After yesterday's massacre of the bulls, it was no surprise to see an oversold bounce today (although CNBC's Ludlow would like us to believe that today's small bounce wipes out any negative connotations about yesterday's sell off). This morning's CPI numbers were favorable in that the inflation rate was less than had been expected (+0.1% versus +0.2% expected) and therefore allayed fears that a higher inflation rate would prompt the Fed to act more aggressively in raising interest rates and thereby choke off economic growth (repeating past mistakes in this regard). And without growth, the stock market doesn't do well. So if it sniffs out lack of growth, we'll see that first "reported" in the prices of stocks. After the FOMC minutes were released at 2:00 today, and the inference that they were removing the "measured pace" of rate increases, the market spiked up and down and was probably a result of many traders fearing this rate increase scenario. But then the market rallied a little more after that as if to say "we ain't afraid of no Green Wolf". So back to this morning, with the CPI numbers out of the way, and a deeply oversold market on a short term basis, we were set up for a bounce today and that's what we got. But whether or not it was just an oversold bounce or something that will lead to a more significant rally is the real question. By the title of today's Wrap, you can guess my opinion on that question.
SPX chart, Daily
The short term pattern looks like it needs another low but it looks close to forming at least some kind of short term bottom. It could surprise to the downside and it's certainly poised for that possibility but until it does, one should never bank on a crash scenario. The SPX daily chart, and the DOW chart below, shows a bullish possibility that could be playing out. Price has pulled back to the bottom of the up-channel that price has been in since last fall. Even if we get a minor new low this week, this uptrend could remain intact as long as the uptrend line isn't violated too much and for no more than 3 days. So this pattern bears watching to see if we get a stronger bounce soon.
DOW chart, Daily
Like the SPX chart above, price has pulled back to the uptrend line from last October's low, currently 10600, making this number doubly important as support. As long as this uptrend line holds, the trend is still up. If price breaks below the line, and sticks, watch for a beeline down to January's low which is also where the 200-ema is (10363).
Nasdaq chart, Daily
The NAZ has been relatively weaker since the bounce started from January's low. It's the one index that should be giving the bulls the willies. This pattern is looking like it will drop hard from here, potentially as low as 1900 before it even thinks of bouncing. The 200-dma's and last October's high, gives us a potential support zone of 1971-2007 and could provide support. Certainly it should provide bounces, but if the bounces continue to look weak and choppy, as it's been since January's low, keep looking for lower prices.
The primary reason I am calling today's rally an oversold bounce is due to the price pattern of the bounce. It was also a rally on lower volume, a classic signal of a countertrend move. After the strong decline yesterday on heavy volume, which was an impulsive move (no overlapping highs and lows in the move down), today's rally was choppy and overlapping, i.e., it was a corrective move. Corrective moves are found between impulsive moves and therefore I am expecting another impulsive move lower once this bounce is finished, which it looks to be very close to doing, if it didn't finish just before the close. It may not have much further to go to the downside, and in fact one more push lower should do it, so bears should be getting ready to tighten up their stops. Bulls should be getting ready for an opportunity for at least a larger bounce if not something much stronger to the upside.
Looking a little deeper at some of today's reports, one of the factors that helped the lower than expected CPI increase was energy costs. Energy prices declined 1.1% for the same period. Gasoline prices declined 2.1% and heating oil declined 5.2%. Guess what's happened to the price of oil since these numbers. Yep, and guess where CPI will probably be next month. Yep, and guess how the market will react. The market of course knows this and is part of the reason for the choppy price action as the competing forces argue their cases. The following chart of the Oil Index, OIX.X, gives some perspective on its rally.
Oil Index chart, OIX.X, Weekly
As noted on the chart, the price rise on this index has gone parabolic and just recently broke to the upside of its up-channel that price has been in for the past 2 years. If price drops back down inside the channel (a drop below 458) it will leave a "throw-over" above the upper trendline, a classic finish to a parabolic move. This will likely correct very fast back down if the correction starts soon. Also, the Oil Service Index, OSX.X, looks like it too is topping right here.
The US dollar got a bounce today, which also might just be an oversold bounce. One rumor I heard today was that South Korea, who reported yesterday that they were going to "diversify" their currency holdings (smart, don't you think?), reportedly said "never mind" today. They were apparently misunderstood yesterday and didn't really say what everyone heard them say and if they said it they didn't really mean it. Hmm, do you suppose someone from our government might have called them and asked if they'd like to see anymore of those dollars from us that they're no longer interested in holding? Nah, I'm sure we play nice with all our allies. The daily chart of the USD shows it to be oversold and threatening to turn back up. By getting down to 82.40 yesterday, the decline from the recent high of 85.44 came within pennies of the 62% retracement (82.32) of the rally off the December low of 80.39 and therefore if the dollar has more upside work to do, this is a likely spot for it to find support. And if the dollar is going to bounce, the metals will probably sell off. Silver in particular looks vulnerable to a new round of selling that could take it back below its January low of 6.35 (March contract). Today's close was 7.445. An alternative view is that the dollar, gold and silver will consolidate between the lows and highs that prices have seen in the past month.
For those who follow, or trade, the home builders, you may have heard Robert Toll (President, Toll Brothers) on CNBC this morning talk about their robust growth, limited supply, immunity to interest rate hikes (they sell to a lot of wealthier buyers who "aren't affected by higher interest rates"), and green pastures (that they own) as far as the eye can see. Excuse me but that sounds a little bit like "it's different this time". He laid down his gauntlet by stating emphatically that "short sellers are going to get crushed". He's certainly been correct over the past two years--anyone shorting the home builders has been as successful as those trying to short GOOG. And they had a good day today. But the weekly chart of the home builders doesn't get my bullish juices flowing. In fact I might just have to take Mr. Toll up on his challenge and short his company. Actually his stock does look like it has a little more work to do to the upside so I'd go pick on a weaker candidate within the index.
U.S. Home Construction Index chart, DJUSHB, Weekly
Like the Oil Index chart above, price has gone parabolic ("but it's different this time") and price broke above the upper trendline before falling back underneath, leaving a throw-over. This is bearish and this is an index I'd want to short (again, search out the weakling trailing the pack and start nipping at its heels).
The Trannies (TRAN) had a big up day today. After declining hard all day yesterday, along with the rest of the market, it reversed all of that in one big green candle on the 60-min chart. The merger news between USF Corp (USFC) and Yellow Roadway (YELL) was considered good news and gave generally good cheer to the industry. Perhaps it was just shorts caught by surprise because once the initial spurt in the first hour was finished, there were no more buyers to be found. The sellers were also too nervous to sell and therefore price went virtually nowhere for the rest of the day.
DJ Transportation Index chart, TRAN, 60-min
Note on the chart that price stopped at the broken uptrend line from January 24th's low. Previous support turned resistance--it's looking like it's going to give it a kiss and then get slapped so this chart does not look bullish even after today's strong rally, or I should say in spite of today's rally.
Not surprisingly, the market is leaving us with many mixed signals at the moment. If I look at the daily and weekly oscillators I get a bearish picture. We recently had a major double-top (DOW and SPX) with bearish divergences and have since sold off. Is it reasonable to expect that we'll only get a small pullback after that? Probably not. But it is after all a game of probabilities, not certainties. As I mentioned earlier, the short term pattern looks like we should get another leg down tomorrow after today's corrective bounce and it could happen out of the gate tomorrow. But it looks like we could be close to support levels and therefore it's probably not wise to bet on a significant decline. It could happen since there are several bearish indicators lining up, but again, the game of probabilities says we should be close to good support levels from which we should see a stronger bounce if not the next rally leg. The daily SPX and DOW charts above argue the possibility for a continuation of the rally. However, any break of the uptrend lines on those charts and I'll be looking to get short in a major way since March could be very ugly for the bulls. Even Mr. Toll might have to eat his words.