A LOT OF MARKETS ARE TESTING IMPORTANT SUPPORT LEVELS AT THEIR 2010 LOWS -- THAT WOULD BE A LOGICAL SPOT FOR OVERSOLD MARKETS TO ATTEMPT A RALLY -- THE MARKET ALSO APPEARS TO HAVE COMPLETED A FIVE-WAVE DECLINE WHICH COULD LEAD TO A FOURTH QUARTER REBOUND
FOREIGN ETFS TESTING 2010 LOWS ... What started off as a potentially bearish week may be turning into something more positive. A large part of the reason for that is the ability of so many global markets to find support at their mid-2010 lows. Given the steepness of the recent declines in foreign markets (which have been much more than those in the U.S.) any hint of stability is a positive sign for them and us. The first two charts below show essentially the same picture. Chart 1 shows Emerging Market iShares (EEM) on the verge of scoring an upside weekly reversal right at its mid-2010 low. The fact that its 14-week RSI (solid line) has reached oversold territory below 30 is another reason that this week's rebound may have some staying power. The same is true of European shares and Germany in particular. Chart 2 shows German iShares (EWG) bouncing from its mid-2010 low as well. Its 14-week RSI line is also bouncing from oversold territory under 30. Germany is the largest and most influential market in Europe. As a result, what it does from here will influence global markets everywhere, including in the U.S.
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Chart 1
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Chart 2
CRB INDEX IS TESTING IMPORTANT SUPPORT... I've written several times about the close correlation between stocks and commodities. Both peaked together during the spring and have been falling together since then. Which is why Chart 3 may hold some hope for both. The weekly bars show the CRB Index having lost about 20% from its May peak (as has the S&P 500). The good news is that the CRB is trying to stabilize at two important support lines. The flat line shows the CRB testing chart support along its early 2010 peak just below 300. [Broken resistance levels usually become new support on market pullbacks]. The CRB is also testing the rising green trendline drawn under its 2009/2010 lows. From a charting standpoint, this would be a logical spot for commodities to find new support and attempt a fourth quarter rebound. A commodity rebound (especially in economically-sensitive commodities like copper and oil) would be positive for the stock market as well. It would be especially positive for stocks tied to those commodities.
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Chart 3
MATERIAL SPDR AND FCX ARE IN CHART SUPPORT... Basic materials have been one of the market's weakest sectors owing primarily to their close correlation to industrial commodities like copper which have been very weak. Chart 4, however, shows the Materials Sector SPDR (XLB) achieving a possible upside reversal near its mid-2010 lows. The flat lines show that the XLB is also finding support near its 50% retracement point measured from its spring 2009 bottom to its spring 2011 top. That holds out hope for a rally attempt from current levels which would of course be helped by a commodity rebound. One of the stocks that I've been tracking is Freeport McMoran Copper & Gold (FCX) which is tied mainly to the trend of copper. The weekly bars in Chart 5 show that FCX is bouncing off chart support at its mid-2010 near near 30. Needless to say, a rebound in that stock and copper would have a positive influence on the rest of the stock market.
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Chart 4
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Chart 5
SMALL CAPS AND TRANSPORTS ALSO IN SUPPORT... Small caps usually fall faster than large caps during a market decline. Economically-sensitive transports also do the same. And that's been the case recently as both groups have been among the market's weakest. Charts 6 and 7, however show ETFs tied to both groups rebounding from chart support as well after having retraced 50% of their two-year bull trends. In fact, both of those beaten-down groups have helped lead this week's rally attempt. That also holds out hope for a fourth quarter stock market rally.
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Chart 6
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Chart 7
FIVE WAVE DECLINE MAY BE OVER... Arthur Hill and myself have expressed the view that the August rally was nothing more than a "wave four" in a normal five-wave decline. And both of us have been expecting an eventual move to a new 2011 low. This week's move below the August low by the S&P 500 accomplished that. The market may now have completed a "five-wave" decline as shown by the boxed numbers in Chart 8. The good news is that a five-wave decline is usually followed by a rally attempt which could reach the top of wave 4 during the fourth quarter. That would fit into a seasonal pattern for an October bottom and a normal yearend bounce. Unfortunately, bear markets rarely end with a five-wave decline. That being the case, any fourth quarter rebound could be followed by another downleg sometime next year. The 14-day RSI line (below chart) shows a short-term positive divergence between it and the S&P 500 which fell to a new low. A positive divergence during a fifth wave is usually worth paying more attention to.
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Chart 8
VIX FAILS TEST OF SUMMER HIGH ... Another short-term positive development has been the failure of the CBOE Volatility (VIX) Index to clear its summer high. A previous message explained that every important market bottom (with the exception of 2008) has coincided with a VIX peak around 45. Any failure of the VIX around that level is usually positive for stocks. Chart 9 shows the VIX suffering a downside reversal day on Tuesday from its summer high around 45. The VIX is still in an uptrend (just as the SPX is still in downtrend). This week's VIX failure, however, also lends support to the idea of fourth quarter stock rebound. [Note: I've expressed the view in previous messages that the S&P 500 needed to test its 2010 low before a meaningful rebound could occur. Considering the fact that so many other foreign and domestic stock indexes have already reached that important support level, and are starting to rebound from it, I've moved up my timetable for a market rebound. I now believe that a fourth quarter bottom could be in place. Not necessarily a final bottom, but at least an intermediate-term bottom that could hold through the end of the year].
