The market was down for most of the day today prior to the FOMC announcement this afternoon but you wouldn't know that by looking at the closing prices. The DOW finished +227, which was 380 points off the low just prior to the FOMC announcement. The market liked the fact that the Fed is showing patience even though they removed the word "patient" from their language. Saying a rate hike in April is "unlikely" is what the market wanted to hear.
Wednesday's Market Stats
Thanks to the FOMC's decision to not change anything in today's announcement, especially the important word "patient," the stock market saw a relief rally this afternoon that quickly wiped out the day's losses. The DOW jumped +400 points (exactly) while SPX rallied 45 points from low-to-high before both pulled back in the final hour. Bond yields tanked on the announcement, as did the U.S. dollar, and both are providing a very interesting message as we look ahead.
The Fed actually got a little more dovish than the market had expected. I've long held the belief that we'll see QE4 long before we'll see a rise in rates and perhaps the Fed's concern about the health of the economy has more market participants beginning to sense the same thing. Basically the Fed is impotent (nothing's changed) and the market will soon become very disappointed in the Fed's inability to make a difference, QE4 or otherwise, and that will be part of the mood change in the next and final bear market leg down in the coming years. There are no good fundamental reasons for why the stock market is as high as it is but for now the market is still pinning its hopes on the Fed being able to do something.
The Fed repeated its statement that it sees improvement in the labor market (apparently they're one of the few who actually believe the labor department's numbers) but not enough. Between that and the inflation rate stubbornly remaining below its 2% target the Fed is saying they'll continue to watch the data before announcing plans to raise rates. It's hinting that a rate hike is coming; just not in April and that's all the market cares about right now. A June rate hike is a possibility but many market analysts now think the first rate hike won't happen until September at the earliest. It was the Fed's expression of caution about the economy that got the bulls excited this afternoon. "Woohoo, a weak economy, let's rally!"
In a nutshell, here's a brief explanation of today's moves, thanks to the Fed (hat tip to Bob):
- Yellen mentioned dollar strength hurting the economy â€“ Result: Dollar down
- She mentioned economy not as strong â€“ Result: lower interest rates
- Lower interest rates and lower dollar â€“ Result: stocks, commodities and bonds UP!
- Lower US interest rates and lower dollar â€“> (higher Euro and Yen) â€“>
pressure on the EU and Asian economies â€“> selloff in EU and Asian stocks ->
money flow back to the US â€“> higher US stocks, bonds and commodities
Now we wait to see if today's moves were more or less a knee-jerk response or something more.
Kicking off tonight's review of the charts will be a look at SPX, which remains one of the better indexes to see what THE market is doing. The RUT has made a new high above its March 2nd high (the first and only to do so), which could be leading the others higher but at the moment I'm not so sure about that happening. It will be important how the rest of this week plays out.
The SPX weekly chart shows price is getting crowded as it gets pinched in multiple rising wedge patterns. There are two wave counts that I consider the highest probabilities and unfortunately it's a coin toss as to which one is the more likely one. As already mentioned, the RUT says follow me to new highs, but the short-term pattern suggests bulls might have used up the rest of their buying power this afternoon. Both wave counts point to lower prices this summer but one is short-term bullish (green) into the end of March/early-April before the market puts in what should be a final high for the year. The more immediately bearish wave count (red) says the high is already in place and we'll see lower prices directly from here.
The uptrend line from March 2009 - October 2011 (bold purple) is currently near 2034 and it's the important trend line for the bulls to defend on a weekly closing basis. You can see a sharp drop below it last October (the tail on the weekly candle) and the minor drop below it at the February 2nd low. A third drop below the line, especially a weekly close below it would be a potentially big deal since it would be a signal that the final high is already in place. Until that happens there is still the potential for another leg up to complete a 5-wave ending diagonal (rising wedge) for the move up from October. The top of the rising wedge is currently near 2132 and then if it can make it up to the trend line along the highs from April 2010 - May 2011 we could see SPX rally up to the 2175 area by early April.
S&P 500, SPX, Weekly chart
In the short-term pattern, the rally off last Friday's low had me thinking we'll get another leg up this afternoon following the pullback from Monday afternoon's high. The pullback into today's FOMC announcement was a good setup for the bulls and the positive reaction could see some follow through tomorrow. But the typical pattern has been for the post-FOMC rally to get reversed the next day and the bearish wave count setup calls for the same thing. If the bounce off last Friday's low is just a correction to the March 2-13 decline then we should not see SPX above today's high at 2107 so a rally above that level would tell us new highs are coming. This afternoon's low near 2061 is an important level for the bulls to defend since a break below that would tell us the bounce finished and the next leg down has begun. It should be a 3rd wave down and that means it would be a stronger decline than the March 2-13 decline.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 2107
- bearish below 2061
If the bulls can keep this afternoon's rally going I'll be looking for the 2130 area before starting a consolidation and then higher next week, potentially up to the 2150 area (maybe higher into early April). But as labeled in red on the 60-min chart below, so far the bounce is an a-b-c correction to the decline and that's why this afternoon's low near 2061 is important for the bears to break. That would confirm this week's bounce is a correction and a stronger decline will follow.
S&P 500, SPX, 60-min chart
The DOW has the same possibilities as shown for SPX. As you can see on its daily chart below, it's not hard to imagine a continuing rally up to about 18400 by the end of the month to reach the top of its rising wedge pattern. The first thing the bulls need to do is get the DOW back above price-level S/R near 18100 (today's high was 18097). But from a bearish perspective it has now completed an a-b-c bounce off last Friday's low, at 18100 resistance, and it will now be followed by a strong 3rd wave down. For the bearish wave count we could see 17000 before the end of the month and then lower into early April before setting up a large bounce correction. As with SPX, the bulls need to defend this afternoon's low at 17697.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 18,100
- bearish below 17,697
It's the same pattern for the NDX as the blue chips -- it looks good for the bears to try a short play and use today's high for your stop (small risk on the play). If the bulls can press the rally higher and only allow choppy pullbacks we should then see new highs this month notice where MACD is -- a turn back down from here would have MACD rolling back over from the zero line, which would create a strong sell signal (MACD having been "reset"). The bearish pattern calls this afternoon's high completes a 3-wave bounce off last Friday's low with two equal legs up at 4440.17 (this afternoon's high was 4440.49) and as such it fits as an a-b-c bounce correction to the March 2-13 decline. The expectation for a short play here is a strong decline for a 3rd wave.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 4484
- bearish below 4344
The RUT has been out in front of the latest rally since last week's lows, starting with the higher low last Friday. This afternoon's rally had the RUT climbing above the trend line along the highs from last September-December, which had stopped the rally into the March 2nd high (it closed marginally above the line but then dropped back below it the next day). That trend line is currently near 1247 and the bulls want to prevent a similar occurrence as the March 2nd high since it would leave another reversal signal and could mark the top of its rally. But if the bulls can hang on (with nothing more than a choppy pullback) and drive the RUT higher we could then see the broken uptrend line from March 2009 - October 2011 tested, which will be near 1285 by the end of the month. A short-term trend line along recent highs, starting from January 28th, intersects the broken uptrend line from 2009-2011 at the end of the month. A clean 3-wave move up from March 11th, to the 1285 area by the end of the month, would be a good finish to a large rising wedge pattern off the October low. The bears need to negate that potential with a strong impulsive decline from here and a drop below its 20-dma, near 1233 would be a good first step. The RUT is obviously the canary dressed up like a bull at the moment and that's reason enough for bears to be cautious.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1256
- bearish below 1206
There were three things the Fed accomplished today -- they drove the stock market up, bond yields down and the U.S. dollar down. They of course want stock prices higher because it helps the "wealth effect," even though it's been well proven that the only ones benefitting from that are the wealthy. The Fed of course wants to keep bond yields down (hence their reluctance to raise rates) so that the governments, businesses and people can borrow at lower costs. That has been a huge help for debt-strapped governments and it's been a huge boon for businesses who borrow money at very low cost and then buy back stock and other things to increase the stock value so that executives can get higher bonus compensation. Consumers haven't taken advantage of cheaper loans and instead have been working their debt levels down.
The other problem for the Fed has been the strong dollar, which makes it less profitable for businesses to conduct business overseas due to the exchange rate and higher selling prices in the foreign country. This creates a drag on the economy and it's why other countries have been involved in the ongoing currency war -- whoever can drive the value of their currency lower than the others is the one who wins in trade. It's also an effort to create inflation as the deflationary cycle becomes harder to fight off.
With so many other currencies valued against the dollar it has been their devaluing efforts that has helped drive the dollar's value higher and I'm sure there's been some gnashing of teeth at the Fed as to how to stop it. They could implement another QE program (and likely will in the not-too-distant future) but for now that would spook the markets. The next best thing is to jawbone the dollar lower by talking about the need to raise rates soon but not yet. Talk about a soft economy but that you think things are improving enough to warrant a rate increase in the near future. It's a narrow line the Fed is walking but so far they haven't fallen off it (a few well-timed and large buy programs in the stock and bond markets helped).
With this afternoon's strong rally in the bond market it crushed bond yields. The 10-year yield (TNX) dropped -5.2% and back below 2%, dropping from 2.05% to 1.944% before bouncing a little and closing at 1.951%. The "magic" level for the 10-year is 2% so it'll be telling us something over the next week once we see if the reversal off the March 6th high continues or not.
Looking at bond prices, using TLT, I could easily argue for another new high to complete its leg up from December 2013 (and potentially its longer-term 30-year rally). The January 20th high came very close to the trend line along the highs from December 2008 - July 2012 and I can see the potential for another test of that trend line with bearish divergence against the peak left on January 30th. Based on this we could see bonds rally into April/May and see TLT top out around 140. If reached, it might not stop there but it would be a good place to evaluate a possible reversal. If TNX (10-year) heads for 1% and TYX (30-year) heads for 2%, which I've believed for years will happen, then we'll see TLT head higher than 140.
20+ Year Treasury ETF, TLT, Weekly chart
Higher yields actually help the banks since they get to make a larger spread between what they can get from the Fed (virtually 0%) and what they can get for loans. So today's large drop in yields hurts banks and the banking index was one of the few to close in the red. The leg up from January 16th can be considered complete at any time, although I see a little more upside potential to the top of its expanding triangle pattern, as shown on its weekly chart below. But betting on the long side for banks is a risky bet in my book. The longer-term bearish divergence, along with the bearish expanding triangle (a topping pattern) tells us that this could break down hard at any time.
KBW Bank index, BKX, Weekly chart
For some time, since November, the TRAN has not been able to keep up with the DOW and the DOW's new highs in December and February went unmatched by the TRAN. That has created a Dow Theory bearish non-confirmation so it's incumbent upon the bulls to get the TRAN at least above its February 25th high near 9215 (today's high was near 9142). Today's rally for the TRAN was not as strong as the DOW's but it's now close to its February high and might be able to get above it if it can through the downtrend line from November. This trend line stopped the February rally so we'll see if the bulls can do better this time. But because of a possible rising wedge pattern for its final leg up, the top of which is currently near 9250, I think price will have to get above about 9270 before one could declare the TRAN bullish. Back below its 50-dma, near 8940, would be the first indication the bulls lost the battle.
Transportation Index, TRAN, Daily chart
The U.S. dollar's rally from February 26th, which I've been calling the 5th of the 5th wave in the rally from May 2014, had gone parabolic (more easily seen on a 60-min chart with the increasing steepness of uptrend lines) and it was begging for a sharp selloff to start at any time. It just needed an excuse (catalyst) and that was provided by the Fed this afternoon. The dollar had been down more than -5% but then recovered with a spike back up to 97.77 after 16:00. But the damage has been done and I think we've seen the top for the dollar for a while.
The dollar looks like it has now completed a 5-wave move up from May 2014 and that calls for at least a multi-month pullback or consolidation (depending on how the larger pattern is interpreted). I would turn more bearish the dollar if it drops back below the top of its large parallel up-channel from 2008-2011, which it broke above in January and is currently near 93.40. The first level of support is the apex of the previous triangle (the consolidation pattern in February), near 94.50.
U.S. Dollar contract, DX, Daily chart
On March 6th gold had dropped below price-level support near 1180 and it's been struggling since to get back above that level. It got a good bounce today, thanks to expectations that the Fed will continue to back away from accommodation, but it has multiple levels of resistance between 1180 and about 1220. The bearish pattern suggests gold will drop a little lower to the bottom of a shallow down-channel from 2013, near 1105, before bouncing stronger but nothing has changed with my expectation for gold to drop down to the 1000 area before setting up a potentially good buying opportunity.
Gold continuous contract, GC, Weekly chart
I'm always watching silver with gold because I want to see the two in synch to help identify the more likely directions. The pattern for silver is one of the things that has kept me bearish the metals even during the last high bounce for gold. I'm looking forward to the time when I can start building a long-term hold position in both metals but I still see this as too early to start (other than nibbling every now and then when I see a good deal). The first bullish sign for silver would be a rally above 19.61 where it would have two equal legs up from December 1, 2014 and it would break its longer-term downtrend line from April 2011, which is the top of the down-channel it's been in since that high.
Silver continuous contract, SI, Weekly chart
Yesterday oil dropped to a new low and then a little lower this morning (42.03). It then consolidated for most of today until the FOMC announcement when it shot back up (thanks in part to the dollar's decline). The pattern looks good for a stronger bounce in oil so we'll see if this afternoon's rally gets some follow through. This morning's low achieved a 162% projection for the 2nd leg of the pullback from February 17th, at 42.12, and almost achieved the 127% extension of the previous bounce (January 13 - February 17), at 41.47. A bounce off this Fibonacci cluster suggests the pullback from February 17th is part of a larger a-b-c bounce pattern off the January 13th low. The c-wave should be a sharp rally and it typically achieves a 162% projection of the a-wave, which points to 58.13, as shown on the chart. This is pennies away from price-level S/R near 58.50 and makes for a good upside target in the large sideways consolidation that I expect oil to do for the first part of this year.
Oil continuous contract, CL, Daily chart
Thursday's economic reports will include the usual unemployment numbers before the open and then at 10:00 we'll get the Philly Fed and Leading Indicators, neither of which should be a market mover. There have been a string of economic misses (economists are not seeing the slowdown that's in progress) and tomorrow's reports could continue the same streak but so far the market has been much more interested in what central banks are doing. The economy will matter again sometime, and probably soon, but it hasn't yet.
Economic reports and Summary
The Fed managed (perhaps directly) to pull off a successful move in several markets this afternoon. They got a rally in the stock and bond markets and a decline in the dollar. Golf clap for the Fed. Now we'll see if there will be any follow through in each of the markets. For the stock market there are two reasons why I expect a reversal of this afternoon's rally and we should find out quickly whether or not the reversal will happen. First, following the post-FOMC move, which is typically a rally, the following day often sees a reversal of the move. Second, there's a bearish wave count that says this afternoon's rally completed the c-wave of an a-b-c bounce off last Friday's low and will be followed by a resumption of the decline. It should be a 3rd wave (or c-wave) down and that means it should be stronger than the March 2-13 decline. It was reason enough to attempt a short play at today's close (tight stop at a new high).
The bullish case is strongly argued by the RUT, which made a new high above its March 2nd high. Bullish sentiment is high if they're buying the small caps. The absence of the tech indexes joining the RUT is a little bothersome but that could quickly be resolved with a continuation of the rally on Thursday. And a continuation of the rally Thursday morning would strongly argue for new highs for all the indexes. Either way, I suspect we'll have our answer in the first hour of trading.
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