lead to a sharp pullback.

***Dark Clouds Forming*** Financial stocks led the advance over the last two weeks. They had the biggest losses to recover and acted accordingly with big rallies. Now that they have advanced the most in the last two weeks, they have the most to correct. Prior to yesterday's pullback, XLF was up over 70% from its March low. A 50% correction of this rally would entail a 20% decline from yesterday's high. XLF opened strong and closed weak to form a long black candlestick. Over the last two days, a dark cloud pattern took shape. This bearish candlestick reversal occurs when the open is above the prior high and the close is below the mid point of the prior white candlestick. It signals an intraday reversal that could foreshadow further weakness. The Regional Bank HOLDRS (RKH) and the Broker Dealer iShares (IAI) also formed dark cloud patterns.

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***Major-index ETFs***

***Medium-term Trend*** The current rally extended a little further than I thought it would, but there is evidence for resistance near current levels. Moreover, the major-index ETFs became overbought after huge rallies and we have yet to see a decent pullback. Signs of selling pressure started to emerge yesterday as the major-index ETFs opened strong and closed weak. Thursday's black candlesticks affirm resistance that could mark a short-term peak. SPY and IWM retraced 50% of the Jan-Mar decline and met resistance from broken support. QQQQ overshot its retracements, but is meeting resistance from the 17-Feb gap. At best, the surge over the last 7-8 days signals the start of a medium-term advance and we will see a pullback or consolidation over the next week or two. At worst, this rally was the mother of all head-fakes and we are due for a test of the March lows.

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***Short-term Trend*** After extending overbought conditions on Wednesday, the major-index ETFs stalled much of Thursday with a consolidation. Notice how QQQQ, SPY and IWM were volatile from 2:00PM Wednesday until 11:00AM Thursday. After 4 hours of volatility, the major-index ETFs settled into a tight trading range (red boxes). This is like a mini-inside day that shows indecision. With the major-index ETFs overbought and near key retracement levels, this indecision could foreshadow a short-term reversal and pullback. Technically, the 7-8 day uptrend has yet to reverse. 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 7-8 days, QQQQ is up over 15%, SPY is up over 17% and IWM is up over 20%. 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.

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***Inter-Market Charts***

***Dollar*** The Fed's bold moves on Wednesday are still reverberating throughout the Forex world. This week's decline was the sharpest since, well, December, when the Dollar declined over 7% in five days. The most recent decline has put other countries and currencies on the hot seat. Asian and European exporters are not happy with the recent surge in their currencies (drop in the Dollar). Bernanke has thrown a hot potato to Europe and Asia. Will they respond in kind? Nobody wants a strong currency right now. Here's an example of the Fed ruffling feathers. Just last Thursday, the Swiss National Bank announced intervention plans designed to push the currency lower and cut its key interest rate. This cause a gap down and support break in the Swiss Franc ETF (FXF). On Wednesday, Bernanke one-upped the world with the Fed announcement and the Swiss actions have been negated. Turning to the price charts, the US Dollar Bullish ETF (UUP) is bearish and oversold, while the Euro ETF (FXE) is bullish and overbought. Time to stand aside and let the dust settle.

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***Gold*** No change. 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 Euro does not counter the Fed actions. On the daily chart, the Gold SPDR (GLD) opened weak and closed strong to form a big bullish engulfing pattern on Wednesday. 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.

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***Oil*** 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 moved above the 28-30 resistance zone. Rising flags are bearish patterns, but they are short-term bullish as long as they rise. On the 30-minute chart, USO broke triangle support and this breakout is holding. First support level is set at 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.

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***Bonds*** No change. 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.

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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.