With no news AAPL got hit with a lot of selling today and that dragged the indexes lower. The blue chips recovered but the tech indexes stayed in the red.
The only thing that surprises me about the numbers in the table above is that the stock indexes are not all red. Other than AAPL's weighting in the indexes, especially the techs, which obviously pulled the indexes lower, the market largely ignored what was happening to AAPL. "Oh look, that poor child is being mauled by vicious dogs. So, where shall we go eat?"
There was nothing newsworthy about AAPL to help explain the selling and that may have been a big reason why it was largely ignored as any kind of sentiment indicator. It's weighting in the indexes, especially the techs, obviously pulls the indexes down but the rest of the stocks did fine and held the blue chips up. Even most of the other tech stocks held up. The RUT barely closed in the red. So all in all, considering the debacle in AAPL, it wasn't a bad day (unless you hold AAPL stock).
Futures had rallied during the overnight session (for no particular reason other than to get the market to gap up) but the morning gap was immediately sold into (again). This is a disturbing pattern that should be spooking the bulls. But the strong selling into the early-morning low was bought and we got a little v-bottom reversal.
Actually the overnight rally in the futures was credited to some good news out of China. The government approved the ability for insurance companies to invest in commercial real estate. This of course helps with the liquidity problem by making more money available for lending. The oversold Shanghai Composite index (SSEC) rallied strong, up +2.9%. Unfortunately for the index it's a mere blip in its downtrend. But today's candle is a bullish engulfing candlestick for a possible key reversal. Bullish follow through would confirm it and a rally in SSEC could help the global markets believe things are getting better.
This morning's economic reports were mixed but didn't really seem to move the market in a direction that it wasn't already going. The ADP employment report showed 118K new jobs, which came is a little less than the expected 125K and less than October's 158K. As to why it dropped? You guessed it -- Sandy ate our jobs. Companies on the east coast were unable to hire as many people as they might have since they were dealing with the damage from Hurricane Sandy. ADP estimated Sandy consumed about 86K jobs so we'll see if she regurgitates them next month.
The other big number was the ISM Services, which came in at 54.7, essentially flat from October's 54.2. But it was a little better than the expected 53.7. Factory orders were up slightly in October, +0.8%, but significantly less than September's +4.8%. All in all, mixed reports this morning and that's added to mixed signals from the market.
There are more than a few of us trying to read the tea leaves and figure out how December might go. So far the start of the month hasn't been great but we're not seeing strong selling either. A finger to the wind tells me the winds are calm at the moment but I sense a stronger wind coming.
I read an interesting interview this morning by Todd Harrison at Minyanville with Jeff Saut, the Chief Investment Strategist at Raymond James Financial. Harrison asked Saut for his take on how December might go, to which Saut responded that he thought we'd get the Santa Claus rally after the political theatrics over the fiscal cliff come to some kind of compromise on taxes and push the rest of the decisions into next year. Honestly, it's anyone's guess how all that's going to play out.
I was more interested in Saut's comments about what he sees happening with mutual and hedge fund managers, most of whom are apparently hoping for a market decline in December. That would mean they're currently reluctant to buy any dips, hoping the dip will turn into a selloff. If the market is down from here and they've moved more into cash then the manager's performance will improve relative to the indexes. This goes for European as well as U.S. fund managers who are having a largely disappointing year. The key here, according to Saut's analysis, is that if the market does not decline then we could see a long squeeze into the end of the year as these underperforming managers are forced to chase the market higher.
The key takeaway here is that a rally into the end of the year would likely have nothing to do with underlying fundamentals, political shenanigans, moon phases or anything other than everyone chasing everyone else higher. So prepare for that possibility even if you see absolutely no reason for this market to rally. It would likely set up a bearish January but we'll have time to figure that out if December is bullish.
As I think about the possibility for a market melt-up into the end of the month, I can see that potential in the price pattern. But the pattern that is making the most sense to me at the moment is suggesting we will not see a rally. A strong selloff in the coming weeks is a strong possibility. It's one day at a time until the larger picture clears up. I'm leaning bearish (after a rally into the end of the week, hopefully) but I'll be ready to jump in long if the "long squeeze" materializes.
The weekly chart of SPX is a little spinning top so far as the bulls and bears battle for control with neither side willing to push very far. Monday's high was just shy of 1425, which is price-level resistance from previous highs and lows since April. At the moment I see higher potential to about 1440 to back test (again) its broken uptrend line from October 2011. My preferred wave count calls for just a correction to the October-November decline that will then be followed by a stronger decline into next year. But the alternate wave count calls for one more leg up to the 1500 area (dashed line) before the bears will have their turn. On a weekly basis the bears will not be confirmed the winner until they break prices back below the November 16th lows.
S&P 500, SPX, Weekly chart
The weekly chart above is using the log price scale, which is my preference for the longer-term views, especially when using trend lines. But as I've mentioned before, I constantly switch back and forth to see where those trend lines are located because more often than not I'll see price reacting to the trend line. As an example, the daily chart below is using the arithmetic price scale. On the weekly chart you can see the broken uptrend line from October 2011 above the current price (near 1440 mentioned above). On the daily chart the same trend line is currently near 1413, which held as resistance today. The good news for bulls is that the broken H&S neckline, near 1407, held into the close. These trend lines are shown with a closer view on the 120-min chart following the daily chart below.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1435
- bearish below 1385
Looking at the bounce pattern off the November 16th low, the 120-min chart below shows what I think is the best wave count for it. I don't believe it's an impulsive wave count, although I've seen some try to make it one and while it violates no EW rules I think the better count is a corrective one. I'm showing two a-b-c's to complete a double zigzag correction to the October-November decline. It needs one more leg up to complete the 2nd a-b-c and two equal legs up for it (which starts from the November 28th low near 1385) gives us an upside projection to 1432.50 (1436.53 if I use a slightly different way of counting the a-b-c waves). This places the price-level resistance near 1434 at the same spot and therefore makes for a very good setup to watch for a very good shorting opportunity. That's the setup and now we wait to see if it completes.
S&P 500, SPX, 120-min chart
As can be seen on the above chart, SPX has been oscillating around its broken uptrend line from October 2011 (green), near 1413, as well as its broken/recovered H&S neckline, near 1407, which held this afternoon's pullback. Based on the pullback pattern from today's midday high I'm looking for the rally off this morning's low to continue on Thursday and hopefully into Friday. While the key level to the downside is last week's low near 1385, a drop below today's low near 1398 would have me worried that there will be no further bounce. Otherwise I hope to get to the setup near 1434 since it could be a beauty of a trade for the bears (using a stop just above 1440).
The H&S neckline for OEX is part of a 643-647 price-level resistance band that I've shown before and is on its daily chart below. Price made it up to just above the band and almost tagged the 50-dma on Monday, at 651, but has since dropped back down through that band. The rejection at its broken uptrend line from October 2011 adds to the bearish picture. If I were not looking at the intraday pattern, which keeps me bullish into tomorrow/Friday, I'd be strongly recommending that short is the place to be right now, with a stop above Monday's high. Sometimes I get too cute in trying to figure out a better price to get into a position and end up missing it. For the want of pennies I miss the dollar move. Is that going to be true here? It could be but I'm still trying to pick up some pennies with a higher entry to get short (wink).
S&P 100, OEX, Daily chart
Whereas SPX was able to hold above its H&S neckline, the DOW is finding it to be resistance and this one has me worried about the short-term bullish potential for the rest of the week. In addition to the 50% retracement of its October-November decline, at 13067, its H&S neckline at 13087 has been tough resistance for the bulls to crack. Each rally attempt is sold into and that will need to change tomorrow if the bulls hope to achieve a move up to at least the 13300 area to test its broken uptrend line from October 2011 (arithmetic scale).
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 13,100
- bearish below 12,765
The DOW's 120-min chart below shows the leg up from November 16th in a parallel up-channel (with only a brief break of the bottom yesterday and this morning) and a closer view of its battle with the H&S neckline (blue line that was tapped yesterday morning and twice today). If we a rally tomorrow I'll be watching for a move up to the first price projection near 13220 (two equal legs up from November 28th) and then potentially up to 13304 to achieve two equal a-b-c's up from November 16th and a back test of its broken uptrend line from October 2011. If we have a clean 5-wave move up from this morning's low to either of those two upside targets it will be an outstanding setup for the bears. It's just a setup at this point and I'll be watching to see if it completes.
Dow Industrials, INDU, 120-min chart
The name of the chart below is OUCH. As the title of tonight's wrap said, someone took a big bite out of AAPL and the selling was relentless, right into the close. By the time the carnage was over AAPL lost -37 (-6.4%). There was no real news driving the move but it's what happens when so many are convinced it's the stock to own. Those owners become sellers-in-waiting and when the selling is triggered there are simply not enough buyers to hold prices up. Dumping into year-end, to take advantage of the lower capital gains rate this year vs. next, is the only thing I can think that's driving this. That and the fact that so many fund managers own this stock and the last thing they need is for it to be pulling down their performance.
I see bounce potential at least back up to its downtrend line from September, currently near 561, before heading lower. Back above price-level S/R at 570 would at least neutralize this somewhat. But what's clearly bearish here is the strong rejection following the back test of the broken trend line along the highs from 2000-2007, which was last tested on Monday (3 drives to a high on the trend line). While there's always bounce potential, and maybe it will look better in January, but right now there's no way I could recommend this stock to anyone. I simply do not care about funnymentals; this chart is bear-butt ugly.
Apple Inc, AAPL, Daily chart
On Monday I had shown on NDX's chart how it was rejected at its 50-dma following the gap up to it. The daily candlestick was a bearish engulfing one, which left an outside down key reversal day. But it held its 200-dma at the close and left the possibility for recovery. Unfortunately it sold off on Tuesday and wasn't able to close back on its 200-dma by the close, although the afternoon rally was a gallant effort. Today's gap down and selloff was brought to us courtesy of AAPL and quite frankly the only surprising thing is that NDX did not finish down stronger. AAPL could have spooked the entire market but it seemed to be largely ignored. But AAPL's weighting in NDX makes it hard to ignore. Tech bulls can at least be thankful for the other tech stocks that held up.
The next support level for NDX, if it sells off some more on Thursday, is its 20-dma at 2611, which supported the pullback on November 28th. If the selling in AAPL is finished for at least a day or two and it gets a bounce I can the potential for NDX to make a higher bounce with the broader market so I show that possibility (green dashed line). But first the bulls need to prove they can get through both the 50-dma, now near 2688, and the 50% retracement of the September-November decline, at 2686. Then it will have to deal with its downtrend line from September, near 2711. I don't like the chances for a rally in the NDX as much as I do for the blue chips and this one makes me nervous when looking for a rally into Friday.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 2700
- bearish below 2613
I was surprised the small caps didn't sell off harder with AAPL today. Perhaps that's a bullish sign. After being dragged lower off this morning's gap up, and testing yesterday's low, the RUT ran back to the upside and almost made it back up to the morning high. It was a good recovery and even though it gave back some of that bounce in the afternoon it looks like a correction to the rally and therefore I had suggested near today's close that we had a setup for a rally out of the gate on Thursday. The daily chart doesn't help us any at the moment as price struggles between support at its 50-dma, near 818, and resistance at its broken uptrend line from October 2011, near 828. That's a 10-point spread at the moment that could be filled with a lot of chop. But as long as that broken uptrend line remains resistance, setting up a potential kiss goodbye, it's not a good time to be long.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 828
- bearish below 798
In Monday's update of the banking index, BKX, I pointed out resistance at 49 and 49.50 and suggested it's not bullish until it can rally above 49.50. To the downside it has trend line, 200-dma and gap support above 47 so it's not bearish until it declines below 47. To put its price pattern into perspective, the weekly chart below shows what a bullish month could do for this index. The top of a rising wedge pattern for the bounce off the October 2011 low will be up near 53 by the end of the month. I show some price relationships between the up legs for the bounce and why 53.35 makes a good upside target if the bulls get some help this month (such as the long squeeze I mentioned earlier in the wrap. The 2nd leg up for the bounce off the October 2011 low is 62% of the 1st leg at 52.06 and the September highs were 52.11 and 52.04. The 3rd leg up would be 62% of the 2nd leg at 53.35 and a little throw-over finish to the rising wedge at the end of the month would tag that level. This one has some potential and is a reason that I will be cautious in shorting attempts in the other indexes. The upside potential for BKX would be negated with a drop below 47.
KBW Bank index, BKX, Weekly chart
The U.S. dollar made it down to its uptrend line from October 2011, near 79.55, so any lower would show that the bears are control. But as long as 79.50 holds I'm expecting a rally to resume. It's at least a low-risk entry for a long play in the dollar -- place your stop just below today's low.
U.S. Dollar contract, DX, Daily chart
Gold got a little more follow through to the downside and broke below 1704 support, putting it on a confirmed bearish path at the moment. It now needs to get back above 1735 to negate the bearish wave count. If it drops further from here we'll probably see some consolidation for a few days near 1670 where it would test its November low at 1672.50 and its 200-dma near 1665. After a new low from there I would expect a bounce back up into January to retrace a portion of the decline from November 23rd before starting a stronger decline.
Gold continuous contract, GC, Daily chart
Oil continues to hide its intentions well but the overall structure of the bounce off the November 7th low remains choppy and corrective. That calls for a complete retracement and new lows. Whether it will be from here or after another bounce into the end of the year is what I'm having a hard time figuring out. It takes a break below 85 to confirm the next leg down is already in progress.
Oil continuous contract, CL, Daily chart
Thursday will be a quiet day for economic reports but Friday will be a big day as we get the payrolls numbers, Michigan Sentiment and Consumer Credit (since wages are not rising we'll see if shoppers are loading up their credit cards for the holiday season again, which would depress spending and savings in the early months of next year).
Economic reports and Summary
As can be seen on the SPX daily and weekly charts at the beginning of tonight's review, we've got spinning tops for the candlesticks, which represents indecision as the bulls and the bears battle it out for control. The consolidation is beneath resistance for some indexes and above support for others and that's not helping us figure out the next move. It's a time for caution by both sides and a reason to not get caught in the crossfire as both sides shoot at each other.
My best guess for the rest of this week, based on the intraday patterns, is for a rally into Friday to set up a good shorting opportunity into next week. Hopefully a rally into Friday (assuming we'll get one) will be a nice 5-wave move up from today's low so that it will set up at least a pullback if not the start of a much stronger decline, one that will give us a good trade (I only care that it makes a tradable move, not about the direction).
But I need to emphasize strongly that shorting the market this month is a risky venture. But hey, no risk, no reward (wink). December is typically bullish and on top of that we've got many fund managers who are behind the eight-ball and might be forced to do lots of buying if the market even hints of a rally. It would be a long squeeze as discussed at the beginning of tonight's report. A rally doesn't have to make any sense and if there's market breadth behind the move just join in and trail your stops along the way. Bears have to be very careful not to fight a rally just because it makes no sense.
The flip side of that coin is that bulls need to be especially careful here. I would say the majority of people are expecting a rally this month, even if they're not feeling particularly bullish (as measured by the bullish vs. bearish sentiment indicators). The price pattern supports the idea that December is going to instead sell off and it could do so in a very hard way. Don't be looking to buy the dips if the key levels to the downside start breaking (primarily the November 28th lows).
Next Wednesday we'll have the FOMC rate decision and while no one cares about the rate decision they do care about more drug money. The Fed has hinted about more QE money (to replace the Operation Twist money, which is about $45B/month, that expires at the end of this month). If there's no hint of a fiscal resolution it could prompt the Fed to make a preemptive strike and boost their Treasury-buying capability (foreigners could back away from buying Treasuries if they feel we can't get our fiscal house in order, which would force the Fed into buying more).
As for the stock market, QE hasn't been working and it won't work any better in the future but it could be good enough for a short-term squirt to the upside. Throw in the behind-the-curve equity managers and you have the makings for a rally into year-end. But if the politicians coordinate a delay on fiscal decisions into the new year and the Fed decides to hold off on any new QE money, we could find a lot of disappointed traders. The uncertainty could be too much for the bulls to hold back the bears.
This is of course all speculation about what could happen and I have no clue. Nor do I have a clue how the market will react to any of these possibilities. It's best to stick with the charts and at the moment they suggest caution. Hopefully by Friday we'll have a better setup for next week so that's what I'm waiting for.
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