FALLING RATES BOOST STOCKS -- BONDS FINALLY BOUNCE -- OIL SURGES OFF SUPPORT -- OIL SERVICES REMAIN STRONG -- SLB HITS 52-WEEK HIGH -- RSI SIGNALS FOR SPX
RISING BONDS GIVE STOCKS A LIFT... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor
The stock market got a triple dose of good news today. First, the Fed released its Beige Book and the report was largely positive. Despite a few problem areas like housing, the report notes that the economy is in good shape and inflation remains tame. Second, news from the Fed sent bond prices sharply higher and the 10-year T-Note Yield moved back below 5.25%. Third, Retail Sales rose 1.4% and handily beat expectations. The triple whammy propelled the major indices higher and the S&P 500 moved back above 1500. The S&P 500 and Nasdaq both bounced off their 50-day moving averages and the Russell 2000 moved back above its 50-day.
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OVERSOLD BOUNCE FOR BONDS... While the surge in bonds and drop in rates is certainly good news for stocks, we should keep in mind that bonds were severely oversold and ripe for a bounce. The iShares ~20-year T-Bond Fund (TLT) broke support in mid May, gapped below 85 and declined over 6 points in six weeks. This is a big move for bonds and RSI moved below 30 last week to become oversold. Broken support and the gap turn into resistance and this oversold bounce could extend towards 85-85.5. I consider this an oversold bounce because the long-term trend is down. TLT broke major support at 85, broke its 200-day moving average and the 50-day moving average just moved below the 200-day moving average.
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RISING OIL BOOST ENERGY STOCKS... The U.S. Oil Fund ETF (USO) surged over 1% today and this fueled a rally in energy related stocks. USO is bouncing off support and a break above last week's high would signal a continuation of the prior advance (Jan-Mar). USO advanced from January to March and then declined to support in May. Support at 47.5 extends back to February and USO bounced off this level four times. Talk about solid support. In addition, the Apr-May decline looks like a falling price channel (blue trendlines) and a break above last week's high would open the door to higher prices.
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The Oil Service HOLDRS (OIH) surged 2.75% today and the uptrend remains strong. The ETF stalled over the last three weeks and established support at 165. This level held and today's surge reinforces support here. The bulls are in good shape as long as it holds. Also notice that RSI is trading above 50 and momentum remains bullish overall. The indicator first became overbought in mid April and registered four overbought readings in the last few months. RSI even formed a negative divergence over the last four weeks. Despite these overbought readings and the negative divergence, OIH remains strong and RSI remains above 50.
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SLB LEADS OIL SERVICE HOLDRS ... Schlumberger (SLB) led the Oil Service stocks with a new 52-week high. The stock also remains in a clear and strong uptrend. The uptrend started with a surge in January and continued with a breakout in March. There was a correction in late April and early May with a falling flag/wedge. SLB broke out in mid May and surged above 80. The stock again consolidated the last few weeks and today's surge reaffirms the current uptrend.
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RSI SIGNALS... Developed by J. Welles Wilder and introduced in his 1978 book, New Concepts in Technical Trading Systems, RSI is still one of the most popular momentum oscillators. Traditionally, this oscillator is used to identify overbought (>70) and oversold (<30) levels. In addition, traders can use positive and negative divergences to anticipate price reversals. While these traditional signals can be helpful, I like to add another filter by requiring a move above or below 50 for confirmation. RSI fluctuates between 0 and 100 with 50 in the middle. The bulls have the edge when RSI is above 50 and the bears have the edge when RSI is below 50.
The chart shows RSI and the S&P 500 over the last few months. As the March-June advance attests, overbought indices can remain overbought and negative divergences do not always produce good trading signals. Traders need something else to confirm a reversal. RSI moved above 70 in late April, but the index kept on moving higher and did not peak until early June, which was six weeks after the first overbought reading. A negative divergence also formed in May (red line), but the first negative divergence did not pan out as the index moved to a new high in early June.
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While nothing is perfect, looking for confirmation with a cross above or below the 50 line can increase the chances of success. Notice that RSI moved above 50 on 20-March and remained above 50 until 7-Jun (yellow area). This captured the bulk of the March-June advance. The move below 50 this month is bearish and confirms the negative divergence that formed in May. In a downtrend, 50 will now act as resistance the RSI is getting its first test this week. The indicator is back above 50 and momentum favors the bulls as long as it holds above 50. Look for a move below 40 to signal a continuation of the earlyh June decline.
