MARKET RALLY CONTINUES AS OIL BOUNCES -- ENERGY AND MATERIAL STOCKS ARE MARKET LEADERS -- FREEPORT MCMORAN HAS BIG DAY -- CH ROBINSON LEADS TRUCKERS HIGHER -- SMALL CAP INDEX TESTS MAJOR SUPPORT IN OVERSOLD CONDITION

S&P 500 NEARS TEST OF FEBRUARY HIGH ... My weekend message suggested that stocks had put in a short-term bottom. We'll find out soon enough if last week's bottom was even more significant. Chart 1 shows the S&P 500 Index nearing a test of its February 1 intra-day high at 1947. That initial barrier is also close to the 50-day moving average. A close above both of those barriers would signal that a more significant bottom may be in place. The 14-day RSI line (top of chart) is moving above 50 for the first time this year, which means that momentum is strengthening. In addition, MACD lines (below chart) have turned positive. The market has a lot of positive intermarket factors supporting the rally. First, a strong rebound in foreign shares in Europe and Asia. That had been one of the drags on U.S. equities. Right now, they're helping lead us higher. A rebound in bond yields is also starting to siphon some money out of Treasury bonds and other safe haven assets. Third, a rebound in oil and new buying in energy stocks and materials. That's also helping commodity exporters in developed and emerging markets which are rallying today as well.

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Chart 1

ENERGY AND MATERIAL STOCKS TURN UP ... The direction of oil plays an important role in the direction of energy stocks and the market as a whole. You may recall my weekend chart showing crude in a very oversold condition and near chart support at $25. I also showed the Energy Select SPDR (XLE) testing major support at its 2011 low at 50 and in an oversold condition as well. With crude climbing 6% today and back above $30, energy shares are the day's strongest sector. Chart 2 shows the XLE gaining more than 3% and testing its 50-day average. The XLE hasn't traded above that resistance line in nearly three months. Basic material stocks are also rallying. Chart 3 shows the Materials SPDR (XLB) trading above its 50-day line for the first time since early December. Copper stocks are leading that rally on the back of stronger copper prices. Freeport McMoran (FCX) is the strongest stock in the XLB. Chart 4 shows the big copper producer surging well above its 50-day line to the highest level this year. New buying in commodity stocks is producing strong rallies in commodity producers like Brazil, Canada, Mexico, and Russia. A strong rebound in Chinese stocks this week (and the yuan) are also lending support to the commodity space.

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Chart 2

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Chart 3

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Chart 4

TRANSPORTATION BUYING... Last Wednesday's message showed the Dow Jones Transportation Average bouncing off a long-term support line extending back to the 2009 bottom. It also suggested that the transports were oversold relative to the industrials and the utilities. That may help explain this week's buying in the transportation group. Chart 5 shows the Dow Transports climbing above their 50-day line for the first time since December. Airlines and truckers have been the main drivers in that rally, and truckers in particular. Chart 6 shows the Dow Jones Trucking Index rising above its 200-day average (red line) and a falling trending drawn over its 2015 highs. Chart 7 shows the trucking leader C.H. Robinson Worldwide (CHRW) climbing to the highest level since October. Its relative strength line (above chart) has reached a 52-week high. Last week's message also suggested that a bottom in the transportation group would be a good sign for the rest of the market.

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Chart 5

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Chart 6

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Chart 7

SMALL CAP INDEX BOUNCING AS WELL... Over the last week, I've shown two of the market's weakest groups -- the transports and banks -- having reached potential support levels and in a deeply oversold condition. Both are helping lead this week's rally. Small caps are another weak group in the same positon. Chart 8 shows the S&P 600 Small Cap Index rebounding from last week's successful test of its January low. Elliott Wavers will notice the five-wave decline from the start of December, which usually signals that the downleg has been completed. A close above its early February peak would turn its short-term trend higher. [That five-wave decline also shows up in several other market indexes]. The long-term chart of the SML is also encouraging.

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Chart 8

SMALL CAP INDEX TESTS LONG-TERM SUPPORT LINE... The weekly bars in Chart 9 show the S&P 600 Small Cap Index ($SML) testing a major trendline drawn under its 2009/2011 lows. That's an important test for the SML and the rest of the market. That's because small cap weakness has been one of the more negative influences on the overall stock market. The SML lost -21% from last summer putting it just in bear market territory. The Russell 2000 Small Cap Index lost -27%, while the S&P 500 Large Cap Index lost -15%. That's not unusual in a market correction because smaller stocks usually fall further than larger stocks. The main message of Chart 9, however, is that small caps have reached a major support level which could bring new support to that group. In addition, the 14-week RSI line (top of chart) is stabilizing near oversold territory at 30. Needless to say, a bottom in small cap stocks would be a big positive for the entire stock market.

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Chart 9

WORLD STOCK INDEX REACHES IMPORTANT SUPPORT ... I know I've shown this chart before, but I think it's worth another look. That's because global stocks (which include the U.S.) have reached a very important juncture. Chart 10 shows the FTSE All World Stock Index ($FAW) starting to stabilize right at its 2011 peak at 235 (black horizontal line). Chartwatchers know that market corrections usually find new support at an important previous peak. The green Fibonacci lines also show that the FAW has retraced fifty percent of its 2011/2015 uptrend, which marks another potential support zone. In addition, the 14-week RSI line (top of chart) is showing "positive divergence" at the oversold 30 line. The FAW has lost -20% from last summer's high. This would be a logical chart point for it to find new support and start probing for a new bottom.

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Chart 10

CORRECTION OR BEAR? ... There's a big debate going on as to whether we're in a market correction or a bear market. The fact is we're in both. Market groups in the U.S. that are in bear markets (more than a 20% drop) include banks, biotechs, small caps, and transports. While the Dow and S&P 500 reached correction territory (-15%), the NYSE Composite Index has lost -20% and the Nasdaq -19%. Foreign stock indexes in developed and emerging markets have also reached the bear market threshold. So some markets are in bear markets, and others in a correction. But those are just numbers. And just because something is labeled a bear doesn't mean that it has to continue. What really matters to me is what the chart pictures look like. Many of the chart patterns in this and other messages over the past week show that a lot of important market indexes have reached important support levels while in very oversold conditions. The most important of those may be the FTSE All World Index in Chart 10. After studying all of the evidence, I think there's a pretty good chance that the global downturn has run its course. We'll need to see a lot more strength to confirm that optimistic view. Otherwise, I'm going to have to reread one of my books on how to read charts.