If you don't like the direction of the market today just wait a day or two and it'll go the other way. If you like trading the market both ways and can time the turns well you have to like this volatile market. But I suspect quite a few are getting whipped pretty severely. And each time one side starts to think they're winning they get a quick reversal to remind them to take their profits quickly or else risk giving them back.
The bullish thing we've got going is the fact that the S&P 500 is back above the January /March lows, the Russell 2000 (small caps) successfully tested the lows and the Nasdaq hasn't even dropped down to those lows. The bearish thing is we've got intermarket divergence with the DOW having broken below its January/March lows and is currently finding them to be resistance. And of course they're all still within a downtrend from last year's highs.
So we've got a real battle going on right now between the bulls and the bears, each arguing their case every day in the market. Sometimes the bulls are winning and the shorts run for cover. Other days the bears are winning and the longs are getting spooked out of their positions. Once the weak holders (those trading more short term or less sure about the future direction of the market) are flushed out of their positions the market spins around and charges off in the other direction. Welcome to trading in a bear market.
The bulls point to the 2-day rally this week as proof that last week's pullback was just a correction of the rally off the July lows and that we'll head much higher into the election. But today's rally already showed signs of weakening in some market breadth measurements as compared to Tuesday's rally. It doesn't mean we'll see an immediate reversal tomorrow (although as I'll point out on the charts, that's a possibility) but it does mean that we have some internal measures that support the idea that the bounce off the July 15th low is probably a correction of the May-July decline and nothing more. How high the bounce will get is the bigger question. As always I'll provide some upside targets and key levels to watch as we wait for better clarity as to who's winning the tug of war in this market.
The day started off quietly as far as economic reports go. The ADP jobs report showed private-sector employment grew by 9,000 jobs. That's a small number but at least it wasn't negative and certainly a lot better than the expected loss of 60,000 jobs. Add in 20,000 government jobs and we've got a heads up for the payrolls number coming out on Friday. But the ADP report has tended to overstate job growth in recent months as compared to government data and they did revise their June number to a 77K loss.
Helping today's mood was probably a report out that the SEC (Securities and Exchange Commission) has extended the order protecting their favorite big investment banks and Fannie Mae and Freddie Mac from the big bad bears who like to short naked. The original order protected these banks until July 31st and now the order has been extended to August 12th. I suspect it will be extended for a lot longer than that. The only surprise was that they didn't add more banks to their endangered species list in order to prevent the bears from shorting them too. I guess it pays to have contacts in high places in government in order to get your name on that list. With the plethora of vehicles available to short the banks' stocks (futures and options for example), it might not have as much of an impact on trader activity as the SEC and others hope but I'm sure the order has a psychological effect on the market--traders feel the government is here to save them, again. We want all gain and no risk. Seems to be the American way now.
Crude inventories fell less than expected and that may have contributed to the rise in crude prices today, up nearly +$4.60 from yesterday's close. The pundits ignored the oil rise since the stock market rallied anyway. But it surely would have been the cause of a stock market selloff had one occurred today. The US dollar closed up slightly so that wasn't much of a factor in today's rise in oil. I think oil is just ready for a bounce to correct the $27 drop from its July 11th high.
And with that let's get to this week's charts.
S&P 500, SPX, Weekly chart
Last week's weekly candle was a doji which basically means indecision (it can be a heads up for a reversal pattern if it's at support or resistance). I show either a continuation lower in a steep selloff (dark red) or a little higher first before selling off (pink). The bullish things I see are oscillators turning back up and MACD is showing a bullish divergence against the new price low in July vs. the January/March lows. There is potential for SPX to rally back up to its downtrend line from October 2007, currently near 1400. I think there are lots of reasons we will not see that kind of rally but that's the potential.
S&P 500, SPX, Daily chart
After the May-July decline we've been in a bounce to correct it. A typical retracement is around 50% and the first leg up to the high on July 23rd achieved only a 38% retracement. While that could certainly be all we'll see, the correction is short in both time and price when looking for a more typical correction. Therefore a larger 3-wave bounce up to perhaps the 1320 level (50%) would be more likely and is shown in pink. It's possible that today's bounce completed the correction of the move down from July 23rd which would mean some hard selling is next, shown in dark red. But this scenario requires a near-immediate selloff tomorrow. Any higher than the July 23rd high at 1291 would suggest we'll see the higher rally into next week.
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Key Levels for SPX:
S&P 500, SPX, 60-min chart
The 60-min chart shows the proximity of the downtrend line from May 19th to the July 23rd high at 1291. If the market heads higher tomorrow morning I'd watch for resistance at that level and a deeper pullback before heading higher into next week (pink). But if the bears get a hold of the reins tomorrow and start driving the market lower again, it will be possible the correction is over and we'll start heading lower at a higher rate of speed. A break below 1235 at any time now would be very bearish.
Dow Industrials, INDU, Daily chart
The DOW's daily chart looks very similar to SPX. The horizontal red lines show the levels of resistance. The July 23rd closing high was right at the January low and therefore that's recognized resistance now. If the bulls can push it up through there and then the 11700-11750 area they'll have a shot at 50% retracement near 12K. If the bears take over and drive the DOW back below 11125 then the selling should kick in hard.
Key Levels for DOW:
Dow Industrials, INDU, 60-min chart
Again, similar to SPX, it looks like we could be set up for a brief new high tomorrow followed by a pullback. Whether the pullback develops into something more serious (dark red) or just a correction before heading higher again (pink) is the question. We might not even get the pullback shown in pink if the bulls get very strong and the bears run for cover en masse. But with signs of waning upside momentum I think we're probably close to at least the pullback.
Nasdaq-100, NDX, Daily chart
NDX has remained inside a consolidation pattern. It's either an ascending triangle (flat top, rising bottom) or a flag pattern. Either is bearish as it's a continuation pattern in the decline from June. As noted on the chart, keep an eye on MACD and RSI for clues. If MACD gets above zero and RSI above 50 we'll probably see NDX move up to the top of its flag, currently near 1900 (seen more clearly in the 60-min chart below).
Key Levels for NDX:
Nasdaq-100, NDX, 60-min chart
Inside a triangle will normally be five waves, labeled a-b-c-d-e as I've done on the chart. This morning's high may have completed the pattern in which case we should see strong selling begin (dark red). A rally above today's high of 1862 would suggest a move up to 1900 before potentially reversing back down and heading to new lows.
Russell-2000, RUT, Daily chart
The RUT has been stronger in the bounce off the July low and still maintains the possibility for a continuation higher. In fact it has the best chance of exceeding the June high (if it does I think it will be the only one and only marginally), shown in pink. But like the others, any continuation lower, especially with a break of Monday's low near 694 would be a heads up that the bounce is over and down we go (dark red).
Key Levels for RUT:
Banking index, BIX, Daily chart
After being rejected last week at the top of a parallel down-channel, BIX is back up for another try. It would obviously be bullish if it can break above it, in which case I see upside potential to the 240 area (apex of the previous triangle pattern). But in addition to the top of the channel BIX is bumping into its 50-dma. Not far above it is the 100-dma just under 218 and then the 200-dma is heading down to where it might meet price around 240 by mid August. A drop back below Monday's low would say the bears win again and we'll see new lows (dark red).
U.S. Home Construction Index, DJUSHB, Daily chart
The home builders index is cycling around the level of the 2002 lows, near 280. Today it tagged its 50-dma again but got soundly rejected by it. A rally above it at 287.63 would suggest we'll see a test of its downtrend line from February 2007, which is where the May rally failed. I continue to believe this index is close to being finished to the downside. I've had the downside target of 216 on my chart for well over a year now. I think the chances of it getting tagged are still good but trying the short the home builders is probably not your best use of resources or time. I continue to watch it at this point mainly to see where it will end.
Transportation Index, TRAN, Daily chart
The Transports banged into the broken uptrend line from January again and got rejected again. It left a long-legged doji at resistance and if we see a red candle tomorrow it will complete an evening star candlestick reversal pattern in which case I would expect to see some strong selling kick in. But if the broader market is able to rally higher into next week it will be important to see the Trannies join in and get themselves back above that uptrend line.
U.S. Dollar, DXY, Daily chart
The move up from the July low looks like an impulsive 5-wave move (hard to see on this chart) and that suggests we've got higher to go for the dollar's bounce. But first it should pull back to correct the leg up to today's high. A pullback to around 72.50 could set up the next rally leg (pink).
If the US dollar is rallying then commodities must be selling off. Well, some did but not oil:
Oil Fund, USO, Daily chart
Oil got a nice bounce today, giving us the biggest white candle we've seen since early June. With the increasing number of speculators shorting oil it's not going to be hard to get some short-covering rallies going. But I believe we'll only see a correction of the decline from the July high, perhaps back up to the 50-dma near 108, before heading lower again. I'm speculating on what the decline might look like and just one idea is shown on the chart. However it gets there I think the downside target of $70-$80 remains a good one by September.
Oil Index, OIX, Daily chart
Oil stocks got a big bounce today with both the stock market and oil. Get two tail winds behind you and you can do some serious sailing. OIX closed marginally back above its broken uptrend line from March 2003 so obviously the bulls need to hold it above. While the bounce could be over after today's rally I think the larger price pattern would look better with a pullback and then another leg up into mid August, perhaps getting as high as 900 before tipping back over into the fall.
Gold Fund, GLD, Daily chart
As I had mentioned for the US dollar and its impulsive 5-wave move up from the July low, gold has done the opposite. It's a little easier to see on its chart the 5-wave move down from 97.50. Once a 5-wave move completes it's due a correction and I think that's what started off this morning's low, which came close to the 200-dma (slightly exceeded it on the gold futures contract). A 5-wave move does not stand alone so it should be followed by another one after a bounce finishes, shown in dark red. After the correction, labeled wave 2 on the chart, we'll either see gold break for new lows (78-80 initial downside target) or find support at its uptrend line from May (which could be the bottom of a larger sideways triangle that will play out into the end of the year). I should have a better idea which scenario could play out once we see the 2nd leg down into the end of August (assuming it will play out as depicted).
Economic reports, summary and Key Trading Levels
Tomorrow's reports include GDP and Chicago PMI, either of which could influence tomorrow's opening. Both are looking for a slight improvement over last quarter/month so any disappointment could affect the market negatively.
Tomorrow is month end and the last two days have been bullish. A little painting of the tape perhaps? Let's not scare the sheeple into calling for withdrawals. Consumer sentiment is already bad enough and I'm sure more than one person (or government entity) would like to see July finish on a positive note. Getting the DOW back above the March low would be a good accomplishment.
The first few days of a new month are generally positive but only if there's new money coming in for investments. If withdrawals are ticking higher then of course the beginning of the month might not be so bullish. There is of course a lot of money that comes in for regular 401(k) deposits and such but it's interesting to note that there's been an increase in hardship withdrawals. As many of you with 401(k) accounts probably know, you can borrow from your retirement account for something like a down payment on a house (and pay it back into your account with interest which means you're paying yourself the interest) or you can withdraw from it if you demonstrate it's for a hardship. Medical costs would be one reason.
The increase in withdrawals from retirement accounts is proof that the American consumer is cash strapped and now robbing the last piggy bank he/she has. Credit card balances are increasing (as well as default rates) and consumers are going after their last pot of money to pay off bills. It's scary really.
If you're playing the market on the long side I urge caution and tight stops. Surprises will likely still be to the downside and the price pattern is setting up where we can probably expect a very ugly open in the not too distant future with hard selling to follow (think mini crash). We have some systemic problems in our financial markets and the best the Fed and others have been able to do is stem the bleeding. There have been massive infusions of whole blood (cash) but the bleeding continues. The patient may look somewhat OK on the outside but inside there's a lot of damage inside. Don't let your account (bank, mutual fund, retirement account, etc.) die with the patient.
Fundamentally the market remains overvalued, somewhere in the neighborhood of a P/E of 18. Never has there been a bull market that started with a P/E that high. To think we're starting another bull market after this year's lows is to completely ignore history and say it'll be different this time. That's not how I bet my money and I can only suggest you be in protection mode rather than profit mode.
If we get a continuation of the rally into next week use it to lighten your investment positions. Cash is good (even if boring). If you're looking for a shorting opportunity use a break of Monday's lows as a sign we're heading back down again. If we rally some more, watch the Fib retracement levels for possible resistance next week and hopefully we'll have some good setups by the time I'm back with you next Thursday. Good luck with your trading and I'll be back with you next week and every day on the Market Monitor where we'll try to catch these swings.
Key Levels for SPX:
Key Levels for DOW:
Key Levels for NDX:
Key Levels for RUT: