RUSSELL 2000 ETF BOUNCES OFF SUPPORT -- DOW INDUSTRIALS SPDR FORMS FALLING FLAG -- OIL GETS OVERSOLD BOUNCE -- ENERGY SPDR FINDS SUPPORT AT MARCH LOW -- FALLING BULLISH PERCENT INDEX IS SHORT-TERM BEARISH
RUSSELL 2000 ETF BOUNCES OFF SUPPORT... Link for todays video. After a sharp decline the prior five days, stocks got an oversold bounce with small-caps leading the way. Chart 1 shows the Russell 2000 ETF (IWM) getting a bounce off support from the early April low. Support in this area is confirmed by the trendline extending up from late November. At this point, the big trend remains up because IWM hit a fresh 52-week high at the beginning of May. More importantly, support from the April low is holding for now. A move below 81 would break support and argue for a trend reversal. Even though IWM is showing some upside leadership today, it has been relatively weak since early April. The indicator window shows the IWM:SPY ratio zigzagging lower for over a month.
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Chart 1
DOW INDUSTRIALS SPDR FORMS FALLING FLAG... The Dow Industrials SPDR (DIA) has been holding up much better than IWM over the last few weeks. While IWM tested its April low, DIA held well above this low and bounced off broken resistance. The highs in late February and early April were broken with the surge above 124. These broken resistance levels turned into the first potential support level. The May decline traced out a falling flag, which is a bullish consolidation pattern. However, the May decline has yet to be reversed. While a move above the flag trendline would be positive, I am marking resistance at Fridays high. A move above this level is needed to fully reverse the May slide. Such a breakout would signal a continuation of the March-April advance. It has yet to happen though.
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Chart 2
OIL GETS OVERSOLD BOUNCE... An unexpected decline in oil inventories (supply) provided a strong bid for oil on Wednesday. Chart 3 shows the 12-Month US Oil Fund (USL) firming with a long legged doji last week. These are weekly candlesticks. Doji indicate indecision and long legs (high-low) amplify this indecision. After another dip below 44 this week, USL moved back above 45 and the August trendline. Also notice there is support in the 43 area from broken resistance and the 50% retracement mark. Oil was oversold after the early May decline. Last weeks firming and this weeks recovery could give way to an oversold bounce that retraces a portion of the big decline. The indicator window shows RSI hitting the 40-50 zone for at least the fifth time in three years. This zone acts as support when the overall trend is up. Momentum favors the bulls as long as it holds.
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Chart 3
Chart 4 shows daily candlesticks for more granularity. After breaking the late November trendline with a very sharp decline, USL firmed around 44 the last two weeks. There was a clear breakdown on this chart with the gap, support break and long black candlestick. A throwback bounce to the broken trendline and broken support is quite possible here. Broken support turns into resistance. RSI shows some improvement with a small bullish divergence the last two weeks.
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Chart 4
ENERGY SPDR FINDS SUPPORT AT MARCH LOW... Todays big jump in oil triggered a jump in energy-related shares. Chart 5 shows the Energy SPDR (XLE) finding support from its early February and mid March lows. XLE did, however, break below the mid April low to confirm the double top noted in the May 4th Market Message. The ETF was oversold after falling over 9% from its May high. The combination of oversold conditions and support increased the chances for an oversold bounce or consolidation. At this point, a one day bounce is treated as an oversold bounce and it is not enough to change to negate the double top. Last weeks high marks support at 77. Follow through above this level is needed for a reassessment of the double top scenario. Chart 6 shows the Oil Service HOLDRS (OIH) also battling support from the early February and mid March lows. The pattern at work here looks like an even bigger double top with highs around 165 and support around 150. As with XLE, a move above last weeks high would call for a reassessment.
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Chart 5
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Chart 6
FALLING BULLISH PERCENT INDEX IS SHORT-TERM BEARISH... The Bullish Percent Index can be used to gauge market strength over different time frames. At its most basic, the indicator favors the bulls when above 50% and the bears when below 50%. Readings above 50% indicate that over half of the stocks in the index are on P&F buy signals. Readings below 50% indicate that less than half are on P&F buy signals, which means more than 50% are on P&F sell signals. While there are certainly periods when the Bullish Percent Index oscillates above/below the 50% line, there are also relatively long periods when it remains above or below the 50% line. These occur during strong trends. Chart 7 shows the S&P 500 Bullish Percent Index ($BPSPX) over the last three years. I added a 23-day SMA (about one month) to smooth the BPI and reduce crosses above/below the 50% line. The most recent crossover occurred when the 23-day SMA moved above 50% in mid August 2010, nine months ago. Overall, crosses above/below the 50% line can be use to judge market strength for longer time horizons.
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Chart 7
Chartists looking for a shorter time horizon can use moving average crossovers to generate signals in the Bullish Percent Index. Chart XX shows the S&P 500 Bullish Percent Index ($BPSPX) with the 23-day EMA. I am using an exponential moving average instead of a simple moving average to put more weight on recent values. The percentage of stocks on a P&F buy signal is largely increasing when above the 23-day EMA and decreasing when below it. As with all indicators, this moving average crossover system is not without its whipsaws (bad signals). The key, as with all trend following indicators, is to catch a few big trends that will pay for the small losses. The Bullish Percent Index moved above its 23-day EMA in early September and remained above until late February. That was one big trend. Currently, the Bullish Percent Index is trading below its 23-day EMA and falling. This is short-term bearish for the S&P 500.
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Chart 8
The Bullish Percent Index shows the percentage of stocks with P&F buy signals. A basic P&F buy signal occurs with a Double Top Breakout. This is a zero sum game because a stock is either on a basic P&F buy signal or a basic P&F sell signal, which is a Double Bottom Breakdown. You can read more in our ChartSchool article. StockCharts.com provides Bullish Percent numbers for 19 indices, which includes 10 S&P Sectors, the S&P 500 and the Nasdaq 100. Below is a complete list from the Symbol Catalog.
