OIL SPIKE CAUSES STOCK DROP ON RISING VOLUME -- ASIAN MARKETS FALL ESPECIALLY HARD AND HURT EMERGING MARKETS -- SHORT-TERM STOCK INDICATORS ARE TURNING NEGATIVE -- LONG-TERM CHARTS SHOW AN OVERBOUGHT MARKET IN NEED OF A CORRECTION
EMERGING MARKET ISHARES LOSE 3% ... Today's spike in oil prices has put global stocks on the defensive. Among the weakest are emerging markets, especially in Asia. Asian losses of more than than 3% have been seen in China, South Korea, Taiwan, and Singapore. Chart 1 shows HongKong iShares falling below their fourth quarter lows, while Chart 2 shows Singapore iShares close to doing the same. Chart 3 shows the Emerging Market iShares falling more than 3% today after failing a test of its 50-day average. I showed this chart last Thursday to demonstrate that emerging markets have been diverging from developed markets since last November but that no serious chart damage had yet been done. I warned, however, that the EEM needed to stay above chart support along its late November low (and 200-day average) to prevent a more serious breakdown. Today's price drop on heavy volume suggests that those support levels may be challenged. Emerging market weakness is finally spilling over to developed stock markets.
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Chart 1
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Chart 2
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Chart 3
DEVELOPED MARKETS WEAKEN -- NASDAQ 100 BREAKS 20-DAY LINE... Up until today, developed stock markets have managed to shrug off Mideast concerns and continue their three-month uptrend uninterrupted. That may be changing. The daily charts shown below are flashing short-term warning signals. EAFE Index iShares in Chart 4 are falling more than 2% on rising volume. [EAFE stands for Europe Australasia and Far East]. The RSI line (top of chart) is in danger of falling below its 50-day line for the first time in three months which would be a sign of weakness. The daily MACD lines (below chart) have already turned negative. If a correction does occur, the next level of important support is its 50-day moving average and its early November peak near 59. U.S. charts look similar. Chart 5 shows S&P 500 iShares (SPY) falling more than 2% on rising volume and threatening its 20-day average (green line). The RSI line (top of chart) is falling back from overbought territory over 70, while the daily MACD histogram (bottom of chart) has turned negative. The Nasdaq 100 is even weaker. Chart 6 shows the Power Shares QQQ Trust (QQQQ) tumbling 2.5% on heavy volume. It has already broken its 20-day line. A pullback to their 50-day lines would not be surprising on these charts. That would help determine if today's selling is just a normal pullback or something more serious. Longer term charts suggest that the market has reached levels where a pullback of some type is also in order.
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Chart 4
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Chart 5
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Chart 6
LONG-TERM CHARTS SHOW OVERBOUGHT CONDITION ... Long-term charts show an overbought stock market that has reached levels from which a downside correction would normally be expected. Chart 7 shows the S&P 500 having doubled in price from its spring 2009 low. In addition, the 14-week RSI (solid line) has reached overbought territory over 70 for the first time since the bull market began. That looks like a market in need of a correction. Even more compelling is the chart of the Nasdaq Composite Index which is testing its 2007 high (see circles). Its weekly RSI line is also in overbought territory and showing negative divergence (red line). Those two factors suggest that the Nasdaq uptrend is in need of a breather as well. None of these charts suggest a major top. They may justify some short-term profit-taking (or the taking of some defensive action to protect existing profits). For longer-term investors, however, a downside correction is a normal part of any major uptrend and should offer better entry points at lower levels.
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Chart 7
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Chart 8
OIL SPIKE HURTS AIRLINES... An early spike in gold and oil prices owing to Libyan turmoil pushed global stocks lower and bonds higher. Chart 9 shows the United Stated Oil Fund surging 6% on huge volume. Airlines were among the hardest hit owing to their heavy reliance on fuel. Chart 10 shows the AMEX Airline Index (XAL) tumbling 5% to a four-month low. Bond prices rallied in a flight to safety. Some money also flowed into the dollar, although the Japanese yen and Swiss franc saw most of the safe haven currency buying. It was a nervous day all around. Given the steep rally in stocks over the past few months, and the big drop in bond prices, it's not surpising to see some of those gains and losses retraced. The Libyan situation is just the catalyst for some over-extended trends in need of correcting. I doubt if today's events are signaling any major trend reversals. It's enough, however, to justify turning a bit more cautious on global stocks, at least over the short run.
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Chart 9
