DAILY AND WEEKLY MACD LINES ARE HELPING TO SUPPORT STOCKS WHICH END WEEK ON A POSITIVE NOTE -- SIGNS OF BUYING IN FINANCIALS AND HOMEBUILDERS ARE ALSO AN ENCOURAGING SIGN

MACD LINES SHOW SOME PROMISE ... Another reader complained this week that we failed to point out the "negative divergence" in the daily MACD lines during January prior to the latest downturn. The reason I didn't point it out was because none existed. In fact, it may be the other way around. At the moment, the daily MACD lines look more positive than negative. Chart 1 overlays the MACD lines (and MACD histogram) over daily bars for the S&P 500. The chart shows that the MACD lines bottomed during October and gave a positive divergence during November (rising trendline) before rallying into the start of January. No negative divergence was given at the early January top. Although the S&P fell to the lowest level in two months during January, the MACD lines remained well above their earlier lows. The lines have now turned positive again (see circle). To me, that looks like positive divergence and hints at more market strength. The market is rallying today with the biggest gains coming from financial stocks (and banks in particular). The S&P is up more than 2% and is nearing a test of last week's intra-day high at 877. A close through that initial chart barrier would strengthen the market's "short-term" trend and keep the three-month trading range intact. There's even more good news.

Chart 1

WEEKLY MACD LINES REMAIN POSITIVE ... Another factor supporting the market at current levels is the fact that "weekly" MACD lines have remained positive throughout the recent market drop. After turning negative last June, they turned positive at the end of December (see arrow) and remain so (Chart 2). That's not enough to signal a "major" bottom, but increases the odds that the S&P 500 may attempt another move toward its January high at 943. The weekly RSI lines (top of chart) have also turned up from oversold territory below 30. At the very least, that suggests continuation of the recent trading range with a slight upward bias.

Chart 2

FINANCIALS SPDR SHOWS POSITIVE MACD DIVERGENCE ... Chart 3 provides a textbook example of a positive MACD divergence for the Financials Sector SPDR (XLF). The XLF rose nearly 8% today and was the market's strongest sector (helped greatly by a 12% jump in bank shares). For those of you not familiar with a "positive divergence", compare the November-January lows in the MACD lines and the price bars in Chart 3. Both bounced during November. During January, however, the XLF fell to a new low (falling trendline). The MACD lines, however, remain above their November lows (rising trendline). When the momentum indicator fails to confirm a price breakdown, a "positive divergence" exists. Even better, the daily MACD lines turned positive this week for the XLF. Normally, the second positive crossing by the MACD lines is more important than the first (during November). Needless to say, any follow-through buying in financial shares would be positive for the market. The XLF needs to do a lot more, however, to signal that a "major" bottom has been seen. Other groups leading the market higher today were consumer discretionary, materials, techology, and transportation.

Chart 3

HOMEBUILDERS HAVE GOOD DAY ... Another encouraging sign came from today's big jump in homebuilding stocks. Chart 4 shows the S&P Homebuilder SPDR (XHB) climbing 7% to clear its 50-day moving average. Notice the huge upside volume. Most of that came from double digit percentage gains in Centex (+14%), KBH (+13%), DR Horton (+13%), and Lennar (+12%). The monthly bars in Chart 5 may also carry some good news. The 14-month RSI line overlaid on the price bars of Centex is showing some positive divergence in oversold territory below 30. The monthy MACD histogram (although still negative) is very close to turning positive for the first time in more than three years. Centex (and several other homebuiders) are finding support near the 2000 price low. If any improvement is going to be seen in the housing sector, it will be seen first in signs of strength in homebuilding stocks. That would certainly be a welcome sign for the stock market and the economy.

Chart 4

Chart 5