Have we bottomed for the summer? The simple answer is, quite possibly.
My work was looking for three things to come together:
- A break of the October '11 lows for leading stocks/indices, such as GDOW, BHP, ITUB, & SU
- A spike higher in VIX, possibly to the low 40's
- An early June low, followed by a 6-8 week bounce
So where are we now? Stocks such as BHP and ITUB have indeed broken their October '11 lows. GDOW and many energy related names, such as SU, have yet to break their October '11 lows. Let's take a look at BHP first. A global commodity megacap, it has been leading the market lower. Of the leading stocks that I follow, it has one of the best technical structures. It is currently overbought on the daily chart. I would look for some selling this week, followed by a possible move higher into mid-July to backtest it's broken trendline coming off its November '08 low.
On a longer term look at BHP, the technical picture shows two nice setups to watch. First, a large head & shoulders pattern continues to develop over the course of the past three years. A breakdown of the 55 level on BHP would be significant. Also, the price structure on BHP since April '11 through early June '12 resembles the SPX structure from October '07 through July '08.
So why ITUB? Emerging markets have been brutalized this year, and Brazil is no different. As an emerging market, commodity rich nation, Brazil is a great mirror into demand for commodities, but also the flight into $US assets, which continues to skew US markets higher. ITUB, as a large Brazilian bank is leveraged to all these themes, and gives us a nice leading indicator.
ITUB has broken its October '11 low, and has thus far bottomed in late May '12. It too, it beginning to become overbought on the daily chart. I would look for some selling this week, to possibly retest the May '12 low, or possibly make a slightly lower low. This would create a nice positive MACD divergence, and position it for a nice bounce through June/July. I'm looking for a gap fill of the 16.70 level for this bounce.
And to the VIX… Let's be honest, it was crushed today. The IHS setup was broken, and the MACD rising trendline was also broken. In my mind, this portends further VIX weakness in the future. Keep in mind though, the VIX is currently oversold on the daily chart. A move back toward 20-21 would make sense, before a move lower in the VIX.