BANKS AND SEMICONDUCTORS BOUNCE OFF MAJOR SUPPORT LEVELS -- LONGER RANGE CHARTS SUGGEST CURRENT PULLBACK IS A CORRECTION IN A LONGER RANGE UPTREND -- HOMEBUILDERS SHOW RELATIVE STRENGTH -- DR HORTON IS HOMEBUILDING AND MARKET LEADER
BANKS BOUNCE OFF CHART SUPPORT... I've explained in previous messages that I lean toward the view that the stock market is in the midst of an overdue correction. It's been four years since the market saw a correction of more than 10%. That's much longer than the historical average for a correction every eighteen months. I've also placed a lot of importance of the lows that were formed last October. The reason for that is my view that a correction should not violate that previous low. Today I'm going to apply that same analysis to two key stock groups, namely banks and semiconductors. The daily bars in Chart 1 show the KBW Bank SPDR (KBE) bouncing off chart support formed during January and October. That's an important support point. It's 14-day RSI (top of chart) is rebounding from oversold territory below 30. The KBE/SPX relative strength ratio (below chart) looks a lot better than its price chart. The KBE remains below its 200-day average, however, and has a lot of work to do to reclaim its uptrend. It's longer-range trend, however, remains positive. The weekly bars in Chart 2 show the KBE still in an uptrend that started in 2009. A major uptrend was signalled in mid-2013 when it exceeded its 2010 high. As I've explained before, major uptrends usually have at least two corrective waves. So far, the only meaningful correction took place during 2010 and 2011. That increases the odds that the current setback is a correction as well. The horizontal line drawn over the 2010 peak should act as a floor under the price. A previous peak usually acts as support. That's why the flat line changed from red to green during 2013.
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Chart 1
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Chart 2
SEMICONDUCTOR INDEX BOUNCES OFF CHART SUPPORT... You may recall my recent concerns that weakness in semiconductor stocks were a threat to the technology sector and the market in general. Those concerns turned out to be valid when stocks entered a downside correction. This week, however, semiconductor stocks are actually helping lead a rebound in technology and the market. And they're doing it from an important support level. Chart 3 shows the PHLX Semiconductor (SOX) Index rebounding from chart support at last October's low. It still has a lot of work to do to repair the technical damage done since June. But this is a logical spot for it to start doing that. The SOX/SPX relative strength ratio (top of chart) is also rebounding from chart support formed last October. Needless to say, a bottom in this key group would be good for the rest of the market. Its longer-range chart also looks promising.
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Chart 3
SOX STILL IN UPTREND... The weekly bars in Chart 4 show the SOX in a major uptrend dating back to the end of 2008. That longer-range view puts the current price drop into better perspective (red circle). The SOX remains above chart support along last October's low. But it's also bouncing off the horizontal line drawn along its 2007 high (see horizontal line). [Although not shown here, that flat line also extends back to the 2004 and 2006 highs]. That should be a major support level. Its major uptrend line extending back to 2008 is also intact (black up arrow). The SOX has only suffered one prior correction during the last six years, and that was between 2011 and 2012 (red box). It was overdue for another correction and it's now in one. To me, this looks like a correction in a long-term uptrend. The 14-week RSI line (top of chart) is the most oversold in four years.
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Chart 4
HOMEBUILDERS SHOW RELATIVE STRENGTH... You've read previous positive messages on this site about homebuilders. Here's another one. The daily bars in Chart 5 show the Dow Jones U.S. Home Construction iShares (ITB) bouncing off initial chart support formed during the spring. It's also climbing above its (blue) 50-day average after bouncing off its (red) 200-day line. Also impressive is the continuing uptrend trend in its relative strength line (top of chart). That's because housing is in a rising cycle of its own which is likely to continue. It's also a domestic group that's not impacted that much by foreign markets (like China). DR Horton is helping lead it higher.
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Chart 5
DR HORTON LEADS HOMEBUILDERS ... DR Horton (DHI) is the standout performer in the homebuilding group. The weekly bars in Chart 6 show the stock bouncing off chart support along its 2013 high and nearing a new recovery high (up arrow). Its relative performance is equally impressive. The DHI/ITB ratio (just above chart) is hitting a high as well which makes it a homebuilding leader. The rising DHI/SPX ratio (top line) shows it to be market leader as well.
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Chart 6
NYSE PERCENT OF STOCKS ABOVE 200-DAY AVERAGE STABILIZES... One of the warnings that I wrote about over the summer was the drop in the percent of NYSE stocks trading over their 200-day average. I pointed out over the summer (before the August plunge) that a stock market couldn't maintain an uptrend while two-thirds of its stocks were in downtrends (below their 200-day lines). Chart 7 is an updated version of those earlier charts, and carries good and bad news. First the good news. The red line has fallen below 20% which puts it in a major oversold condition. This is a logical spot for it to attempt a bottom. The bad news is that the red line is still in a downtrend. That has to change. Chart 8 shows the downtrend starting in late April from a +60% reading. Its been all downhill since then. To the bottom right, the line is starting to stabilize (red circle). That's encouraging. But it needs to more to signal a bottom. A good start would be a rise above its late August peak at 24%. A more convincing move would be above its early August high at 42%. It may take awhile for that to happen. But the bottoming process may have started.
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Chart 7
