KOREAN MARKET LEADS GLOBAL STOCKS LOWER -- MOST FOREIGN MARKETS HAVE ALREADY BROKEN THEIR FEBRUARY LOWS -- TECHNICAL ODDS SUGGEST THE US MARKET WILL PROBABLY DO THE SAME
NOW IT'S ASIA FALLING... First it was China that started falling a few months ago which gave an early warning of global weakness. Then it was Europe pulling the rest of the world lower, which is where most of the attention has been focused over the last month. Chart 1 shows EAFE iShares (EFA) having trading well below its February low after completing a bearish "double top" formation between January and April. Most of that selling came from Europe. Problems in the Korean Peninsula are now hurting Asia and Korean shares in particular. Chart 2 shows South Korea iShares (EWY) tumbling more than five percent today to lead the rest of the world lower. The EWY has also broken its February low. With Asia now in retreat, emerging markets are faring badly. Chart 3 shows Emerging Market iShares (EEM) falling below their February lows. The fact that most other global markets have broken their February lows carries an ominous message for U.S. stock indexes that are in the process of testing that important support level.
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Chart 1
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Chart 2
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Chart 3
S&P 500 TESTS FEBRUARY LOW... I wrote a message on May 6 warning that the idea of the U.S. escaping weakness in foreign markets (global decoupling) was misguided, and that U.S. would start falling as well (although not as far). One of the headlines called for the U.S. market to test its February low in the biggest correction since last March. The U.S. market has now reached that critical chart point. Unfortunately, the odds of that support level holding aren't very good. That's because weekly indicators have turned negative. Chart 4 overlays the 14-week RSI line over the S&P 500 since early 2009. An oversold reading below 30 last March helped launch a yearlong rally. An overbought reading above 70 in April gave warning of an overbought market. Even worse, the RSI line has fallen below its January low and the 50 line which signals a more serious downside correction. To make matters worse, weekly MACD lines (below chart) have turned negative. Those two indicators increase the odds that the February lows will probably be broken.
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Chart 4
FIBONNACI RETRACEMENT LINES... Several times during the first quarter I expressed the view that the market was in the fifth wave of a five-wave advance which is usually followed by a serious downside correction. That view was reinforced by the fact that the S&P 500 had retraced 62% of its bear market which is an important resistance level. A reader asked me to update that picture. A correction after a five-wave advance usually pulls back to the bottom of the fourth wave. In this case, that's the February low which is now being tested. If that low is broken, the market can retrace anywhere from 38% to 62% of its prior advance. I've marked those lines on the S&P 500 daily chart. A 38% retracement of the entire uptrend would provide support near 1010. A fifty percent retracement would take it to 945 (which happens to coincide with the May 2009 top). A 62% retracement (which is the most the market can correct and maintain a major upturn) is near 880 which is last May's reaction low. I'd keep the two higher lines in mind as a possible support zone if the February lows are broken. A drop into that zone could provide a buying opportunity during the second half of the year (especially in the autumn) when the four-year presidential cycle bottom is scheduled to appear.
