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The Daily Swing - Arthur Hill
Friday, 27 March 2009 7:30AM ET

***Executive Summary***

• Stock Market: Reserved…
• AD Volume Net% Lags for the S&P 500
• Financials Lag at Resistance
• A Look at the 2002 Surge
• QQQQ Extends into Resistance Zone
• IWM Gaps Up and Holds Gap
• UUP Shrugs off Global Currency Jabber
• GLD Forms Rising Wedge
• USO Extends within Rising Flag
• IEF Corrects with Bullish Flag

***Technical Highlights***

***Breadth Turns Mixed*** Stocks surged again on Thursday with a pretty broad advance. All nine sectors were higher with materials, industrials and consumer discretionary leading the way higher. These three were up over 4% each. Financials lagged with a relatively small gain (+1.18%). The table below shows the breadth stats for the major indices. Notice that breadth was very strong for the Nasdaq 100 ETF (QQQQ) and the Russell 2000 ETF (IWM). It is positive to see techs and small-caps leading the way higher. AD Net% was also very strong for the S&P 1500 ETF (ISI) and the S&P 500 ETF (SPY), but AD Volume Net% was not very impressive. Relative weakness here can be attributed to energy, consumer staples and financials. Even though yesterday's surge was impressive overall, the market was not firing on all cylinders and this could foreshadow a pullback.

***Financials Lag*** Once again, I will highlight three key financial ETFs as they stall at resistance. He who hesitates is lost. Well, the financial ETFs are hesitating near resistance. The Financials SPDR (XLF) stalled the six days with resistance just above 10. This stall started with a big dark cloud cover pattern last Thursday. The Regional Bank HOLDRS (RKH) surged above last week's high on Monday, but stalled with inside days on Tuesday, Wednesday and Thursday. The long white candlestick and three inside days form an extended harami. The Broker Dealer iShares (IAI) also surged above last week's high with a long white candlestick on Monday and then stalled the last three days. I still think the odds favor a correction or consolidation as all three remain overbought and at resistance.

***A Record Three Weeks*** According to my data, the current three week rally is the largest in over 40 years for the S&P 500. The next biggest surge was August 1982, when the index surged almost 13% in three weeks. This surge kicked off a bull market that lasted until the 1987 crash. The chart below shows the current surge relative to the 2002 surges. The S&P 500 bottomed in July 2002 and surged 22% in 4-5 weeks (green arrows). After this momentous surge, the index embarked on a 38 week trading range and tested the July low twice. Bottoming is a process, just like healing. As in July 2002, stocks became too oversold in early March 2009. The current rally alleviated these oversold conditions and the healing process has begun. The March low may hold for some time to come, but we are very likely to see a significant pullback that will allow a second chance to partake with lower risk.

***Major-index ETFs***

***Medium-term Trend*** Despite another surge, there is not much change in the medium-term analysis. Over the last 13 days, SPY is up 22%, QQQQ is up 22% and IWM is up 29%. IWM also led the way higher during the Nov-Dec surge. The advance over the last three weeks is impressive – no doubt. However, IWM and SPY are still overbought and within resistance zones. The 62% retracement line (blue) cuts right through the middle of the last consolidation (late Jan- early Feb). QQQQ surged into its resistance zone from the January-February highs. I under estimated the strength of this rally, but I am still not going to chase the market when the major-index ETFs are overbought and at resistance.

***Short-term Trend*** The recovery started late Wednesday and continued on Thursday. QQQQ, SPY and IWM held Monday's gap and surged to new highs for the move. Technically, the short-term trend is up as the major-index ETFs forge higher highs and higher lows. Thursday's gap turns into the first support level to watch for signs of weakness. Even though I run the risk of being a stopped clock (correct twice a day), I will remain short-term bearish because of overbought conditions and resistance on the daily charts. The risk is that end-of-quarter window dressing further fuels the rally. However, I still think the odds favor a pull over the next 1-3 weeks.

***Inter-Market Charts***

***Dollar*** The Dollar continued to shrug off the frivolous global currency debate and edged higher on Thursday. There is not much change in the technical picture. The US Dollar Bullish ETF (UUP) found support near the 62% retracement mark and moved higher the last five days. Even though the advance looks like a potentially bearish rising flag, the bulls have the short-term edge as long as it rises. Support remains at 25 and a break below this level would signal a continuation lower. As long as the flag rises, I expect a move towards broken support around 25.9-26. The Euro ETF (FXE) became overbought after the surge above 137 and met resistance at the 62% retracement mark. In contrast to the Dollar, FXE sports a potentially bullish falling flag with resistance at 136.6. A break above this level would be bullish. However, as long as the flag falls, the bears have the edge and I expect a move towards broken resistance around 129-130.

***Gold*** If the Dollar bounces back to broken support, then gold could come under pressure in the coming days. The Gold SPDR (GLD) surged last week, but never followed through on this big move off support. After this surge, GLD pulled back to the Oct-Nov trendline and firmed over the last three days. On this daily chart, a break below 90 would be most negative and I would then expect a decline into the low 80s. On the 30-minute chart, the bounce over the last three days looks like a rising wedge, which is potentially bearish. GLD broke the lower trendline yesterday and further weakness below 91.5 would argue for a continuation of the prior decline. This would be the early signal to expect a more important support break at 90.

***Oil*** There is still no 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 on Monday. 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.

***Treasuries*** The Treasury market is perking up. The 20+ Year T-Bond ETF (TLT) opened weak and closed strong for the second day running. Overall, the ETF remains within a trading range. However, TLT is trying to firm above last week's low and continue last week's surge. A move above this week's high would show some promise. I am also showing the 7-10 Year T-Note ETF (IEF), which actually looks bullish. Notice that IEF broke resistance with a big surge last week and the decline over the last six days looks like a falling flag. A break above flag resistance would signal a continuation higher. Of note, the Fed is continuing with its plan to purchase $300 billion of Treasuries. On Wednesday, the Fed purchased $7.5 billion worth of Treasuries. Buying resumes today. This gives new meaning to the term: don't fight the Fed. The Fed wants interest rates lower and Treasury prices higher. Moreover, it now has skin in the game. While there are long-term supply concerns, purchases from Fed mean Treasuries are likely to hold support levels.

Good day and good trading -Arthur Hill Click Here for a Free Trial

Good day and good trading -Arthur Hill

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About: The Daily Swing is posted every trading day around 7AM ET and focuses on trading strategies for QQQQ, SPY and IWM. A video accompanies the written commentary with further insights into gold, oil, bonds and the Dollar. Videos featuring stock setups are published on Tuesdays and Thursdays.
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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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