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Finance Stocks Are Beginning to Rebound

David Becker
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www.iforex.com
Finance Stocks Are Beginning to Rebound

The percentage of stocks above the 20-day moving average can be used as a short-term breadth indicator that can use to time market swings. At its most basic, chartists can compare indicator values for the S&P Small-Cap 600, S&P MidCap 400 and S&P 500 to find the strongest of the three. Currently, 41% of S&P 500 stocks are above their 20-day EMA, 43% of S&P MidCap 400 stocks are above and 53% of S&P Small-Cap 600 Stocks are above. Small-caps show the strongest short-term breadth because they have the highest percentage of stocks above their 20-day EMA.

For timing purposes, you can look for oversold conditions and breakouts to trigger bullish signals. This breakout represents a breadth thrust that is short-term bullish. A quick drop back below 30 would negate this breakout. You can also use bullish and bearish thresholds in an effort reduce the chances of whipsaw, but these signals will lag somewhat. The moves above/below 50% will provide quicker entries, but this level is crossed quite often and prone to whipsaws. Using thresholds, a surge above 70 is considered bullish until countered with a plunge below 30%.

The Finance SPDR (NYSE:XLF) is showing some relative strength with a modest advance. The XLF is hitting the 50% retracement in late July and firming for seven days. This firmness turned to buying pressure the last three days as the ETF attempts to move back above the support break. The long-term trend is up for XLF. Even though the ETF broke support, this decline was always viewed as a correction within a bigger uptrend. A move back above broken support would be quite positive for this key sector. The Commodity Channel Index (CCI)is becoming way oversold with a move below -200 in late July. The indicator has since moved back above -100 to suggest an end to the correction.

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