Did the FOMC End Another Correction?

10/09/2014 10:30 am EST

Focus: ETFS

Thomas Aspray

, Professional Trader & Analyst

The upside reversal is being treated with skepticism by many analysts, so MoneyShow’s Tom Aspray takes a look at the technical studies to determine what is needed to confirm that the correction is indeed over.

The S&P futures traded as low as 1918 early Wednesday but skyrocketed to the upside on the release of the FOMC minutes, closing at 1961.75. The futures were higher early Thursday but are now in negative territory.  

The Dax Index has, so far, held the August lows at 8903 but the gains early Thursday have also evaporated as we head into the New York opening. The upside reversal is being treated with skepticism by many analysts but that is a good sign as they are likely not going to change their tune until the market is significantly higher.

The dollar had pushed higher and stocks plunged on the belief that the Fed would raise rates earlier than expected. The Fed minutes suggest that this won’t be the case, which is likely to make those who sold on that expectation a bit more nervous.

A look at the technical studies suggests that the correction may indeed be over but for confirmation, the market needs to add to Wednesday’s gains in an impressive fashion. Let’s look at the evidence.

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Chart Analysis: The daily chart of the NYSE Composite shows Wednesday’s impressive upside reversal after it came quite close to the monthly projected pivot support at 10,408.

  • The advances led the declines Wednesday by over a 4-to-1 margin.
  • The NYSE Advance/Decline Line has turned up but is still below its WMA.
  • A move above the downtrend, line a, would be a further sign that the correction is over.
  • The bullish divergence in the McClellan oscillator (line c), mentioned early in the week, has been confirmed by the move above resistance at line b.
  • This is generally a quite reliable bottom formation and a strong surge above the zero line would add further confirmation.
  • There is next resistance at 10,704 with the declining 20-day EMA at 10,747.
  • A weekly close back above the quarterly pivot at 10,789 would be positive.

The Spyder Trust (SPY) came close to the daily starc- band early Wednesday before closing back above Tuesday’s high.

  • The close was just below the 20-day EMA at $196.83 but above the quarterly pivot at $196.19.
  • There is minor resistance now at $197.60 with further at $198.40.
  • The daily starc+ band is at $199.91 with the monthly projected pivot resistance at $204.17.
  • The S&P 500 A/D line is just barely below its WMA.
  • A move above the downtrend, line d, is needed to confirm the correction is over.
  • The daily on-balance volume (OBV) shows a potential double bottom formation but needs to move above its WMA and resistance, at line e, to turn positive.
  • A daily close below $192.35 would be negative.

NEXT PAGE: 2 More ETFs to Watch

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The SPDR Dow Industrials (DIA) dropped slightly below last week’s low at $166.43 before closing strong at $169.62.

  • Wednesday’s close was above the quarterly pivot at $168.61 with Monday’s high at $170.69.
  • The daily starc+ band is at $172.40 with the September high at $173.32.
  • The Dow Industrials A/D line has been acting stronger than prices as it has held the early September lows, line a.
  • With Wednesday’s close, the A/D line is back above its WMA.
  • The relative performance completed its bottom formation on September 12 as it moved above resistance at line b.
  • This indicated that the Dow Industrials were now a market leader.
  • The weekly RS analysis (not shown) has also completed its bottom formation.
  • There is initial support now at $167.50-$168.50.

Powershares QQQ Trust (QQQ) had a low Wednesday at $96.06, which was just above last week’s low of $95.97.

  • The uptrend from the June lows, line c, was tested in Wednesday’s session.
  • QQQ is now above the quarterly pivot at $97.59 with the quarterly projected pivot support at $94.61.
  • There is next resistance at $99.30 and then at $100.56, which was the September 19 high.
  • The monthly projected pivot resistance is at $101.88 with the weekly starc+ band at $103.34.
  • The Nasdaq 100 A/D line held the September lows, line e, and has now moved above its WMA.
  • A strong move above the bearish divergence resistance at line d, will confirm that the correction is over.
  • The daily OBV has been weaker than the A/D line but has turned up from support at line e.
  • The weekly OBV (not shown) has moved back above its WMA and could trigger an AOT buy signal on Friday.

What it Means: The technical evidence does suggest that once again the FOMC comments spurred a rally that has ended the correction. The fact that the McClellan oscillator and Dow Industrials A/D line were above the recent lows alerted traders to a potential bottom.

As I said in last week’s Sellers In Charge Now, but...  “The weight of the evidence makes a strong rally likely in the next week.”

If a bottom is in place we are likely to have confirmation by early next week as it would take a very sharp down day in the next day or two to reverse the positive signs. The oversold Dow stocks are still being watched closely for new buy signals.

How to Profit: No new recommendation.

Portfolio Update: Should be long the PowerShares QQQ Trust (QQQ) $86.88 and added a 25% long position at $97.52 or better. Use a stop at $92.89, but on a move $100.56, raise the stop to $95.77.

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