There is so much to review after Monday's market moves that I want to take this in order of time frames. Let's begin with the indicators that say we can have a quick short-term bounce to relieve some of the selling that took place in the last session. From there we'll move on to the fact that nothing has changed in the intermediate-term indicators, as they remain overbought and are heading down -- which keeps me in the camp that says the market needs more of a correction. Finally we'll look at the currencies, since that seems to be the main area of interest these days.
If you want to look for a short-term bounce, you might cite that the Arms Index (TRIN) came in around 3, and the fact that 90% of the volume was on the downside. Both of these indicators often lead to a one-to-three-day bounce.
I might even note that the number of stocks making new lows actually contracted, and did not expand on Monday vs. last week. I can even point to the put-call ratio, which chimed in at 115%. Or that the S&P 500 is almost at its channel line which is also where its 50-day moving average resides. I can even say the CBOE Volatility Index (VIX) got jumpy, although I believe it will become even more so in the coming weeks.
As for the intermediate-term indicators, they have now all rolled over. The McClellan Summation Index has turned down a great deal -- in fact, if the market has a severe selloff Tuesday, this indicator will need the NYSE to put in a net differential of more than +4000 in advancers minus decliners in order to reverse itself. A level like this typically means a short-term oversold rally is at hand. But the intermediate-term move is the direction of the indicator is down.
The 30-day moving average of the advance-decline line continues to head down, as well, after it reached an overbought reading two weeks ago. It will be quite some time -- that is, several weeks -- before it gets back to an oversold condition.
The Hi-Lo Indicator rolled over a few weeks ago, made a lower high and is heading down. The ratio of the S&P to the Russell 2000 dipped under 1.65 and then reversed back up, signaling an overbought condition in the market. For this, too, the indicator will now have to run its course in order to return to oversold.
In the race to the 50-day moving averages, the KBW Bank Index (BKX) won. Yes, I know, I have harped about this index constantly in the last few weeks. But after it broke that uptrend line last week, it saw a pathetic rally and now is sitting at its 50-day line -- whereas the S&P still has about 10 points to go before it reaches its 50-day.
You can see there is support here from prior lows and an uptrend line. In my view, even if it holds and has a rally attempt from here, it is likely to break at some point in the next few weeks.
Finally there is the chart of the dollar-yen currency pair. That was some move on Monday! A few weeks ago I drew in the same line you see on the chart, noting I thought it would come down and tag the line. At the time the line was at 90; on Monday it was closer to 91, and you can see it did bounce right off the line.
The question, therefore, is whether I still think this will come down and tag 90 -- and actually I do. If dollar-yen cross has a lethargic bounce that cannot get above 92.25-ish, I do believe it will head down again and break that uptrend line. If it can manage a rally back up above 93, I might reconsider that view. For now I think the likelihood is a failing rally that takes it down again.
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