***Position Summary***

The bears remain in control of the medium-term and short-term trends. However, the major index ETFs are getting oversold for the short-term and approaching their January lows. There may be support here, but I would not count on it unless we see a selling climax or strong recovery rally. There is also the outside chance for a double bottom, like those seen in Mar-07, May-06 and Oct-98. I will cover these past double bottoms in detail on Monday. Again, let's see some evidence of support before considering a double bottom. Right here and right now, the bears are in control and it could get worse before it gets better. The biggest concern for the bears is the Bernanke put. The last section of this commentary suggests that we may see a surprise rate cut. The Fed normally makes its policy announcement on 18-Mar, but could move earlier if the stock market starts to tank. I remain short IWM with a nice profit that I do not want to see disappear. At this point, I will take it one day at a time and wait for signs of firmness before closing this position. Picking a bottom now would be like catching a falling knife.

Market moving events for the next five trading days:
  • Friday: Employment Report, Consumer Credit
    -Earnings: Ciena (CIEN)
  • Monday: Wholesale Trade
    -Earnings: Six Flags (SIX)
  • Tuesday: ICSC-UBS Store Sales
    -Earnings: Kroger (KR), Boston Beer (SAM)
  • Wednesday: EIA Petroleum Status Report
    -Earnings: Hot Topic (HOTT), Jo-Ann Stores (JAS)
  • Thursday: Retail Sales, Business Inventories
    -Earnings: Amercian States Water (AWR)

A Video Addition to today's commentary will be posted around 8:15AM ET - click here.
The Stock Setups page is updated on Tuesdays and Fridays - click here.

***Technical Highlights***

***Big Losses*** We have been seeing this pattern for some time now. The advancing days are tepid and the declining days are torrid. Yesterday was no exception. For the SPY, AD Net% dipped to –93% and AD Volume Net% hit –87%. This was the seventh day since 11-Dec when one or both moved below –90%. Such days show extremely lopsided selling pressure. Just to give you an idea. There are 500 stocks in SPY. To get a –90% down day, we need 475 stocks declining and only 25 advancing:
  • 25 (up) – 475 (down) = -450 (net)
  • -450/500 = -.90
  • -.90 = -90%.



That is some serious selling pressure. Big rallies often start with +90% up days in breadth. So far we have yet to see that big breadth day or even a selling climax for that matter. I will get the t QQQQ, SPY and IWM charts next, but support will likely firm with a big washout day that forms a hammer or some sort of long white candlestick. This can occur with a big gap down on the open and strong recovery. A hammer forms with a sharp intraday decline and then a strong recovery that recoups the losses. Let's see at least one strong recovery day before considering support and a possible oversold bounce. 

***Surprise Rate Cut?*** The 13-week TBill Yield ($IRX) declined below 1.5% as money rushed into short-term treasuries. This is the third sharp decline in eight months. Prior sharp declines led to surprise rate cuts from the Fed. The Fed cut the discount rate 1/2% on 17-Aug and cut both the discount rate and the fed funds rate by 3/4% on 23-Jan. Both cuts gave way to a sharp advance in the stock market. This is the risk that bears and shorts face right now. The major index ETFs are closing in on their January lows and the Fed is no doubt standing on the sidelines ready to pull the trigger. The employment report looms today and I would not be surprised to see the Fed move if the market unravel today. My gut tells me that the Fed would likely move Monday morning before the market open and this could lift stocks on Monday. This is just my gut talking though.



From the WSJ Market Beat Blog: ….William Hornbarger, chief fixed income strategist at A.G. Edwards notes: “There’s so much uncertainty in the world right now that people are looking for any asset that is perceived as the safest…people who are just worried about everything, who would not ordinarily buy Treasurys.” The rush to government debt was particularly prominent in the short-term markets, where the yield on the three-month bill fell as low as 1.30% during the day, putting it about 1.70 percentage points below the federal-funds rate. Lance Lewis, writing on Minyanville.com, says that this type of condition does not occur often — and generally only during instances when the Federal Reserve is about to surprise markets with an interest-rate cut. “Could the Fed ease tomorrow morning after the release of the jobs data? It’s a distinct possibility in my view,” he writes.

***Breaking Support*** The Russell 2000 ETF (IWM) led the way lower with a break below its February lows. The financial services sector is the biggest sector in this ETF and relative weakness in banks pushed IWM lower. The support break is clearly bearish and it looks like IWM is going to test its January low. SPY also broke support, but not as drastically. Thursday's close was below the February lows and I also expect a move towards the January low.



In contrast to IWM and SPY, QQQQ is still holding support from the February low. The ETF still has a descending triangle working and this pattern is still bearish. In addition, QQQQ has been relatively weak since January. However, Q's are showing some relative strength over the last four weeks by holding above the February low. This is actually less weakness and it has yet to translate into absolute strength. A break below 42 would confirm the descending triangle and target further weakness towards 40.



***Failure Below Gaps*** Yesterday I pointed out three bearish things for the 60-minute charts: the failure at resistance in IWM and QQQQ, the gaps down and the lower lows. QQQQ, SPY and IWM remain in short-term downtrends and all three formed reaction highs just below the gap.



***Finance Started It*** It is little secret that the finance sector started this whole market mess. The Finance SPDR (XLF), Broker Dealer iShares (IAI) and Regional Bank HOLDRS (RKH) were the first to show relative weakness and the first to break down. IAI broke its January low, while the RKH and XLF closed at their lowest (closing) levels since September 2003. Even though these ETFs remains above the 22-January opening low, I think they broke their January lows for all intents and purposes. Moreover, the trend for all three is clearly down with the late February highs marking key support. The market is not going to turn around until these three find support and get a solid bounce.



***Key ETFs Breaking Support*** The February lows marked support for a number of ETFs. I highlighted a few of these over the last few days. Technically, these ETFs failed at resistance and gapped down last Friday. With a three day stall, many were finding support near the February lows. However, the failures at resistance and Friday's gaps remain. With yesterday's decline, many broke support (XLY, RTH, XRT, XLV, IYR). I am going to highlight the first three: Consumer Discretionary SPDR (XLY), Retail HOLDRS (RTH) and Retail SPDR (XRT). These three are still well above their January lows and have further room to fall. The Consumer Discretionary sector is just as important as the Finance sector. We already saw XLF fall to its January lows and it may now be time for XLY to lead lower.



***Key ETFs Holding Support*** Despite yesterday's carnage, some key ETFs actually held support and these are showing some relative strength. Let's see how long it last. With the overall market weak, even pockets of strength are fighting an uphill battle. However, when (if) the market turns around, those that held up the best on the way down are likely to lead on the way up. XLI, XLK, PHW and SMH all held support. I don't see the Industrials SPDR (XLI) bucking the market trend for too long, but I will be watching the Hardware PowerShares ETF (PHW) and Semiconductor HOLDRS (SMH) closely in the coming days. PHW gapped down last Friday and firmed the last four days. It is holding support for now, but we need a strong surge to reinforce support in a weak market. SMH also gapped down last Friday and then firmed the last four days. There is support at 28 and this ETF could lead if the market finds some buyers. I would wait for the overall market environment to improve first though.



***Two Techs Holding Up*** It is too early to consider longs, but I noticed two key tech stocks holding up yesterday and actually gaining on the day. These are two to keep an eye on if/when the market recovers. Symantec (SYMC) remains within a falling flag and well above its January low. Even though the stock edged higher yesterday, it needs some help from the overall market and a break above flag resistance to turn bullish. Oracle (ORCL) gapped up and held the gap on Thursday. The stock has lots of support around 18-19 that extends back to August. Upside volume was also above average over the last two days. Look for a break above 19.6 to solidify support.



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.