SECTOR CARPET SHOWS ONE GAINER IN 11 DAYS -- PANIC SELLING GRIPS WALL STREET AND THE CCI -- MARKING POTENTIAL SUPPORTS FOR SPY -- BOND ETF BREAKS 2010 HIGH -- KEEPING PERSPECTIVE WITH LOUIS RUKEYSER
SECTOR CARPET SHOWS ONE GAINER IN 11 DAYS... Link for todays video. Investors hit the panic button as stocks moved sharply lower on Monday. Today might be considered a black Monday, even though stocks finished deeply in the red. There are at least two other black Mondays of note. First, the Dow declined 11.82% on Monday, October 28, 1929. Second, the Dow declined 22.61% on Monday, October 19, 1987. Today, the Dow declined 5.55% with huge volume. While the percentage decline does not stack up with the first two black Mondays, there was clearly blood in the streets as investors rushed for the exits. Picking a bottom during a panic decline is difficult, but panic selling usually paves the way for a bounce. Chart 1 shows the Dow falling almost 15% the last 11 days. The senior average broke through the 61.80% retracement and the support level around 11000 today. Chart 2 shows the Sector Market Carpet over the last 11 days. Only one S&P 500 stock is up during this timeframe: Lexmark. Looks like investors through out a few babies with this bath water.
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Chart 1
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Chart 2
CCI DIPS BELOW -300 FOR 2ND TIME IN 12 YEARS... There is oversold and then there is OVERSOLD. Most momentum oscillators became oversold on the daily charts last week. With another sharp decline this week, most are now oversold on the weekly charts as well. The Commodity Channel Index (CCI) is normally considered oversold on a move below -100. Today this indicator for the S&P 500 moved below -300 for the first time since October 2008. Note that this indicator did not break below -300 during the 2000-2002 bear market. There were, however, several dips below -200 during this timeframe.
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Chart 3
Chart 3 shows weekly candlesticks for the S&P 500 and CCI during the 2000-2002 bear market. The green dotted lines mark the seven dips below -200. First, note that CCI dips below -200 during bear markets, not bull markets. Therefore, we can expect a few more dips below this level during a long-term downtrend. Of the seven dips, four gave way to oversold bounces within the bigger downtrend. The other three were early by 3-5 weeks. When it comes to market timing, early is another word for wrong.
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Chart 4
Chart 4 shows the most recent bear market from October 2007 until March 2009. CCI dipped below -200 three times and below -300 once. The first dip below -200 occurred in January 2008 and the index bounced the next few months. Also notice that a small bullish divergence formed between CCI and the index in early 2008. The second oversold reading below -200 occurred in September 2008. $SPX continued lower and CCI moved below -300. After this extreme reading, the market firmed with a 3-4 week trading range. A bullish divergence formed from October to December and the market bounced at the end of 2009. The third oversold reading occurred in March 2009, which marked the Hanes bottom (Mark Hanes).
MARKING POTENTIAL SUPPORTS FOR SPY... Estimating support in a free fall is pretty much impossible on the daily chart. Big moves require more perspective and chartist need to look at long term charts. Using weekly charts, chartists can use the Fibonacci Retracements Tool, broken resistance levels, trendlines and prior lows to estimate support levels. Chart 5 shows the S&P 500 ETF (SPY) since the March 2009 bottom. The ETF advanced over 100% from March 2009 to May 2011 and over 35% from July 2010 to May 2011. With the decline below 115, the ETF has now retraced just over 61.80% of the smaller advance and just over 38.2% of the bigger advance (green oval). Also notice that broken resistance from the July-August resistance levels turns into potential support (green dotted line). This combination tells us that a support zone is at hand. Also remember that CCI is below -300, which is the second most oversold reading in more than 20 years.
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Chart 5
The next support level resides around 100. This level is marked by the 2010 lows and a 50% retracement of the entire advance. Even though support may be at hand and stocks are clearly oversold, we have yet to see some sort of intraday reversal or selling climax. A selling climax occurs when stocks move sharply lower during the day, but recover to close near even or with a gain. With the market in crash mode, we could see the ultimate fear dip carry SPY into the 100-105 area. In candlestick lingo, a hammer would form with a one-day pattern. A two day pattern would involve a bullish engulfing or piercing pattern. A three day pattern would involve a morning star. Keep in mind that this is all for an oversold bounce within a downtrend. I am not advocating a major bottom based on these potential supports and oversold conditions.
BOND ETF BREAKS 2010 HIGH... Standard & Poors downgraded US debt and US Treasuries surged to a new high. The bond market does not have much respect for this ratings downgrade. Obviously, this is a flight to safety rally and US Treasuries are still deemed relatively safe. Chart 6 shows the 20+ year Bond ETF (TLT) moving above its 2010 high and approaching its 2008 high, which marked the pinnacle of the financial crisis. The red dotted lines mark the 2008 and 2010 highs, which forms what we can call the zone of fear. Investors must be really afraid to buy downgraded debt that yields less than 4%. There is nothing but uptrend on this chart and further strength would entail more fear and further weakness in stocks.
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Chart 6
I am using CCI to monitor this uptrend. CCI moved above +300 in December 2008 and May 2010. TLT continued higher each time. This time I am using trendlines to define CCI signals. This technique comes from Rex Takasugi, former StockCharts.com contributor and current editor of Technical Disciplines. It is not always possible to draw trendlines on CCI or other momentum oscillators. The early part of 2009 represents one such period. Trendlines require at least two peaks or two troughs. The green trendlines show uptrends and red trendlines show downtrends. Trendline breaks were pretty good a forecasting reversals on the price chart. The current trendline is up with support at 100. There is no chance of a downtrend until a trendline break. Chart 7 shows the 7-10 year Bond ETF (IEF) for reference.
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Chart 7
KEEPING PERSPECTIVE WITH LOUIS RUKEYSER... With another black Monday in the stock market, I was reminded of Louis Rukeyser and the Wall Street Week episode just after the 1987 crash. Rukeyser helps us keep things in perspective. Click here for the video
