GLOBAL STOCK BOUNCE CONTINUES -- OVERSOLD CHINESE STOCKS SHOW SOME BOUNCE -- EEM AND EAFE ISHARES BOUNCE OFF CHART SUPPORT -- SELLING IN TREASURIES, THE EURO, AND YEN SHOWS MORE CONFIDENCE
CHINESE STOCKS REBOUND... Global stocks opened higher this morning from deeply oversold conditions. In many cases, those rebounds have also taken place from potential support levels. Chinese shares in Hong Kong and Shanghai jumped 3.6% and 5.3% respectively. That also relieved selling pressure around the globe. While it's too soon to call that a bottom in Chinese stocks, chart patterns are encouraging. The weekly bars in Chart 1 show HongKong iShares (EWH) rebounding from a rising trendline drawn under its 2009/2011 lows, and potential chart support along its 2010 high. In addition, its 14-week RSI (top of chart) is at the most oversold reading at 30 since its 2011 lows. Mainland stocks traded in Hong Kong are also in chart support. The weekly bars in Chart 2 show FTSE China iShares (FXI) trying to stabilize near chart support above its 2014 low after having retraced 50% of its 2009/2015 gains. Its 14-week RSI line has also entered oversold territory below 30 for the first time in four years. At the very least, all of those chart points suggest that Chinese stocks have reached levels where some stabilization is likely. That's coming at a good time for global stocks, and emerging markets in particular.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
EMERGING MARKETS BOUNCE OFF CHART SUPPORT... The recent plunge in emerging market stocks to four years lows rattled the world's developed stock markets which led to Monday's panic selling. Chart 3, however, shows Emerging Markets iShares (EEM) starting to rebound from potential chart support formed at its 2011 low. Its 14-week RSI line (top of Chart) has also fallen into oversold territory (below 30) for the first time since 2011 and by the deepest margin since 2008. That helps make the 2011 low a logical spot for a rally attempt to start. If it holds, that would certainly help stabilize global stock markets.
(click to view a live version of this chart)
Chart 3
EAFE ISHARES BOUNCE OFF CHART SUPPORT... Yesterday I wrote about the need for U.S. stock indexes to find support around last October's lows. That's also true for foreign developed stocks. Chart 4 shows EAFE iShares (EFA) bouncing off chart support formed during January and last October. [EAFE stands for Europe Australasia and the Far East]. A deeply oversold condition (as shown its RSI line on top of chart) is helping. Like in the U.S., the EFA still needs to do a lot of work to repair the technical damage done over the last week. That will most likely require some backing and filling over the next month or two (as in the states). But this is a logical spot for a bottom attempt to start. The weekly bars in Chart 5 show the EAFE also finding support at a rising trendline drawn under its 2009/2012 lows, as well as chart support along its 2011 peak. European stocks are up 3% today, while Japan gained 1% today to build on yesterday' 3% gain.
(click to view a live version of this chart)
Chart 4
(click to view a live version of this chart)
Chart 5
SAFE HAVEN ASSETS DROP ... Another sign of renewed optimism over the last two days is the drop in save haven assets. That includes Treasury bonds and a couple of safe haven currencies. Chart 6 shows the 20 + Year T-Bond iShares (TLT) falling back below its 200-day average yesterday. Its price slide since Monday occurred in heavy trading. That's normally a sign of renewed optimism on stocks and the U.S. economy. The euro and yen also fell sharply. Chart 7 shows the Japanese yen continuing to drop from a Monday peak. The yen is viewed as a safe haven currency. The fact that it's now falling is a positive sign. A falling yen is also good for Japanese stocks. The same is true of the Euro. Chart 8 shows the Euro falling back below its 200-day line today after peaking on Monday. Euro strength during August was primarily short-covering because of its role as a "funding" currency which is used in so-called "carry trades". That's when currency traders sell a low-yielding currency (like the Euro or yen) and invest those funds in higher yielding assets. When those riskier assets start to fall, traders have to buy back those currencies. [That also explains why the U.S. dollar lost ground earlier this month]. The fact that safe haven currencies are dropping is another sign of renewed optimism in stocks. A weaker Euro is also positive for eurozone stocks.
(click to view a live version of this chart)
Chart 6
(click to view a live version of this chart)
Chart 7
(click to view a live version of this chart)
Chart 8
ENERGY SECTOR IS OVERSOLD... Another encouraging sign is the fact that commodity prices like copper and oil are bouncing today along with their respective stocks. Energy and materials (copper and aluminum) are the day's strongest stock sectors. Commodity deflation has been a big concern for global economies, especially emerging markets and commodity exporters. Any hint of a commodity bottom would be good news. The weekly bars in Chart 9 show the Energy Sector SPDR (XLE) bouncing off potential chart support at its 2012 low, and a 62% Fiboncacci retracement line measured from its 2009 low to its 2014 peak. The 62% retracement line often acts as support for a deeply oversold market. The 14-week RSI line (top of chart) shows the XLE to be in the most oversold territory since 2008. Chart 10 shows the price of West Texas Intermediate Crude (WTIC) dipping below the psychological level of $40 this week (although it's back above it today). WTIC crude is very close to $37 which was the lowest weekly close in 2009. In addition, its 14-week RSI (green line) is deeply oversold (below 30). More importantly, it's last trough is much higher than its early 2015 trough, which qualifies as a "positive divergence". That may be enough to lure some buyers back to oil and the beaten down energy sector. That would be a good sign for the global economy.
(click to view a live version of this chart)
Chart 9
(click to view a live version of this chart)
Chart 10
DOW PUTS IN SHORT-TERM BOTTOM... The ability of the Dow Industrials to overcome Monday's intra-day high confirms at least a short-term bottom. As I suggested yesterday, however, a period of "backing and filling" is probably necessary before any meaningful upturn can occur. That may last for a couple of months and will most likely include a retest of recent lows. While long-term investors may be using this week's meltdown to pick up some bargains, traders with shorter time horizons will most like sell into rallies. The three red Fibonacci retracement lines drawn on Chart 11 (from the May peak to this week's low) show where some of that selling may occur. The continuing drop in the CBOE Volatility (VIX) index is encouraging. Chart 12 shows the VIX falling back below last Octobers's peak near 31. A retreating VIX is supportive to stocks.
(click to view a live version of this chart)
Chart 11
