The market lost some ground this week as we headed for the Fed's latest decision on rates and learn how they see the current economy. The FOMC announcement left the market hanging with little information.
Wednesday's Market Stats
Following a volatile Monday and Tuesday, equity futures had sold off some in the early-morning pre-market session but then got hit harder following the GDP report at 8:30 AM, which was a miss. It's pretty clear that the economy is slowing but the market has been basically ignoring the signs in favor of an expectation that the Fed will be forced to stay on the sidelines (no rate increase). This morning's negative reaction to the weaker-than-expected GDP report was followed by a few buy programs at the open but by 9:45 AM there were no takers on the long side and the market sold off again. There was general weakness into a midday low and even though there was a bounce into the FOMC announcement at 14:00, the entire day was spent in the red. There was the usual volatility post-FOMC but prices stabilized and finished close to where they were prior to the FOMC announcement.
The advance estimate for GDP came in at +0.2% for Q1 vs. expectations for +1.0%, which is down significantly from 2.2% for Q4 and it was the weakest reading in a year. Blame for the slowdown was placed on the usual culprits -- the weather, the strong dollar and for good measure the West Coast port strikes got some of the blame. The government report did not cite the shutdown of local kids' lemonade stands by local authorities (for having no business license) but I'm sure that was also a factor (said tongue-in-cheek).
Consumer spending increased +1.9% in Q1 but that's a slowdown from +4.4% in Q4 2014, even after factoring in the reduction in gas and home heating oil prices. This factor was also cited by the Fed this afternoon as one of the reasons why they're concerned about the economy, although they call the slowdown "transitory." They love that word when they have to explain bad economic news. Factoring in the lower prices, nominal consumption actually declined $2B in Q1, which was the first decline since Q2 2009 (and Q2 2009 was the first positive quarter for the stock market following the March 2009 low).
The other economic report this morning included Pending Home Sales at 10:00 AM. It was largely ignored since the +1.1% for March was in line with expectations although it was down from 3.1% in February. Interestingly, the home builder stocks continued their selloff from the April 6th high, as I'll show later, and this continues to be a warning sign about housing in general.
Crude inventories were released at 10:00 AM, which increased marginally (+1.910M barrels) and that gave oil a boost this morning. It was one of the few things in the green today.
Other than that there was little to move the market today. The morning decline in the stock market was probably more about worry about the Fed than anything in particular. And once we got through the FOMC announcement there wasn't much of a change in the prices into the end of the day. The Fed has left us hanging by removing forward guidance from their statement. Their next meeting, in June, will be the next opportunity for the Fed to review more data to see if and when a rate increase will soon be justified. Don't hold your breath.
The Fed has maintained that their policy decisions are data dependent and basically told the market that they're removing any reference to the calendar for what and when their next move might be. They instead said, "The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term."
What the Fed really said is that they're scared silly that the deflation monster is coming and they're out of ammunition. And rather than offer any guidance about when they're thinking of raising rates, they instead are now simply saying they'll review the data at each future meeting and make decisions based on the new data. In the meantime, don't call us, we'll call you when there's something important to report. The bond market is now projecting December as the earliest we'll see a rate increase. Those who believe we're in a deflationary cycle that can't be stopped by the Fed also believe the Fed will be forced to start QE4, QE5 ... QE to infinity and beyond long before rates will be raised. They'll have no choice but to keep doing the same thing in hopes they can keep things elevated on their watch.
All of this uncertainty has left the market rudderless since the end of February. The economy is weakening but the Fed remains supportive. The short-term moves in the stock market have left both sides feeling a little whipsawed as the market continues its directionless consolidation. It's getting old but I suspect the market is going to soon pick a direction. As for what direction that will be, I'm waiting for the snow to settle in my crystal ball before I'll have a better clue.
I'll start off tonight's chart review with another top-down look at SPX. While I've been short-term bullish, with the expectation for another rally leg into May, it's not something I think is a slam-dunk kind of trade. In fact I consider the upside potential to be dwarfed by downside risk. But for swing traders there might be one more move higher in the next couple of weeks. I see the potential for a quick drop down to the 2060-2075 area before rallying but the short-term pattern is not clear enough to make a confident projection.
The SPX monthly chart below shows the big bad bearish rising wedge for the rally from 2009. It's hard to pick out the smaller wave movements on a monthly chart but I'm looking for only one more leg up to complete the final 5th wave of wave-C of the A-B-C move up from March 2009. The c-wave would equal 162% of the a-wave at 2213.50, which I consider the highest potential for another rally leg, especially since it crosses the top of its rising wedge pattern next month. Once the A-B-C rally from 2009 finishes, which could happen at any time (even without another rally leg), it could get completely retraced in the next bear market decline. Rising (and descending) wedges tend to be completely retraced much more quickly than it takes to build them.
S&P 500, SPX, Monthly chart
Many Elliotticians believe the big (a)-(b)-(c) correction off the 2000 high into the 2009 low completed the bear market correction but I think the 2009-2015 rally is wave-(d) in a larger expanding triangle correction pattern off the 2000 high. I don't believe the secular bear ended in 2009 and the only reason the rally has become so stretched to the upside is because of the massive liquidity injections of free money from central banks around the world. The net result is a bigger bubble than we had at either the 2000 or 2007 high and the reaction to the downside could make the 2000-2002 and 2007-2009 declines look like child's play.
Instead of a new bull market starting off the 2009 low the 3-wave start of the rally off the 2009 low into the May 2011 high (my wave-A) suggests we have a very large corrective move up from 2009 instead of a more bullish 1-2-3. And if I'm correct, anyone who believes in buy-and-hold is going to get crushed in the next decline. Part of the reason for a very large decline would likely be a result of the market realizing once and for all that their Emperor (the Fed) wears no clothes.
The weekly chart below is the one I've been using for the weekly updates and you can see more clearly how the bottom of the rising wedge, which is the uptrend line from 2009-2011, has been supporting the sideways consolidation off the February high. It looks like it's trying to break out of the consolidation but so far it's been a weak attempt. There's a trend line along the highs since last December-February, currently near 2150, and that would be the first, maybe final, target for a rally from here.
S&P 500, SPX, Weekly chart
Not shown on the weekly chart above, but is shown on the daily chart below, is another trend line along the highs from July-December 2014, which will be near 2180 by mid-May. This trend line and the one along the highs from December-February gives us a target zone of roughly 2150-2180, with an outside chance it will rally up to the 2213 projection mentioned on the monthly chart above. If we get another rally leg I expect to be able to narrow the upside target range once it gets closer. The bulls are not in trouble until price drops below 2045, which would signify the top is likely already in place.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 2126
- bearish below 2045
The intraday pattern leaves me scratching my head as I wonder who's in control. Movement in both directions remains choppy and corrective and that leaves the short-term (next few days) direction unclear. There's a parallel up-channel for the move up from the end of March, the bottom of which is currently near 2090. Two equal legs down from Monday morning's high points to 2085 so that gives us a downside target zone for a deeper pullback that would still remain bullish. Below 2085 would suggest a drop down to the uptrend line from 2009-2011 (2073) or the bottom of its triangle pattern off the February high, near 2060. There are plenty of support levels to make the bear's job more difficult but if the bulls can get SPX above Monday's high at 2123 we should see it work its way higher into an important turn window in mid-May (there will also be a new moon on May 18th and this market has often topped on new moons).
S&P 500, SPX, 60-min chart
The DOW has been weaker than SPX since it hasn't been able to make new highs since February (except for the very brief high on Monday morning that made it above its April 16th high). It has been trapped below the downtrend line from February but mostly supported by its 20- and 50-dma's, which are currently crossing near 17980 (today's low was 17953 but it closed at 18035). It's barely holding onto its uptrend line from October-February, currently near 18100. The 2-week consolidation appears more bullish than bearish but only marginally so. All of the choppy moves still leaves its next direction somewhat of a guess but at the moment, gun to my head, I'd choose the long side (and then quickly buy some puts for downside protection when the gun-holder wasn't looking). Upside potential is first to the trend line along the highs from December-March, near 18500 in early May, and perhaps up to the trend line along the highs from December 2013 - December 2014, near 18700 in mid-May. The bulls would be in at least short-term trouble below the April 22nd low at 17887.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 18,289
- bearish below 17,887
Last Friday the tech indexes got a big boost, thanks to some big jumps in a few stocks like AMZN (+16%). That had NDX popping up out of its sideways consolidation that followed its March 2nd high (bull flag pattern). Its rally peaked on Monday morning and it has since pulled back to the top of its bull flag, near 4466, and if today's back-test of the top of the channel is followed by a rally on Thursday we'd have a buy signal. In that case I would expect to see a rally at least up to the trend line along the highs from November-March, near 4597 next week. There's higher potential, such as up to the trend line along the highs from March-November 2014, near 4760 by mid-May, but I'd want to first see how it does near 4600. A drop below its April 17th low at 4333 would tell us the high is already in place.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 4466
- bearish below 4333
As mentioned above, AMZN had quite the rally last Friday and it gapped up and rallied about 62 points (16%) to put in a quick high that morning. It's been all downhill since that high but it was good for the techs. But look where AMZN stopped -- with a high at 452.65 it achieved its 450 price objective out of the descending triangle that ran from January 2014 to January 2015 (width of the triangle projected from the breakout level). It also came very close to back-testing its broken uptrend line from June 2010 - December 2011. It's a very interesting setup for a final high for AMZN, although I do see the potential for one more ride up to a minor new high to complete the leg up from March.
Amazon, AMZN, Weekly chart
The RUT is threatening to break down and if it does it's going to be a bearish warning for the rest of the stock market. At the moment, with Tuesday morning's low, it has achieved a 3-wave correction off the April 15th high and did so at its 50-dma, where it essentially closed today. The short-term pattern is looking more bearish than the others, which suggests it's going to break down rather than start another rally leg, but Thursday should provide more clues in that regard. The bulls need to so some buying right here, right now.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1276
- bearish below 1242
Bonds sold off strongly today, presumably on the disappointing GDP report and weaker dollar. It's looking like TLT (20+ year Treasury ETF) could soon test its uptrend line from December 2013, currently near 123.84 (today's low was 125.28). Its 200-dma is currently 123.40 so that's also within striking range. A drop below its March 6th low, near 123, would likely mean a trip down to a price projection at 117.23, which is where it would have two equal legs down from its January 30th high. I continue to believe we have not yet seen THE high for bond prices (lows for yields) but at the moment it's looking like we might get at least a little more selling in bonds before starting another rally. Selling in the bond market is generally supportive for the stock market but that wasn't true for today.
20+ Year Treasury ETF, TLT, Weekly chart
The transports have been relatively weak for a long time -- since the November high for the TRAN it has made a series of lower highs. But it keeps finding support at its December low at 8580 and it has created a descending triangle in the process. This is typically a bullish continuation pattern following a rally (October-November) but it keeps struggling to get a rally going. Following its April 6th low it got a 3-wave bounce (corrective pattern) and is now dropping back down toward 8580 support. It is again threatening to break its uptrend line from November 2012 - October 2014 (near 8780, it closed below it again) as well as its 200-dma, now near 8713 (today's close was 8701). Another drop below 8580 might not recover this time and it would leave a failed bullish pattern in its wake. Failed patterns tend to fail hard so keep an eye on this index for some clues. It now needs to get above 9125 to turn the pattern back to bullish.
Transportation Index, TRAN, Daily chart
I had mentioned earlier that the home builders sold off some more today, presumably on the pending home sales report. The decline from the high on April 6th looks impulsive, which suggests the trend is now down. From a wave count perspective there is a way to consider it as a bullish setup following a 3-wave correction off the February 25th high but at the moment it's looking more bearish than bullish. On April 23rd, following the new-home sales report, it broke its uptrend line from October-January and then dropped below price-level support near 553 (which had held the pullback in mid-March), which includes its May 2013 high. A bounce back up to resistance on Monday has been followed by more selling and we could see the index drop down to its 200-dma, near 516 before it will be ready for a bigger bounce into May.
DJ U.S. Home Construction index, DJUSHB, Daily chart
Following this morning's GDP report there was a selloff in the U.S. dollar as traders become more convinced that the Fed will not be thinking of raising rates anytime soon. The pullback from the dollar's high on March 13th is so far a 3-wave pullback and two equal legs down points to 94.25. With today's low at 94.75 it's now close to achieving that level and we could see a bounce back up from there. The top of a previous parallel up-channel from 2008-2011 (blue line on the weekly chart below) is near 93.50 so that's another potential support level. If the dollar drops below 93.50 we could see a drop down to the 90 area. It's still early in the pullback pattern to determine the longer-term pattern but at the moment I'm expecting the dollar to consolidate for much of this year before heading higher next year.
U.S. Dollar contract, DX, Weekly chart
Gold had a nice rally Monday and Tuesday and now has it looking like we could get another leg up for its bounce off the March 17th low. Two equal legs up would take gold up to 1257, which is what I'm showing on its daily chart below. It's possible gold will instead chop sideways in a larger bearish consolidation pattern but in either case I don't believe gold has put in its bear-market low yet.
Gold continuous contract, GC, Daily chart
How silver does from here should provide more clues for gold. Notice how silver has bounced back up to its broken uptrend line from November-January and stalled. A turn back down from here would leave a bearish kiss goodbye and the selling could become accelerated, especially if it breaks below its uptrend line from November-March, near 15.35, which could be the neckline of a H&S continuation pattern. An upside break through its downtrend lines from January-March, near 16.86, and from November 2012 - July 2014, near 17, would help keep the bulls in control.
Silver continuous contract, SI, Daily chart
Oil got a bump back up this morning on the crude inventory report that showed a slower build than we've seen in the past. Traders are hoping to catch a ride higher on hopes that we'll soon see a report that shows an inventory draw rather than a build. It continues to push up against price-level resistance near 58.50 (it closed at 58.55 today) and if it can break through this time there is upside potential to at least 62.50 where it would run into the top of a rising wedge pattern for the leg up from March 18th. This leg continues to fit well as the c-wave of an a-b-c bounce off its January low and once complete we should see a larger pullback/consolidation in what I think will be a multi-month consolidation for oil before it drops lower (essentially the opposite of what I'm expecting to see for the dollar). A drop below its April 21st low at 55.01 would be a good indication the leg up from March 18th completed.
Oil continuous contract, CL, Daily chart
Tomorrow's economic reports include unemployment claims and more importantly, personal spending and PCE prices. A continued slowing in consumer spending (contracting economy) and a drop in PCE prices (deflationary) would likely worry the market even more. Shortly after the opening bell we'll get the Chicago PMI, which is expected to be right at the border of expansion/contraction (50).
Economic reports and Summary
In reality we still have a market that is trapped in a sideways trading range since the end of February. The choppy whipsaw moves have shaken the trees on both sides of the fence, shaking loose the stops of both the bulls and bears. This could continue for a little longer, especially if we get a drop this week. I remain intermediate-term bullish for higher prices into mid-May but short term (the next few days) could literally go either way. I would be careful about getting bearish too early but by the same token I'd be very careful about the long side.
The longer-term pattern remains bullish and the sideways consolidation continues to point to higher prices, especially with longer-term uptrend lines still holding. Banks got a nice boost today and that's bullish for the market. But the TRAN is threatening to break down and that would be a bearish warning sign. Part of the problem at the moment is that it appears money is sloshing around from sector to sector and in the meantime the major indexes have been marking time. We've seen several important highs get put in place with this kind of sideways consolidation, which turns out to be topping patterns instead. That's a possibility here and just one more reason to be careful and manage your stops with discipline. While I like the potential for a rally into mid-May, the downside risk means light trading -- smaller than usual trade size and/or tighter stops.
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