BIG DROP IN GREEK BOND YIELDS ENCOURAGES STOCK AND COMMODITY REBOUND AS DOLLAR DROPS -- MATERIALS ARE DAY'S STOCK LEADERS -- A LOT OF 200-DAY AVERAGES ARE HOLDING FOR NOW -- THAT SUGGESTS A SHORT-TERM BOTTOM
MATERIALS LEAD GLOBAL REBOUND... A 40 basis point plunge in Greek bond yields, which is the biggest drop in more than a decade, has increased hopes for some type of aid to that endangered economy. That has eased downside pressure on the Euro and caused some profit-taking in an overbought U.S. dollar. Dollar weakness has caused buying in stocks and commodities. While most stocks are bouncing, commodity-related stocks (gold, energy, and materials) are leading the rebound. Last Saturday, I showed the NYSE Composite Index starting to bounce off its 200-day average (red line) and its early November low near 6700, and suggested the start of a short-term rebound. Today's more than 2% bounce suggests that a short-term rally attempt is now in progress. NYSE leadership is coming largely from its large weighting in material stocks. Chart 2 shows the Materials SPDR (XLB) also bouncing off its 200-day line (which I also showed on Saturday). The XLB is the day's top performing sector. Two of its biggest gainers are Freeport McMoran Copper & Gold and US Steel. Charts 3 and 4 show both of those stocks also bouncing off their 200-day averages. Chart 5 shows the Energy SPDR bouncing off its 200-day line as well. That's a logical spot to expect a rebound.
Chart 1
Chart 2
Chart 3
Chart 4
Chart 5
GLOBAL MARKETS ALSO BOUNCE OFF 200-DAY LINES... The 200-day average is also providing support in several global markets which have led the global retreat. For example, Chart 6 shows Emerging Market iShares bouncing off that support line. Chart 7 shows Brazil iShares doing the same. Resource-based currencies, like the Brazilian Real and Australian Dollar, are doing the same as shown in Charts 8 and 9. That doesn't necessarily mean that the global downturn is over. It does mean, however, that this phase of the decline that started a month ago may have run its course. The 200-day average is used by chartists to distinguish between a bull and a bear market. That being the case, the current test of that long-term support line in so many markets is very important. The ability of the markets to rebound holds out hope that the 2010 slide is just an intermediate correction. Unfortunately, deterioration in several longer-term technical indicators argue against a sustained upmove from here. The best we may be able to hope for is a sideways pattern for several months. A more pessimistic outlook is for a short-term rebound followed by another test of the February lows (and 200-day averages).
Chart 6
Chart 7
Chart 8
Chart 9
TRADING BETWEEN AVERAGES, BUT WHICH ONES ... My best guess at this point is that the S&P 500 (and other stock indexes) will continue to trade between their 50- and 200-day moving averages for the time being. Although I usually prefer arithmetic averages, a lot of chartists prefer exponential smoothed averages (which are more sensitive and closer to the price action). So as not to leave anything out (and hedge my bets a bit), I'm showing both versions in Chart 10. It shows, for example, that the S&P has bounced off its 200-day EMA but is still well above its 200-day arithmetic average. The green line above the price action is the 50-day EMA which currently sits at 1100. That's 10 points below the standard 50-day line which sits at 1110. I'm not sure which of those two moving average versions will prove most helpful in the days ahead (although the 200-day EMA appears to be working better). That may give a slight nod to the 50-day EMA acting as resistance. Even so, it's a good idea to know where both versions are located.
Chart 10
