Oil bounced sharply on Friday (+10.7%) and with the stock market still locked at the hip to oil it too rallied (about +2%) and the recovery has it looking like we should get some bullish follow through in the coming week(s).
Review of Major Stock Indexes
The table above shows the week finished in the red for most of the indexes, the 4th week out of 6 in the new year, but it could have been a lot worse. There was a strong recovery off Thursday's lows and it cut the losses for the week from about -70 for SPX to -15. That left a bullish hammer candlestick for the week following a test of the January low. It looks good for the bulls in the coming week so hopefully they won't fumble the ball.
The biggest thing to note on the charts is the retest of the January lows. Some indexes dropped a little lower (the techs) while some made higher lows (the Dow) but by Friday's close they all were above their January 20th lows. The test of the lows is also showing bullish divergence on the momentum oscillators, showing the selling into this week's lows was on weaker momentum and that's a bullish sign for the coming week(s).
Some indexes obviously look stronger than others, especially when relating recent lows to previous lows in 2014 and 2015. For example, the Dow has not broken its August 2015 low yet while SPX has. But at its August low the Dow had broken below its October 2014 low and made it down to its February 2014 low. At its August 2015 low SPX was still above its October 2014 low, but that low was tested in January and again this week. It has not yet made it down to its February 2014 low. NDX has a series of higher lows since its February 2014 low. The Nasdaq was looking the same as NDX until this week when it broke below its January low and its August 2015 low but recovered above both into Friday's close.
The RUT is the weak index and has been making lower lows since February 2014. In fact its January low and this past week's low were both tests of a trend line along the lows from February 2014 and its weekly bullish hammer candlestick at this trend line suggests we could get a bigger bounce of trendline support.
The big argument among analysts is whether the large pullback from 2015 highs is the start of something more bearish or instead just a correction within the longer-term bull market. One could make an argument for either case based on fundamentals and technical and the only way we'll know the answer is in hindsight (still working on my hindsight trading model). But the price pattern will provide clues in the weeks ahead and I'll discuss what to watch for.
A Look At the Charts
Fear & Greed index, chart courtesy CNN Money
The first chart I want to show is the Fear & Greed index, which you can find at CNN Money (Fear&Greed), which describes the 7 measurements they use to measure this sentiment gauge. You can see how much fear spiked into the August 2015 low and then the January low. This week's low is showing bullish divergence against the January low and while that could indicate complacency (bearish) I think it's a bullish sign that traders have done the selling the plan to do for now. Whenever the fear index reaches the horizontal red line that I added (near 15) it's a sign for the bears to be cautious since the market is likely oversold and too much fear is bullish from a contrarian perspective.
5-day Average Put/Call Ratio, chart courtesy CNN Money
One of the measures used in the Fear & Greed index is the put/call ratio, shown below (the 5-day moving average of it). As you can see, when the ratio gets up to 1.0 it indicates a lot of put buying, as happened at the August 2015 low and January low. The small pullback this week shows traders are starting to make bullish bets and that's probably a bullish sign coming off the 1.0 reading earlier in the week. You can also see how the late-December low, at 0.7, was a good indication that traders were feeling too bullish and from a contrarian perspective that set up the January decline. The low around 0.76 on February 1st wasn't helpful in seeing the decline that followed into this week's low so it's not always helpful as a timing tool but it does give you sense of when things have become extreme.
Dow Industrials, INDU, Daily chart
On Thursday, the Dow dropped below price-level S/R at 15666 (its August 2015 closing low) but recovered almost back up to the line by the close. Friday's rally had it closing only about 26 points shy of its price-level S/R at 16K. The retest of the January 20th low shows bullish divergence on the oscillators and another rally day will have MACD crossing back up. If it can get above the zero line it will be more bullish. A rally above 16K would also be more bullish, especially if it can break its downtrend line from December 29th, near last Wednesday's high at 16201. If we see the Dow chop sideways for several weeks it will point down sooner rather than later. Bullish above 16200, bearish below 15500.
Key Levels for INDU:
-- bullish above 16,200
-- bearish below 15,500
S&P 500, SPX, Daily chart
For a second time SPX tested its October 2014 low at 1820 and Friday's rally has it looking like support will hold. Now if the bulls can break above its 20-dma and downtrend line from December 29th, both near 1885, we'd have a stronger indication that we're looking for at least a larger bounce. But like the Dow, if price chops sideways into the end of the month I would get more defensive and look for another leg down next month. For now it would be bullish above 1885 but bearish below 1800 (although its uptrend line from March 2009 - October 2011, currently near 1761, would likely be strong support).
Key Levels for SPX:
-- bullish above 1885
-- bearish below 1800
S&P 100, OEX, Daily chart
Thursday's low for OEX was another test of support near 810 (with a low at 811.61), which is its October 2014 low. It was tested in August 2015 and then again in January and again on Thursday. The more support gets beat on the weaker it gets as it consumes buyers (real buying as well as short covering). You can visualize a H&S top between the left shoulder following the August 2015 low and the right shoulder following the January low. The downside objective for this pattern would be about 675, which would be a test of the September 2012 high and close to a 62% retracement of the 2011-2015 rally. That's just something to think about if OEX breaks down, especially if it drops below its uptrend line from March 2009 - October 2011, currently near 780. The bulls need to see OEX above resistance at its downtrend line from December 29th and its 20-dma, both near 843, and then get back above its broken uptrend line from October 2011 - August 2015, near 850. The pattern would turn much more bullish above 872.
Key Levels for OEX:
-- bullish above 872
-- bearish below 810
Nasdaq Composite, COMPQ, Daily chart
Last Monday the Nasdaq gapped down to and closed on its uptrend line from October 2011 - November 2012, which is where it chopped around all week and then closed above on Friday. It's the weekly close that counts and the bulls saved the Nasdaq. It might continue to struggle between this uptrend line and the broken uptrend line from October 2014 - August 2015, near 4395, which is where its downtrend line from December 29th is also located. So a break above 4395 would be a bullish sign but continue to stay aware of the potential for a whippy bounce pattern. Further upside looks like the higher-probability direction from here but it might not be smooth ride for traders playing the long side.
Key Levels for COMPQ:
-- bullish above 4395
-- bearish below 4099
Nasdaq-100, NDX, Daily chart
The NDX pattern looks very similar to the Nasdaq, especially with Friday's close back above its uptrend line from March 2009 - August 2015, near its January low near 3993. The next hurdle for bulls is its September low at 4053 and then its downtrend line from December 29th and 20-dma, both nearing 4125. If the bears step back in we could see NDX drop down to its August 2015 low, at 3787, but at this point I don't see it going lower than that before giving us a larger bounce correction (in time if not price).
Key Levels for NDX:
-- bullish above 4125
-- bearish below 3787
Russell-2000, RUT, Daily chart
At its January low the RUT had tested its trend line along the lows from February-October 2014 and it did so again this past week. The line was broken intraweek but it held on a closing basis with Friday's rally. The rally stopped at the top of its parallel down-channel for the decline from December, near 972. A downtrend line from December 29th is slightly higher, near 984, above which the bulls would be in stronger shape. Other than its declining 20-dma, currently near 997, it could make it back up to its broken uptrend line form March 2009 - October 2011, near 1043, for a 38% retracement of its December-February decline. As long as the RUT stays above 940 we should see a multi-week bounce/correction. There is one longer-term bullish pattern that is on my radar screen so if the bounce pattern becomes sharp to the upside it would be all the more reason to look to buy dips instead of selling rips.
Key Levels for RUT:
-- bullish above 984
-- bearish below 940
SPDR S&P 500 Trust, SPY, Daily chart
Now we bring in some volume studies and I've added the Volume At Price (VAP) indicator, which shows how much volume was traded at specific prices. The idea here is that the more volume at a particular price the more likely there is to be support/resistance there and the potential for choppy price action as traders battle it out for control. In price areas where there is little volume there's not likely going to be much in the way of support or resistance (not as many traders traded in that area and therefore might not have a dog in that hunt).
The SPY chart below shows why there should be a little bit of concern about the upside potential. The trading volume on Friday was light and this past week was spent below 187 where there is little volume at this price area. Friday's close stopped at resistance near 187 and the combination of resistance with volume says the bulls better get up and go on Monday to avoid sinking further. Above 187 would have the bulls in better position, especially if they can rally above the 20-dma (midline of the Bollinger Band), near 188, and then the upside potential is to 194.50 where it would hit price-level S/R and the top of its BB. As for the MFI, the last time it stalled at 50 (the red horizontal line for this indicator) was at the end of December, which led to the January decline. MFI is again stalled at 50 so it's another reason the bulls need to keep the buying going this coming week.
Powershares QQQ Trust, QQQ, Daily chart
The QQQ presents the same picture as SPY but if anything it looks weaker. The bullish divergence on the Williams %R is bullish but the lower volume on Friday and price below 99.50, where there is significantly less VAP, does not yet support the bulls. Monday needs to see stronger volume in the buying that gets the QQQ up above 99.50. Then the bulls can worry about the declining 20-dma, now at 100.58, and then try to get to the top of the BB, currently at 15.85. It looks vulnerable here to more downside so let's see what the bulls can put together.
Assuming we'll get a bounce in the coming week it's not clear how it will develop. The larger pattern suggests we should be looking for just a bounce correction, which could last several weeks and through March, and then head lower again. But whether the bounce will be a sideways multi-week choppy consolidation or instead a sharp short-lived a-b-c bounce can't be known yet. When I look at the SPY and QQQ charts I don't feel quite as bullish as I do when I look at the other charts. Volume is the pressure behind a move and obviously bulls want to see some more pressure behind the buying. This could simply be an indication that we're going to chop around near the lows but for now look to buy dips since I think that will be the direction of least resistance. Just keep your trades short term so you avoid the whipsaws.
Trade safe, have a good week and good luck with your trading. I'll be back with you next weekend.
Keene H. Little, CMT
Technicians look ahead. Fundamentalists look backward. The true language of the market is technical. - Joe Granville