GLOBAL STOCKS START WEEK ON A STRONG NOTE -- IMPORTANT SUPPORT LEVELS FOR EMERGING AND DEVELOPED FOREIGN MARKETS CONTINUE TO HOLD -- SAME IS TRUE FOR U.S. STOCK INDEXES WHICH ARE UP SHARPLY -- STOCK INDEXES APPROACH TEST OF 50-DAY LINES
EMERGING MARKETS LEAD GLOBAL RALLY ... Stocks around the world are continuing the rally that began Friday after the very weak U.S. jobs report. Part of the reason for the renewed optimism may be the belief that the weak job report took a Fed rate hike off the table for this year. That also weakened the dollar and boosted commodities like copper and energy. Energy and materials are among the strongest sectors in a strong market. Stronger commodities are boosting countries that export commodities, and emerging markets in particular. That includes Brazil and Russia. Although mainland Chinese stocks are closed until Thursday, Hong Kong stocks are having a strong day. That's helping commodities as well, and risk assets in general. That includes developed stock markets in Asia and Europe. It remains to be seen if the October rally is enough to overcome overhead resistance barriers and moving average lines. It's important, however, to review where this rally is starting from. The weekly bars in Chart 1 show Emerging Markets iShares (EEM) bouncing off important chart support formed at its 2011 low. If emerging markets are going to make a turn for the better, this is precisely where that should begin. It's also encouraging that the 14-week RSI line (top of Chart) is rising from the most oversold reading since the end of 2008. Emerging markets have been the world's weakest link. Any improvement there would have a positive influence everywhere else.
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Chart 1
EAFE ISHARES ALSO BOUNCE OFF MAJOR CHART SUPPORT... Foreign developed stocks are also bouncing off important support levels. The weekly bars in Chart 2 show MSCI EAFE iShares (EFA) bouncing off two important support lines. The first is the rising trendline drawn under its 2009/2012 lows. The second is the flat line drawn over its 2011 peak. There again, if that index is going to turn back up again, this is precisely where it needs to do that. It's getting help from its 14-week RSI line (top of chart) which has bounced twice off it oversold line at 30. [EAFE stands for Europe Australasia and the Far East]. Europe and Japan are two of the day's EAFE leaders. European stocks have seen gains close to 3%. Australian stocks are also rallying on the back of commodity gains.
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Chart 2
DOW INDUSTRIAL BOUNCE OFF TRENDLINE SUPPORT... U.S. stocks are also bouncing off some important support levels. The weekly bars in Chart 3 show the Dow Industrials bouncing off a major up trendline drawn under its 2009-2011 lows and chart support near last October's low (circle). On July 9, I warned that the U.S. stock market had completed a four-year upleg starting in 2011, and was due for a period of correction or consolidation within its major uptrend. I further suggested that a market correction could drop to last October's low. But that low had to hold if this was just a correction, and not the start of a major bear market. All major U.S. stock indexes are trading above that support level. The fact that the 14-week RSI line (top of chart) is bouncing off its oversold line at 30 for the first time since 2009 is encouraging. The daily bars in Chart 4 show the Dow Industrials dipping briefly below last October's during the August meltdown. Last week's retest, however, however, bounced off that previous support level near 16,000. [The Nasdaq and S&P 500 remained above last October's low all summer]. If this is just a correction in a longer-term uptrend, this is precisely where U.S. stock indexes should start taking a turn for the better. And they appear to be trying that. The Dow, and other U.S. stock indexes, however, still need to clear their mid-September peak and 50-day average to turn their short-term trends higher. It's also encouraging to see the stock rally starting during October. That happened last October, and during October 2011.
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Chart 3
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Chart 4
S&P 500 NEARS 50-DAY LINE ... Chart 5 shows the S&P 500 climbing sharply today after a successful retest of its August low. It appears headed for a test of its falling 50-day average, and possibly its mid-September peak at 2020. It will have to clear both barriers to turn its trend back up again. Chart 5 shows the twin August/September lows on the SPX remaining well above the previous October's low. Seasonal trends start to turn more favorable for stocks during the fourth quarter. The fact that so many oversold global stock markets are bouncing off important support levels at the same time suggests that the worst may be over. It may take some time, however, to repair the technical damage done over the summer. But a new basing process may have started.
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Chart 5
VIX DROPS BELOW 20... Chart 6 shows the CBOE Volatility (VIX) Index falling back below the 20 level today (and its 50-day average). A close below the 20 level would move the VIX out of the danger area for stocks. That's another sign that option traders don't see much need at this point to hedge against a possible stock market drop.
