STEEL, COAL, OIL SERVICES AND NETWORKING ETFS LEAD OVERSOLD BOUNCE -- DOW INDUSTRIALS SPDR FIRMS WITH INSIDE DAY -- PERCENT OF S&P 500 STOCKS ABOVE 50-DAY PLUNGES TO BEAR LEVELS WEEKLY AROON AND MACD TURN BEARISH FOR IWM AND SPY
STEEL, COAL, OIL SERVICES AND NETWORKING ETFS LEAD OVERSOLD BOUNCE ... Link for todays video. The bulls found their footing on Monday as stocks bounced from oversold levels. The hardest hit groups bounced the most as the Networking iShares (IGN), Market Vectors Coal ETF (KOL), Oil & Gas Equipment/Services SPDR (XES) and Market Vectors Steel ETF (SLX) led the market. Such oversold bounces work like a stretched rubber band. The further a rubber band is stretched, the bigger the subsequent snap back. Chart 1 shows the Networking iShares falling over 20% since early April. The ETF broke below the November-December lows, but managed to hold above the August-October lows with todays bounce. Nevertheless, the wedge break down around 29 remains the dominant chart feature, which makes this just an oversold bounce within a bigger downtrend. IGN still shows relative weakness as the Price Relative (IGN:SPY ratio) hit a new 52-week low just last week.
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Chart 1
Chart 2 shows the Coal Vectors ETF hitting a 52-week low last week and bouncing back above 26 today. While this is certainly an impressive 1-day bounce, there is no support or base to speak of and the overall trend remains down. Broken support in the 31-32 area turns into the first resistance zone. Chart 3 shows the Steel ETF with a chart similar to IGN above. Who would have thought these businesses were so closely related!
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Chart 2
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Chart 3
Chart 4 shows the Oil & Gas Equipment/Services SPDR (XES) breaking below its November-December lows and then surging over 3% in afternoon trading on Monday. Again, this looks like an oversold bounce after a 20% decline since late February. XES shows relative weakness as the Price Relative also hit a new low last week.
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Chart 4
DOW INDUSTRIALS SPDR FIRMS WITH INSIDE DAY... Chart 5 shows the Dow Industrials SPDR (DIA) firming around 24 with an inside day taking shape so far. Inside days, like harami, signal indecision that can foreshadow a short-term reversal, and I do mean short-term. Medium-term, the trend is down after DIA broke neckline support of a head-and-shoulders pattern. After becoming oversold, there is often a throwback bounce to broken support, which turns into the first resistance level. DIA was down over 6% this month and RSI moved below 30 for the first time since August 2011. Should an oversold bounce materialize, I would expect resistance in the 126-127.5 area and then a continuation lower. The first significant support zone resides around 120, which is marked by the 200-day SMA and broken resistance from the December high.
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Chart 5
Chart 6 shows the S&P MidCap 400 SPDR (MDY) breaking support in the 172.5-173.5 area and almost touching its 200-day SMA last week. After becoming oversold, the ETF bounced on Monday and broken support turns into the first resistance level to watch.
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Chart 6
PERCENT OF S&P 500 STOCKS ABOVE 50-DAY PLUNGES TO BEAR LEVELS... Is this bounce for real or just an oversold bounce within a bigger downtrend? As the next two sections suggest, the stock market suffered some serious technical damage and this looks like just an oversold bounce for now. What exactly does technical damage mean? This can refer to key support breaks, bearish breadth signals, bearish moving average crossovers or other technical signals. Two weeks ago I covered two breadth indicators that triggered 6-7 signals in the last six years: the Nasdaq 100 %Above 50-day SMA ($NDXA50R) and the S&P 500 %Above 50-day SMA ($SPXA50R). A bearish signal is generated when these indicators plunge below 15%, while a bullish signal triggers with a surge above 85%. The assumption is that selling or buying pressure is deemed strong enough to have lasting consequences when these levels are breached. A plunge below 15% shows broad-based weakness in the S&P 500 and Nasdaq 100. In other words, some serious technical damage has been inflicted on the stock market and a recovery period is needed.
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Chart 7
Chart 7 shows the S&P 500 %Above 50-day SMA with the prior two bear periods highlighted in yellow. It took the index four months to recover from the May 2010 signal and three months to recover from the early August 2011 signal. Even though the last two signals foreshadowed corrections within the current bull market, the 2007 signal foreshadowed a nasty bear market. Not all corrections evolve into bear markets, but all bear markets begin with a correction. In all honesty, nobody really knows if the current signal will result in a correction or mark the start of a bear market. We can, however, see that the technical damage was deep enough to warrant a defensive stance. This stance remains in force until countered with a bullish signal. Chart 8 shows the Nasdaq 100 %Above 50-day SMA with a similar signal.
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Chart 8
WEEKLY AROON AND MACD TURN BEARISH FOR IWM AND SPY... Further evidence of technical damage can be found on the weekly charts for the Russell 2000 ETF (IWM) and the S&P 500 ETF (SPY). Chart 9 shows IWM breaking a clear support level with a sharp decline the last three weeks. The March-April lows established support at 78 and IWM broke support like a hot knife through soft butter. Yum...... butter. The topping pattern over the last three months looks similar, but smaller, to the topping pattern in 2011. Perhaps, the decline will also be smaller. For now, the support break looks like a valid trend reversal that should be respected as long as it holds. The indicator window shows Aroon Down (red) moving above Aroon Up (green) for the first time since December.
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Chart 9
Chart 10 shows the S&P 500 ETF with weekly MACD moving below its signal line four weeks ago. This downturn in MACD means the 12-period EMA (green) turned down and moved closer to the 26-period EMA (red). A bearish signal line crossover occurred in March 2011, but SPY did not breakdown until August, which is when MACD turned negative. With this signal line crossover, MACD is moving in the bearish direction and the next test will be the zero line. Note that MACD turns negative when the 12-period EMA moves below the 26-period EMA. The vertical blue lines show MACD crosses of the zero line.
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Chart 10
JUNK BOND ETFS CONFIRM CHANGE IN ECONOMIC OUTLOOK... I reported a few weeks ago that the junk bond ETFs were performing well and that this was positive for US equities. With a sharp decline the last two weeks, these junk bond ETFs moved from equity-positive to equity negative. Companies that issue junk bonds are considered riskier than companies issuing investment grade debt. The chances of default are higher and these companies are more dependent on the economy to be profitable and service their debt. Investors, therefore, require a higher rate of return (yield) and become skittish when the economy stumbles. Chart 11 shows the High-Yield Bond SPDR (JNK) stalling around 39.50 and breaking down with a very sharp decline below 38.50. The Correlation Coefficient shows that JNK and the S&P 500 are positively correlated, which means they move in the same direction. Chart 12 shows the iShares High-Yield Bond ETF (HYG) for reference.
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Chart 11
