MAJOR INDEX ETFS REBOUND -- IWM AND QQQQ LEAD -- GENTLE BEN FIRES UP FINANCIALS -- U.S. DOLLAR INDEX GETS A BOUNCE -- OIL FALLS FOR SECOND DAY
TECHS AND SMALL-CAPS LEAD MARKET REBOUND ... Today's Market Message was written by Arthur Hill. John Murphy will return next week. - Editor
The stock market rebounded on Tuesday with the Russell 2000 ETF (IWM) and the Nasdaq 100 ETF (QQQQ) leading the charge. IWM surged over 3%, while the tech-heavy QQQQ was up over 2% on the day. Before looking at these two, it is worth noting that selling pressure over the last 4-5 weeks affected the major index ETFs differently. Charts 1 and 2 show the Dow Industrials ETF (DIA) and S&P 500 ETF (SPY) breaking below their March lows. These two bore the brunt of selling pressure and showed the most weakness.
Chart 1
Chart 2
IWM HOLDS ABOVE MARCH LOW... IWM and QQQQ also experienced selling pressure, but both held above their March lows. Chart 3 shows IWM nearing its March lows this week and bouncing with a long white candlestick on Tuesday. The ETF was quite oversold after a double-digit decline from the early June high. How far might an oversold bounce extend? Broken support around 72 turns into resistance. In addition, the Fibonacci Retracements Indicator is overlaid on the price chart. A 50-62% retracement of the June-July decline would extend to around 70.5-72. A weak bounce would probably meet resistance lower and fizzle around the 38.2% retracement mark (~69). The bottom indicator window shows StochRSI trading below .50 since early June, which captured the entire downtrend. A move above .50 would be positive for this short-term momentum indicator.
Chart 3
QQQQ SHOWS RELATIVE STRENGTH... Of the major index ETFs, QQQQ held up the best over the last 4-5 weeks. As noted above, DIA and SPY broke their March lows and IWM pretty much tested its March lows. QQQQ, in contrast, held well above its March lows and showed much less weakness, which can also be interpreted as relative strength. Chart 4 shows QQQQ firming near the 62% retracement mark over the last five trading days. Today's bounce reinforces support around 44-45, but the ETF is just short of a breakout. Last week's sharp decline established resistance just above 46. While a one day surge is a good start, some follow-through is needed to trigger a short-term breakout. The bottom indicator window shows StochRSI edging above .50 for the first time since 5 June.
Chart 4
FINANCIALS SURGE ON BERNANKE COMMENTS... The finance-related ETFs surged after comments from Fed Chairman Bernanke suggested that the Fed might make its lending facilities available to securities dealers beyond 2008. This news reassured the credit markets and provided a big boost to the financial sector. Chart 5 shows the Financials SPDR (XLF) surging over 5%, Chart 6 shows the Regional Bank HOLDRS (RKH) jumping over 6% and Chart 7 shows the Broker Dealer iShares (IAI) advancing over 4%. All three were severely oversold after gut-wrenching declines the last two months. Today's advances are impressive, but still considered oversold bounces within bigger downtrends. Each chart has been labeled with resistance from broken support and the Fibonacci Retracements Indicator. The yellow shading marks resistance zones based on broken supports and the key retracements.
Chart 5
Chart 6
Chart 7
DOLLAR INDEX BOUNCES OFF SUPPORT... Reassurances from Bernanke and a decline in oil lifted the U.S. Dollar Index ($DXY). Chart 8 shows the U.S. Dollar Index bouncing off support over the last three days. The index has been working its way higher since mid March with a series of higher highs and higher lows. With a bounce off support at 72, the index held above the mid May low to keep this 3-4 month uptrend alive.
Chart 8
Chart 9 shows weekly prices extending back to January 2007. The big trend is down as the index trades below the falling 40-week moving average. This moving average is equivalent to the 200-day moving average. The advance since mid March looks like a rising flag, which could turn out to be a bearish setup. As long as the flag rises, the bulls have the edge with the next resistance zone around 74.5-75. Look for a break below the May-June lows to reverse the 3-4 month uptrend. Such a move would signal a continuation lower and project a move to new lows. StochRSI is displayed in the bottom indicator window. Momentum favors the bulls as long as this oscillator holds above its centerline (.50).
Chart 9
OIL MOVES SHARPLY LOWER... A sharp drop in oil prices also contributed to the rise in the dollar. In addition to general overbought conditions, the United States Oil Fund ETF (USO) came under pressure as the global economic outlook continued to deteriorate. John Murphy noted weakness in the French CAC 40 Index ($CAC), the German DAX Composite ($DAX) and the London Financial Times Index ($FTSE) last Tuesday. Chart 10 shows that the Shanghai Stock Exchange Composite ($SSEC) down over 50% from its October highs. On Chart 11, the Tokyo Nikkei Average ($NIKK) is down over 25% from its October high. Also notice that the index hit resistance at the 40-week moving average in May (red arrow). With stock markets in the US, Europe and Asia down sharply since October, concerns over the global economy are certainly justified.
Chart 10
Chart 11
Turning our attention back to oil, the United States Oil Fund ETF (USO) declined sharply on Tuesday. I noted a flat flag in the commentary on June 25. USO subsequently broke flag resistance with a surge above 115, but this breakout failed to hold as the ETF came right back down. Overall, the bigger uptrend is still in place as USO holds above the February trend line and rising 50-day moving average. These two indicators mark the first support area to watch around 105.
Chart 12
