Selloffs are being met with buy programs and the indexes are knocking on the door to new highs but resistance is still holding at the moment. However, a good gap up could easily take care of resistance, something this market is very good at (with an overnight rally in the futures). Whether or not that happens here should provide further clues for the coming week.
Wednesday's Market Stats
Equity futures had spiked down shortly after 3:00 AM and ES dropped a little more than 18 points from a high at 2098.50 (+7.50) to a low at 2080.25 (-10.75) by 6:00 AM. That was then followed by a rescue and futures were pushed back into positive territory before the open. The small gap up was immediately sold into and the indexes dropped to new lows for the week but another couple of buy programs took care of the shorts and sent the bears scurrying.
It only took 30 minutes for the DOW to rally 120 points off its morning low, which was then followed by another smaller pullback before rallying some more into the close. We're getting only inside days (trading inside a previous day's range) since last Friday's big drop so there's clearly some indecision here. But there's also clearly an effort being made to hold the market up and they could be close to accomplishing a breakout, especially if it starts off bullishly on Thursday.
This morning was quiet in regards to economic reports, which consisted of some home data, including existing home sales. The numbers were a little better than expected, with existing sales for March at 5.19M, which was an improvement over February's 4.89M. Tomorrow we'll get new home sales, which should give us a better idea how the home builders will do. But for some reason the home builders index (DJUSHB) sold off hard today, down about -3% at today's low, and that's a firm break of its 20-dma and now 50-dma. It had been trying to hold these MAs but the index is giving us a heads up that not all is well in the housing market (as well as declining lumber prices).
A slowdown in the housing market would be just another sign for the bulls to ignore (the proverbial wall of worry) and if the indexes can push just a little higher it could ignite some short covering as stops on short positions start getting hit. I'm sure that's what the purpose of last night's save in the futures was all about and then again this morning -- "they" (government/Fed-sponsored big banks) know that if they can get the indexes to start breaking resistance they'll then be able to ignite another rally leg. As I'll describe below, corporations are also large net buyers of stock right now and they've been greatly helping the current rally. But it's also reminiscent of what we saw into the 2007 high so it's not necessarily a good thing (short term yes, long term no).
For now all we can do is follow the charts and shut out all the noise around us (CNBC and other "news" sources and opinions, except for those of us at OIN of course, wink). I do have to admit though that the charts are currently not all that helpful since we've been in a 2-month chop zone. A sideways consolidation in a bull market is most often a bullish continuation pattern and that's the way I'm leaning. But we've seen many sideways choppy topping patterns in this market and instead of rallying out of the top of the pattern it suddenly breaks down instead (a failed pattern tends to fail hard as it catches too many traders leaning the wrong way). This makes it imperative to wait for a breakout or breakdown before acknowledging what the new direction is (and of course being careful about a head-fake break).
Kicking off a review of the charts, the SPX weekly chart shows price has worked its way over to its uptrend line from March 2009 - October 2011 (purple line), which was tested on April 1st and held. The rally off that low is what could lead us to new highs if resistance at the top of its little sideways triangle, which was tested again today, breaks. A sideways triangle fits well as the 4th wave in the move up from last October and triangle patterns typically lead to the final move of the trend (up in this case). Assuming it will break to the upside it would fit well as the final 5th wave of its rally to give us a high for the year (probably the high for years).
S&P 500, SPX, Weekly chart
The daily chart shows a closer view of the sideways triangle off the February 25th high, the top of which is currently near 2108. SPX pushed marginally above it today (the high was near 2110) but then closed on the line, which leaves both sides guessing whether or not resistance will hold. This has been resolved many times in the past with a gap up the next morning so we'll soon find out if the handlers can arrange that for the bulls. If we do get a breakout that's then followed by a back-test (similar to what it did when it broke out of the descending wedge back in early February) it would give us a very good buying opportunity. But a breakout that's then followed by a drop back below the top of the triangle would be a failed breakout attempt and put SPX on a sell signal (stop at the false breakout high). Upside potential is 2160-2180 by mid-May (an important cycle turn date is May 13th).
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 2112
- bearish below 2045
What can't be ruled out yet is another drop down inside the trading range and if it drops down to its uptrend line from March 2009 - October 2011 we could see 2067 before it sets up the next rally. It takes a drop below 2050 to negate the bullish pattern. The most important thing to keep in mind here is that these triangle patterns tend to whip traders around like little rag dolls. It's why even right here there is no assurance which way this market will head next and it's why I've been urging caution until we get a confirmed breakout/down.
S&P 500, SPX, 60-min chart
The DOW has formed more of a parallel down-channel off its March 2nd high, which fits well as a bull flag pattern. Ideally, like the triangle pattern for SPX, it needs one more leg down inside the pattern to complete it, which would then be a good setup to get long. Going long here, at/near resistance, is usually not a good idea. As of today's close it was a coin toss for tomorrow and I'm waiting to see if the DOW can break out from here or if instead the bears will take another swipe at the bulls. If the DOW loses support at its uptrend line from October-February, near 18010, and its 50-dma at 17971 it could usher in stronger selling. Its 20-dma is currently near 17904.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 18,289
- bearish below 17,410
Watching what has happened to GE's stock over the past week reminded me of something I recently read about cash holdings of U.S. companies. It's looking like we're seeing a repeat of what happened into the 2007 stock market high. Corporate cash holdings have reached a historical high, which is great for companies and their bank accounts, but what it says is they don't have anything better to do with their cash than hold onto it. Instead of investing it in their businesses (capital improvement programs, buying competitors, etc.) and finding more productive ways to invest their cash, they have been buying back their own stock and offering higher dividends (or just sitting on higher piles of cash). The below chart shows the continuation of cash hoarding (you can see the little "dip" in 2007-2009).
The chart below shows the S&P buybacks (dark green bars, in $B) and how the current level is nearly back up to where it was in 2007. The smaller light green bars are domestic equity flows into mutual funds and ETFs. From this it's clearly evident that companies are much bigger buyers of stocks than those investing in mutual funds and ETFs. If you want to know why the stock market keeps heading higher, in spite of a slowdown in the economy and worsening corporate earnings, this is certainly one explanation.
The fact that the companies are buying back so much of their stock, and the underlying support this creates for the stock market, hides the fact that the stock market is once again rising against a deterioration of the underlying fundamentals. Instead of putting their money into productive uses, for which they can derive future benefits (earnings), these companies are simply buying back shares so that it shows improved earnings today (this of course helps companies reward their executive management teams for doing such a splendid job with their businesses). Company management is really no better than your average retail trader -- corporations buy most of their own stock back at market highs and they sell the most stock at market lows.
The problem for both the companies and the stock market is that all this buying covers up a significant problem -- the deterioration in current earnings is being masked by share buybacks. When the companies decide to rein in their stock purchases it will reduce the support that the stock market has been experiencing. Recognition of a slowing economy would then take its toll on the stock market as well. A repeat of what happened in 2007-2009 looks to be a logical conclusion.
General Electric (GE) was in the news last week after it announced it was going to sell its capital lending business and other "non-core" businesses and then they'll use some of their cash reserves to buy back more of their shares and offer higher dividends. They plan on repatriating some of their earnings in foreign countries and they're willing to pay $4B in taxes to do so. That's great for helping the government pay its bills (albeit only a tiny drop in an ocean of debt in which the U.S. government is swimming) but what does it say about GE's lack of investment opportunities? Rather than invest the money in revenue-generating operations they'd rather fork over $4B to the IRS. They'd rather hand the money out to their investors (and themselves) than invest it in more productive ventures.
The initial reaction to GE's announcement was a large spike in their share price, from April 8th's closing price at 25.01 (the day before the announcement) to a high of 28.68 (+14.7%) the day after the announcement. The stock started to rally strong the day of the announcement on the 9th (they announced after the bell on the 9th) but it looked like "someone" got wind of the announcement and started the rally early. I'm sure there was no inside trading though because that would be illegal. But following the spike up on the 10th GE has pulled back and it leaves me wondering if the spike on good news might have been the completion of its rally.
I've found over the years that GE tends to trade very well technically. It reacts to trend lines, price levels, Fibs, trading patterns, etc. and at the moment we have two opposing setups and the resolution here will tell us what will likely happen longer term. And as GE goes, the rest of the market could follow right behind it.
The weekly chart below shows GE's spike last week stopped right at its downtrend line from 2000-2007 -- this is a very important longer-term trend line so whether or not GE can get above it, near 28.65, will tell us which side is in control. At the moment it's resistance until proven otherwise. At the same level is the mid-line of its up-channel from October 2011 so it's double resistance. The 62% retracement of its 2007-2009 decline is at 28.24 so make that triple resistance, all of which makes it look like it's going to be tough for the bulls to break through.
General Electric Co., GE, Weekly chart
The bulls in GE are not to be discounted yet. Notice last week's breakout from a bull flag pattern that GE was in since the December 2013 high. That's a bullish break (and on volume) and so far the pullback from last week's high has found support at the top of the flag, near 26.55 (yesterday's low). A drop back into the flag would leave a failed breakout attempt (head fake) and give us a sell signal, especially if it drops back below its 50-week MA at 25.82. The bulls need to negate this potential with a breakout above 28.70 and then hold above (I see the potential for another new high, perhaps 29.40, to complete a 5-wave move up from January, but then a reversal back down so I'll be watching for that possibility). In the next week or so we could have some further clues about GE and therefore the broader market.
The Nasdaq is getting closer to challenging its all-time at 5132.52 on March 10, 2000. The closing high on that day was 5048.62 and today's closing high was 5035.17 (after making an intraday high at 5040.65) -- only 13 more points for a new all-time closing high and the bulls can taste it (they've been tasting it since first climbing back above 5000 on March 2nd). As with the blue chips, it's possible we'll see one more drop down to the bottom of the sideways consolidation, or at least down to the uptrend line from January where it would meet its 20- and 50-dma's near 4950 next week. Notice the hanging man doji for today at the trend line along the highs from January 2004 - October 2007. It's decision time for the bulls here -- the bullish pattern calls for a continuation higher but they need to keep the rally going from here. Upside potential is the all-time high at 5132 and then 5150 where it would hit two intersecting trend lines from previous highs, one from April 2010 - March 2014 and the other from last November. Those lines cross at the end of this month and it would make for an interesting setup for a longer-term top.
Nasdaq Composite index, COMPQ, Daily chart
Key Levels for COMPQ:
- bullish above 5042
- bearish below 4912
For a while the RUT was helping the bulls with their mojo but lately it's been holding back some of that mojo. Following its April 15th high I've been wondering if it will instead switch sides and start leading the bears back down the hill. The April 15th high was a small throw-over above the top of a rising wedge pattern for the rally off the March 26th low and it fit well as an important top. Of the different indexes at the moment, this is the one that has me thinking the rally might not have much of a chance of making it much higher. But in reality, like the others, the RUT is simply inside a choppy trading range and this makes it very difficult to make predictions for the next big move. Above its April 15th high near 1279 would clearly be more bullish whereas a drop below its uptrend line from October 2014 - February 2015, near 1248, and its 50-dma, near 1243, would be more bearish. A drop below the March 26th low is needed by the bears to confirm an important high is already in place.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1279
- bearish below 1225
The VIX is typically a mirror image of SPX and since March 2nd it's been chopping up and down opposite to what SPX has been doing. The VIX appears to be forming a bullish descending wedge pattern off its February 2nd high and has a little more downside potential to the bottom of the wedge, currently near 12.05. It would test the December 5th low at 11.53. The VIX has been holding its uptrend line from Sept-Dec 2014 so it's possible it will get another bounce if SPX pulls back from resistance. If SPX does break out into a stronger rally it will be interesting to see if the VIX only makes it down to the bottom of its wedge and continues with a bullish divergence, which would be an additional warning to bulls not to get complacent about new highs.
Volatility index, VIX, Daily chart
The 30-year Treasury yield (TYX) looks like it could soon be heading lower. At least that's what the current bear flag pattern is pointing to. Following its March 6-25 decline it's been in a choppy bounce pattern and today's high tagged the top of the little parallel up-channel for the bounce (the bear flag). If it rallies much above the top of the flag, near today's high at 2.662%, it could be the start of a more bullish move (bearish for bond prices) but I'd first want to see it climb above its downtrend line from September 2014 - March 2015, near 2.74%, which is also where its broken uptrend line from July 2012 - October 2014 is located. But if TYX starts back down from here I'll be looking for at least a test of its January low near 2.23%.
30-year Yield, TYX, Daily chart
The TRAN continues to hold support at the bottom of its trading range since last November, near 8580, which was last tested on April 14th. It has managed to get back above its 20-dma, at 8708, and is now close to testing its broken 50-dma, near 8900 (today's high was 8878). It would be good for the bulls to see a rally above 8900 and hold above. The risk at the moment is that the TRAN has accomplished a 3-wave bounce off its April 6th low with two equal legs up at 8868 (it closed at 8863). If we have just an a-b-c bounce correction off the April 6th low it could start back down from here and another break below support at 8580 would very likely be followed by stronger selling. That would be fair warning to bulls that this index is paying attention to underlying fundamentals about our deteriorating economy. It wouldn't prevent the DOW from making yet another new high without the TRAN but it would clearly be a strong warning not to trust the new high.
Transportation Index, TRAN, Daily chart
The U.S. dollar's bounce off its March 18th low might have completed at the April 13th high and now we'll get another leg down as part of what will become a larger pullback correction from its March 13th high. Two equal legs down would give us a preliminary downside target at 94.25 but a further drop to its 200-dma, perhaps near 90.50 in early May. However, there's still a bullish wave count that's looking for one more rally before starting a larger pullback and the dollar remains bullish as long as it holds its 50-dma, currently 97.24, as well as the bottom of its up-channel from last year, which it's trying to hold right here at 98.23.
U.S. Dollar contract, DX, Daily chart
Gold has been consolidating since late-March and it has formed a sideways triangle in the process. This can be viewed as a bullish continuation pattern but the gold bulls need to defend price here otherwise any further decline will leave a failed pattern. If it does rally out of the pattern we'd have an upside projection at 1263 for two equal legs up from March 17th but if it starts to break down from here then we'll very likely see gold drop toward 1000.
Gold continuous contract, GC, Daily chart
I show the gold chart every week but I also keep an eye on silver because it has been the one that has helped me stay bearish gold even when gold is looking bullish. That hasn't changed yet, although silver has the potential to rally for another leg up off its March 11th low. What's looking more bearish for silver at the moment is the fact that it has not formed a sideways consolidation like gold has done. It has dropped back down and while I see the potential for a small bounce before heading lower, it's looking like silver could break down before gold, giving gold traders a heads up. The neckline for the H&S continuation pattern is currently near 15.37 so a break of that would be a bearish warning sign for the metals.
Silver continuous contract, SI, Daily chart
Crude inventory builds have been a little volatile recently, climbing +10.9M barrels for the week ending April, +1.3M barrels for the week ending April 11 and then +5.3M barrels last week. The initial reaction in crude was a spike up this morning (obviously as a reaction to the jump in inventories not being as high as feared) but then the price worked its way back down during the day and finished in the red. Since last Thursday's high oil has been trading in a small sideways range, which is what I was expecting to see for a 4th wave correction in its move up from March 18th. This should lead to another leg up for the 5th wave to complete the c-wave of an a-b-c bounce off its January 13th low. An upside projection for the 5th wave will be to about 61.50 by the end of the month if it can get through price-level resistance near 58.50. That would get oil up to the top of its rising wedge pattern for the c-wave and upon completion of that move we'd very likely see oil start heading back down as part of a larger multi-month consolidation pattern.
Oil continuous contract, CL, Daily chart
Tomorrow's economic reports include unemployment claims and new-home sales. They will not likely move the market since it has been more concerned about what central banks are doing around the world. That will continue to dominate this market for a while.
Economic reports and Summary
The choppy trading range that we've been in for the past two months could continue for at least a little longer if the market pulls back from resistance here. So far the sideways consolidation fits as a bullish continuation pattern and it's for the bulls to lose. That would take a drop below the March 26th lows (watch the TRAN as a leading indicator in this regard) but in the meantime a pullback to the lower region of the trading range would be a buying opportunity. It's possible the rally will simply continue from here since resistance is close and it won't take much to break through, especially for SPX since a rally above 2112 (only 2 points above today's high) would signal the consolidation is likely finished. Unless of course a breakout is followed by a collapse back down -- a pullback would need to hold above 2108 to stay bullish.
These choppy consolidation patterns drive both sides crazy with the lack of follow through to even large moves. This could continue a little longer so a continuation inside the trading range should be reason enough to back away until we get a break one way or the other. Day trading only. Assuming we'll get an upside breakout, once it's confirmed there should be a good trading opportunity on a pullback so wait for the right setup or let the bus leave without you and wait for another one. That's the nice thing about trading the market -- they always send another bus, hoping to entice you to climb aboard. Just don't get taken for a ride.
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