Weekend Video – Reviewing Prior Bear Market Bounces – Applying Lessons to Current Bounce

Top 20 ETF Ranked by StochCLose

The image below comes from the StochClose rankings (read about here). The top ten are dominated by precious metals, bonds and healthcare, not exactly the most offensive groups in the market. Several tech-related ETFs feature in the bottom half of the top twenty, but not one recorded a 52-week high this past week and their bounces still look like big counter-trend bounces.

ETF Highlights

Today’s report will highlight a few ETF charts and then turn to the counter-trend bounces in the last three bear markets. After notching a 30+ percent gain on Wednesday and coming within 2% of the falling 200-day SMA, the S&P 500 turned down with a sharp decline on Friday. Technically, the short-term trend is still up for SPX, but it remains in a danger zone similar to prior bear market bounces. More telling, selling pressure was quite intense in a few key areas as the Semiconductor ETF, the EW Consumer Discretionary ETF, the Bank SPDR and the Regional Bank ETF fell over 8%.

Let’s start with the strongest areas of the market. The 20+ Yr Treasury Bond ETF (TLT) and Gold SPDR (GLD) are holding strong, as is the Gold Miners ETF (GDX). SPY is up some 27% the last 28 days and TLT held up with a 1.17% gain. A bullish pennant is taking shape for both TLT and GLD. Also notice that RSI(10) is in the 40-50 zone for both and this marks a spot were momentum can turn up.

In contrast to Treasury bonds, junk bonds act more like stocks and are more sensitive to the economy. Kind of like the EW Consumer Discretionary ETF. The High-Yield Bond ETF (HYG) broke out with a surge on Wednesday, but gave it back with a sharp decline on Friday. Talk about cold feet in the junk bond market.

Over the last ten days, the SPX Advance-Decline Percent indicators dipped below -80% twice and did not exceed +80%. Relative strength in small-caps also means relative weakness in large-caps. Relative weakness and above average selling pressure in large-caps is the real concern here. Keep in mind that the S&P 500 accounts for some 80% of the total US equity market.

The pennant breakout in the Russell 2000 ETF (IWM) is already looking shaky as the ETF fell 7.5% in two days. The bigger downtrend is the dominant force at work here and the rising wedge since mid March is just a counter-trend bounce. IWM is WELL below its falling 200-day.

The Finance SPDR (XLF) is the third biggest sector in the S&P 500 and it failed to exceed its early April high. In addition, its retracement was one of the shallowest of the 11 sectors.

The Semiconductor ETF (SOXX) had one of the strongest bounces from mid March to early May, but also one of the biggest declines over the last two days (-8.4%). The bounce, while strong, fell well short of the February high and the ETF is back below its 200-day.

Prior Bear Market Bounces and Now

The next charts highlight the bear market bounces in 1981-82, 2001-2002 and 2008. Each chart shows the 200-day SMA, RSI(14) and the PPO(20,200,0). The trend is down when below the 200-day and when the PPO is negative. During a counter-trend bounce, the 50-70 zone is the danger zone for RSI. Sometimes momentum (RSI) peaks at 55, 60, 65 or 69. In other words, RSI does not peak at the exact same level every time. Also notice that RSI becomes oversold often in a downtrend and does not become overbought. And finally, the retracements and patterns are marked for the counter-trend bounces. Typically, a rising wedge of sorts forms and retraces 38.2 to 61.8 percent of the prior decline. The last chart shows current conditions for SPY.

Thanks for tuning in and enjoy your weekend!

-Arthur Hill, CMT
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