The market's price pattern puts it at a decision point and the setup is for a big move. Now we're waiting for the catalyst to set the next direction in motion.
The market had opened near the flat line after a relatively quiet consolidation during the overnight session. After a quick pop higher on economic news at 10:00 (pending home sales) the market then went quiet again but the bulls were able to keep the bears away. The bounce off Monday's low has the SPX now just shy of a 50% retracement of the decline from last week's high. We're nearing a point where the market is about to make a significant decision -- one that could have the market testing April/May highs or crashing lower from here. We've got some potentially strong market-moving news coming and as I'll show on the charts, the price pattern is at a significant decision point.
This morning's economic reports included durable goods orders before the bell but futures barely registered a reaction to the improved number. At +1.1% it was better than expectations and better than April's 0.0% (revised up from -0.2%). But removing transportation goods dropped the number to +0.4%, which was still a big improvement over April's -0.9% (revised lower from -0.6%) but a little less than the market expected.
The better reaction was to the Pending Home Sales number that came out at 10:00 and gave the market a little pop higher. May's +5.9% was a big improvement over April's -5.5% and better than the expected +0.5%. Following the improved new-home sales number yesterday, this morning's improving pending home sales was a big boost to the home builders and the DJ Home Construction index (DJUSHB) popped to a new high above its May high before pulling back. There is the possibility the index will create a double top and I'll show two charts of this index a little later.
There's very little to add to recent discussions about what's happening in the economy and the geopolitical arena. The world and the various financial markets seem to be on hold while we wait for the results of a number of potentially market-moving events to occur. Europe's continuing saga over how to resolve the multiple-country debt issues has moved from Greece to a much bigger problem. We all knew Greece was merely a symptom of a much bigger problem, the same as the sub-prime mortgage problem back in 2007 as the stock market was peaking. So many were saying Greece doesn't matter since it only has a tiny GDP relative to the rest of Europe. They were completely missing the point, just as many missed the signals from the sub-prime slime problem before it turned into a major banking crisis. Now the bigger financial problem in Europe has become abundantly clear and they're trying to figure out how to bail out each country's banks without the help of Germany.
Many bash Angela Merkel and the German people for not doing the "right thing" and backing the eurozone's efforts to monetize all the debt. As France's new President Hollande suggests, they should simply print all the money that's needed to get the banks and governments out of trouble. These people ignore history's perfect record here -- no country has ever, no exceptions, inflated their way out of debt through money printing. None, zilch, nada, zero. Any questions Mr. Hollande or Mr. Bernanke or Mr. Draghi? But these arrogant men believe it's different this time and that they will be the first to succeed by doing this. Angela Merkel knows better and kudos to her for standing up and saying "Nein!"
Think about the Germans' position -- they would be responsible for the bulk of the loans to profligate countries who have no good plan for paying their debts now, never mind more debt. Merkel says if the Germans are on the hook for so much money to the governments then they want control over how that money is spent. And the rest of the EU leaders are shocked and dismayed by this! If you get a collateralized loan the bank wants title to the collateral -- they keep the deed to your house or your car until you pay off the loan. In other words they ensure how you spend the money. And yet the EU's banksters (whom the government leaders support, don't kid yourself otherwise) don't want to be controlled. Taking medicine is not always pleasant (such as paying off one's debts instead of piling on more) but it's always the best way toward recovery.
At any rate, the EU saga continues this week as the EU summit progresses toward some kind of resolution. That resolution will likely be a plan to make a plan to figure out a date for the next meeting. Nero fiddles while Rome burns (btw, that's actually in incorrect rumor about Nero). The market continues to wait anxiously for some kind of news that somehow the EU will figure out a way to get more money into the hands of the banksters so that the proverbial can is kicked further down the road in hopes that some magic solution will identify itself. The news today was that a trial balloon was floated to get reaction to the idea that the eurozone's bailout fund (EFSF) would buy Italian and Spanish bonds at their auctions so that the yields will be held below 7% (Spanish 10-year bonds closed marginally higher today at 6.92%). From what I hear, Merkel has launched a few Messerschmitts to shoot down the balloon.
Unfortunately France is the perfect example of how the people won't let their political leaders do the right thing and get this problem fixed. I seriously doubt France will be alone and the process is likely to be very unpleasant for most people in most developed countries when the realities are forced upon the people and governments lose control. I wonder why Homeland Security is buying millions of rounds of ammunition and building so many FEMA camps.
Supposedly tomorrow (Thursday) we'll get the Supreme Court's decision on Obamacare. I can see the decision affecting healthcare stocks but I'm not sure why the broader market would really care. Perhaps there will be speculation about what it would mean for Obama's re-election chances but again, I don't see why the market should really care. Does it really matter who sits in the chair? Did Obama change any of Bush's policies (how's that hopey-changey thing workin' for ya?). Will Romney be able to do much about the intractable problem with our debt with a totally dysfunctional government? Ah, but hope is a wonderful thing (it really is, just not in the stock market).
Much of Bernanke's hopes are pinned on an improving housing market. One of the reasons for Bernanke's efforts to keep interest rates low (Operation Twist is one way) is an effort to make it more affordable to buy houses. So much of our economy is pinned to the housing market and whatever can be done for this industry helps (or hurts) our economy enormously. It's one reason why the market reacted somewhat favorably to the sales numbers yesterday and today. Whether it's the construction industry, furniture and appliance sales, landscapers and the myriad other businesses tied to the homeowners or it's the borrowing of money and helping grease the credit markets, the housing industry and all that's associated with is huge.
The health of the home construction industry therefore is a very good window into the overall health of the economy. There are a few basic industries that can be used in this regard, transportation being another, so the fact that the home construction index (DJUSHB) made a new high today, above its May high and the highest it's been since September 2008, is a big deal. Unfortunately I see the potential for a high soon, if not here, and it may be completing a large bounce correction off the November 2008 low. If true then everything mentioned above about the importance of this industry could mean our economy is going to make a significant turn back down. I'll start off tonight's chart review with a look at this important index.
Following the sharp decline in the DJUSHB index, from 1120.47 in July 2005 to 130.01 in November 2008, there has been a 3-wave bounce correction that has retraced only 21.4% of the decline, which is obviously a weak correction. The a-b-c bounce off the November low would have two equal legs up at 368.77 and today's high at 352.31 is still shy of that projection. Whether or not it will be able to make it a little higher will likely be controlled by how well the broader market does in the coming week. As noted on its monthly chart, this month's candle is a hanging man doji at potential Fib resistance. Once the 3-wave correction finishes we will likely get another leg down in the bigger bear market correction.
DJ U.S. Home Construction index, DJUSHB, Monthly chart
On the monthly chart above you can see the rate-of-change (ROC) indicator is showing bearish divergence again the 2010 high. I've placed a Fib projection on the indicator to show the c-wave (the leg up from last October) hasn't even been able to achieve 62% of the a-wave (the 2008-2010 choppy climb vs. the straight up wave-c from October). What looks like a strong rally is actually weaker, which is another warning toward those who are feeling bullish about this sector.
As shown on the weekly chart below, following the pullback to the June low, which was a break of its uptrend line from last October, the index has managed to bounce back up to its broken uptrend line and is close to back testing a broken uptrend line from November 2008 through the August 2010 low, which it already tested at its April and May highs. That line crosses the 368.77 projection around mid-July so there's a little more upside potential (as I'll show for the broader market, it too has the same potential into mid-July) but with the back test of the broken uptrend line from October there is the risk it could fail from here.
DJ U.S. Home Construction index, DJUSHB, Weekly chart
The daily chart of the index is shown below and you can see there's a little more upside potential but based on the price projection, trend lines and bearish divergence I would not want to place a bet on the upside from here. I'm instead watching for a shorting opportunity for the home builders, which might be a little higher and not until mid-July. But a break below its last pullback near 319 would be a sell signal since it would indicate the high is probably already in place.
DJ U.S. Home Construction index, DJUSHB, Daily chart
Moving to our regular charts, the SPX weekly chart shows the same potential as the home builders index. The move down from April can be counted as an impulsive 5-wave, setting the trend to the downside. The bounce so far is counter-trend and I'm trying to figure out how high the bounce could go. Last week's high (June 19th) may have been the end of the bounce and a drop back below the June 4th low near 1266 would definitely say the next leg down is underway. But the shorter-term pattern supports the idea for another leg up for a higher a-b-c bounce off the June 4th low, with an upside target zone in the 1400 area, possibly even to a marginal new high above the April high. Back above last week's high near 1363 would have me looking toward 1400.
S&P 500, SPX, Weekly chart
Following a 5-wave decline from April to June we got a 3-wave bounce into last week's high. The strong decline from June 19th confirmed the 3-wave pattern. With a 5-down-3-up pattern we have a bearish pattern and we will get another leg down. The only question here is whether the next leg down will start from here or after first getting a new high for a larger bounce pattern. At the moment I'm leaning toward a higher bounce before turning back down and I'm showing a projection to about 1395 to hit its downtrend line from April-May by mid-July. That would fit time, price, Fibs and trend line and be a very good setup to get longer-term short. But at the moment the bears remain in control as long as SPX stays below the 1335-1340 resistance band. Note that SPX failed just shy of the line of resistance near 1335 and only marginally higher is its 50-dma, currently near 1341. A kiss goodbye here and a drop below Monday's low near 1309 would be bearish.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1363
- bearish below 1340
The wave count for the move down from last week is not clean. I show a 5-wave move down but I don't like the way it looks. Much of EW analysis is achieving the right "look", which is the subjective part and hard to grasp at times, but based on other indexes and sectors I'm inclined to look at the decline as an a-b-c (labeled in green), which calls for a retracement of it and one of the reasons why I'm looking for another leg up. But this week's bounce is sloppy and I would have expected to see a cleaner impulsive move and therefore I can't rule out the start of the next major decline from here. And the next leg down would be three degrees of 3rd waves unwinding to the downside. In other words it could be a screamer of a move to the downside.
S&P 500, SPX, 60-min chart
While I might be leaning long I am staying fully aware of the downside risk (including the likelihood for a downside disconnect, aggravated by the light trading volume and HFTs using momentum and not caring about direction). This is a reason why I'm saying the market is at an inflection point -- I see upside potential for a fairly strong rally, perhaps 60 S&P points or more, and downside potential for a couple hundred S&P points. If I were forced to be in a position it would short with enough time (in options) to withstand a rally into July).
It's the same story with the DOW -- it's at resistance and the next move down could be a rip-snorter (down 1000 points to at least the December low at 11735 by mid-July) or we could instead get a 700-pont rally up to the 13300 area by mid-July. Note that the DOW has stalled just below its February-March-April neckline near 12663 and a turn back down from here would leave a bearish kiss goodbye (although watch for the possibility of a pullback to correct the leg up from Monday and then press higher).
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 12,900
- bearish below 12,370
NDX has the same pattern but for its next leg up, if we get it, I'm showing a rally only to the 62% retracement of its April-June decline, at 2661, which crosses the downtrend line from April-May on July 9th. But if it drops back below Monday's low near 2527 it will be the bears who remain in control. In that case look for support at its uptrend line form 2009-2011 and the 200-dma, currently coinciding near 2470.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 2680
- bearish below 2527
Similar to NDX, for the RUT I'm showing another leg up to the 795 area where it would hit its downtrend line from March-May and a price projection where the 2nd leg of the bounce off the June 4th low would be 62% of the 1st leg, which crosses the downtrend line on July 9th (same projection date for NDX). Back below 758 would tell us we got all the bounce we're going to see.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 790
- bearish below 758
Last week I had mentioned the banking index, BKX, had completed a very nice setup for the bears. It had reached the level for two equal legs up (45.58) in an a-b-c bounce off the June 4th low, tagged its 50% retracement of its March-June decline and its 50-dma (the 50/50 reversal setup) and ran into its broken 2009-2010 neckline. We got the reversal and things were looking good for the bears. But after finding support at its 20-dma at 43.68 on Monday, and close to its October-November uptrend line, the bounce into today's high has left a 3-wave pullback into Monday's low at 43.69, achieving two equal legs down at 43.84. I'm now counting the pullback from last week as a b-wave in what will become a larger A-B-C bounce pattern off the June 4th low. The pullback from last week's high is a clear 3-wave move and this index is one that's telling me to look higher before it heads lower.
KBW Bank index, BKX, Daily chart
I can only go with probabilities and while there is certainly the chance BKX, and the broader market, will turn right back down, this one is telling me the odds have improved for another rally leg. Two upside projections for the next rally leg are to 46.80, where the 2nd leg up would be 62% of the 1st leg and close to a 62% retracement of the March-June decline (46.93), and then to 48.72 for two equal legs up from June 4th. It's possible we'll see a further pullback before getting the next leg up but that would be pure guesswork from here, something I'd have to react to in real time.
The dollar's pattern looks bullish and I'm projecting just a pullback before heading higher into July before it will be ready for a deeper pullback. But the pattern is not clear enough to negate the idea that we could see at least another leg down for the pullback from June 1st (or something more bearish). For now I'm looking for a pullback that will stay above 82 and would only turn a little bearish if it breaks below that. It would be more bearish below 81. If the dollar continues higher as depicted we could see at least 85 before the end of July.
U.S. Dollar contract, DX, Daily chart
If the dollar heads higher then gold will likely head lower and its pattern continues to fit that expectation. It might bounce a little higher as part of a correction but I would not turn bullish on gold until it breaks above 1680. For now I've got a downside target for gold near 1325, a $250 drop from the current price. There's much lower potential but a drop down to 1325 by the end of September would set up a bigger bounce correction. As the weekly chart shows, we've got two down-channels to watch.
Gold continuous contract, GC, Weekly chart
Oil might consolidate for a few weeks and give us one more minor new low but the move down from March can be counted as a completed 5-wave move down that's due for a bounce to correct the decline. I'm showing a 3-wave bounce into August and a back test of its broken 1998-2001 uptrend line where it crosses the 50% retracement of its decline. This is obviously a guess but it would be a typical correction. The 5-wave move down says that's the trend and once the bounce correction has finished I'll be looking for another leg down. If it were to bounce up to 93 and head lower again, two equal legs down from March would target $60. Another longer-term pattern idea suggests a big sideways triangle consolidation from the May 2011 high, which would keep oil trapped between 75 on the low side and 110 on the high side into 2013 before breaking out to the upside into 2014. We'll obviously have plenty of time to figure that one out as we go along.
Oil continuous contract, CL, Daily chart
Unemployment claims and GDP estimates are tomorrow's reports before the bell. They should be largely ignored. Overseas reports will likely have a great impact and then Friday's reports.
Economic reports, summary and Key Trading Levels
For the rest of the week we've got to get through a couple of potential land mines and then next week worry about underwater mines (Iran). On deck we've got the Supreme Court's decision about Obamacare, which is scheduled for 10:00 AM. Then we've got a scheduled vote by Congress on the Eric Holder contempt of Congress charge (not to mention the brouhaha in which Obama may have also entangled himself).
Then there's the always worrisome EU summit and Angela Merkel's "Nein!" response to Eurozone bonds or any other monetizing effort. In actuality what she said was something like "nur uber meine Leiche" (a rough translation of the idiom "over my dead body"). The worry over a breakup of the EU, who's staying, who's going, will the euro survive or not -- it's all becoming a grand soap opera that our grandchildren will read about in the history books. In the meantime it's a big cloud sitting over the market and ready to dump rain all over everyone.
We've still got two more days of potential window dressing into the end of the month/quarter (Friday) but we're in the 3-day settlement window so fund managers could start selling without it showing on their books until the beginning of the next quarter.
The next few days are going to be critical for the market and I wish I had a better sense for the direction. If the June highs are exceeded we will probably see the market press higher into mid-July but I believe the April/May highs will not be broken (at least not by all the indexes, leaving a bearish non-confirmation if it happens). If Monday's lows are broken there is the possibility it will only be a relatively minor new low and if accompanied with bullish divergences it will make a good opportunity to buy for a multi-day bounce correction. But the bearish interpretation of the pattern says a break of Monday's lows will be followed by a strong and fast decline and we will not see current prices for years. Don't get stuck long if the market starts to break down.
Good luck and I'll be back with you next Wednesday.
Keene H. Little, CMT
In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying