The overseas uncertainty continues to hamper the bulls and then this afternoon's FOMC announcement failed to give the bulls more than what they expected.
The global stock markets are getting whipped around on currency/debt/rate changes in some of the emerging markets and that gave us a completely different start to today's trading than it looked like last night. Following an announcement by Turkey that they would raise the bank lending rate in an attempt to stabilize their lira we saw equity futures shoot up last evening. But during the overnight session it was deemed not enough or that there were more significant problems and a 120-point rally in the DOW's futures turned into a 130-point decline instead. It was a 250-point reversal during the overnight session and needless to say the bulls were not happy with that move.
Normally these kinds of things from smaller countries would not have much of an impact on the larger stock markets but everyone knows the story about the tiny Thai bhat that almost crashed the markets back in 1997. The Asian contagion quickly spread and took down those who were highly leveraged, such as Long Term Capital Management (LTCM). When it was learned that LTCM was going to take down some major banks as well it was Greenspan to the rescue. We've had Fed bailouts ever since then.
Could the Turkish lira cause similar problems today? Turkey is a much larger economy than Thailand and its impact on global markets is certainly larger than Thailand's. The house of cards that each central bank has built is in jeopardy and many worry about the first domino to fall and where that first domino is located. The market is jumpy.
Adding to today's worry was what the Fed was going to say in their announcement this afternoon. Everyone knows there won't be any change in rates for as far as the eye can see so no one cares about that. It's the story of the taper that has everyone on the edge of their seats. Will Bernanke work to keep the boat steady and give the market what it expects or does he surprise the market with more or less taper than expected based on the "data."
Some troubling news about our slowing economy and the turmoil from the emerging markets could have had the Fed put any further tapering on hold. And watch out if the Fed feels the need to add instead of withdraw QE purchases. It would be an admission by the Fed that they can't withdraw money support, which in turn would tell everyone the Fed is trapped. They are but many still believe the Fed knows what they're doing. When it becomes clear that our Emperor (the Fed, not Obama) wears no clothes it will become clear that the market is on its own. That day will not be kind to Wall Street.
So the Fed announced no rate change and they tapered another $10B to $65B/month, which is what the market expected to hear but it was still disappointed. A drug addict does not to hear he'll still get some drugs, just not as much as he's used to. The Fed cited signs of an improving economy as the reason to continue their tapering of bond purchases. The decision was unanimous. Now we get to hear from Janet Yellen and what she thinks about future tapering. My prediction is that she'll start to increase QE, prove the Fed is trapped and try to ride the rough seas from there. I think the trio of Greenspan, Bernanke and Yellen will get equal blame for destroying the Fed and making the world understand they don't know what they're doing. But that's for the future.
As for liquidity concerns (from the Fed pulling back), I keep hearing why it should not be a major issue because companies have so much cash on their books. While some of it is on their books in other countries (and they can't bring it back without a heavy tax hit), there is supposedly a lot of cash for companies to buy back their own stock. But I came across an interesting chart that shows a comparison of cash levels along with debt levels. While cash levels have been on the rise (this chart starts from 1998), so too has debt. Debt minus cash (net debt) has been on the rise so the cash has essentially been spoken for. Companies will be able to service their debt as long as income keeps coming in, otherwise they'll have to draw down their cash reserves to service the debt. This is not as rosy a picture of "all that cash on the sidelines" that bulls would have us believe.
Corporate cash vs. debt, chart courtesy wallstreetdaily.com
I thought I'd start tonight's review of the charts with a top-down look at one of the bigger indexes, the NYSE Composite (NYA). Recently I've shown a monthly chart of the DOW and the trend line along the highs from 2000-2007, which is where it topped out at December's high. Along with some other technical reasons it made for a good place for the rally to end. That trend line is up-sloping but for the NYA you can see it's a double top (so far). The monthly chart shows the rally right up to the 2000 high (10387) with a high on December 31st at 10406. There were two more attempts made to get above that high, on January 15th and 21st but the rejection from the 2nd attempt was a violent slap to the bullish kiss. Note the clear 3-wave move up from 2009 (as compared to the impulsive 5-wave move down from 2000-2009), which is a clear indication that the corrective bounce within the longer-term secular bear market will likely be completely retraced. That's a possibility that almost no one is considering.
NYSE Composite index, NYA, Monthly chart
The uptrend line from 2009 shows the bullish trend since 2009 is clearly intact and that's a reason why so many market pundits are not worried (yet). From a longer-term perspective I agree with them. My method of trading is to anticipate turns so that I can get an early entry (I'm often too early) and more importantly to protect profits on a position in the current trend. Using the monthly chart and the uptrend line from 2009 means I need to wait until that trend line, currently near 9450, breaks before punching out of my long position. That's giving up about 1000 points (-10%) and I don't like doing that. But if you're managing your 401(k) and not wanting to jump in and out then waiting for that kind of signal could be perfectly adequate for you. Know your trading style and time frame.
The weekly chart of NYA is shown below and it zooms in on the 3rd leg of the 3-wave move up from 2009, which started from the October 2011 low. An uptrend line from that low is currently near 9840, not much below Monday's low at 9935 (nearly tested with today's low at 9944). A shorter-term uptrend line from June 2013, near 10220, was broken last Friday. The reversal from the price projection at 10317, which is where the c-wave of the a-b-c up from October 2011 is 162% of the a-wave, gives some more credibility to the wave count that says the rally is likely complete. Again, depending on your trading time frame you can use one of the uptrend lines to help guide your trading. Or if you like using moving averages, a break of the 50-week MA, at 9601, could be used for your stop loss.
NYSE Composite index, NYA, Weekly chart
The 5th wave of the leg up from June 2012 (wave-c of the a-b-c move up from October 2011) is shown in more detail with the daily chart below. It's not a clean count but the December high fits as the completion of the 5th wave and a drop below 9900 would start to be better confirmation the high is in place. But it's possible we haven't seen the final 5th wave yet and this is what bears need to be careful about. I've drawn a bold up-channel based on an EW method of drawing a trend line from the 1st to 3rd wave and then attaching a parallel line to the 2nd wave. The bottom of this channel is often a good guide where the 4th wave will find support and that's where price is currently trying to hold. If the January decline is the completion of a 4th wave pullback and we get a new rally leg started we could see it head for 10800 in March. Bears need to keep this in mind when thinking about risk management. Bulls need to get serious about risk management if 9900 gives way.
NYSE Composite index, NYA, Daily chart
Since last Friday SPX has broken every support level presented to it, starting with its uptrend line from October (which had held last Thursday). It sliced through its 50-dma and price-level support near 1813 like they weren't even there. But at least it's holding price-level support near 1770, which was tested Monday and again today. Slightly lower is its uptrend line from November 2012 - October 2013, near 1765 (log price scale). A break below that trend line would then call in support at 1748. As shown on the chart below, I'm expecting a bounce into early next week for a correction to the decline and then hard down through February. A bounce back up to price-level S/R and its 50-dma could set up an ideal short entry.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1812
- bearish below 1765
A closer view of SPX, with the 60-min chart below, shows a 5-wave move down from last week. It's possible to consider the decline the completion of an a-b-c pullback from December 31st but at this point that's a lower-probability wave count. More likely, the 5-wave move down tells us the trend has flipped around to the downside. Tuesday evening I was looking for a 5th wave down today for a test or minor new low with bullish divergence and that's what we have so far. This afternoon I thought it was a good setup for a long play into next week (for a counter-trend play). The larger-degree 1st wave down should be followed by a 3-wave bounce (or something more complex) into next week, hopefully up to the 1812 area, to complete a 2nd wave correction and from there the start of a stronger selloff in the 3rd wave down. That's the one traders will want to ride on the short side so break out some short plays, dust them off and get ready.
S&P 500, SPX, 60-min chart
Thursday is a new moon and it could coincide nicely with a bigger bounce into next week before heading lower.
SPX MPTS daily chart
I'm using the DOW's truncated finish on January 21st as the completion of its rally, which keeps it in synch with the other indexes. As with SPX, the 1st wave of the decline looks complete and at the same time it's finding support at price-level S/R near 15700. A little lower, near 15590, is its uptrend line form November 2012 so watch that level if the bears hold the bull's head under water a little longer. Otherwise a bounce up to its broken 50-dma, near 16155, early next week should be an outstanding setup for the bears to really do some damage.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 16,410
- bearish below 15,700
Take the pattern I've drawn out on the chart above, which reflects what a typical bearish wave count would look like (1st wave down, 2nd wave bounce, stronger 3rd wave decline), and compare to the chart below. Tom McClellan has continued to update his chart of the 1929 analog pattern and it continues to hold. Tom DeMark was on CNBC, on Monday I think it was, also talking about this analog pattern.
INDU 1928-1929 vs. 2012-present analog pattern, chart courtesy Tom McClellan, mcoscillator.com
A trading group that I belong to, which has some of the top names in the industry (regularly seen on CNBC, written trading books, etc.), has surprised me with the amount of negativism toward this analog. Almost to a person this analog pattern is referred to as a ridiculous effort to project what the market might do from here. What I constantly hear is "it's different this time" because today's market condition is completely different from what it was back in 1929. I don't argue with that logic but I think what even most technical analysts forget is that the sentiment is the same and it's the sentiment that creates similar market patterns.
Human beings have reacted to the same fear-greed emotions since the time we were still climbing around in the trees. It is for this reason, and maybe especially because most appear to completely discount the possibility, that I continue to follow the pattern with McClellan. But keep in mind that this is only a possibility, not a certainty. I've drawn where we are currently, what the little bounce I'm expecting would look like and then what follows. It's spooky how closely it continues to track. Ignore this at your own peril until the analog breaks.
On Monday NDX broke below its 50-dma but recovered it by the close. No harm, no foul. On Tuesday it broke it again but was only able to back test it during the day, closing marginally below it. Some harm done but still recoverable. Today it is convincingly below its 50-dma and following Tuesday's back test it looks bearish. But it's now getting close to its uptrend line from June-October, near 3448. A little lower is price-level S/R near 3425 (mid-November high, December low). Based on the short-term pattern I think the uptrend line will hold and we'll get a higher bounce into next week before starting back down.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 3610
- bearish below 3425
The NDX 60-min chart below shows a closer view of the decline from its January 22nd high, which shows a clean 5-wave count for the decline. As discussed with the SPX chart, the decline from last week could be the completion of an a-b-c pullback from the December high, which is a better possibility for NDX than what I see on SPX. While I believe an a-b-c pullback is a lower-probability alternative, bears need to keep in mind since a "bounce" could turn into a full-blown rally into March. The bearish interpretation here is that a 5-wave move down tells us the trend has changed to the downside. The 5th wave is the small descending wedge (ending diagonal 5th wave) starting from Monday afternoon's high and has some bullish divergence supporting the idea it's an ending pattern.
Nasdaq-100, NDX, 60-min chart
The little descending wedge should result in a pop up out of it on Thursday and it's the reason for my recommendation for a long play, with a stop just below its uptrend line from June-October, near 3450. A bounce correction into next week should be an outstanding setup to get short for a stronger decline in February. This pattern says bullish positions for February opex, such as bull put spreads, will be in danger. Based on this pattern we could see a quick decline Thursday morning but should see it immediately reverse to the upside. A drop below 3450 would be more bearish, especially if it stays below 3450.
The RUT has a similar short-term pattern that calls for a bounce correction and it's testing support at its uptrend line from September-October 2013 near 1123. The bulls need to step in now otherwise it could spark some stronger selling sooner rather than later.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1170
- bearish below 1123
After leaving a 3-drives-to-a-high topping pattern (January 9th, 15th and 22nd), with bearish divergence, it was a strong warning to bulls to get out of the way. Once it broke, it broke down hard. It's holding support at its uptrend line from November 2012 - April 2013 and we should get a bounce back up into early next week, matching the broader averages, but then look out below once the bounce correction completes.
KBW Bank index, BKX, Daily chart
For more than a few years I've been expecting the bond market to rally to new highs through the secular bear market for stocks and I haven't changed that opinion, yet. The large pullback in 10-year and 30-year bond prices from the 2012 highs has created what I think is a corrective pattern but another new low following the bounce from December 31st would turn it longer-term bearish. So from a long-term perspective I remain bullish bond prices against the December highs. Today's reaction in the bond market (post FOMC rally) says the bond market is expecting the Fed to hold tight on any further tapering.
The daily chart of the 10-year bond futures (ZN) is shown below and what I'm looking for is evidence of an impulsive rally vs. a corrective one, but unfortunately I could argue either at the moment. I have no trouble calling it an a-b-c bounce so far with two equal legs up at 125'200. I was watching for resistance at 125'200 to 125'270, which is price-level S/R going back to last July. It's a good setup for a pullback before heading higher but more immediately bullish above 125'270.
10-year Note contract, ZN, Daily chart
The U.S. dollar is a little weaker than I expected to see here. On January 23rd it broke its short-term uptrend line from December 18th and then did a bearish back test of it yesterday and today. I've been looking for the dollar to rally but I don't have a warm fuzzy about that expectation at the moment. It has been in a very choppy pattern for months (years) and my opinion on the dollar is as much fundamental as it is technical (I think the dollar will continue to show relative strength compared to other currencies but all are in a race for the bottom). Its uptrend line from 2011-2013 is currently near 79.72 and two equal legs down from its January 21st high points to 79.59 so that's a downside target zone if the dollar drops from here. Below 79.59 could see acceleration lower. It takes a rally above 81.50, where its 200-dma is also located, to keep the dollar bulls on track.
U.S. Dollar contract, DX, Daily chart
Gold's pattern has me thinking the bounce off its December 31st low will fail and we'll get another new low before a better trading opportunity on the long side. For now I've got a downside target near 1155 but a rally above 1280 would keep the bulls alive, especially if gold can get above its 200-dma near 1318.
Gold continuous contract, GC, Daily chart
Silver is the one that keeps me leaning bearish gold. Its ascending triangle pattern that's been built since early December is a bearish continuation pattern in this location. It fits well as a 4th wave correction in the move down from August and strongly suggests one more leg down to complete the 5th wave. For now I'm projecting silver down to about 17.90 for a minor new low below its June 2013 low at 18.18 (I've had longer-term price-level support at 18 so this fits well). Assuming we'll see the 5th wave down I think it will be an excellent opportunity to buy the metals for a longer-term hold.
Silver continuous contract, SI, Daily chart
I've had a bearish opinion about oil since its high back in August and longer term I still do. But shorter term I'm wondering if we're going to see a higher bounce. It's currently battling its downtrend line from August-December so a rally above its recent highs (97.84) would be at least short-term bullish and more bullish above its December 27th high at 100.75. But oil bulls should be aware that the bearish wave count is now very bearish with a 1-2, 1-2 to the downside, which means get ready for a strong selloff in a 3rd of a 3rd wave down. A fast break below the January 9th low at 91.24 would suggest the trap door just opened up.
Oil continuous contract, CL, Daily chart
Economic reports pick up a little for the rest of the week and tomorrow we'll get the usual unemployment claims numbers, an advance look at GDP and pending home sales.
Economic reports and Summary
There remains the potential for another rally leg into March if the current decline is followed by some strong impulsive rallies. But the strength of the decline favors the bears and a bounce correction, which I'm expecting into early next week, should be a very good setup for some short trades. A bounce correction could get a little whippy so be careful of that possibility when entering trades.
The price pattern suggests a bounce, as well as short-term bullish divergence at today's lows, and it's common for the market to reverse the post-FOMC move, which also suggests a rally. We should get a better idea over the next two days whether or not the bounce is likely to be a correction or something more bullish. Based on that we can make plans to buy the dips or sell the rips. I lean toward the selling but preferably not until early next week. Trade carefully over the next couple of days while we wait for some answers.
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