STOCK INDEXES ARE TESTING IMPORTANT CHART SUPPORT NEAR 200-DAY AVERAGES AND LOOK OVERSOLD -- THAT COULD GIVE WAY TO A SUMMER BOUNCE -- BOND PRICES ARE NEARING OVERHEAD RESISTANCE -- ANY BOUNCE IN STOCKS AND COMMODITIES MAY DEPEND ON A FIRMER EURO
%NYSE STOCKS ABOVE 200-DAY AVERAGE STILL DROPPING... Last Thursday's message showed the point & figure version of the % NYSE stocks above their 200-day moving average in a downside correction. I suggested that the first sign of improvement would be a three-box reversal to a rising X column. We got that this week, but it proved short-lived. That's the bad news. The good news is the p&f chart now gives us a clearcut chart point to use to spot any market upturn. A traditional p&f buy signal requires a rising X column to exceed a previous X column. This week's high point was at 60. That means that the $NYA200R needs to hit 61 to signal a possible upturn. Why this indicator is worth watching is that virtually all major US stock indexes are now testing their 200-day moving averages and major chart support along their March lows. Chart 2 shows the % NYSE stocks above their 50-day averages still in a downtrend but dropping into oversold territory below 20%. That more volatile measure needs to rise to 25 to signal a possible bottom.
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Chart 1
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Chart 2
OVERSOLD S&P TESTS 200-DAY AVERAGE... My main downside target for this stock market correction has been a test of the 200-day moving average and/or the March low. Chart 3 shows the S&P 500 in the process of testing both support points. The 9-day RSI line (below chart) also shows the SPX in oversold territory near 30 and showing a slight positive divergence. That may be enough to stabilize the market at current levels. To signal that a short-term bottom is in place, however, the SPX needs to close above Tuesday's intra-day high at 1292. Chart 4 shows the Nasdaq Composite trading just above its March low and trying to regain its 200-day line. The Commodity Channel Index (below chart) shows the Nasdaq to also be in oversold territory. The first hurdle the Nasdaq needs to overcome to signal a rally attempt is Tuesday's intra-day high. The "hourly" bar charts in Chart 5 show that intial resistance barrier at 2685 more clearly. Although the "sell in May" maxim worked this year, the market is entering the time frame when a "summer rally" is possible. Unfortunately, any summer rally is usually followed by an autumn downturn. Earlier in the week, Arthur Hill suggested that a 50% retracement of the May/June decline was possible. Even if a summer rally does regain that much, the market may retest the spring/summer lows again during the autumn months.
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Chart 3
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Chart 4
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Chart 5
BOND PRICES APPROACH OVERHEAD RESISTANCE... Investors have been buying bonds as a hedge against a weakening economy and a falling stock market. Chart 6 shows the 7-10 Year T-Bond iShares (IEF) hitting a new seven-month high this week. It is, however, approaching potential chart resistance along its October/November highs near 98. Bond prices fell temporarily on Tuesday when the stock market rallied. The hourly bars in Chart 7 show Tuesday's intra-day low at 96.20. The IEF would have to break that initial support level to signal a downturn in bond prices (and a rebound in bond yields). That's only likely to happen if the stock market starts to rally again.
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Chart 6
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Chart 7
EURO MAY HOLD KEY TO COMMODITY DIRECTION... Commodity prices took a hit along with stock prices on Wednesday. A big reason why was the sharp drop in the Euro (and rally in the dollar). Chart 8 shows the Euro trading in the lower part of its spring trading range. The crucial chart point to watch is its mid-May intra-day low at 139.87. The lines on top of the chart (S&P 500) and below (DBC Commodity Index) show the close correlation between those two asset classes and the Euro. That means that any meaningful rally in stocks and commodities may depend on the Euro staying above its May low. A bounce in the Euro would be even better.
