SHORT-TERM STOCK BOTTOM APPEARS TO BE IN PLACE -- SMALL AND MIDCAP INDEXES BOUNCE OFF FEBRUARY LOWS -- S&P 500 BOUNCES OFF SUPPORT -- AND MAY BE HEADING FOR A RETEST OF ITS 200-DAY AVERAGE

SMALL AND MIDCAP STOCKS INDEXES BOUNCE OFF FEBRUARY LOWS... A lot of technical signs point to a short-term bottom in place for stocks. That suggests that major stock indexes will try to regain some of their October losses. The big question is how much of those losses. Before getting to that, however, let's review the technical signs for a bottom. A drop in small and midcap stocks a month ago was an early warning sign that the market was heading into a correction. Those smaller stocks are now bouncing off important support levels formed earlier in the year. Let's start there. Chart 1 shows the Russell 2000 Small Cap Index rebounding from a level just above its February intra-day low at 1436. On a closing basis, the RUT came within 5 points of its February low. That's certainly close enough to qualify as a retest of previous support. In addition, its 14-day RSI (top box) is recovering from oversold territory below 30. Its daily MACD lines (lower box) are still negative, but are converging. Those are both positive signs. Chart 2 shows a similar bounce off support taking place in the S&P 400 Mid Cap Index. The ability of those two indexes of smaller stocks to rebound off such important support levels is supporting a rebound in larger stocks as well.

Chart 1

Chart 2

S&P 500 IS ALSO REBOUNDING OFF SUPPORT... Larger stocks are also continuing the rebound that started yesterday near chart support. Chart 3 shows the S&P 500 bouncing off the top of a support zone marked by two horizontal lines drawn under lows formed between February and May. Its 14-day RSI line (top box) is also rising from oversold territory below 30 (see circle).The fact that the RSI formed two rising bottoms over the last couple of weeks is another positive sign. So is the fact that trading volume on yesterday's price rebound showed a big increase. That's a welcome change from the recent tendency for volume to drop on higher prices. All of which supports the view that a short-term bottom is probably in place. The question now is how far can it go? That may be determined by a couple of overhead resistance barriers. The first one is its falling 200-day moving average (red arrow). The second barrier is the peak formed a couple of weeks ago at 2816. The SPX needs to clear those two barriers to reverse some of the chart damage suffered during the month of October. Seasonal trends should also turn more supportive as we enter the month of November.

Chart 3