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Stock Market Bounce Should Be Short-Lived

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We can look forward to a bounce that repairs or recovers some of the damage from last week, but it may be fleeting and followed by another down leg.

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Editor's Note: This article was originally published on MPTrader.com (click to visit the site and watch the accompanying video).


Last week's bottom line can be summarized quite simply: There's a lot of serious chart damage out there! We certainly can look forward to a bounce -- and that could be seven hours or seven days -- that repairs or recovers some of the damage from last week. However, my sense is that the bounce will be fleeting and followed by another down leg.

A quick look at the charts of the Volatility Index (VIX), or fear index, and the iShares Barclays 20+ Year Treasury Bond (TLT), or flight to safety ETF, support the argument for a brief bounce in the stock market. The VIX had a huge downside reversal Friday that usually signals a directional change, and the TLT didn't make a new high on Friday while a lot of indices took out their "flash crash" lows.

But, again, the expected rally in the stock market will be tough to sustain, as it will be used by big fund managers to sell positions that they want to lighten up on into the strength so that they can raise cash and go shopping later on in this quarter.

The focus of my analysis this week is on the commodities and materials sectors, and what they tell us about both the near- and intermediate-term direction of the market.

Any discussion of this sector begins with China, the big procurer of materials. The Shanghai Composite Index (SHCOMP) has the worst looking multi-month chart of the all the indices, having peaked at 3483 in August of last year and last Friday hit 2482, a 34% down move. However, from a near-term technical perspective, the Shanghai should rally off of Friday's low and get to 2700-2800 before its next down move.

The Reuters/Jefferies CRB (Commodity Research Bureau) Index looks somewhat like the Shanghai, having had a coil-type pattern from its January high of 29.38, followed by a fall-out into last week's low of 24.75, a 16% sell-off.

Any rally in the CRB index off of 24.75 is going to smash into some serious resistance at the prior low at 25.73, which would be a 2.3% rally. That's the kind of bounce, somewhere between 2% and 5%, I'd expect for most of these indices after absorbing so much damage.

The ProShares Ultra Oil & Gas ETF (DIG) doesn't look well either. It has a major top that is as large and as wide as the base it came out of originally. Based on the daily chart, it looked like a bull market followed by a correction, but put into perspective on the weekly chart it looks like it finished the correction on the upside and now has some difficulty ahead.

United States Oil (USO), the oil component of the DIG, has the same look as the DIG, which is not surprising, Maybe United States Oil can get back to the 34-35 zone, but the weekly chart shows it's already headed back down from a small recovery.

The transportation sector, which is impacted by oil, lately hasn't looked very good. There's a big top on the iShares Dow Jones Transportation Average (IYT), which needs to get back over the 80 level for it to really take off again. Friday's upside reversal from 73.60 to a 76.64 close, or 4%, seems disappointing when you think about that fact that oil has just gotten crushed. It could be telling us that the economy isn't doing all that well despite the fact that oil prices have come down so much.

Both FedEx Corporation (FDX) and United Parcel Service, Inc. (UPS) both look toppy as well. These companies thrive on economic growth on retail consumption. It's not to say that UPS can't rally to the 65 level, but right now it looks like a countertrend rally because the downside isn't finished yet. Both FedEx and UPS could be significant indicators about US economic growth in the coming months.
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No positions in stocks mentioned.
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