FINANCE SECTOR BOUNCES OFF KEY RETRACEMENT -- GOLD MINERS ETF GETS A BULLISH MOMENTUM SIGNAL -- SMALL-CAP BREADTH IMPROVES -- HIGH-LOW LINE LINES REMAIN NEGATIVE -- USING THE VIX TO TIME A MARKET BOUNCE
FINANCE SECTOR BOUNCES OFF KEY RETRACEMENT... Link for today's video. The Finance SPDR (XLF) is showing some relative strength early Tuesday with a modest advance. Chart 1 shows XLF hitting the 50% retracement in late July and firming for seven days. This firmness turned to buying pressure the last three days as the ETF attempts to move back above the support break. I still think the long-term trend is up for XLF. Even though the ETF broke support, this decline was always viewed as a correction within a bigger uptrend. A move back above broken support would be quite positive for this key sector. The indicator window shows the Commodity Channel Index (CCI) becoming way oversold with a move below -200 in late July. The indicator has since moved back above -100 to suggest an end to the correction.
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Chart 1
GOLD MINERS ETF GETS A BULLISH MOMENTUM SIGNAL... Chart 2 shows the Gold Miners ETF (GDX) breaking pennant/triangle resistance to signal a continuation of the June surge. Also notice that the June breakout signaled a continuation of the January-February surge. A pennant/triangle is a consolidation that typically forms as a continuation pattern. The prior move was up and this makes the current pattern a bullish continuation pattern. The breakout over the last few days targets a move above the March high. Chartists can mark their first reevaluation level at 26.3 because a strong breakout should hold. A move back below this level would show cold feet. The indicator window shows MACD turning up and breaking its signal line.
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Chart 2
SMALL-CAP BREADTH IMPROVES... The percentage of stocks above the 20-day EMA is a short-term breadth indicator that chartists can use to time market swings. At its most basic, chartists can compare indicator values for the S&P Small-Cap 600, S&P MidCap 400 and S&P 500 to find the strongest of the three. Currently, 41% of S&P 500 stocks are above their 20-day EMA, 43% of S&P MidCap 400 stocks are above and 53.83% of S&P Small-Cap 600 Stocks are above. Small-caps show the strongest short-term breadth because they have the highest percentage of stocks above their 20-day EMA.
For timing purposes, chartists can look for oversold conditions and breakouts to trigger bullish signals. Chart 3 shows the Small-Cap Percent Above 20-day EMA (!GT20SML) in the main window and the S&P Small-Cap 600 in the indicator window. Notice how this indicator dipped to the 20% area twice in the last few weeks and then shot above 50% on Monday. This breakout represents a breadth thrust that is short-term bullish. A quick drop back below 30 would negate this breakout. Chartists can also use bullish and bearish thresholds in an effort reduce the chances of whipsaw, but these signals will lag somewhat. The moves above/below 50% will provide quicker entries, but this level is crossed quite often and prone to whipsaws. Using thresholds, a surge above 70 is considered bullish until countered with a plunge below 30%.
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Chart 3
Chart 4 shows the MidCap Percent Above 20-day EMA (!GT20MID). The indicator surged back above 40, but fell short of breaking the mid July highs in the 50% area. This is the first level to watch for an upside breakout.
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Chart 4
Chart 5 shows the S&P 500 Percent Above 20-day EMA (!GT20SPX) moving below 30% last week and surging back above 40% this week.
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Chart 5
HIGH-LOW LINE LINES REMAIN NEGATIVE... Chartist can also use Net New Highs to time market swings for the major stock indices. In general, Net New Highs turn slightly negative when the stock market corrects. The key is not going too negative. A subsequent move back into positive territory signals that the correction is ending because new highs are expanding. As with many indicators, chartists can consider using a bullish and bearish threshold instead of a simple cross above/below the zero line. Chart 6 shows the S&P SmallCap High-Low Line ($SMLHLP) in the main window and High-Low Percent in the indicator window. A move into negative territory signals a correction and a subsequent break back above 4% signals an end to that correction.
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Chart 6
Chart 7 shows the S&P MidCap High-Low Line ($MIDHLP) with High-Low Percent. I set the bullish-bearish thresholds at +3% and -3% because mid-caps are a little less volatile than small-caps.
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Chart 7
Chart 8 shows the S&P 500 High-Low Line ($SPXHLP) and High-Low Percent. I set the thresholds set at +2% and -2% because large-caps are less volatile than small and mid-caps. Notice that the S&P 500 indicator turned bullish with a move above 2% on Monday. This signal, however, could be too early - like the one in late January.
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Chart 8
USING THE VIX TO TIME A MARKET BOUNCE... The S&P 500 Volatility Index ($VIX) measures the implied volatility for a basket of S&P 500 options, both puts and calls. Implied volatility rises when the S&P 500 declines because of an increase in the volatility of puts. A put option gives the owner the right to sell the S&P 500 at a specified price. Put premiums expand as the S&P 500 declines and this creates a strong negative correlation between the S&P 500 and the Volatility Index.
Traders using the VIX to time entry points often look for extremes that signal excessive fear or complacency. Over the last few years, a surge in fear often coincided with an intermediate low in the S&P 500. In order to measure fear extremes over time, chartists need to normalize the S&P 500 Volatility Index because this index actually trends. Since the 2011 surges above 40, the VIX has been trending lower and the extremes are getting lower and lower. Chart 9 shows that a move above 25 was excessive in 2012 and a move above 20 was excessive in 2013 and 2014. "Excessive" is a relative term that is subject to change, sometimes without notice.
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Chart 9
Chart 10 shows the Percentage Price Oscillator (PPO) of the VIX in the main window, the S&P 500 in the first indicator window and the VIX in the bottom window. The PPO is set at (5,63,1), which measures the percentage difference between the 5-day EMA and the 63-day EMA. Five days is a week and sixty-three days is around three months. Fear is deemed excessive when the PPO surges above 20%, as it has done six times since 2011. While this denotes an extreme, note that the PPO of the VIX can move above 20 and keep going when the market remains weak. The signal to look for is a subsequent decline back below 20, which occurred this week. This suggest that fear is subsiding and the stock market bulls are finding their footing again. Chart 11 shows the Nasdaq 100 Volatility Index ($VXN) with similar characteristics.
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Chart 10
