MARKET BOUNCES SHARPLY OFF FEBRUARY LOW -- S&P MAY REGAIN A THIRD TO A HALF OF THE MAY LOSS -- TAKE SOME PROFITS IN BEAR FUNDS
SHORT-TERM OVERSOLD CONDITION LEADS TO MARKET BOUNCE... The combination of a short-term oversold condition and the presence of chart support at the February low has produced gains of more than 2% in most major stock indexes, including the S&P 500. The short-term oversold condition in Chart 1 is shown by the 14-day day RSI line (below chart) bouncing off the 30 level twice during May. Needless to say, most global stocks (which are trading below their February lows) are bouncing strongly as well. With stocks rallying, most safe havens that had rallied lately are dropping today including Treasury bonds, the U.S. Dollar, the Japanese yen, gold, volatility indexes, and bear funds. Most other commodities are rallying. In other words, the prevailing trends that have been seen throughout the month of May have reversed themselves at least for today. It's too soon to determine if today's stock bounce is signalling the end of the correction or just the end of the first part of a deeper correction. But the ability of the February low to hold is certainly encouraging. It would be even more encouraging if the S&P 500 (and other large-cap U.S. indexes) could climb back above their 200-day averages (red line) and stay there.
(click to view a live version of this chart)
Chart 1
OVERHEAD RESISTANCE... The hourly bars in Chart 2 show some overhead resistance barriers worth watching. The most important is the red resistance line drawn over May highs. The S&P 500 needs to clear that line to signal that the rally is more than just a short-term blip. The horizontal lines show Fibonacci retracement leves that often act as resistance barrers. Interestingly, the 50% (middle line) corresponds closely with the red downtrend line. That suggests significant overhead resistance in the vicinity of 1130. There are a couple of other technical reasons to keep an eye on that resistance area.
(click to view a live version of this chart)
Chart 2
BOLLINGER BAND SUPPORT AND RESISTANCE ... Bollinger bands are helpful in determining support and resistance levels. While daily bands are helpful for short-term extremes, weekly bands are more meaningful. Chart 3 combines both versions. The blue lines in Chart 3 show the S&P bouncing off the lower 20-day band. If the rally continues, overhead resistance would be expected near the 20-day average (dotted line) which currently sits at 1129. The red lines use a 100-day band (which corresponds with a 20-week band). The red bands are more helpful in determining intermediate turning points. The good news is that the S&P is bouncing off the lower red 100-day band. Overhead resistance, however, can be expected around the 100-day average (dotted line) which currently sits 1139. That puts overhead resistance in the 1130-1140 region which corresponds to the resistance lines in Chart 1.
(click to view a live version of this chart)
Chart 3
TAKE SOME PROFITS IN BEAR FUNDS... Earlier in May I suggested buying an inverse (bear) fund as protection against a downside correction. I warned, however, that these were just short-term trading vehicles. Chart 4 shows the ProShares Short S&P 500 Fund (SH) backing off from its (red) 200-day average. Its 14-day RSI line (above chart) is backing off from overbought territory at 70. Although no significant support levels have been broken, the fact that the SH has fallen below a support gap (green circle) formed last week is a sign of weakness. The same is true for the ProShares Ultra Short QQQ (QQQQ) shown in Chart 5. I'd say that's enough chart evidence to consider selling at least a portion of both bear funds.
(click to view a live version of this chart)
Chart 4
