It was another snoozer of a day in the market while everyone sits on the sideline waiting for word from the Bernank.
With the market doing nothing this week there's not much to cover. In fact it hasn't done much for twelve trading days in a row. We're talking about 2-1/2 weeks of nothing and it will likely be almost 3 weeks by the time we get at least some kind of reaction to Bernanke's speech on Friday.
Economic news is not driving the market. Other than individual stock news they're not driving the broader averages. But we have the tech and small cap indexes outperforming slightly this week, which says fund managers, and certainly retail traders, are betting on the higher-beta stocks with an expected rally from here. I sure hope for their sake that Bernanke and/or Draghi don't disappoint. The exit door on these stocks get very narrow very fast when a lot of sellers try to get out at once.
There were a few economic reports, not that anyone cared, and came in as expected or slightly better. The GDP 2nd estimate was slightly better than expected at +1.7%, revised up from +1.5% and better than expectations for +1.6%. Good news, right? Well, not if you were hoping for bad economic news to help Bernanke release some of his drug money. What a crazy market we trade in.
Pending home sales were a big improvement over June's -1.4%, jumping up to +2.4%. The one thing I don't like about this number is that it doesn't tell us how many homes were closed on since many pending home sales fail to close for a variety of reasons. Obtaining a mortgage has become much more difficult for buyers.
The Fed's Beige Book report was less downbeat than many analysts expected. It showed a "gradually" growing economy when looking at all 12 Fed Districts. So, overall positive for the economy but negative for those hoping for bad economic news to get Bernanke to do something other than threaten us with more easing.
As can be seen on the SPY daily chart below, volume is pathetic. Today's volume was the lowest of the year, even lower than the July 3rd holiday session. When the last trader leaves, please turn out the lights.
S&P 500 SPDR, SPY, Daily chart with volume
But low volume is not scaring the buyers away; it's only the sellers who have disappeared. And the lack of volatility has many of the HFTs taking time away from the market as well. Once we get through the Bernanke/Draghi sideshow and vacationers are back to work next week we will definitely see higher trading volumes. The direction of that trading is the big question.
A big concern by many is whether or not the U.S. is going to slip into another recession, following in the footsteps of Europe. I believe it will but those who measure such things won't be able to tell us until we're well into it and the stock market is much lower. Throwing more money into overly indebted countries in Europe (which is what the ECB wants to do) doesn't fix the underlying problem; it only exacerbates it but those in power are hoping to stay in power at least a little longer by hiding the true problems for as long as possible (while attempting to transfer the debt to the public sector -- there's a reason why we call them banksters).
Another country that is a signpost on the way to recession is China. So much of its manufactured goods are exported to other consuming countries and the lack of consumption means lack of business for China. When we look at the Shanghai composite index, which looks to be heading for a test of its October 2008 low at 1665 while SPX is testing its April 2012 high, something is seriously out of whack. Personally I think the SSEC is more accurate than our overly inflated indexes, hyped up on hope for more drug money. In other words, I'm betting (literally) that SPX will turn down to meet the SSEC rather than the other way around.
Shanghai Composite index, SSEC daily chart
There's another indicator of economic health and it has to do with the amount of garbage we throw out. I came across the next two charts below in an article written by Sam Ro at businessinsider.com who got the charts from Michael McDonough, a Bloomberg economist. The first chart shows the AAR rail waste carloads vs. the GDP and as you can see, there's a high degree of correlation. The waste-carloads number has been dropping since 2010 and another leg down this year. In the meantime GDP is hanging up but will it for long?
Waste vs. GDP, chart courtesy Michael McDonough, Bloomberg
The next chart shows the 2012 waste carloads vs. historical by month. While there's normally a dip from April to July, this year's "dip" has been much deeper and faster. Bulls will look at this one and see a recovery while bears will see just a dead-cat bounce. Time will tell but at the moment we've got another bearish indicator.
Waste vs. GDP, chart courtesy Michael McDonough, Bloomberg
Moving on to the regular charts, the corrective wave pattern on the weekly chart of SPX for the bounce off the March 2009 low has created a rising wedge and I've labeled the wedge with the requisite 5 waves, with us now being in the 5th wave since the June low. The top of the wedge is near 1450 so that's the upside potential by this pattern. It doesn't have to get there (the final leg in a wedge/triangle often fails short of trend line). You can see how price stalled in April and May at the top of its parallel down-channel that contains price since the October 2002 low and October 2007 high, currently near 1410. On a weekly basis it takes a drop below 1375 to indicate the sellers are overpowering the buyers. Between 1410 and 1450 is a risky area right now.
S&P 500, SPX, Weekly chart
Here's another look at the weekly chart but this time with some interesting Fibonacci time sequences. As pointed out by a colleague, Ed Carlson, the weekly chart below shows the rally from the March 2009 low. As mentioned above, I'm counting it as a large A-B-C correction to the previous decline (2007-2009). There are a multitude of fractals between the moves but what I really want to show is the Fibonacci time relationship we have here, as noted with the blue vertical lines.
S&P 500, SPX, Weekly chart
At the bottom I show the Fibonacci time relationship between the low-to-low-to-high, with the first low being 38.2% of the total time from March 9th to a projected date of August 17th. This projection comes from taking 161.8% of the 38.2% to get the 61.8% that is added to the 38.2% to equal 1 (giving us the Golden ratio). At the top of the chart I show the low-to-high-to-high with the first high occurring in May 2011 and the second high is the one we're waiting for. Taking 61.8% of the March 2009 to May 2011 period gives you 38.2% (again, to get 1 for the whole period) and that projection lands on August 29th, today. So with this tool, we're at the end of the window of August 17-29 to mark a turn (down in this case since we're making a high into the window) but the August 29th date could easily stretch into the early part of next week since a high next Tuesday (Monday is a market holiday) would still fit the time window on a weekly basis.
We have another reason for a potential turn on Friday -- the full moon. Whether it will or not is up for speculation but it's interesting that a full moon, known for increasing emotions, happens to fall on the day of Bernanke's speech. It could result in an acceleration of the trend (up) or it could cause a reversal. Whichever way it goes it could go big, even if for only a day or two.
SPX MPTS, Daily chart
For the A-B-C move up from June (I expect a 3-wave move because each leg inside a wedge is a 3-wave move or some other more complex corrective structure), depending on whether I use the June 19th or July 3rd high I get upside projections for the c-wave (to equal the a-wave) at 1425.96 and 1437.31. Hitting the upper target would likely happen if the market reacts favorably to Bernanke. It would be a very good finish to the rally and should be one of the best shorting opportunities you're likely to see. If it drops instead from here I can't be confident yet that we've seen the final high for the bounce. It might be just a larger pullback before heading higher. Below last Friday's low at 1398 would be bearish but it takes a break of its uptrend line from June 4th and its 50-dma (co-located), currently at 1374, to prove the bears have taken over.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1426
- bearish below 1398
So far the bulls are holding on, especially by holding above the top of the parallel down-channel, shown on the weekly and daily charts above, and its uptrend line from July 24th through the August 24th low, which was tested this morning and where SPX came down to again into the close near 1410. The buyers need to step back in immediately on Thursday in order to at least hold these support lines.
S&P 500, SPX, 60-min chart
There's another reason I'd like to see one more new high and that has to do with the Gann Square of Nine chart. I've shown this chart in the past and explained the important relationship between numbers that are on the same vector. To the left of center on the portion of the chart that I copied, in red, I've highlighted the October 2002 low at 768 and the October 2007 high at 1576. They are 6 circles apart, which can be thought of as 6 squares which makes a closed box (6 sides creates a cube). For whatever reason, this relationship is particularly strong. The high in April, at 1422, is on the same vector. Coincidence?
SPX Gann Square of Nine chart (top center section)
On the right side of the Gann chart, in blue, I've highlighted the March 2009 low at 666 (close to 667) and 6 squares up from there is 1429-1430. If SPX makes it up to this level, maybe even with a news-related throw-over, and then rolls back over it's going to be a strong sell signal. I find it more than a little interesting that it's possible we could see a rally up to the Gann number at 1430 in the Fibonacci time window and on a full moon if it happens no later than next Tuesday. When time and price come together like this I pay very close attention. The October 2007 high was the same kind of setup. It's all speculation for now but clearly a very good setup to watch for.
The DOW broke its 20-dma last Thursday and has been struggling to get back above it, currently at 13152 (today's high was 13144). If it rolls over from here there's a good chance it will test its uptrend line from June 4th, which coincides with its 50-dma near 12935 tomorrow. That should be good for at least a bounce if it gets tagged and clearly it would be more bearish with a drop below that level. In the meantime there remains bullish potential to the price projections for the wave count at 13385.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 13,265
- bearish below 12,925
While the DOW's drop from last week's high could be interpreted as the start of the next major decline, the NDX pattern is just the opposite. It has been choppy and corrective since last Thursday, which fits well as the 4th wave of the move up from July 25th. For now I'm only guessing that it will form a sideways triangle as depicted but we'll have to see how it looks through Friday and into next week. The difficulty with this pattern is that it expects the market to not move much on Friday, which is a little difficult to believe. However, it plays out as depicted, with a move up to the price projection at 2890, where the 5th wave would equal the 1st wave, I'll be watching very closely for topping. The 2890 level is also the 127% extension of the previous leg down (April-June), a common reversal Fib. Below 2750 would mean a deeper pullback but I'll have to see more evidence in the price action before believing the top is already in place (unless we get a quick new high and then roll over and drop below 2750 -- that would still be a completion of the 5th wave).
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 2803
- bearish below 2750
This week's message from the small caps is that there's more rally to come. The risk-on trade is alive and well and if there's even a hint of a rally to come it's likely the RUT will lead the way. Either that or this week's buyers will be scrambling to get out the door as quickly as possible, and at any price they can get. Therefore I would expect the RUT to be the leader no matter which way it breaks from here. Upside potential is to
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 827
- bearish below 803
The VIX is at an interesting place right now -- it has rallied up to its downtrend line from June 4th, which shows a higher level of fear since SPX has barely moved off its high and would have to drop to 1375 tomorrow to even match what the VIX has done. VIX also closed marginally above its 50-dma today. If the VIX moves much higher it's going to be a strong warning that the prices are about to tumble lower. But from a wave pattern perspective I see the potential for VIX to drop back down to the bottom of its bullish descending wedge, perhaps down to about 12 by early September. The last time it tested its 50-dma, near 21, was July 24th and then it dropped to 13.30 on August 17th. Since then we've seen more caution even as the indexes have rallied or held up. If it does drop as depicted it would of course mean the stock market is rallying hard.
Volatility index, VIX, Daily chart
The dollar remains bullish as it holds at its uptrend line from August 2011 but I do see the possibility for one more up-down sequence to finish its pullback from its July 24th high. I would imagine we're going to see some kind of reaction in the dollar (and the metals) if Bernanke says anything other than double speak. Regardless of the short-term pattern, I believe the dollar is close to another rally leg to new highs for the move up from May 2011.
U.S. Dollar contract, DX, Daily chart
Last Wednesday I had mentioned gold should be able to tag its price projection at 1670.20 (where the c-wave of the move up from June 29th equals the a-wave) and possibly up to the top of its parallel up-channel from May, which was near 1680.70 last week and will be near 1685 by the end of this week. Monday's high stopped a little short of the trend line with a high of 1679.30. The short-term pattern is not clear yet but the risk for gold bulls is for gold to start down right from here (which means the dollar could start a rally from here (no easing from the Fed).
Gold continuous contract, GC, Daily chart
Silver has a similar a-b-c bounce pattern as gold (with the triangle b-wave) but its c-wave extended to 162% of the a-wave, at 31.21, with a high of 31.22 on Monday. That may be all we'll see for silver, like gold, and it could be in the early stages of rolling over. But so far it looks like a consolidation following Monday's high and a push higher should target its downtrend line from April 2011, near 31.70 by Friday.
Silver continuous contract, SI, Daily chart
Oil may have topped out last Thursday with a high of 98.29. It was an intraday high and then it closed lower, creating a key reversal outside down day. But since then it's been chopping lower, which is either a corrective pullback or it's building a series of 1st and 2nd waves and is about to let go to the downside. It's currently hugging its uptrend line from June 28th so as long as that holds it remains bullish for at least a test of the 99.51 projection, where wave-c = wave-a in the move up from August 2nd. Above that level would open the door to at least the 106 area.
Oil continuous contract, CL, Daily chart
Tomorrow's economic reports include unemployment claims, personal income and spending and PCE core inflation. No one will care and the market will be dead.
Economic reports, summary and Key Trading Levels
I continue to be on alert for a market top. There are many who believe we'll see a strong rally into October-November (election year cycle) and they could be right. If SPX makes it above 1450 I'd turn into a bull also. But I don't think the market can hold up much longer in the face of some global economic problems. European debt woes will be front and center again next month, regardless of how much money the ECB plans to dish out. The quickest way to the poor house is to borrow money to pay off some of your existing debts and pay for living expenses. Adding debt, without the ability to pay down what you have now, is not a recipe for financial success. Most developed countries have been doing that for far too long and the Piper wants to be paid back Now. This is a problem that will continue to get worse no matter how much money the ECB throws at it. Look at the success (as in lack thereof) of the Fed's policies.
A common way to end rallies that have chopped their way higher, as this one has (for a long time), is on a news-related spike. The last remaining bulls jump aboard and the few remaining bears jump out (of a window). Suddenly the market is left without any more buyers and no shorts to protect the downside. If we get a news-related spike to the upside, especially if the upside targets I'm looking for get tagged, such as SPX 1430-1437, it will be a very good (and scary) time to fade the rally and get short. Do it with options and with only what you'd lose on a normal stop on a stock purchase. Go out at least 90 days when you're buying options (vs 30-45 days when you're selling). That way you don't have to use a stop -- let it ride and become either a winner or a loser. I think selling bull put spreads right now is a disaster waiting to happen -- there's no premium but that will change quickly in a selloff, which is a double whammy for short puts.
At this point I'm just anxious to get into next week so that we have a market to trade again. We'll be almost 3 weeks on hold and I'm more than a bit tired of it. So let's get through Friday and then see what Tuesday brings us.
Good luck and I'll be back with you next Wednesday and I hope everyone has a very enjoyable Labor Day weekend. Then we start thinking of the cooler fall and colder winter (and it may be colder than usual for the bulls, wink).
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