STOCKS GET OVERSOLD BOUNCE -- ENERGY AND MATERIALS LEAD THE WAY -- OIL AND BASE METALS JUMP OVER 8%

STOCKS STAGE BROAD ADVANCE... Today's Market Message was written by Arthur Hill. - Editor

The stock market staged a broad advance on Wednesday with eight of nine sectors moving higher. While this advance looks impressive by itself, it needs to be considered in the context of the prior decline. Remember, it takes a bigger percentage gain to recover a loss. January and February were brutal months with the S&P 500 ETF (SPY) losing 17.5%. It would take a 22% advance recover this loss. The 17.5% loss tells us that the ETF was overextended on the downside. Chart 1 shows SPY with its 14-day RSI moving below 30 for the second time in two weeks. Readings below 30 are deemed oversold, while readings above 70 are deemed overbought. RSI previously dipped below 30 in early October, which led to a choppy trading range the next few weeks. The bigger trend for SPY remains down and a rally from here would be considered an oversold bounce - at best. Broken support from the November and February lows marks the first resistance test around 74-75. Further up, broken support levels in the low 80s turn into a resistance zone. The falling 50-day moving average will also reach the low 80s soon.

Chart 1

MATERIALS AND ENERGY LEAD HIGHER... A rebound in commodities powered the Materials SPDR (XLB) and Energy SPDR (XLE) higher on Wednesday. Chart 2 shows XLB moving below its November low on Monday and then rebounding on Tuesday-Wednesday. The rebound is impressive for day traders, but not enough to affect the bigger downtrend. XLB declined over 20% from its February high. Today's surge barely makes a dent in the prior decline. With the RSI becoming oversold this week, it looks like an oversold bounce within a bigger downtrend. Broken supports around 21 turn into the first resistance zone. Chart 3 shows XLE with a potential bear trap. This occurs when a security breaks support and then quickly springs back above the support break. The failed support break shows resilience, but it is not enough to reverse the bigger downtrend. XLE was also down over 20% from its February high and RSI became oversold. Like SPY and XLB, XLE was also ripe for an oversold bounce or consolidation.

Chart 2

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OIL AND BASE METALS SURGE... The energy and materials sectors were powered higher by a surge in oil and base metals. The United States Oil Fund ETF (USO) and Base Metals PowerShares ETF (DBB) both surged over 8%. Chart 4 shows DBB plunging over the prior 12 months with a move from 27 to 11. The ETF found support around 11 in December, tested support over the last two months and then surged back above 12 today. It's still a bear market, but a bear market rally could retrace a portion of the prior decline. The gray lines show the Fibonacci Retracements Tool with the first possible target around 17-18 from the 38% retracement. Chart 4 shows USO bouncing from oversold levels over the last few days. I noted that its RSI was oversold in the market message last Wednesday. Broken supports around 28-30 turn into the first resistance level to watch. This area is also confirmed by the falling 50-day moving average. As you can see from the Rate-of-Change indicator, today's surge was not the biggest. USO has had plenty of 8-10% surges in the last four months.

Chart 4

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