FOREIGN STOCKS BACK OFF FROM MAJOR RESISTANCE BARRIERS WHICH MAY CAP SPRING RALLY -- OVERSOLD VIX MAY START BOUNCING FROM CHART SUPPORT -- BOLLINGER BANDS HINT AT STOCK WEAKNESS
EMERGING MARKETS BACK OFF FROM 200-DAY AVERAGE... One of the ways to help determine the staying power of the current global rebound is to track the performance of the world's strongest markets. That happens to be in the emerging market area. Judging from the fact that several of the bigger emerging markets are starting to back off from major resistance at their 200-day averages, the current global rebound may be starting to weaken. Chart 1, for example, shows Emerging Markets iShares (EEM) failing for the second time in two weeks to clear its 200-day average (red line). A drop below last week's low would confirm that failed test and most likely lead to a retracement of the March/April price gains. Adding to that more negative tone is the fact that daily MACD lines have turned negative for the first time since early March. In addition, the 14-day RSI line (top of chart) is in danger of falling below its 50-day line for the first time in nearly two months. The two biggest contributors to that picture are Brazil and China. Chart 2 shows Brazil iShares (EWZ) backing off from their 200-day average. Chart 3 shows China iShares (FXI) falling back below their 200-day line in today's selloff. [Several other Asian markets like Hong Kong, South Korea, and Taiwan look pretty much the same]. Since those are the markets that have led the spring stock rebound, any signs of weakness on their part should contribute to profit-taking elsewhere. Several other leading markets are backing off from their January highs.
Chart 1
Chart 2
Chart 3
COMMODITY EXPORTERS BACK OFF FROM JANUARY HIGH ... I've written before about how commodity exporters (and their respective currencies) have benefited the most from recent weakness in the U.S. Dollar and the accompanying rebound in commodity and stock markets. One of those is Brazil which was shown in Chart 2. Two other commodity exporters that come to mind are Australia and Canada. I recent showed the ustralian Dollar challenging its January high and its 200-day average. Chart 4 shows the XAD backing off from those resistance barriers today. So are Australia iShares as shown in Chart 5. Chart 6 shows Canada iShares (EWC) also backing off from their January highs. The January highs and/or 200-day averages should contain a bear market rally or the first upleg in a bottoming process. I happen to lean toward the latter view. In either case, however, there's a strong chance that the March/pril rally in global stocks may have run its course.
Chart 4
Chart 5
Chart 6
OVERSOLD VIX REACHES MAJOR CHART SUPPORT... One of the bullish factors for the stock market has been the continuing drop in the CBOE Volatility (VIX) Index since last November. A falling VIX is normally bullish for stocks. That's why Chart 7 is worth paying attention to. It shows the VIX have moved down to the highs of last spring where new support is likely. [A broken resistance level becomes new support]. In addition, the 14-day RSI line (below chart) is showing "positive divergence (blue arrow). A VIX upturn from this support area could spell trouble for stocks. Chart 8 shows the downturn in the VIX since early March (when the market bottomed). A close above 40 would put it at a two-week high and break its two-month down trendline. That short-term upturn would probably cause some selling in stocks. A close back over its 200-day moving would probably cause even more.
Chart 7
Chart 8
BOLLINGER BANDS HINT AT WEAKNESS... Last Tuesday, I showed three ways to use daily Bollinger bands. The most common way is by viewing the two outer bands placed around a (dashed) 20-day moving average. The current uptrend remains intact as long as prices remain above the 20-day line. If that line is broken, prices will usually drop to the lower band. The other two indicators are more anticipatory. %B on top of Chart 9 shows the three lines as an overbought-oversold oscillator (with the 20-day average as the middle line). Notice that %B has failed to reach 1.00 on this latest bounce. Failure to reach the upper band is an early sign of weakness. Bollinger band width (BB) below Chart 9 measures the distance between the two outer bands. It's been falling since late March. That implies lower volatility and higher prices. The BB has declined to oversold territory and has leveled off. Any upturn in BB from here would signal market weakness. Here's what those three versions of Bollinger bands are telling us. The trend is still up and will remain up until the S&P 500 closes below its 20-day (dashed) average (and last week's intra-day low at 826). The %B at the top of the chart hints at weakness as does the BB line below the chart. They suggest that the current rebound is on shaky ground.
Chart 9
NEW FORMAT ... You've no doubt noticed some improvements to our Market Message format over the past couple of weeks. The most important change is a greater role being played by Arthur Hill who was been a valuable contributor to the messages over the last year. Arthur's Video Messages accompanying his articles are a big plus as well. There are more changes coming, all of which are intended to provide you with even more market coverage on a day to day basis. Arthur's work provides a nice balance to mine. For one thing, he often makes use of indicators that I don't and is more fluent in the use of candlestick charts. Arthur covers a broader array of markets than I do on a daily basis which allows me to pick those spots that I consider especially relevant. As a result, I don't feel as burdened to comment as often on short-term market moves and can focus more on the bigger picture. All of these changes have been carefully considered and have been introduced at a gradual pace. The end result should be the same high-quality analysis that you initially signed on for. You'll just be getting more of it.
