STOCKS REBOUND AFTER TUESDAY'S BIG LOSSES -- MATERIALS SECTOR SURGES ON DOLLAR WEAKNESS -- OIL AND GASOLINE ETFS BOUNCE OFF BROKEN RESISTANCE -- MAKE-OR-BREAK POINT FOR THE 20+ YEAR BOND ETF -- KEY BREADTH INDICATORS SHOW STRONGEST DOWN DAY SINCE AUGUST
STOCKS REBOUND AFTER TUESDAYS BIG LOSSES... Link for todays video. What a difference a day makes. Stocks rebounded as the major index ETFs recaptured a large portion of yesterdays losses. Stocks were buoyed by strong results from Boeing and Delta Air Lines, two separate, but very much related businesses. Chart 1 shows the Dow Industrials SPDR (DIA) dipping to 109 yesterday and then surging back above 111 today. The ETF swung around 2% from low to high over the last two days. Tuesdays reaction low becomes the first short-term support level to watch. CCI also bounced off the lows of its overbought zone. I pointed out this zone on Monday. Even though CCI is technically overbought after a move above 100, the initial move above 100 reflects strong upside momentum until proven otherwise with some sort of downside momentum break. Upside momentum remains strong as long as CCI holds above 50. Notice how CCI bounced off this level in early October and again today. CCI is back near 100 again. Momentum clearly favors the bulls as long as CCI holds above these two lows.
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Chart 1
A reader asked why I am using CCI instead of RSI these days. There is really not that much difference in these oscillators. After all, both measure momentum in some way, shape or form. The bottom indicator window shows 7-period RSI with a plot that looks quite similar to 20-period CCI. RSI crosses above/below 50 about the same time as CCI crosses above/below 0.
Turning back to the market leaders, chart 2 shows Dow Component Boeing (BA) breaking its summer highs last week and broken resistance turning into support this week. Chart 3 shows Delta Air Lines (DAL) breaking above consolidation resistance with a gap above 12. The price relative also broke out as DAL started outperforming the S&P 500.
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Chart 2
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Chart 3
MATERIALS SECTOR SURGES ON DOLLAR WEAKNESS... Strength in the Euro and weakness in the Dollar contributed to strength in commodities and the Basic Materials SPDR (XLB). The Euro recovered most of Tuesdays losses and the Dollar gave back most of the prior days gains. Weakness in the Dollar also contributed to the general rebound in stocks. Chart 4 shows the Euro Currency Trust (FXE) recovering all of Tuesdays loss with a sure back above 139. Todays move establishes short-term support at Tuesdays low. Chart 5 shows the Base Metals ETF (DBB) recouping Tuesdays loss with a move back towards resistance from the April highs. The indicator window shows the Base Metals ETF, Euro ETF and S&P 500 ETF all moving higher since early July. All for one and one for all. Unsurprisingly, chart 6 shows the Basic Materials SPDR moving back above the April high with a surge today.
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Chart 4
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Chart 5
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Chart 6
OIL AND GASOLINE ETFS BOUNCE OFF BROKEN RESISTANCE... After a sharp decline on Tuesday, the USO Oil Fund (USO) and the US Gasoline Fund (UGA) also rebounded on Wednesday. Most of this volatility can be attributed to stocks and the Dollar. As with other commodities, Dollar weakness and equity strength are bullish for oil. Chart 7 shows the USO Oil Fund (USO) breaking out of its falling flag pattern and bouncing off broken resistance today. Even though the falling flag has been marginalized, resistance around 37 remains. USO has been stuck in a trading range since May with support in the 31-32 area and resistance in the 36-37 area. At this point, the cup is still half full as USO trades above broken resistance. With todays rebound, I am marking support at 34.50. Downside follow through below this level would be negative for oil. Chart 8 shows the US Gasoline Fund (UGA) for reference.
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Chart 7
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Chart 8
MAKE-OR-BREAK POINT FOR THE 20+ YEAR BOND ETF... After a rather sharp decline last week, the 20+ year Bond ETF (TLT) firmed this week to affirm support around 100. Chart 9 shows TLT and the Commodity Channel Index (CCI) at their make-or-break levels. Bonds moved sharply higher as stocks declined in May June. Even though stocks surged from July to October, bonds held their own and even gained over this period. The advance from May to October is rather choppy with sharp surges followed by consolidations. An ascending triangle formed in May-June and there was a breakout in late June. A flag then formed into July and there was a breakout in early August. After a two week surge above 105, a falling wedge formed over the last nine weeks. It is a sporadic advance overall, but the overall trend is up since April. A break above wedge resistance at 105 would signal yet another continuation higher.
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Chart 9
At what point does the wedge go far enough to reverse the 6-7 month uptrend? Last weeks long red candlestick is a warning, as are the two red candlesticks from August. TLT bounced this week to affirm support around 100. Support stems from broken resistance and the early September low. A move below last weeks low would break support and argue for lower bond prices (higher interest rates). CCI declined to the zero area last week. The indicator has captured the entire advance because it has been positive since mid April. A break into negative territory would confirm a support break in TLT. Chart 10 shows the 7-10 year Bond ETF (IEF) within a well-defined uptrend since April. A bearish engulfing formed last week and the ETF is firming this week. Last weeks low marks the first support level to watch.
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Chart 10
BREADTH INDICATORS SHOW STRONGEST DOWN DAY SINCE AUGUST... The major indices give us an idea of what is happening on the outside, while breadth indicators show us what is happening under the surface of a market advance or decline. Chart 11 shows the Nasdaq with Net Advances and Net Advancing Volume. Net Advances equals advancing stocks less declining stocks. Net Advancing Volume equals the volume of advancing stocks less the volume of declining stocks. Breadth is exceptionally strong when both surge above +1000 and exceptionally weak when both plunge below -1000. Net Advances and Net Advancing Volume moved above +1000 on a regular basis from late August until early October. Even though the Nasdaq surged to a new high last week, these breadth indicators barely made it above +1000. With Tuesdays decline, both moved below -1500 for the first time since August. This shows the strongest selling pressure since the rally began. In other words, selling pressure was not limited to just a few issues or big volume stocks. Instead, selling pressure was broad based and this could give way to an overdue correction. With todays bounce, we can mark short-term support at Tuesdays lows for the Nasdaq. Broken resistance just above 2300 turns into the next support zone to watch for the Nasdaq.
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Chart 11
Chart 12 shows the NY Composite with Net Advances and Net Advancing Volume. As with the Nasdaq, Net Advances moved above +1000 several times during the September-October surge. With Tuesdays decline, Net Advances plunged to 1964, the lowest level since mid August. This seriously lopsided number reflects broad selling pressure. Net Advancing Volume also plunged to its lowest level since August as the volume of declining stocks swamped the volume of advancing stocks. After an extended advance, the rather sudden plunge in Net Advances and Net Advancing Volume signals a shift that argues for a correction period to unfold. With todays bounce, yesterdays lows turn into short-term support for the NY Composite. Broken resistance turns into the next support zone around 7150-7200.
