EGYPT TURMOIL ACTS AS CATALYST FOR STOCKS THAT WERE DUE FOR A PULLBACK -- EMERGING MARKETS LEAD GLOBAL DECLINE -- UPSIDE BREAKOUT IN VIX COINCIDES WITH S&P 500 BREAKING 20-DAY AVERAGE

MARKETS WERE RIPE FOR A PULLBACK ... It took the turmoil in Egypt to finally cause some profit-taking in global stocks and bounces in safe havens like bonds, gold, and the dollar. Arthur Hill wrote yesterday about how the dollar and gold had reached potential support levels and were due for a rebound (or upside reversal). Both took place on Friday. It's also no surprise to see bonds rally since they trend in the opposite direction of stocks. Crude oil jumped on fears of supply disruptions in the mideast. I'm going to limit today's brief comments to stocks. Nothing happens in a vacuum. Some will argue that the "only" reason stocks sold off was Egypt. I would argue that the technical and intermarket warnings were already flashing that global stocks were due for a pullback. Egypt simply acted as the catalyst (or excuse) for that pullback to occur. The three charts shown below were included in my Tuesday message to warn that stocks were starting to look toppy. Chart 1 demonstrated that Emerging Market iShares (EEM) were in danger of falling below their 50-day average after faIling to exceed their November high. The falling relative strength line (below chart) showed that emerging markets had been underperforming US stocks since November. Friday's plunge on very heavy volume pushed the EEM below that support line to the lowest level in two months and was among the day's biggest percentage losers. I also warned that the CBOE Volatility (VIX) Index was starting to bounce off chart support formed last spring near 15, and that a close over 19 would most likely coincide with a market pullback.

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Chart 1

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Chart 2

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Chart 3

UPSIDE BREAKOUT IN VIX PUSHES S&P 500 BELOW 20-DAY LINE... Chart 2 shows the VIX surging 24% on Friday to close over 20. That was enough to push the S&P 500 (and most other stock indexes) below its 20-day moving average. As I suggested on Tuesday, that downturn signals a likely pullback toward its lower Bollinger band (1260) or its 50-day average (1248). Notice also the fact that the 14-day RSI line (top of chart) has been weakening from overbought territory at 70, and the negative crossing of the daily MACD lines (below chart) that started a week earlier. Both were early warnings that the stock rally was weakening and a pullback due. There's always some catalyst that actually causes that pullback to start. Egypt was the catalyst this time. If it wasn't Egypt, it would have been something else. The stock selling, however, wasn't a complete surprise to chartwatchers.