NY COMPOSITE AND NASDAQ REBOUND - FINANCE SECTOR LEADS - DOW THEORY REMAINS BULLISH - USING PRICE AND TIME FILTERS - PERCENT OF STOCKS ABOVE 50-DAY AVERAGE PLUNGES - BONDS TEST KEY SUPPORT
NYSE LEADS REBOUND... Video Link (click here) The harder the fall, the bigger the rebound. After plunging below the 50-day moving average on Wednesday, the NY Composite managed to hold above its early October low with a sharp rebound on Thursday. As chart 1 shows, the string of higher lows since August remains in place. Even though todays rebound was on less volume, NYSE volume was still respectable and the second highest of the week.
Chart 1
Chart 2 shows the Nasdaq rebounding with a move back above its 50-day moving average. Notice that the Naz also held its support zone and early October low. In addition, the string of higher lows since August remains in place. Nasdaq volume was the lowest of the week, but still respectable with over 2 billion shares exchanging hands. With a long red candlestick on Wednesday and a smaller white candlestick on Thursday, a harami formed over the last two days. These are short-term bullish reversal patterns that require confirmation with further strength. Watch for follow through above Wednesdays high.
Chart 2
FINANCE SECTOR LEADS REBOUND... Stocks rebounded on Thursday with the Financials SPDR (XLF) leading the charge. Chart 3 shows XLF surging over 4% with a bounce off support from the August trendline. There is also support around 14 from the early October low. At this point, XLF remains with a series of higher highs and higher lows since early August. Technically, it would take a break below the October lows to reverse the current uptrend. This also insinuates that the most recent decline was a pullback within that uptrend.
Chart 3
The Regional Bank SPDR (KRE) remains a tough call. KRE lagged the Financials SPDR today, but the ETF held up pretty good by remaining above support at 20.5 this week. Since last weeks high volume surge, the ETF has been range bound with trading confined to last weeks high-low range. Chart 4 shows KRE with a four day consolidation or indecisive period this week. I am watching resistance just above 21.5. A move above this level would turn indecision into a bullish breakout and argue for higher prices. Conversely, a move below last weeks lows would break triangle support and be bearish.
Chart 4
DOW THEORY REMAINS BULLISH... Even though the Dow Transports closed below its early October low yesterday, Dow Theory remains bullish overall. First, the Dow Industrials and Dow Transports both recorded higher highs in early October. Chart 5 shows the Dow Industrials easily exceeding its September high with a close above 10,000. Chart 6 shows the Dow Transports barely exceeding its September high with a close above 4000. Note that close-only charts are used for Dow Theory purposes. Higher highs in both Averages affirm Dow Theory as bullish.
With the October decline, the Dow Transports broke below the 50-day moving average and closed below its October low yesterday. This is indeed negative, but it has not been confirmed by the Dow Industrials. Confirmation is an important aspect of Dow Theory. Both must trigger a signal for it to be valid. With the Dow Industrials holding well above its prior low, a non-confirmation is present. Before moving on, notice that the Dow Transports did NOT confirm the lower low in the Dow Industrials in July (orange highlight).
Chart 5
Chart 6
PRICE AND TIME FILTERS... Even though Charles Dow never explicitly covered price or time filters, it is something to consider with Dow Theory signals. The Dow Transports closed below its October low for one day and by less than 1.5%. To prevent whipsaws and false signals, a price filter could require the Average to close below its prior low by 3% or more. This means a close below 3581. A time filter could require the Average to hold the break for at least three days.
PERCENT OF STOCKS ABOVE 50-DAY PLUNGES... Chart 7 shows the percentage of NYSE stocks above their 50-day moving average plunging below 40% for the first time since July. While the NY Composite moved to a higher high in October, this indicator formed a lower high for a bearish divergence. This also occurred in May-June. The red dotted lines mark support breaks after the bearish divergences. With confirmed bearish divergence and plunges below 50%, the odds of a correction unfolding are increasing. Chart 8 shows the percent of Nasdaq stocks above their 50-day moving average. This indicator formed its third bearish divergence of the year and broke below support. The first occurrence foreshadowed the June-July correction, but the second occurrence did not produce a good signal. With this third occurrence, the indicator broke below its July low. This shows a significant increase in selling pressure over the last two weeks.
Chart 7
Chart 8
A GOOD MONTH FOR COMMODITIES... October has been a good month for commodities (up), but a rough month for bonds (down). Chart 9 shows the DB Commodity Index Tracking ETF (DBC) breaking triangle resistance in early October. At its high point, the ETF was up over 15% last week. While the triangle breakout remains bullish, the ETF became short-term overbought last week. Such conditions increase the chances for a pullback or consolidation. Broken resistance around 23 turns into the first support level to watch.
Chart 9
A ROUGH MONTH FOR BONDS... In contrast to commodities, chart 10 shows the 20+ Year Treasury ETF (TLT)falling around 6% from its early October high. Despite this decline, the ETF remains in an uptrend since the June low. A rising price channel has taken shape with the ETF testing the lower trendline this week. Notice that the October decline retraced a Fibonacci 62% of the prior advance (Aug-Oct) and formed a falling wedge. Both the retracement and the pattern are typical for corrections. A move above 96 would break resistance and reverse the four week decline. Next weeks employment report could tip the balance.
Chart 10
