FRIDAY UPSIDE REVERSAL MAY GIVE WAY TO OVERSOLD BOUNCE AS NYSE INDEX BOUNCES OFF NOVEMBER LOW -- MATERIAL AND FINANCIAL SPDRS BOUNCE OFF 200-DAY LINES -- SELL SIGNAL IN NYSE BULLISH PERCENT INDEX, HOWEVER, ARGUES AGAINST QUICK RECOVERY

MATERIALS AND FINANCIALS BOUNCE OFF 200-DAY LINES ... The stock market remains in a downside correction as evidenced by the breaking of initial support levels and negative turns in several longer-term technical indicators (more on that later). Friday's heavy-volume upside reversal, however, suggests that a short-term bottom may have formed from an oversold condition. That's especially true of two sector ETFs that bounced off their 200-day moving averages. Material stocks have been among the hardest hit because of the sharp selloff in commodity markets. Chart 1, however, shows the Materials Sector SPDR (XLB) reversing upward on Friday (on huge volume) after touching its 200-day line. Its 9-day RSI line (below chart) shows slight "positive divergence" from an oversold condition below 30. The chart picture for the Financials SPDR (XLF) in Chart 2 looks weaker owing to its having broken its fourth quarter lows. But it too bounced impressively off its 200-day line. The Commodity Channel (CCI) Index is also in oversold territory. That helped launch the late rebound on Friday.

Chart 1

Chart 2

NYSE COMPOSITE INDEX BOUNCES OFF NOVEMBER LOW... I've been expecting the S&P 500 to eventually drop down for a test of its early November low and its 200-day moving average and continue to do so. One major stock index that did that this week was the NYSE Composite Index (probably owing to its heavy exposure to material stocks). The daily bars in Chart 4 shows the NYA rebounding off its early November low and coming within points of its (red) 200-day line. Although it closed marginally lower, it was the only major index to do so. All of the others closed higher. That fact that the NYA bounced off its November low also gives Friday's late bounce a bit more credibility. The hourly bars in Chart 5, however, put Friday's bounce in better perspective. The 9-hour RSI line has turned up after bouncing off its late February low. That suggests a short-term oversold bounce. The horizontal bars show overhead resistance starting at 6870 and ranging up to 7111. The fact that weekly MACD lines have turned negative argues against placing much faith in any short-term bounce. So does a sell signal in one of our other technical indicators.

Chart 3

Chart 4

NYSE BULLISH PERCENT INDEX TURNS DOWN ... This index measures the percent of NYSE stocks that are in point & figure uptrends. As such, it's a good measure of overall market direction. Chart 5 compares the BPNYA (red line) to the NYSE Composite Index (green line) over the last four years. Turns in the red line usually precede turns in the green line. That especially true when the BPNYA turns up from oversold territory below 30 (as it did last spring) or turns down from overbought territory over 70 (as it did in early 2007 and again in 2010). The trendlines in Chart 5 show a negative divergence in October 2007, a positive divergence in March 2009, and a negative divergence in 2010. Chart 6 shows this year's negative divergence between the two lines more closely. The January 2010 high in the NYSE was accompanied by a "lower high" in the BPNYA. The actual "sell signal" took place this week when the red line fell below its fourth quarter low. That sell signal is seen more clearly on its point & figure version in Chart 7. The last O column has fallen below the previous O column at 68. That reverses the buy signal given last April. Sell signals like that suggest that the January top may be in place for several months.

Chart 5

Chart 6

Chart 7