MARKET SCORES HIGH-VOLUME REVERSAL AFTER TOUCHING NEW LOW -- UPSIDE LEADERS ARE COMMODITY STOCKS, FINANCIALS, SMALL CAPS, AND REITS -- WHY RECENT TRIANGLE IN FINANCIAL SPDR MAY CARRY SOME GOOD NEWS

S&P JUMPS 6% AFTER TOUCHING NEW LOW... After dropping briefly to the lowest level since March 2003, the S&P 500 achieved an upside reversal day (as did all of the other major indexes) that resulted in a 6% gain. It also did that on the highest volume in weeks. The fact that the S&P touched a new low before rallying is especially impressive (Chart 1). The Nasdaq did the same (Chart 2). The Dow Industrials bounced off psychological support near 8000. The rally was aided by short-term positive divergences in both the daily RSI and MACD lines. Although all market groups participated, the biggest gains were seen in consumer discretionary, financials,REITS, and small caps. Commodity stocks also rallied strongly. Gold and energy stocks gained 12%. The commodity bounce was aided by stronger stocks and a weaker dollar. Many commodity markets were closed during the late stock rally and will probably see more buying tomorrow. Bond prices sold off as stocks rallied.

Chart 1

Chart 2

VIX DROPS 10% ... After recovering half of its late late October selloff, the CBOE Volatility (VIX) Index suffered a downside reversal day resulting in a 10% loss. Its daily MACD lines have remained negative during the recent bounce. A downturn by the VIX would be supportive for stocks. How much will depend on whether it's able to stay over its 50-day average.

Chart 3

WHY FINANCIAL ACTION IS ENCOURAGING... We've written recently about the "triangular" formation that's formed in the Financials SPDR (see Chart 4) and the S&P 500. I also wrote that there's good and bad news attached to a triangle. The bad news is that it's usually followed by a new low. The good news is that a triangle usually precedes a final downleg. That's one of the reasons why I find today's upside turnaround especially impressive. Chart 4 shows the XLF having fallen to a new low yesterday and again today before reversing higher. That raises the possibility that the downturn from mid-September has been completed. The fact that the daily RSI line is showing positive divergence is also encouraging. It's too early to get overly excited about a one-day turnaround. Having said that, I think today's strong price and volume action is the most impressive in the last two months. It will be even more impressive if the market indexes are able to achieve an upside "weekly" reversal tomorrow. Chart 5 shows the Energy SPDR (XLE) beginning today's upside reversal from above its October low. That has created a short-term positive divergence between it and the price of crude (solid line). Given oil's close correlation to the stock market, oil (and most other commodities) should finally experience an overdue relief rally.

Chart 4

Chart 5