Some believe today's rally was a patriotic effort to show the world you can hurt us but you can't keep us down. Whether it was that or it was because the market was ready to rally today (after the completion of a impulsive move to the downside from Monday's high at this morning's low) we all have opinions as to why the market does what it does. Nevertheless we saw a nice rally today and it had some buying volume behind it as you can see in the numbers in the table above.
Coming into this morning I warned traders to watch for an early-morning low followed by a reversal into a rally today. The EW (Elliott Wave) pattern called for that kind of move after putting in a 5-wave move down from Monday and today was head-fake day today. Very often we see an initial move on the Thursday prior to opex. It seems to make a move to catch too many traders leaning the wrong way, trap them and then get the market moving quickly the other way which causes a lot of traders (including big fund managers) to chase the market. So I warned of a bear trap this morning after seeing equity futures down hard pre-market. The market opened down and then sprang to life. Amazing how they do that.
But what's discouraging for bulls is the lack of market breadth, including today's rally. While the up volume handily beat down volume the same can't be said for advancing issues over declining issues where the advancers only marginally beat out decliners. And new 52-week lows completely swamped new highs. Other than the tech stocks the major averages are still holding above their yearly lows and yet we see a lot of stocks doing much worse than that. The relative weakness in the NYSE shows this.
The market is still dealing with a lot of uncertainty which of course is reflected in either selling or whipsaw price action. There are many different opinions on the issues affecting the economy, and therefore the stock market, and day to day we get different pictures of the health of the economy, banking system, housing market, you name it. It seems unreal to me that people are still arguing whether or not we're in a recession and whether or not we should be fighting the inflation monster rather than worry about a slowing economy and deflating assets.
I've mentioned often the credit crisis we're heading into and how it will cause a deflation of most assets just as it caused inflation of most assets as we went through a credit boom the past decade. I read some interesting numbers yesterday about how much various assets have dropped in the past year:
-- U.S. stocks are down 21% from October 2007
This listing is a good sample of most asset classes and shows vividly what happens when we go through a credit contraction (which has a long way to go). The one safe area? Cash. As assets deflate cash becomes more valuable (takes fewer dollars to buy the same asset. There was a brief bout of deflation in the 1st quarter of 1980 and then a little bit of a scare in 2001-2002 (the reason Greenspan flooded the economy with cheap money and applauded the financial engineering that was creating the horrible derivative mess we're in now--it was all done to create more credit). But the last time the U.S., and the world, faced a deflationary environment was in the 1930s. I'm hearing more and more comparisons to that period of time as people look at the numbers behind the economy and there's a reason for that.
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I was fighting QCharts today (they're becoming a super pain in the butt if you're still running version 5.1). They want us to port over to 6.0 but neglected to make it possible to bring all our saved charts over. They keep promising it but keep failing to deliver. Supposedly it will be ready by October 1st which is the date they've decided to cut the data feed on any futures data except CME (so all CBOT data will no longer be received by the older version of QCharts). Their servers are worse than what QCharts had improved them to before it was bought out by eSignal a couple of years ago and now the problems have only become worse as far as I'm concerned. And for this pleasure they're raising the cost $10/month. They are unresponsive to the concerns of long-time QCharts customers and for that I cannot support their company any more. For those asking for a recommendation for charting software I recommend you go elsewhere.
Now that I've ranted, and lost more time, let's get to the charts before I'm too late in getting this sent out to you all.
S&P 500, SPX, Weekly chart
There's been no change to the SPX weekly chart from last week. Price is still sitting on top of the long-term uptrend line from 1990 and I continue to see the possibility for another leg up for the bounce off the July low (pink) or only a small bounce here followed by a collapse lower. The key levels to watch are shown on the daily chart:
S&P 500, SPX, Daily chart
A push back above 1285 would target at a minimum 1324 where the bounce off the July low would have two equal legs up (pink a-b-c bounce). The next resistance level (other than a Fib retracement level near 1350) would be the downtrend line from October 2007 that's currently near 1375. A rally above 1375 (green bullet symbol) would say we've put in the low for the year and to look for a year-end rally. I don't expect that scenario but we'll let price decide. A break back below today's low near 1211 would confirm the hard selloff has started.
Key Levels for SPX:
S&P 500, SPX, 120-min chart
The market is either stair-stepping lower and getting ready to waterfall lower (dark red wave count) or else it's going to rally above 1285 and shoot higher at least through the rest of this week. SPX closed slightly above its downtrend line from September 2nd so that's potentially bullish. If it can keep going tomorrow morning watch to see if it rallies up to 1261 (a Fib projection based off today's move up) for a possible reversal. Watch for a short play to set up there as the reward potential will be very high. One might say this is the mother of all MOAPs (Mother of All Puts). Just keep your risk management under tight control since the upside potential from here is also high.
Dow Industrials, INDU, Daily chart
The DOW is in the same position as SPX and we'll have to let price tell us which scenario is going to play out. Above 11577 we could see a run up to the Fib projection at 12077 (two equal legs up from July) otherwise a tip back over below today's low at 11100 would indicate some hard selling to come.
Key Levels for DOW:
Dow Industrials, INDU, 120-min chart
The DOW came close to its downtrend line from September 2nd, currently near 11450. A failure there would be a very good short play setup so watch for that. It could be close between SPX hitting 1261 for a reversal and DOW hitting 11577 saying long is the place to be. Keep your eye on both.
Nasdaq-100, NDX, Daily chart
The wave pattern for the decline in NDX from August 11th would look best with one more leg down, shown in dark red) before setting up a larger bounce. Otherwise a push above 1820 opens up the possibility we'll see a strong rally into October. But even above 1820 I'd be concerned about the 50-dma (1853), the 200-dma (1893) and then its downtrend line from June (1930). I'll see how the price pattern looks if and when it gets above 1820 before worrying about what could play out to the upside. The higher probability scenario says we should be worried about the downside risks.
Key Levels for NDX:
Nasdaq-100, NDX, 120-min chart
The way I've labeled the decline it calls for NDX to stair-step lower into next week before getting a bigger bounce. The top of the parallel down-channel that I've drawn (untested as of yet) is currently near 1800. Before that is potential resistance at 1785 where the bounce off this morning's low would have two equal legs up.
I often say "as go the semis so goes the market". The demand for semiconductor chips is such a good barometer of business and consumer demand and when that demand increases or decreases it is of course reflected in the price of the semiconductor stocks. That in turn is a reflection of the overall health of the economy. Looking at the chart of the semis shows me that we should be looking for a correction of the decline from August before continuing lower:
Semiconductor Holders, SMH, Daily chart
The wave pattern of SMH supports the idea that we're going to see a larger bounce from here but it might not start until SMH works its way slightly lower to the bottom of a parallel down-channel for price action since May. But whether we get a bounce from here or slightly lower the larger pattern is bearish and calls for some strong selling once the larger bounce is finished.
Russell-2000, RUT, Daily chart
The RUT's pattern since the August high is either a bull flag or the early stages of a coming waterfall decline. Let price lead the way and follow a break above 740 or a break below 700.
Key Levels for RUT:
Banking index, BIX, Daily chart
After a brief poke above the top of its parallel down-channel from last October and then the break of its uptrend line from July, the BIX bounced back up to the broken uptrend line today. A kiss goodbye and break below today's low, confirmed by a break below the August low near 165, would usher in strong selling. A break above 200 should see a run up to at least the 200-dma near 230.
Like the banks, the brokers index has had a clean price pattern and has continued to drop inside a parallel down-channel from October 2007. It looks like it has another leg down coming (after a bounce into next week).
Brokers index, XBD, Daily chart
I'm using a slightly different wave count on the brokers than on the banks but they both point to further downside once the consolidation pattern is finished which for the brokers looks like the last high on September 8th. The bounce that started off today's low should have a little higher to go before it reverses back down.
U.S. Home Construction Index, DJUSHB, Daily chart
The September 8th high was a brief throw-over above the rising wedge pattern shown in red. It looked like a classic ending to the wedge pattern so watch for failure of the bounce at the top of the wedge, currently near 346. A push to a new high above 350 could target the top of a parallel up-channel (bear flag) near 380 before reversing back down again for a selloff into the end of the year.
Transportation Index, TRAN, Daily chart
The Transports remind me of the toy that bumps into walls and spins around and races off for the other wall and keeps doing that and going nowhere. Talk about a frenetic market? These traders don't know which way is up or down. Consequently the wave pattern is a mess and I could easily argue for a rally up to 5500 or a sharp decline well below 4600 before the month is out. Follow the break of a key level.
U.S. Dollar, DXY, Daily chart
After breaking its downtrend line from January 2002 there's been no stopping the US dollar bulls (or scaring the dollar bears). The sharp rally off the July low took the dollar back up to the previous low in December 2004 and it's a logical place for at least a pullback before heading higher again (or making a retest of the high as shown in green). Bearishly the 3-wave move up from March could be complete(ing) and we'll see the dollar sell off into the end of the year.
While the rally in the dollar looks very impressive on the daily chart, to put it into perspective one needs to look at the monthly chart:
U.S. Dollar, DXY, Monthly chart
It's a clean break of the downtrend line from 2002 and it might not stop at the December 2004 low (80.39) but it's certainly a good place to at least consolidate.
Oil Fund, USO, Daily chart
After breaking both its uptrend line from August 2007 and its 200-dma (followed by a retest and kiss goodbye) oil appears to be headed lower. The first level of support is coming up--the April 2008 low and arguably the beginning of the rising wedge pattern I reference on the chart (up to the July high). These rising wedge patterns are typically retraced quickly and support can often be found at the beginning of it. So support near 80 would make sense. There's a Fib projection (two equal legs down from July) at 69.20 which is close to the January/February 2008 lows. I continue to think USO will find support in this range and then get a big bounce back up to correct the decline before heading lower again.
Oil Index, OIX, Daily chart
Oil stocks may have already bottomed in which case it will be a heads up that oil is about to bottom as well. The wave pattern counts well for a 5-wave decline from May and that calls for a correction of that decline, shown in dark red. It also means the trend has changed to the downside (a 5-wave impulsive move shows the direction of the trend, unless it's completing an a-b-c bounce in which case the c-wave will be a 5-wave move). First thing it needs to do is break its downtrend line from early July otherwise another leg down can't be ruled out (as part of a larger corrective decline).
Gold Fund, GLD, Daily chart
Gold has now broken its second longer-term uptrend line--both from July 2005. While GLD could work its way a little lower before a bigger bounce, the dollar is warning we could see a reversal in commodities, gold and silver included. Silver has a cleaner pattern and it looks very close to a reversal into at least a bigger bounce back up. If GLD continues lower watch for potential support near 60.
Economic reports, summary and Key Trading Levels
An inflation scare or high inflation numbers could spook the market although I don't think they'll have much of an impact.
The market was set up for a bounce today and we got it. The last-minute jam job into the close now has me a little confused as to what comes next. Was that real buying or just some program buying to spook shorts out of the market? Too many times we've seen those end-of-day jam jobs followed by a down day (after getting the weaker shorts out of the way). This afternoon was a good setup for a short play following a 3-wave bounce off the low but then we got stopped out going into the close.
Therefore tomorrow's open could be important--any further rally would be bullish as would turn the short term wave pattern bullish for at least a morning rally. Keep an eye on the key levels I showed, especially on the 120-min charts of the primary indices. My concern going into the weekend is that we might be facing a strong selloff next week. I don't like to use the word crash but it could border on that. Let's call it unbridled selling enthusiasm. The wave pattern is set up for that so I've been on alert waiting for signals that it's about to happen.
The flip side is that we're going to get a bigger rally over the next couple of weeks to give us a larger a-b-c bounce off the July low. DOW 12K/SPX 1330 (or higher) are some upside numbers to think about. Don't bet the farm on the short side thinking that September and October are going to be super bearish. That's the way I'm leaning but this market has an uncanny ability to thwart expectations when those expectations are held by the majority.
I don't like the long side because I think we're in an environment where many downside surprises await us. Every morning is an adventure so trade carefully, manage your risks well, honor your stops and don't get yourself into a position where you just know the market will turn around and prove you were right. You will eventually be proven right but not until you've lost your trading capital and watch from the sidelines and tell everyone how right you were.
Good luck and I'll be back with you next Thursday.
Key Levels for SPX:
Key Levels for DOW:
Key Levels for NDX:
Key Levels for RUT: