March has started strong for the stock market, starting with the strong reversal off Monday's low and Friday made it 4 for 4 positive days for March. An old proverb "In like a lion, out like a lamb" is based on weather expectations but it has often been applied to the stock market as well. The last half of that proverb is obviously in question.
Review of Major Stock Indexes
"In like a lion, out like a lamb" is a phrase often associated with weather and came from the fact that the month of March usually starts with cold, damp and unpleasant weather but then finishes with much more mild and pleasant weather (spring like). Whether or not this is true for the stock market is questionable but a strong start to March has many traders wondering if it will lead to a weak finish. It's certainly not something we can trade on but it will be interesting to see what follows the strong first week.
The week's economic reports were mixed, starting weak with Monday's Chicago PMI (in contraction territory with a 47.6 reading) but then we received some improved metrics as the week progressed. Friday finished strong with the NFP report showing +242K jobs vs. expectations for +190K. Of course a strong employment number gives the Fed more wiggle room to raise rates and Friday morning's initial reaction to the news was a selloff. That was quickly reversed and the market made new highs for the week on Friday.
Oil had a good week, up +9.6%, and with stock prices and oil prices joined at the hip (for now) that gave a big boost for the stock indexes. A recovery in oil prices helps relieve some of the financial pressure on many of the oil firms (the oil service sector rallied +13.4%) and that in turn relieves some worries about the banks, which rallied +6.2% for the week. The rally in the oil sector helped the RUT (+4.3%) outperform the blue chips, doubling the Dow's +2.2%. The big market, the Wilshire 5000 index, finished +3.1% for a solid week and March has started with a +3.8% gain. It was a good week for the bulls and March has started off with a bang. Now the only question is whether or not it will finish with a whimper.
The McClellan Oscillator (NYMO) is now extremely overbought and in fact the only other time it was more overbought was January 2009. That was the big bounce off the November 2008 low before dropping lower into the March 2009 low. These kinds of readings are important indicators for us because we're trying to figure out if the rally off the February low is just a bear market rally or instead the start of a more bullish run that will take us to new highs. The latter means we want to buy dips while the former means we want to sell the rips and in bear markets the rips tend to be very strong, like the current one. The abnormally high NYMO reading tells me we should be looking to sell the rip.
I know there are some of you who do not like my bearish stance but I think it's important for you to know where I put my money. I can show you pretty charts with lots of lines of resistance and support and let you figure out what it all means. I think it's extremely important that you in fact do analyze the charts and make your own trading decisions but we all read different market analysts as a way to help us form an opinion about which direction to trade. I think the one thing we look for from various analysts is their opinion about what the charts mean. If I offend anyone with my opinion then I suggest you're holding onto a bias too strongly.
I try to let the charts speak for themselves and I'll turn bullish and bearish as the charts tell me and obviously my longer-term opinion of the charts will take longer to change while I change my short-term opinion about direction a lot more often. As we approached the February low I showed why I thought bears were pressing their luck if they continued to jump into new short positions. I was looking for a high bounce correction to the decline, potentially into early March and that's what we got. I've now switched around and I'm telling bulls that you're pressing your bets if you continue to jump into new long positions. It's time to start looking to play the short side again. That is of course just my opinion at the moment, which will change when the price pattern tells me to change.
A Look At the Charts
Wilshire 5000 index, W5000, Monthly chart
Since I stated above that I'm longer-term bearish the market, let me show you why we should all still be bullish. Not that I'm trying to confuse you (wink) but I think it's important to see both sides and why we will always have a debate about what the market is doing, especially if we're talking about different time frames. The Wilshire 5000 monthly chart below shows a parallel up-channel from 2009, based off an uptrend line from March 2009 - October 2011. W5000 rallied above the top of the channel in November 2013 and then fell back into the channel last August. February's low was a test of the bottom of the channel and the bounce into Friday's high has it up to the midline of the up-channel. Notice how the midline acted as support in August-October 2015 and then broke in January. Now we watch to see if the midline will act as resistance.
Obviously it's bullish with W5000 holding inside its longer-term up-channel from 2009 and a bullish wave count for the rally says we need another rally this year to complete a 5-wave move up. It would take the index up to a new all-time high and the first indication this could happen would be a rally above the midline of its up-channel, with a rally above 20800. But the bearish wave count says the throw-over above the top of the up-channel, in 2013-2015, followed by the drop back inside the channel in August 2015 was the first indication that the up-channel is probably going to break ("probably" being the operative word). A break below the February low at 18462 would leave little doubt that the bull market off the 2009 low finished last year. What happens from here will tell us what we need to know about how the rest of the year is likely to go.
Dow Industrials, INDU, Weekly chart
The Dow's weekly chart below shows one idea that would frustrate both sides this year -- a large-range consolidation before heading higher in 2017. A large sideways triangle would fit as a bullish continuation pattern and it would mean the downtrend line from May-November 2015, currently near 17700, will hold as resistance, if reached. The bottom of the sideways triangle is the uptrend line from August 2015 - February 2016 and it should hold as support if the longer-term bullish pattern is correct. A rally above its 50-week MA, currently near 17300, would be a strong indication that the more bullish interpretation (either directly higher from here or after one more "dip" back down to the bottom of the triangle) is correct. But the bearish interpretation is very bearish since the next leg down would likely be extremely strong.
Dow Industrials, INDU, Daily chart
The Dow's daily chart below shows a bearish rising wedge pattern for the rally off the February low and as the Dow often does, it's been "sliding" up along the broken uptrend line from January 20 - February 3 (the top of the rising wedge). There's no bearish divergence on the daily chart (but there is on the intraday charts) and there is additional upside potential at least to price-level S/R at 17138. This was an important support line that broke in January and a return to the scene of the crime would likely be tough resistance for the bulls to break through since the market is now overbought. Just above that line of resistance is its 200-dma, currently at 17182 and coming down. This is a big reason why I say bulls should not be pressing their bets here but instead should now be turning defensive.
Key Levels for INDU:
-- bullish above 17,180
-- bearish below 16,500
S&P 500, SPX, Daily chart
SPX looks like the Dow except it's a little more bullish because of Friday's rally and close above price-level S/R near 1992. It could not have gotten much closer to a weekly close at 2000 if the computers had been programmed a little tighter. With Friday's close it has recovered back above the support line that was broken with the January breakdown and it opens the door to its 200-dma and downtrend line from December, both near 2023. But it's going to be important for this 1992 level to hold as support on a pullback since a close back below the line would leave a head-fake break (bull trap on Friday?). At the moment, with the idea of an a-b-c bounce correction off the February low and the inability to get back above the broken uptrend line from January 20 - February 3, which was tested again on Friday, it's looking more like a bounce correction rather than something more bullish. The bulls need to drive SPX above the 78.6% retracement, near 2041, which would then strongly support an expectation for new all-time highs.
Key Levels for SPX:
-- bullish above 2042
-- bearish below 1930
S&P 100, OEX, Daily chart
OEX also looks the same as the Dow and SPX and it's now close to price-level S/R near 895, which is the level it broke sharply below in January. Its 200-dma is also coming down to the same level, making it an important level for the bulls to break through. A break below Thursday morning's low near 879 would be a confirmed break of the uptrend line from February 11th, which would be the signal for bulls to get defensive and bears to get more aggressive. But if the buyers keep at it, a rally above 895 would lead to at least a test of its downtrend line from November-December, currently near 912.
Key Levels for OEX:
-- bullish above 895
-- bearish below 842
Nasdaq-100, NDX, Daily chart
Following Tuesday's strong rally NDX has been consolidating near the 50% retracement of its December-February decline, at 4321, and has upside potential to at least the 62% retracement, at 4420, which would also be a test of its 200-dma. To indicate the bounce could be complete, the bears need to see a break below its uptrend line from February 11-24, currently near 4275. A drop below 4200 would be further proof the leg up from February completed but it might be good for just a deeper pullback before heading back up again in April to give us a larger a-b-c bounce off the February low.
Key Levels for NDX:
-- bullish above 4420
-- bearish below 4200
Nasdaq Composite, COMPQ, Daily chart
Like the NDX, the Nasdaq finished with a star doji on Friday and following a strong rally this is often the middle candle of a reversal pattern. It needs a red candle on Monday to confirm it otherwise it's simply an indecision/pause day and a white candle on Monday would keep things bullish. Bulls want to see the uptrend line from February 11th hold on a pullback, currently near 4660. Closing above its 50% retracement of its December-February decline, at 4693, opens the door to the 62% retracement at 4807, above which would then have us looking for a test of its 200-dma near 4889, if not price-level S/R near 4920.
Key Levels for COMPQ:
-- bullish above 4920
-- bearish below 4425
Russell-2000, RUT, Daily chart
Thanks in part to the rally in the small cap energy stocks the RUT was the stronger index this past week and starting with Tuesday's rally it broke through tough resistance near 1040, which was its broken/recovered uptrend line from March 2009 - October 2011 as well as price-level S/R at 1040 and 50-dma at 1043. That opened the door to price-level S/R near 1080, which includes its 38% retracement of its June 2015 - February 2016 decline, at 1078. Closing at 1082 for the week was a bullish accomplishment and as long as that holds on Monday it will keep the bulls in charge. The next level of resistance is nearby -- its broken uptrend line from October 2014 - September 2015, near 1097. A close back below 1080 would leave a failed attempt to get through resistance so that's what the bulls need to defend against.
The oscillators are showing us a big reason to be cautious here -- they're now extremely overbought. This by itself is not necessarily a reason to turn bearish since it could lead to just a pullback/consolidation to work off the overbought conditions, but again, bulls need to be more defensive here. The last time MACD was this overbought, in November 2014 it led to a consolidation/pullback into the December 2014 low before continuing higher. The time before that, where MACD was just as overbought, was off the October 2011 low into the October 2011 high. That led to a 62% retracement into November 2011 low before continuing higher. RSI is now as overbought as it was last June, at the high for the year.
Key Levels for RUT:
-- bullish above 1161
-- bearish below 996
SPDR S&P 500 Trust, SPY, Daily chart
SPY continues to push up against the top of its BB and that keeps it bullish until it turns back down from the BB. The MFI finally let go of the 50 line and is now heading toward 70. It's not there and that means there's additional upside potential, although as you see at the December 2nd high MFI stopped short of reaching 70. The one thing that's worrisome for the bulls is volume -- it's been declining as the rally has continued off the February low and volume is less than we had during the decline. Both of these are indications the bounce is likely a correction to the decline and not something more bullish.
Powershares QQQ Trust, QQQ, Daily chart
The top of QQQ's BB started to rise with this past week's rally and that gives it more upside potential. Williams %R is in overbought but holding above the -10 line and flattening out above this line tells us we're in a steady uptrend. But as with SPY, the declining volume during this rally is not a good sign and while the rally can continue on low volume it would certainly have a better chance if we were seeing increasing volume to indicate more investors were jumping in. Instead it's looking like short covering, which could end at any time.
The rally off the February lows has been strong and could easily press higher. The big caution is the dying volume as the indexes press up against strong resistance and the fact that the rally in prices has been perhaps too strong. Previous strong rallies like this have typically been in bear markets, which are known for their strong counter-trend rallies that suddenly flame out and return to their previous sharp declines. I think that's where we are and the risk from here is a quick downside reversal. I was recommending long plays at the February low, to give us a bounce correction to the December-February 5-wave decline, but now I'm recommending short plays at the top of this bounce. It could press higher but I believe that's the riskier play.
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