LATE BOUNCE PREVENTS BREAKDOWNS NEAR 2010 LOWS -- SMALL CAPS AND TRANSPORTS LEAD AFTERNOON RALLY ON STRONG VOLUME -- UPSIDE REVERSAL DAY KEEPS QQQ OVER AUGUST LOW -- FIVE-WAVE DECLINES OFTEN LEAD TO RALLY ATTEMPTS
UPSIDE REVERSAL ON RISING VOLUME... This morning's message showed a number of foreign and U.S. stock indexes testing important support at their mid-2010 lows. Some foreign ETFS (like the EEM and EWG) were actually trading below those levels. By late afternoon, however, upside reversals prevented those breakdowns from taking place. In the U.S., the NYSE Composite Index was the closest to its 2010 low as shown by the green area in Chart 1. A upside reversal, however, prevented any further damage from taking place. Two other weak groups that were dangerously close to 2010 lows were small caps and transports. As it turned out, they led the afternoon rally. Chart 2 shows Russell 2000 iShares (IWM) ending the day with a 5% gain on rising volume. That's a classic reversal day. Chart 3 shows Transportation iShares (IYT) ending with a 4% gain.
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Chart 1
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Chart 2
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Chart 3
QQQ BOUNCES OFF SUMMER LOW... The day's positive turnaround is also reflected in the two major stock ETFs shown below. After reaching its 20% bear market threshold earlier in the day, S&P 500 SPDRs (SPY) ended with a nearly 2% gain. And it did so on impressive volume. Even more impressive is the ability of Power Shares QQQ Trust (QQQ) to end 1.7% higher after holding its August lows near 50 -- also on impressive volume. Although it was just a one-day turnaround in the market, the fact it took place near some important support levels gives it a bit more significance. With most market averages now in the fifth wave of a projected five-wave decline, there's a good possibility of a rally attempt sometime this month. October's have a history of ending up a lot better than they start. The area around the 2010 lows would be a logical spot for that to happen. Today's upside reversal was encouraging. But the market will have to see more upside follow-through over the next few days to determine if today's upside reversal is the start of an October rally attempt.
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Chart 4
