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October 11. 2015

Market Review

U.S. stocks rallied for the week, with the major averages posting their biggest weekly gains in months.
For the week, the Dow Jones Industrial Average jumped 3.7 percent to close at 17,084.49. The blue-chip average posted its biggest weekly gain since February. The S&P 500 soared 3.3 percent during the week to 2,014.89, its best since December. The Nasdaq climbed 2.6 percent over the week to 4,830.47. All 10 S&P sectors finished higher for the week, led by energy. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held near 17.

Short-Term Technical Condition

If we focus on our short-term oriented trend indicators, we can see that the trend-status from the market turned obviously bullish as the S&P 500 managed to close above the bearish threshold from the Trend Trader Index on Monday. So from a pure price point of view, the short-term oriented up-trend of the market remains intact as long as the S&P 500 does not close above 1,939. Above all, we can see that both envelope lines of this reliable indicator have also started to bottom out as well, which can be seen as another encouraging trend-signal for market technicians. Moreover, the gauge from the Advance-/Decline 20 Day Momentum Indicator was pushed to the highest level since early April and is, therefore, strongly confirming the recent gains from the S&P 500. Another quite encouraging signal is coming from the Modified MACD. Given the fact that we saw a strong surge in both trend lines of this reliable indicator, we strongly believe that any upcoming weakness would most likely just produce a bullish divergence in its readings, as extremely heavy losses would be necessary to bring this short-term oriented gauge back to its former low! As a matter of fact, we are quite sure that we have seen the worst already.

Moreover, it was good to see that short-term oriented market breadth showed some strong signs of improvements compared to last week, although not all of our tape indicators have turned bullish yet. The most encouraging signal is coming from the High-/Low-Index Daily, which almost flashed a bullish crossover signal last week. The main reason for this bullish crossover signal is the fact that we have seen a quite strong reduction in the number of stockss which are hitting a fresh 52-week low, in combination with a quite encouraging increase of those stocks which hit a new 52 week high. This indicates that the market internals are strengthening, especially if we consider the fact that the total amount of new highs during last week was the highest one during the whole correction cycle. Another important fact is that we saw a 9-to-1 up-day on Monday, which was not followed by a 9-to-1 down-day. This indicates a strong demand among the market participants. Moreover, the Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily flashed an extremely strong bullish crossover signal at the beginning of the week, indicating that the broad market is regaining strong momentum. Again, we saw a strong surge in both trend lines, which can additionally be seen as a quite positive breadth signal. The same is true if we focus on the percentage of stockss which are trading above their short-term oriented moving averages (20/50). Both gauges were pushed back above their 50 percent bearish threshold last week and have additionally reached the highest level for weeks!

On the contrarian side, we received a lot of evidences that the strong pessimism within the option market remains persistent (WallStreetCourier Index, All CBOE Options Call-/Put Ratio and Market Sentiment). This can be seen as a quite bullish signal. Moreover, we can see that the Smart Money Flow Index is definitely confirming the recent break-out attempt from the Dow, plus the WSC Capitulation Index dropped to the lowest level for months!

Mid-Term Technical Condition

On a mid-term time horizon, the technical condition of the market still looks quite vulnerable at the moment. This is mainly due to the fact that the gauge from the Global Futures Trend Index has not managed to pass its bullish 60 percent threshold yet! As already mentioned a couple of times, from a formal point of view, the current correction cycle will be not be over as long as its gauge keeps trading below that important threshold! Nevertheless, its gauge has shown a strong form of momentum recently as it climbed to almost 40 percent last week! If this trend continues it might be just a question of time until we receive a bullish signal within that indicator. Moreover, this signal is also telling us that the recent break-out/rally-attempt from the S&P 500 looks definitely more sustainable and could, therefore, easily turn out to be the start of a new sustainable up-trend. However, from a pure price point of view, the market still remains in a mid-term oriented down-trend as the WSC Sector Momentum Indicator has not turned bullish yet. This is telling us that the relative strength score of most sectors within the S&P 500 keep trading below the relative strength score of riskless money market within our Sector Heat Map. In such a scenario, most sectors tend to underperform riskless money market. As a matter of fact, it was good to see that the indictor showed some signs of stabilization last week, which is another indication that the market is about to bottom out.

More importantly, mid-term oriented market breadth showed also some form of improvements last week. The Modified McClellan Oscillator Weekly showed a decreasing bearish gap, plus the percentage of stockss which are trading above their mid-term oriented moving averages (100/150) showed major signs of recovery last week (although both indicators still remain bearish from a pure signal point of view). Moreover, it was quite encouraging to see that mid-term oriented up-volume has strengthen for the week, indicating that more volume was flowing in advancing stocks than in declining ones. Basically, the same is true if we focus on the Advance-/Decline Index Weekly! As a sustainable rally must be accompanied by an improving tape structure, mid-term oriented market breadth will be definitely key area of focus within the next couple of weeks. However, given the quite strong readings/improvements on a short-term time horizon, this bearish divergence can be ignored for the time being.

Long-Term Technical Condition

The long-term technical condition of the market remains quite damaged. The Global Futures Long Term Trend Index is still indicating a risk off-environment for US equities, whereas the relative strength score of all risky markets keeps trading well below the one from US Treasuries. Above all, we can see that only 13 percent of all local market indexes around the world managed to close above their long-term oriented trend-lines. Nevertheless, we saw some small signs of improvements last week. This is mainly due to the fact that the relative strength scores of most risky markets have picked up momentum recently. Above all, we can see that the WSC Global Momentum Indicator showed also some small signs of recovery. This is another piece of evidence that the global rout might have come to an end. This can be also seen if we focus on long-term market breadth as the Modified McClellan Volume Oscillator Weekly showed a decreasing bearish gap last week. Additionally, we saw that the percentage of stockss which are trading above their long-term oriented moving averages showed also some signs of improvements last week. Only the High-/Low Index Weekly remains quite non-confirmative for the time being.

Bottom Line

The bottom line: In our last week’s comment we highlighted the fact that there was a good chance that the market had hit its final low as we had seen typical technical patterns for a major bottom. Moreover we mentioned that we additionally needed to see at least some bullish indication within our indicator framework (especially market breadth) to receive the ultimate bottom confirmation. As a matter of fact, we strongly believe that we have seen the worst already, after we saw broadening strengths in our short-term to mid-term oriented trend- as well as brea dth indicators last week. After our members successfully side-stepped the recent turmoil, we think it is time to get back into the market (by buying into weaknesses). Stay tuned!