BOUNCE IN FOREIGN MARKETS GIVES US STOCKS A BOOST -- OVERSOLD CONDITION AND DROP IN VOLATILITY ALSO SUGGEST THE LIKELY START OF A BEAR MARKET BOUNCE

OVERSOLD FOREIGN MARKETS BOUNCE ... Over the past week, the U.S. market has held relatively firm while foreign shares have mostly fallen to new lows. Today's rebound in foreign shares is finally giving a boost to stocks in the U.S. Charts 1 and 2 show the EAFE iShares and Emerging Market iShares having fallen to now lows over the last week. The good news over the short-run, however, is that their 14-day RSI lines are showing positive divergence. That suggests that the past week's selloff in foreign shares was overdone and a bounce likely. One of the hardest hit markets has been the Nikkei 225 in Japan which recently fell to the lowest level since the 1980s. Part of the reason was the rising yen which hurts the export-driven Japanese market. In today's trading, however, the Nikkei jumped more than 6% and was one of the biggest gainers. Part of the reason for that was the 4.6% drop in the Japanese yen which is the biggest drop in the last two months (Chart 3). Some profit-taking in the yen and a rebound in Japan suggests a rally attempt is due in global stocks.

Chart 1

Chart 2

Chart 3

BOLLINGER BAND WIDTH CONTRACTS ... In an October 9 message, I suggested watching Bollinger Band width for signs of a short-term market bottom. Chart 4 is an updated version of that indicator which plots the difference between the two Bollinger bands. The black line started rising at the start of September which meant that the bands were widening and is a sign of increased volatility. That's usually bad for stocks. I suggested that the black line needed to start dropping to signal any rally attempt. Chart 4 shows the line dropping for the first time in nearly two months. Unfortunately, weekly and monthly charts haven't shown any improvement. That should limit the size and duration of any rally attempt. Initial overhead resistance for the S&P 500 sits at 985 and 1044. The fact that today's rally came on rising volume is also an encouraging sign.

Chart 4

HOURLY BARS SHOW IMPROVEMENT ... The hourly bars in the next three charts those two overhead resistance levels formed during October more clearly for the S&P 500 SPDRS (Chart 5), the Dow Diamonds (Chart 6) and the PowerShares QQQ Trust (Chart 7). The odds of reaching those higher levels were enhanced by today's breaking of down trendlines drawn over the October highs. That negated the short-term triangle formation I wrote about last week. The QQQQ in Chart 7, which had been the weakest of the three ETFs, broke its resistance line most convincingly. Rising volume for all three major market ETFs on today's price advance is another sign of short-term improvement in the market's trend.

Chart 5

Chart 6

Chart 7

OVERBOUGHT VIX DROPS 16%... While the daily RSI lines for the major market indexes are showing positive divergence, the opposite is true for the CBOE Volatility (VIX) index which lost 16% today. The 14-day RSI line for the VIX is showing negative divergence (see red line in Chart 8). Negative divergence takes place when the RSI line fails to confirm a price move to a new high. That increases the odds for a further pullback in the VIX which should give a short-term boost to stocks. There's little technical evidence at this point to support a major upturn in stocks. This is more likely to be the start of a bear market rally.

Chart 8