***Position Summary*** Once again, the stock market gapped on the open and reversed after the gap. Stocks recovered after a weak open on Wednesday, but fell after a weak open on Thursday. Judging the two days side-by-side, the downside reversal day (Thursday) was stronger than the upside reversal day (Wednesday). For SPY, AD Net% was +56% on Wednesday and –78% on Thursday. Bears win. On Wednesday's advance, five of the nine sectors were up. On Thursday's decline, eight of the nine sectors were down. Bear win again. Selling pressure is still outpacing buying pressure. Despite yesterday's failure, IWM, QQQQ, SPY and a number of ETFs remain stuck in consolidation patterns. Neither the bulls nor the bears have been able to deliver the knockout punch. With the bigger trends down and stronger selling pressure, the odds still favor a downside break and further weakness. A lot will depend on participation. I am showing a number of sector/industry ETF charts today with consolidation patterns. Look for these to either confirm or refute the broad market ETFs. This week's market moving events include:

• Friday: Nothing Noteworthy. -Earnings: Nicor (GAS), PG&E (PCG)
• Monday: Existing Home Sales -Earnings: Nordstrom (JWN), Lowe's (LOW)
• Tuesday: ICSC-UBS Store Sales, Consumer Confidence, PPI -Earnings: Home Depot (HD), Macy's (M)
• Wednesday: Durable Goods, New Home Sales -Earnings: Limited (LTD), Noble Energy (NBL)
• Thursday: Jobless Claims, GDP (Preliminary) -Earnings: AIG Intl (AIG), Dell (DELL), Viacom (VIA)

A Video Addition to today's commentary will be posted around 7:30AM ET - click here. The Stock Setups page is updated on Tuesdays and Fridays - click here. ***Technical Highlights*** ***Ignore the Gap*** While I do not recommend completely ignoring gaps, recent price action makes it clear that we should focus on what happens AFTER the gap. For the second time in three days, stocks gapped up on the open, peaked in the first 30 minutes and declined rather sharply. In between these two failed up gaps, we have a failed down gap on Wednesday. The market does not know if it is coming or going. Overall, I find such volatility and uncertainty more bearish than bullish. There is clearly a lot of anxiety and uncertainty in the market right now. This favors the bears. ***Decline on Bad News*** Yesterday I noted that the market rebounded with bad news. Today, the market fell with bad news. Did pundits really expect the economic reports to be positive? My guess is that we are in the middle stages of a market downturn and the early stages of an economic downturn. The Russell 2000 ETF (IWM) peaked in July, while the S&P 500 ETF (SPY) and Nasdaq 100 ETF (QQQQ) peaked in October. The overall stock market has been moving lower the last 4-6 months. The economy lags the stock market and this suggests that the economic downturn started 2-4 months ago. The economic news is negative during the middle stage of a bear market. Pessimism reaches its peak when the market reaches its trough. The bear market ends when stocks start moving consistently higher in the face of continuing bad news and gloom. We are not there yet. Now, let's get back to the bad economic news. First, the Philadelphia Fed's index of mid-Atlantic business activity fell to -24 in February, compared to -20.9 in January. This was the lowest reading since February 2001. Second, the Conference Board reported that the Index of Leading Economic Indicators fell 0.1% in January, which was the fourth straight decline. The indicator is down 2% since July and this is the largest six-month decline since 2001. As you can see from the chart below, the market was already well on its way down in 2001 (blue dotted lines) and SPY did not bottom until October 2002. ***Triangles Persist*** There is no change on the daily charts. IWM, QQQQ and SPY opened strong and closed weak to remain within their triangles (pink lines). Yesterday's strong open provided the bulls a good opening for a triangle breakout, but they did not take it. This failure reinforces resistance from last week's high and it would take a move above these levels to trigger a bear market rally. This is also known as a counter-trend advance or corrective rally. With another failure, the bears still have the upper hand here and the odds favor a break below triangle support. ***Short-term Ranges Narrow Further*** With another pop and drop yesterday, the short-term trading ranges extended. QQQQ has been working its way lower the last five days, but SPY and IWM have been flat. The key to a successful breakout is participation across the broad. IWM surged above Tuesday's high yesterday morning, but QQQQ and SPY did not. All three need to break key resistance levels to forge a lasting breakout. All three are now trading close to support levels. As negative as I find yesterday's failed gap, I would not rule out the possibility of a bounce off support. However, these support levels mark the line-in-the-sand. A break would turn the short-term trend down and call for a continuation of the January decline. ***XLF and XLY*** Once again I will review the current working triangles and setups in key ETFs. Namely, I will be watching the Consumer Discretionary SPDR (XLY) and the Finance SPDR (XLF) for clues on broad market strength or weakness. Both need to breakout for a counter-trend rally to have any legs. Similarly, support breaks by both would give the bears the momentum to drive the market lower. XLY and XLF have been trading within a very tight range the last seven days. Look for range breakouts to trigger the next signal. With such tight ranges comes the risk of whipsaw (bull trap or bear trap). ***The More, the Merrier*** The key to any directional break is participation. An upside breakout should see good volume, good breadth and most ETFs partaking in the breakout. The same is true for a downside break. The validity of a directional break will depend on the degree of participation. The next charts show key ETFs with consolidations. If the market makes a move today, check these charts for participation or lack of participation to either undermine or validate the signal. ***TLT Surges*** With more bad news on the economy and the stock market under pressure, bonds surged off support with a gap. The iShares 20+ Year Bond ETF (TLT) formed a bullish engulfing pattern on Wednesday and then gapped higher on Thursday. The move reinforces support around 90-91 and keeps the uptrend alive. Even though inflationary pressures are building, the Fed is more interested in the economy. It is a delicate balancing act. The Fed must lower rates long enough and deep enough to stimulate the economy, but also prevent inflation from getting out of hand. For now, the Fed looks like it will err on the side of easing. The second chart shows the 13-week TBill Yield ($IRX). This short-term interest rates declined sharply in August and again in January (red boxes). The sharp drop in short-term rates reflects strong buying in short-term treasuries (13 weeks). Money moves into short-term treasuries as a flight to safety and the stock market could remain under pressure until money starts moving OUT of short-term treasuries, like it did in late August. A move above 2.5% (25 on the chart) would show selling in short-term treasuries and this could free up some money for stocks.  ***CBE Fails At Broken Support*** Cooper Industries (CBE) is a big conglomerate with interestes in residential and commercial construction. It is quite diverse and this is a simplified business description. The stock peaked in July, formed a lower high in October and broke support with a sharp decline in January. Broken support is turning into resistance and the stock fell on above average volume yesterday. Like the market as whole, CBE is caught in a consolidation the last 4-5 weeks. Actually, the stock started consolidating on 24-Jan, about a week before the market turned flat. With the overall trend down and resistance at hand, this stock looks ripe for further weakness. I will add CBE to the Stock Setups Portfolio as a short position (currently 43.36) with a stop-loss at 46.55. Good day and good trading -Arthur Hill --------------------------------------------------------------- Click here to post a comment, suggestion or question. Breadth Charts --------------------------------- --------------------------------------------------------------- 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. -------------------------------------------------------- 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). -------------------------------------------------------- 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.