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Market Wrap

It's How You Say It

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And of course how you define "it". The bulls may have received a little help from their friends at the Fed this afternoon. They certainly seemed to like the language change that ever so slightly hinted that maybe, perhaps, possibly there could be a relaxing in the vigilance of the Fed on inflation and move towards becoming more accommodative in an economy that appears to be slowing down. Could the Fed have done a timely injection of new money into the market through their megabank partners at the same time? It certainly helps their effort to keep the stock market from scaring away investors just at a time they're needed most.

If the stock market drops then many people become depressed about their financial well-being. It won't be anything like if the housing values drop but that will be later (not much later). So the Fed knows that the key to a healthy economy is a happy consumer who is willing to get further into debt up to his eyeballs and keep spending. So the injection of a few hundred million dollars, timed to be used, oh, let's say around 14:15 in the afternoon, could do wonders for peoples' spirits. Is that the way it happened today? It's anybody's guess and other than Jim Cramer spilling the beans on hedge funds, no one else is talking.

Speaking of Jim Cramer, and his now famous interview back in December on street.com, the news of it spreading around the internet on YouTube made the business section of the NY Times yesterday. Assuming the market is in for a big correction ahead, once people get angry again and start looking for someone to blame, you can bet the hedge fund industry will feel the pain of Congressional and SEC oversight. Abuses of the system are easily overlooked when the market is rallying but as we saw in 2000-2002 when all the lawsuits were flying, people become very intolerant when they're losing money. We can also expect to see massive changes in the banking industry after millions of people suffer in the housing market.

Back to the Fed, which was the only economic report of significance today (there was a crude inventories report but oil barely made a blip on the charts today), the language was what the market was looking for. The FOMC announcement had rates holding steady at 5.25% (no surprise there) but they dropped the phrase "additional firming may be needed." They said its "predominant policy concern remains the risk that inflation will fail to moderate as expected." They acknowledged recent data that shows both higher inflation and a weaker economy. Hmm, that smells like stagflation to me.

But don't confuse facts with emotions. The market heard what it wanted today, which was the Fed might, maybe, perhaps, could think about possibly relaxing their hawkish stance on interest rates. It's all a bunch of phooey of course and when you think logically about this (but we of course know we can't go there since a logical market is an oxymoron), there is nothing whatsoever bullish about a weakening economy. I had mentioned last night that by the time the Fed recognizes a slowing economy the market will already be much lower than it is today.


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As the words are further digested tonight, and reported on tomorrow, it may start to look a little less bullish. As one economist noted, "This is a grudging removal of the tightening bias." But the FOMC committee made it quite clear that they have heightened their concern about inflation and suggested that it is still leaning toward raising interest rates should inflation not come down sooner rather than later. As the Fed said, "Recent readings on core inflation have been somewhat elevated. The high level of resource utilization has the potential to sustain those pressures."

J. Alfred Broaddus, the former president of the Richmond Fed noted that the Fed is "not satisfied with the progress they are making long-term in bringing inflation back down to 1-2% level." Most believe the Fed will simply do nothing until the mixed data (slowing economy, higher than desired inflation) starts to sort itself out. This should not have been that bullish for the stock market. But don't confuse emotion with facts. And certainly don't argue with the Fed when they're stuffing the money channels.

Speaking of money creation, it's been a few weeks since I last showed the calculated M3 money supply chart.

Calculated M3 Money Supply chart, Weekly, courtesy nowandfutures.com

After a dip in the early part of the year the Fed has been busy again and the money supply is making new highs. But the rate of increase (light blue line) remains below its peak so it remains to be seen if the Fed will be forced to start draining some liquidity (through a forced program due to credit tightening by banks). This report comes out at the end of the day each Friday so it'll be interesting to see if the Fed was active this week since we've seen such a strong rally from a week ago Wednesday.

Back to the Fed, they also downgraded their assessment of the economy, something that's not exactly bullish. The bulls conveniently skipped over that part. It's called selective listening. For the housing market, the bulls again interpreted as bullish the Fed statement about seeing a continuing softening in the housing market. As discussed here many times, a slowing housing market will clearly be depressive for the economy and stock market. Consider today's rally a yeeha moment that will probably cause some hangovers for bulls buying this bull.

While the bond market is pricing in a couple of rate cuts this year there have been have been a larger number of economists and strategists saying the Fed is more likely to raise rates to stop inflation than lower them to stoke the economic fires.

Even the reaction out of the bond market today was somewhat muted as compared to the reaction out of the stock market. Bond rates changed less than half of what stock prices changed. They even pulled back after the initial post-FOMC drop (in rates, rally in bonds). This is the daily chart on the 10-year yield that I showed yesterday.

10-year Yield (TNX) chart, Daily

I had mentioned yesterday that the important level to watch is 4.4% since a drop below that level would be a break of longer term support and it would mean the bond market sees the Feds a lot closer to cutting interest rates. Follow the bond market's cue here. If support continues to hold here and then rally, that will be our cue that the Fed will either stay at 5.25% much longer or might even be forced to raise rates. I suspect by then the stock market will already have gotten a whiff of the same thing and be making some new lows.

Let's get right into tonight's charts and see what today did to them.

DOW chart, Daily

Today's big white candle took price right up to the DOW's 50-dma. It would be a logical place for the rally to finish but as I show on the 60-min chart below, there's still a chance a pullback could be followed by another push higher and tag its 62% retracement of the decline from the February high (12509). Bottom line here is that this correction could very well be over and therefore be very careful if you're even thinking about chasing to the long side.

DOW chart, 60-min

In yesterday's chart I showed a more bullish short term pattern where the DOW could jump up to the top of a parallel up-channel for price action since the March 14th low. This coincided with the 50-dma so it was a natural target and resistance level. That could be it for the rally and tomorrow we'll kick start the next leg of the decline. But that would leave the wave pattern looking a little unfinished. I think we'll get some consolidation in a 4th wave pullback and then a final 5th wave push to a minor new high that will finish the c-wave up from March 14th.

There are many people, especially after today's rally, and most especially after the strong rally from the March 14th low. Who are yelling from the roof tops that the market successfully tested the low, the correction is over and it's time to buy this market for the ride to new highs. I said last week to watch for this to happen. Certain waves have "personalities" and it's a good time to mention two of them.

A 2nd wave correction (labeled wave-2 on the daily chart where price stopped today) is typically identified as having an even higher sentiment reading than the previous move, the February high in this case. People become convinced that the correction is over and that we're on to new highs (in this case, the other way around in a rally after a 2nd wave pullback). From the initial low on March 5th we've had an A-B-C correction and the personality of c-waves is such that I like to call them sucker waves. They suck people in going the wrong way. In this case we're getting the big rally leg and it's sucking in the bulls.

This excessive bullishness, in the case of a 2nd wave bounce, is what sets up the strongest move in the EW pattern--wave-3. They're such strong moves because of the "disappointment" in the bulls who bought the bounce. By the time they realize they're in serious trouble they bail at any cost and the selling intensifies. I must say this c-wave of the 2nd wave has me doubting my interpretation here as well. It sure seems awfully bullish. But I'm sticking with the pattern that says this is just a correction to the initial decline, albeit a strong one. Once it's finished we will see prices drop hard as per my daily chart. Finding the top of the bounce, as always, will be the hard part.

SPX chart, Daily

SPX was stronger than the DOW all day--it was inching higher most of the day while the DOW ran along the flat line. It also rallied much stronger in the afternoon, already well exceeding the 62% retracement of the decline from the February high and getting above its 50-dma. This one will have the bulls yelling from the roof tops to come join them. The reason I have 1442 as the key level where the bearish count is in serious jeopardy is because that's the 78.6% retracement. I call this the "line in the sand" because rarely will you see a retracement exceed that level that then doesn't go all the way and completely retrace the previous move (meaning new highs in this case). So that's the bears' last line of defense--any higher and you should abandon all bearish bets.

I redrew the down-channel again based on today's high but I suspect I'll have to redraw it one more time if we get a pullback and one more minor push higher as per the short term bullish count shown below. Price by no means has to follow this down-channel and it's only an initial guide but if price does follow it then we're now looking at the end of the first larger degree wave-(1) down in late June/early July.

SPX chart, 60-min

SPX poked its head above its parallel up-channel and I think that's the end of the 3rd wave for wave-c, the move up from March 14th. C-waves are made up of 5 waves and therefore I'm now looking for a 4th wave pullback (1-2 days) followed by another final push higher which may or may not tag that 1442 level. This is actually a nice wave pattern and if it follows the green path it will greatly aid in identifying where the top will be and therefore where and when to get short for the big 3rd wave decline. Keep your powder dry for that one.

OEX chart, Daily

OEX tagged its 62% retracement of the decline from the February high to the March 5th low today (655.74) with an intraday high at 656.76. It also hit its 50-dma at 656.41. Seems like a good place for resistance to hold and give us a pullback and that's what I'm thinking we'll get tomorrow. But for the same reason as shown on the DOW and SPX 60-min charts I think we'll get a consolidation to today's rally followed by a push to a minor new high. That will change the down-channel once again, redrawn here from yesterday's, but these channels are just an initial guide to give you a time frame for a normal move.

The trouble is the next leg down will not likely be "normal". It's quite possible we'll see price drop below the bottom of the channel which would obviously tell us the move has a lot of selling strength. We can only speculate at this time what it will do but I just wanted to mention it so that you don't think price has to follow this channel. The more shallow this down-channel gets, the more likely price will bust through the bottom of it in the next decline.

Nasdaq-100 (NDX) chart, Daily

The NDX looks very similar to the SPX now--stronger rally than the DOW. It has rallied marginally above its 62% retracement of the decline from the February high. It also poked above the top of its parallel up-channel for price action from March 14th (shown on the chart below) and I strongly suspect we'll get at least a pullback tomorrow. I had mentioned the 78.6% retracement for SPX above and for the NDX that's just under 1822. But in this case, with its gap only 8 points above that, I wouldn't be surprised to see that gap get closed before this turns back down. There's nothing that says it will get closed but stay aware of that level if you try to short this index (the QQQQ or NQ). I redrew the down-channel based on today's high but I suspect I'll have to redraw it one more time if we get a pullback and another minor high.

Nasdaq-100 (NDX) chart, 60-min

The same discussion for the DOW and SPX applies here--today's rally could have finished the correction, as per the red wave count, and now down we go. But I think the wave pattern would look better with a pullback followed by one more push higher in order to give us a cleaner 5-wave move up off the March 14 low. Finishing up early next week near 1822, at the mid line of the channel, with bearish divergences between the new high and today's high is the setup you want to identify. If you see it set up that way, back up the truck and load up some short plays.

Russell-2000 (RUT) chart, Daily

There's not much to add for the RUT charts. I've redrawn its down-channel but again I suspect I'll have to redraw it one more time if we get a pullback and then another minor push higher. The downside price projections don't change much but the longer it takes to complete this 2nd wave correction, the longer it potentially extends the rest of the move down, which is projected off the 1st and 2nd waves of the move. If the move breaks below the channel then a new parallel channel is created once the end of wave-3 is identified.

Russell-2000 (RUT)chart, 60-min

The same EW labeling belongs on this chart as for the others. Ideally we'll see a sideways/down pullback over the next day or so and then a final push higher. The RUT tends to over-throw its Fib levels but I'd rather not see it get beyond 815, its 78.6% retracement. A rally back up to the mid line with bearish divergences would be a good short entry. It's possible, like I had shown for NDX's wave count, that today's high was the end of the bounce, and a break of its uptrend line would be the first warning (true for the others as well) so watch them for support for a scalp long play if the pullback looks choppy and support holds. But only a scalp play and even that could be risky. The 5th waves are sometimes truncated (don't make new highs) and are generally unreliable to trade.

BIX banking index (BIX), Daily chart

The banks saw some serious buying today. Obviously investors think the banks will benefit from a rate cut that they just know is coming. It's right around the corner, they're sure of it. Once reality settles in I don't think investors are going to like the banks so much. This sector has become very volatile, more so than the broader market, and I suspect the next leg down is going to be an eye opener. Between some Fibs around 404 and the broken uptrend line currently at 406.80, watch for a short play to set up in the banks. A kiss goodbye against its uptrend line would be ideal. If we get a minor pullback and then another push higher, the bulls just might be able to accomplish that.

Broker index (XBD), Daily chart

The brokers aren't quite as strong, or volatile as the banks, although they too had a good day today. If the bulls can drive this up to its broken uptrend line and 50-dma just under 246, find your favorite broker to short as it'll be a sweet setup.

U.S. Home Construction Index chart, DJUSHB, Daily

The home builders got a little lovin' today too. Unless the market has a lot more rally left to it (I don't think so), I don't think this index will make it back up to its broken uptrend line as I depict on the chart. Two equal legs up in its current bounce is just under 661 and the 200-dma is coming down to 665. That could be the extent of the bounce for the home builders before they tip back over. Maybe up to 669 for a 38% retracement but I have my doubts about that.

It depends on what interest rates do. I showed the chart for the 10-year yield and mentioned the importance of 4.4%. If the yield drops below that level then the home builders will probably benefit from that. If yields reverse back up then the home builders will be a good short sooner rather than later.

Crude Inventories
Crude supplies rose 5.7M barrels for the previous week, as reported by API (American Petroleum Institute) whereas the Energy Department reported a 4.0M increase. API reported gasoline supplies up 753K barrels while the government said supplies dropped by 3.4M. And distillate supplies were down 168K barrels according to API but down 1.7M by the government's count. Somebody needs to get these people in the same room and give us some good numbers. The net result is that oil basically went nowhere today.

Oil chart, May contract, Daily

Oil is still holding above its 50-dma and if it can get another rally leg started it should be bullish for at least a run back up to $65. The larger pattern is not clear at the moment and therefore hard to tell where it's going next. I have a bearish sense about oil and am thinking it's going to break down.

Oil Index chart, Daily

The oil stocks rallied with the broader market today and came right up to its downtrend line from December. It's possible this index is going to consolidate in the triangle shown on the chart but that's just a guess. If that were to happen it would likely be bullish. A break of the downtrend line would have this rallying at least up to 660 but if the broader market turns lower within the next week then I don't see these stocks being immune to the selling. A rollover from here, unless it's going to stay within the triangle, would leave a potentially very bearish EW pattern and a break below its uptrend line just above 600 would likely be followed by some very fast selling.

Transportation Index chart, TRAN, Daily

I thought the Trannies would struggle with the 20 and 50-dma's near 4852, especially with the 20 getting ready to cross down through the 50. If it can manage a shallow pullback over the next day or two it should get another leg up with the broader market. From there I believe the next big sell off will begin. But any rally back above 5000 would suggest the bulls may not be done yet.

U.S. Dollar chart, Daily

The US dollar got hurt on the FOMC news. This should have helped the commodities, including gold and silver, but they barely budged today after the initial morning rally. So the reaction in the dollar may have been a little too much and may find a bottom here. Then we'll get to see if it will start another leg up or instead do a shallow choppy rise in preparation for another leg down (as depicted on the chart). If the dollar does bottom, at least short term, that would likely put some pressure on the commodities and that would start to fit with what I see setting up in the metals.

Gold chart, April contract, Daily

I had mentioned yesterday that gold looks ready to tip back over after a small a-b-c bounce off its March 5th low. Fib resistance is in the 663-664 area and gap close from March 2nd is at 664.80. This afternoon's high, which was a new high for the day, was 665 for the e-mini futures (YG). It could still press a little higher but I believe it's vulnerable to a sell off. A break below 657 would likely signal the breakdown is in progress. If the US dollar starts to rebound watch for the metals to head lower. I still think shorting the shiny metal up here is a good trade but recognize that there is potential now for it to tag 665 (there as of tonight) up to 667.

Results of today's economic reports and tomorrow's reports include the following:

The only two reports tomorrow morning are unemployment numbers and Leading Indicators. The LEI report has the potential to move the market, especially if there's any reconsideration about today's rally. If the LEI shows some continued softening in the economy then there may be a little less bullish enthusiasm.

SPX chart, Weekly, More Immediately Bearish

This week's big rally has given us a large white candle on the weekly chart. It also has the weekly oscillators hinting about turning back up. This actually looks pretty bullish right here and if the rally manages to keep going much higher there will be no question about new highs right around the corner.

But right now SPX is back at the top of its parallel channel, which it broke above in December and then dropped back down below in the sell off from February. Is this going to be a kiss goodbye? Based on the shorter term pattern that's the way I see it setting up. But as discussed with the shorter term charts, any rally above 1442 would have me cancelling all bearish bets until this clears up. In the meantime we've got a very nice setup developing that calls the current bounce just about done, if not done today.

As I pointed out on the few 60-min charts above, the EW pattern would look much better if we get a 1 to 2-day pullback followed by another push higher. That would give us a clean 5-wave move up off the March 14th low, which it needs to be for wave-C of an A-B-C correction off the March 5th low. We'll know if that's setting up by the next pullback. Assuming we'll start a pullback tomorrow, which I believe we will, if it turns into a sharp and impulsive decline (no overlap between the highs and lows within the move down) then that will raise the odds that today's high was it (or perhaps a minor new high first thing in the morning). If the uptrend lines from March 14th start breaking like twigs then we'll want to start looking to get short.

But the better setup would be a pullback that is more of a choppy sloppy sideways/down move that eats up more time than price. It might even form a sideways triangle. That kind of pullback/consolidation would be pointing to another push higher which would be the 5th wave. The new high for that move should leave clear bearish divergences against today's high (or tomorrow morning's if we get one).

That kind of bearish divergence is the confirmation that it's very likely the last move up and it would be the one you want to short. Even if it's only going to be good for a pullback before the market heads higher again, a 5-wave move will be followed by a correction. More bearishly, and the way I continue to lean, is that the 5-wave move will complete the correction of the decline from the February high. The next leg down is the one bears want to grab hold of.

So don't be over-anxious to trade tomorrow as it is likely to be a pretty boring consolidation kind of day. And that might continue right into Friday. Then watch for a new high out of it and start getting itchy fingers to short it. That's what I'll be watching for on the Market Monitor. I was hoping we'd be on our way back down by this time but it looks like the market will once again test my patience. It should be rewarded so keep those stops tight and don't get crazy short yet if you're looking to play the downside. Hopefully it'll set up nicely and give you the ability to keep your stop nice and tight.

Good luck and I'll see you this time next week. Join us on the Market Monitor if you can and we'll try to nail this bad boy and get ourselves a wild pony for the ride back down. See you there.

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