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The Daily Swing - Arthur Hill
Friday, 27 June 2008

***Position Summary***

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***Technical Highlights***

***Meltdown*** Stocks started weak, stayed weak and ended weak. All major index ETFs declined over 2%. All sectors were lower with six of nine declining over 2%. The energy sector held up the best with a .72% loss. Volume expanded on the Nasdaq and the NYSE as both saw above average volume with yesterday's decline. This is a clear sign that selling pressure is intensifying, not letting up.

AD Net% and AD Volume Net% for SPY and QQQQ finished below –90%. These were the second –90% down days for SPY and the fourth –90% down days for QQQQ. The first –90% down days occurred on 6-June to trigger the initial bearish signals for breadth. Subsequent –90% down days simply affirm these bearish signals and it will take a +90% up day to reverse these signals. In addition, the AD Lines for QQQQ, SPY and IWM are all trading below their March lows. These ETFs have yet to hit their March lows, but the weakness in the AD Lines suggests that all three will break their March lows before this decline runs its course.

***Medium-term Down Trends*** QQQQ, SPY and IWM gapped down and closed weak to form long black candlestick. The downtrend is accelerating and selling pressure intensifies. I think all three will break their March lows before all is said and done for this decline. QQQQ and IWM have potential support levels above the March lows and we may see a bounce or consolidation around these levels (QQQQ 44 and IWM 68). "Potential" and "could" are the key words. Support is only potential at this stage and a bounce is merely a possibility. There is one clear definitive at work here: the trend is down. These type declines usually do not end until there is a selling climax or huge intra-day reversal on big volume and strong breadth. Until we see such a signal, the downtrend has yet to run its course and further weakness should be expected.

***Short-term Down Trends*** The short-term trends are clearly down and I have draw falling price channels on each chart. The lower channel trendlines could offer oversold support and trigger a bounce or consolidation. I do not think such a bounce would be worth a play. The next oversold bounce or short-term rally would offer another chance to establish shorts, not a chance to make money on the upside. With yesterday's gaps, QQQQ, SPY and IWM have now gapped down three times since 6-June and all three gaps held. This is testament to the degree of selling pressure and the weakness of buying pressure on the bounces. Minor resistance levels are based on Wednesday's highs. A move above these levels would also fill Thursday's gaps.

***Gold and GDX*** The streetTRACKS Gold ETF (GLD) and the Gold Miners ETF (GDX) broke resistance with big moves on Thursday. These big moves were triggered by a sharp decline in the U.S. Dollar Index ($USD). GOLD broke resistance at 90 with a big move. The yellow metal has been quite volatile since early May and I am going to play it safe by marking key support at 85. GDX also surged with a gap and breakout at 42. This move reinforces key support at 43 and the gap is bullish as long as it holds. A move back below 44 would be cause for concern. Keep in mind that GDX is made up of actual companies that have costs related to energy.

The breakout in gold is not hard to fathom given the sharp decline in the U.S. Dollar Index ($USD) over the last two weeks. Despite the Fed's tough talk on inflation, the European Central Bank (ECB) talked even tougher and is expected to raise Euro rates next week when it meets on 3-July. The 10-year German Bund yields 4.5%, while the 10-year US T-Note yields 4.3%, which is up from 3.3% in mid March. This makes US bonds competitive with Euro bonds and helps the U.S. Dollar. As noted before, there is an ebb and flow at work with the Dollar, Euro, ECB and Fed. The market focuses on tough inflation talk from the ECB and the Euro rises (Dollar declines). After the ECB issues its policy statement on 3-July, we could see attention turn to the Fed and its tough talk on inflation, which could then spark a rally in the Dollar. On the chart, the U.S. Dollar Index has been working its way higher since mid March with lots of support around 72. Failure to hold this support zone would be bearish and signal a continuation of the long-term downtrend. The weekly chart shows a rising flag over the last 3-4 months and a break would signal yet another continuation lower.

***Based Metals*** The Base Metals PowerShares ETF (DBB) and Silver ETF (SLV) surged on Thursday. However, these are not the same as gold, which is considered a precious metal. Silver and the base metals are used in industry and demand is tied to the global economy. DBB consists of aluminum, zinc and copper. Note that it does not include silver. On the price chart, DBB surged in mid June and then consolidated at the upper trendline of a large triangle. A consolidation breakout would also break triangle resistance and this would be bullish. The Silver ETF established support in the low 160s and formed a consolidation in June. Unlike GLD, which broke its June highs, SLV has yet to break its June highs and shows less strength. Look for follow through above 175 to put silver back into bull mode.

For those with a penchant to hedge or engage in pairs trading, an alternative may be to buy GLD and sell (short) SLV. Relative to SLV, GLD is starting to outperform. The price relative (GLD:SLV Ratio) surged in March and then formed a falling flag/wedge consolidation. With yesterday's surge, the price relative is on the verge of breaking its May high and GLD looks set to outperform silver.

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

Good day and good trading -Arthur Hill

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Click Here for a Free Trial

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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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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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