GREEK SUPPORT PLAN BOOSTS STOCKS AND COMMODITIES -- DAILY AND WEEKLY BOLLINGER BANDS SHOW SUPPORT -- MORE MARKETS BOUNCE OFF 200-DAY AVERAGE -- % NYSE STOCKS ABOVE 200-DAY AVERAGE HAS FALLEN TO SEVEN-MONTH LOW
BLENDING DAILY AND WEEKLY BANDS... One of the reasons I thought last Friday's upside reversal day signalled a short-term rally attempt was because it occurred right at its lower Bollinger band as shown in Chart 1. Another reason is that the two bands have started to contract as shown by the Bollinger Band Width (BB) line below the chart. The BB line rose througout the recent selloff as the two bands expanded, which signalled an increase in market volatility. The fact that it has turned down signals that the downtrend has been exhausted at least for the time being. Overhead resistance is expected at the 20-day moving average (middle dashed line) which currently sits at 1095. That bounce is further supported by the version of "weekly" bands shown in Chart 2. Weekly bands use a 20-week moving average as the middle line. You can change that to a daily version by inserting 100 days into the formula. Chart 2 shows the S&P bouncing off its lower weekly band as well, which further supports the bounce on the daily chart. Initial overhead resistance on Chart 2 is at 1091 which is the 100-day moving average. Combining the daily and weekly bands places overhead resistance for the S&P 500 in the 1091-1095 region (based on today's values).
Chart 1
Chart 2
INVERSE RELATION BETWEEN DOLLAR AND STOCKS IS NEW... A reader in Iraq asked why we write so much above the inverse correlation between the U.S. Dollar and the stock market since that negative correlation didn't exist between 1995 and 2003. He's right on the money. Historically, there's been little or no correlation between the dollar and U.S. stocks. Stocks have risen along with the dollar at times and when the dollar has been weak. The vertical lines in Chart 3 show the dollar and S&P 500 trending in tandem from 1995 to 2003 as the reader suggests. They've trended in opposite directions since then. Most of the focus on their negative correlation started with the market collapse in 2008 when global money moved to perceived safety in Treasury bonds and the U.S. Dollar. Chart 2 shows the inverse correlation between the two markets over the last two years. Notice that an upturn in one has correlated with a downturn in the other. To the far right, you can see the Dollar Index turning up in December while stocks peaked a month later. The recent flight back into the dollar (and mainly out of the Euro) is tied to growing fears of default in Europe. That's why we've been writing so much about it lately. Not because that's the way it's always been, but because that's the way it is right now. Stay safe, Frank.
Chart 3
Chart 4
MORE 200-DAY AVERAGES ARE HOLDING ... On Tuesday, I wrote about the large number of indexes and stocks that were bouncing off their 200-day moving averages. Here are three more. Chart 5 shows CSX climbing 5% today to lead a strong transportation group. Chart 6 shows Semiconductor Holders bouncing off the 200-day line as well. Chart 8 shows MSCI Pacific (ex Japan) iShares bouncing off that long-term support line. The 200-day average is the proverbial "line in the sand" to most chartists. It's what separates downside corrections from the start of bear trends. The ability of so many markets to find support at the 200-day is keeping the recent downturn in the "correction" category. They'll have to stay above that line to keep it that way.
Chart 5
Chart 6
Chart 7
NYSE % STOCKS ABOVE 200 MA FALLS TO SEVEN-MONTH LOW ... Arthur Hill showed the NYSE % Stocks above their 50-day averages falling to the lowest level since last March, but into oversold territory in the mid-20s. The number of stocks trading above their 200-day lines has been dropping as well. Chart 8 shows the NYSE % Above 200 MA ($NYA200R) falling from 90% last October to 70% this week. The negative divergence between that red line and the NYSE Composite Index is visible during January. Despite that drop, 70% is still in the "correction" category. The monthly bars in Chart 9 put that into better perspective. The $NYA200R (red bars) fluctuates between overbought territory over 80 to oversold territory below 20. It has just turned down from its 2003 peak near 90 (just as it did at the start of 2004 starting a period of consolidation that lasted through the first half of that year). Chart 9 shows that drops to 40% are still considered to be corrective in nature. The mid-2007 drop below 40% signalled a bear market, just as the mid-2009 rise above 50% signalled a new bull. Although no serious damage has been done yet to the market uptrend, historical precedent suggests that there may be more selling to come in the weeks and months ahead to return the NYA200R to a more neutral level. That's another reason why we'll be watching 200-day averages on stock charts very carefully.
Chart 8
Chart 9
