Editor's Note: If you like Tom's analysis you might try his Viper Hot Stocks report.
The sharp decline Tuesday has taken many of the technical studies like the A/D lines, McClellan oscillator and OBV back to support. The 4-1 negative A/D ratios Tuesday was consistent with heavy selling as was the closing reading of 2.30 in the ARMS Index. This is the most oversold reading of 2016.
The stock index futures are slightly higher ahead of the opening as are crude oil prices. The stock market needs a strong rebound in the next day or two to avoid stronger sell signals. The severity of the January decline would typically be followed by a longer and more complex rally before the January lows are tested.
A rally from here would further frustrate the stock market bears as the Total Put/Call ratio was 1.01 Tuesday and was a very high 2.19 on Tuesday up from 1.21 on Monday . The VIX is still in a downtrend as it flashed a buy signal on January 21st. It would take a close back above 24 to suggest that the VIX has resumed its uptrend.
The financial sector has been hammered since it peaked in December. The Spyder Trust (SPY) is down 8.5% from the late December highs while the Financial Sector Select (XLF) has lost 15%. Earnings from some of the key Euro zone banks hit the tape Tuesday as USB Group (UBS) dropped 7.8% while Banco Santander (SAN) was down 6.5% and Deutsche Bank (DB) dropped over 5%. It is not surprising therefore that the SPDR S&P Bank ETF (KRE) is down 21.9% from the late December highs which is 13% worse than the SPY.
So if you are in the financial sector or long the bank stocks should you be selling them now?
The monthly chart of the Financial Sector Select (XLF) closed negative in December and dropped to $20.53 in January.
- The 38.2% Fibonacci retracement support from the 2011 lows and the monthly starc- bands are in the $19.58 area.
- The 50% support stands at $17.81 with major support in the $16 area.
- There is monthly resistance now at $22.86 and the 20 month EMA
- The monthly studies are solidly negative as the relative performance has broken support, line a, going back to 2014.
- As I commented in the Viper ETF Report the " monthly OBV on the DIA, QQQ, IWM, XLF, XLI and XLK all dropped below their WMAs" in December.
- The weekly studies have been negative since the first week of January with the weekly starc- band at $19.91 which also coincides to monthly pivot support.
The SPDR S&P Bank ETF (KRE) has been trading near its weekly starc- band for the past three weeks and it is now at $26.68 or about 6% below Tuesday's close.
- The long term support from the 2010 high is at $26.54.
- There is initial weekly resistance in the $30 area along with the 20 day EMA.
- The weekly studies have been negative since December 11th, line 2.
- The RS line is now well below its declining WMA and is oversold.
- The weekly OBV was very weak during the rally from the October lows as it moved above and below the support at line d.
- The OBV popped briefly above its WMA at the end of November before reversing (see arrow) which was a negative sign.
- The daily studies though negative are still well above the January 25th lows.
What to do? The ADP jobs report was better than expected as the market opened higher It is now waiting for the ISM Non-Manufacturing Index and the EIA Petroleum Status Report. A higher daily close is needed to keep the market's short term trend positive.
The XLF needs to close above Monday's doji high of $21.74 to reverse the short term weakness. For XLF and KRE I would look for a 2-3% bounce to lightly up on your longs in the financial sector. The negative relative performance analysis indicates that it will take considerable time before they could become market leaders. Alternatively stops could be placed 0.05% under the January 20th lows.
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