Wednesday traded like Tuesday, starting with a selloff in the opening minutes followed by a sideways consolidation. Support levels are holding but the bears are pounding on them like a bear pounding on a dumpster to get it open, and both sides are nervously watching to see what tomorrow will bring.
Wednesday's Market Stats
Equity futures tanked last evening but I couldn't find any solid news stories to explain why. I guess other traders couldn't either and after SPX futures hit a low of 2033.50 for a loss of -26.25 they climbed back up and got 1 point in the green by 6:00 AM. From there futures struggled, especially after the pre-market ADP report, but by the open it was looking like there was an intention to rally the market. Until the opening bell rang that is -- big sell programs hit at the open and SPX gave up 20 points in the first 30 minutes of trading. From there we spent the rest of the day off the lows but basically trading sideways and that left both sides wondering what tomorrow will bring.
The ADP report was released before the bell and it came in as a slight disappointment. Expectations were for +225K, which would have been an increase from February's upwardly revised 214K (from 212K), but the actual number was only +189K. This is of course a bad news/good news kind of number because it means the NFP number, to be released on Friday (which is a market holiday), could be disappointing as well (the expected number is 250K, down from February's 295K). Lower-than-expected numbers are of course a bad sign for the economy but a good sign for keeping the Fed away from the Raise Rates button. Or so the thinking goes.
After the opening bell we then got the ISM index report, which continues to show a slowing economy with the reported number of 51.5, a point below expectations and a drop from February's 52.9. Construction spending in February dropped -0.1% but that was "3 times" better than the expected -0.3% (see how a headline could give you a completely different take on the number?). It was a significant improvement over January's -1.7%.
There's been no change to the steady drumbeat of declining economic numbers and this has most everyone keeping their fingers crossed that the Fed will be forced to stay on the sidelines (trapped as they are) and not talk about raising rates. To me that's called desperation but after such a long-running bull market there's not much else for the bulls to hang their hats on, especially with the deterioration of the economy and corporate earnings (much of which has not yet been acknowledged by the stock market). I suspect much of the volatility we've seen in the market over the past several months is the big bull/bear argument over fundamentals and what it means for stock prices.
While arguments over funnymentals are always interesting, I haven't seen much evidence the market really cares about them. If it did there's no way we'd still be flirting with all-time highs for the stock indexes. But hope is a wonderful thing and most market participants remain very hopeful that something will drive the markets higher and every little clue about another central bank pumping more money into the financial markets provides just enough stimulus to drive the market higher (much of it from short covering from scared bears, and who can blame them).
While I consider myself a very hopeful person with a lot of optimism about our future, hope is a dangerous thing in the stock market. I'm sure I'm not the only one that has been caught a time or two staring at the monitor hoping the market will reverse direction before the close so that it stops the pain from a trade I should have stopped out of long before that point. Hope is far more dangerous than a stop but at the moment that's all that's driving the market higher (or holding it up at the moment). It could still work for another month or so (there's a very interesting turn cycle that's due in mid-May) and bears need to respect its power but bulls also need to understand the slope of hope. That's seen in a bear market where frenzied buying (a lot of short covering as well) follows good news and the hope for a strong reversal. But it doesn't last and new lows keep coming, interspersed with volatile and short-lived buying spikes.
It's possible the market is at a tipping point and we could be close to starting down in a more significant way. In order to avoid this it's very important for the bulls to get back in the game and stop the decline here. They still have an opportunity to slap the bears silly and the next couple of days should tell us whether or not they can do it.
The DOW's weekly chart below shows price trying to hold its uptrend line from October-February, currently near 17725 (17760 using log price scale) but it closed slightly below the line today. It will be important to see how it closes the week and as it stands now there is still a bullish potential for another leg up this month, depicted in green. The upside potential is to the 18500 area, which is where the trend line along the highs from May 2011 - December 2013 intersects the shorter-term trend line along the highs from December-March in mid-May (that would be a good setup to sell in May and go away). But a drop below 17500 would have the pattern looking more bearish, which would open the door for a decline to the 16500 area by mid-May.
Dow Industrials, INDU, Weekly chart
A closer view of this bull/bear battle can be seen on the daily chart below. This morning's decline broke below the uptrend line from October-February but looks it recovered by the afternoon and that keeps the upside potential in play. The choppy price action that we've been in is making projections very difficult but a sharp break below 17500 would turn the pattern more impulsive to the downside.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 18,010
- bearish below 17,500
The 60-min chart below shows a break of a recent pattern that we've been seeing since the March 12th low. The rallies were spikes to the upside (highlighted in green) but they were then followed by spikes back down (but not full retracements). It was the first sign of a change in character for the market since previous rallies off v-bottom reversals were relentless, not letting bulls in or bears out with "normal" pullbacks. Now the pullbacks were stronger and steeper and that was a warning sign that the bounce off the March 12th low was "different." The sharp rally on Monday, according to this new pattern, called for a sharp spike back down, which we got on Tuesday. But now the pullback looks more bearish and that supports the bearish wave count, which is a series of 1st and 2nd waves to the downside. This calls for a very sharp and strong selloff in the coming weeks, one that will not let bears in or bulls out (without a loss). But at the moment there is still hope for the bulls if the bears are unable to capitalize on the bearish setup.
Dow Industrials, INDU, 60-min chart
There's another index that could be a warning sign for us -- the Shanghai Composite index (SSEC). Following its 2007-2008 sharp decline it has been essentially in a sideways consolidation (shallow up-channel as shown below). I'm looking at the 3-wave bounce off the 2008 low as an a-b-c and this week's rally has the leg up from June 2013 achieving equality with the 1st leg up in 2009, as noted on the chart. That gives us a setup for possible reversal, which would be confirmed following the completion of a 5-wave move up for wave-c from June 2013. As labeled on the chart, we do have a 5-wave move and therefore the rally can be considered complete at any time, although it would not be hard for me to argue for a week-long consolidation followed by at least a minor new high, especially since there's a little room left to reach the top of its parallel up-channel from 2008.
Shanghai Stock Exchange Composite index, SSEC, Weekly chart
The SSEC has been ripping to the upside recently, despite evidence their economy is also slowing down, because they too have put their faith in the central bank. The People's Bank of China keeps promising their support and the people are literally buying into it. Interestingly, just as it appears the SSEC a-b-c bounce correction could be completing, new trading accounts in China are exploding. Bloomberg has reported that two thirds of these new accounts are by people who have a below high school education. There's frenzied buying as their market spikes up. What could possibly go wrong... (similar to 1999-2000 in the U.S. when everyone quit their jobs to become day traders). There's a lot of bullish expectation by market analysts and I strongly suspect they're becoming very bullish at exactly the wrong time, and I think that goes for the U.S. market as well.
SSEC and New Trading Accounts, chart courtesy Bloomberg
SPX has the same pattern as the DOW and could also go either way here. This morning's decline tested the short-term uptrend line from the March 12-26 lows, as well as its uptrend line form 2009-2011, both of which intersect tomorrow near 2048 (today's low). As long as that level holds as support the bears have nothing to crow (growl) about since the bullish pattern suggests a rally to new highs in the coming weeks (up to 2155 or 2175 in April or May, resp. The first sign of bullishness would be a rally above Monday's high near 2089 and it would be confirmed bullish above the March 23rd high near 2115. But the bulls need to keep in mind the bearish pattern, which calls for a drop lower tomorrow and then at most another bounce to another lower high early next week. From there it would be hard down and very little opportunity for the bulls to get out without a loss.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 2115
- bearish below 2045
On March 26th NDX broke its uptrend line from October-February but recovered the next day. Yesterday it closed on the line and today it broke it, currently near 4343. As long as it stays below that trend line it remains bearish and we could see the 4000 area later this month. But as with the others, there is still upside potential, especially if it's able to climb back above Monday's high near 4384.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 4436
- bearish below 4280
The RUT continues to be the stronger index and that's a positive sign for the bulls. Whereas the other indexes are testing last week's lows the RUT retraced only a little more than 50% of its rally into Monday's high. And the pullback looks corrective, which makes it look like it's going to head higher. In fact if I were doing a market analysis based only on the RUT I'd be strongly suggesting get long for another rally this month. We could see the RUT rally up to trend lines near 1290-1300 in the next week or two.
The RUT tested its 20-dma this morning, at 1241, and then almost made it back into the green by the close (there was stronger buying interest in the RUT than the others at the end of the day). But it's going to be important for the bulls to keep the buying going Thursday since it rallied back up to the trend line along the highs from last September-December, near 1252. It popped back above this on Monday, closed on it on Tuesday and closed on it again today. It could be a back-test and any selling tomorrow would look like a bearish kiss goodbye. I think the RUT could be a good canary index for us.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1260
- bearish below 1225
Speaking of canaries, I like to keep an eye on a few key "barometer" stocks and AAPL is one of them. At the moment it's not helping us but it should be close to breaking one way or the other. Back in late-February I had been looking for the completion of AAPL's rally and it looked like a nice little throw-over finish when it popped above its trend line along the highs from December 2013 - November 2014 on February 23rd and then rolled over, leaving a head-fake break. But since the low on March 12th it has formed a sideways triangle and it can be interpreted both ways -- either as a bullish continuation pattern that will lead to a final push higher (possibly up to 140), or as a bearish continuation pattern that will be followed by another leg down at least equal to the February 24 - March 12 decline. Two equal legs down from its February 24th high points to 117.27, which crosses the uptrend line from April 2014 - January 2015 next Thursday. Whichever way AAPL breaks out of this little triangle should be a good indicator for what the broader market will likely do next. A downside break would be below 122.60 and an upside break would be above 126.40.
Apple Inc., AAPL, Daily chart
The TRAN is currently holding onto support but it can't tolerate much more selling. On March 26th it poked below its 200-dma but recovered to close slightly above it. Today it broke it again and again closed slightly above it, near 8664 tomorrow. This morning's low at 8621 was also a test of its uptrend line from November 2012 - October 2014. Only slightly lower, near 8580, is price support from its previous lows since December. That's a lot of support broken if the TRAN drops below 8580 so the bulls need to do their thing here (buy the dip).
Transportation Index, TRAN, Daily chart
While I liked the March 13th high for the U.S. dollar to be a multi-month high I haven't seen convincing evidence yet in the decline since then to suggest that high at 100.78 is going to stand for a while. It's a bit like the stock market at the moment and I could easily argue both ways. That tells me any trades (on the dollar or the stock market) should be cautious (in size and stops) until we see what happens from here. The March high had no bearish divergence and therefore it would be somewhat normal for at least a retest with bearish divergence. But the next bearish clue would be a break below its 50-dma, currently near 96.25, which would also be a break of its up-channel. Until then the trend is clearly up and needs to be respected. Maybe getting the euro to parity (it got as low as 1.0472 on March 13th and is currently 1.0775) is the goal for now.
U.S. Dollar contract, DX, Daily chart
Gold's decline from January looks impulsive and following the March 17th low I thought it was a good setup for a bounce correction before continuing lower, which is still the way I'm leaning. We might see gold make it up to the 1250 area (I've got a target zone at roughly 1226-1256, which includes the 200-dma near 1237 and 50-week MA near 1245). But the minimum bounce expectation has been met and therefore a continuation lower from here is possible. Until I see evidence to the contrary I'll continue to look for a low near 1000 later this year (at least I hope we'll see that level so I can back up the truck and fill it with gold).
Gold continuous contract, GC, Daily chart
Following oil's 3-wave pullback from February 17 - March 18 I've been looking for another leg up for the bounce off the January low. The price projection at 58.13 continues to look good, especially since it correlates nicely with price-level S/R at that level. For now I show a rising wedge pattern for the c-wave of the a-b-c bounce off the January low but that's just speculation for now. It means we could see a choppy rise higher, frustrating both side of the trading aisle. I continue to see oil consolidating between 40-60 for a few more months before heading lower.
Oil continuous contract, CL, Daily chart
Thursday's economic reports include the unemployment claims data and Factory Orders, neither of which will likely be market movers. If factory orders come in different than expectations will that be a good thing or bad thing for the market? Your guess is as good as mine. Friday's reports are important but the first time the market will be able to react to them is Sunday night in the futures and then Monday's cash open. Should be interesting.
Economic reports and Summary
Other than the RUT, which continues to show relative strength, the market looks to be on the verge of a breakdown. It can't tolerate much more selling from here without doing more technical damage to the charts. I see the potential for a new low, such as SPX 2045, and then a stronger bounce into early next week before the bottom falls out. That's the bearish pattern. The bullish pattern argues for more sideways consolidation before heading back up or heading back up from here. Monday's highs are important for the bears to defend since above those highs would be a strong statement from the bulls that they're done messing around with the annoying bears.
Short below SPX 2040 and long above 2090 -- that's a wide spread but it's what the market has given us. In between could be lots of chop and whipsaw. Keep an eye on the RUT, TRAN and AAPL for clues in the meantime.
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