Piper Jaffray & RBC Technicians See Bounce Coming in Stocks
- Posted by JC Parets
- on September 26th, 2011
Technical Analysts Craig Johnson from Piper Jaffray and Robert Sluymer from RBC Capital Markets each agree here that the stock market is set up for a nice bounce. The Wall Street Journal has a nice piece out this afternoon with the details.
Piper Jaffray technical analyst Craig Johnson said there are some broad market measures which are near “historically washed out readings.” And with the S&P 500 index ($SPX) sitting just above “good downside support” between the 1100 to 1120 range, Johnson believes “conditions are right for a meaningful fall rally to emerge over the next month.”
He noted that while the market was approaching key support at the lows seen in early August, volume was nowhere near where it was back then. Volume is a measure of both participation and conviction, so is viewed by many as a validator of a market’s move.
When the S&P 500 closed at an eleven-month low of 1119 on Aug. 8, NYSE composite volume reached a 1 1/2-year high of 9.92 billion shares. But as the index closed less than 1% above that low on Sept. 22, volume topped out at just 7.1 billion shares.
In addition, a number of technical momentum indicators, which measure the index’s rate of change and magnitude of recent moves, never approached their August lows. For example, the Relative Strength Index was at -3.06 on Sept. 22 vs. -16.69 on Aug. 8.
And the technicals haven’t just stopped declining. RBC Capital Markets technical analyst at Robert Sluymer said daily and weekly momentum indicators are beginning to turn up.
Another reason to believe stocks are technically poised to kick off a rally is that Sluymer said the Arms Trading Index “is peaking in the short term.”
Also known as the “TRIN,” the Arms index is a measure of the ratio of advancing and declining stocks relative to the ratio of advancing and declining volume. “This ratio is inversely-related to the direction of stock markets,” Sluymer said, as very high readings are seen as signs of capitulation.
And Sluymer said monthly, weekly and daily TRIN readings have reached levels that are historically associated with “oversold” readings for stocks.
Piper Jaffray’s Johnson believes a subsequent rally can take the broad market back toward the 200-day simple moving averages. The 200-day MA for the S&P 500 comes in around 1282, which implies a 12% rally from current levels.
Before it can reach that level, S&P 500 will have to contend with the resistance at the 50-day moving average, around 1210. Above that, the 50% retracement of the decline from the July 7 closing high of 1353 to the Aug. 8 closing low comes in at 1236.
As much as I agree with a few of the things they have to say, keep in mind that risk management here is the most important thing. Sure there are some nice risk/rewards that have set up, but make sure there are exit strategies on both sides. I would be watching $XLF here as the tell. The financials ETF is setting up for a possible short-squeeze and I think that it would absolutely be necessary for any sustained rally in equities.
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J.C. Parets is the Founder & President of Eagle Bay Capital, LLC. He earned the Chartered Market Technician designation (CMT) and is a member of the Market Technicians Association. More
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