Tuesday's market action can be best described by the word bounce. Oh, some might call it a rally, but when the net breadth of the New York Stock Exchange is positive 530 on a day the S&P 500 gains 45 points, I call it a bounce.
Let me note that this is a minor change in the pattern that we've seen of late. For the last week or so, we've seen breadth doing better than the indexes, something I always prefer. The more stocks participating, the more the merrier. But once we see the mega-cap tech stocks rally and if they do so at the expense of the rest of the stocks, we get back into a narrow market where the index rises and not much else.
Did you notice there has been another minor change in the market recently? The relationship between interest rates and tech stocks. Just witness that Monday interest rates moved down a smidgen and tech stocks got taken to the woodshed. On Tuesday interest rates moved up and tech stocks rallied. These are not the only two days we've seen this lately, but it is no longer one-for-one.
And there was another change in the market on Tuesday. Well, it began last week and continued on Tuesday, yet I saw so few comment on it. The transports, which had stopped going down late last week and again on Monday, actually rallied on Tuesday. And they rallied smartly.
The black line is what we looked at a few days ago. Now the blue lines come into play. The first part is clearing that blue downtrend line. Doing so ought to take out the two tiny little highs from September, so if it can do that it clears two prior (minor) peaks at the same time it crosses the downtrend line.
The reason we care if it breaks the downtrend line is it has been in place since the spring. Crossing over it implies that trend may be coming to an end. The real hurdle and one that would not be immediate in nature -- or at least I don't think it would be -- is the flat blue line. Clearing that would be a serious change in trend should it occur.
Now let's turn to energy, the new favored group. Sometimes I wonder if it has replaced tech with its most favored nation status (not quite yet, but close). Just over two weeks ago, I argued that tech was over-owned and over-loved and Barron's had put it on its cover just a few weeks prior to that and it meant it needed to correct.
At the same time, I drew in this head-and-shoulders bottom on the chart of the Energy Select Sector SPDR fund (XLE) . This head-and-shoulders bottom measures to $55-$56, which was achieved on Tuesday.
Energy, and the XLE specifically, has done nothing wrong and likely, even if it backs off, it will rally again. However, I feel compelled to note that the pattern's measured target has been achieved and the Daily Sentiment Index (DSI) for crude oil is now at 88. If we see another green day for oil Wednesday, I'd expect that DSI to go over 90, which generally means the runway is short until there is a correction.