To say the choppy go-nowhere market is getting old would be a gross understatement. It would appear many traders are now sitting back and just waiting for the market to make a decision and do something. So far there's no answer from the market.
Wednesday's Market Stats
It's getting very old writing about a choppy market that's been range bound for 2-1/2 months and I know it's even worse if you're trying to trade it. About the only thing that's working is selling options above and below the trading range and then let the options expire worthless. Anyone who's trying to trade the market directionally probably has very little hair left to pull out. Hopefully you haven't been chopped to pieces with multiple stop-outs in both directions (in which case your broker thanks you). This too shall pass but at this point it can't be soon enough.
Equity futures climbed higher during the overnight session but then became a little volatile in the pre-market session, holding just above breakeven until a buy program hit at the opening bell (pretty common lately). But there was no follow through to the buy program (also pretty common lately) and the market sold off before the indexes spent most of the day trying to hold in the green. The techs were a little stronger while the small caps were weaker, which just added to the sense that this market is not going anywhere. The metals were the big movers today (up).
This morning's economic reports included retail sales, which weakened from March into April. Sales dropped from +1.1% in March to flat in April and sales ex-auto dropped from +0.7% to +0.1%. It's just more evidence that the consumer is not consuming enough. Shame on all of you -- do your patriotic duty and get out there and spend!
Export and import prices dropped in April, -0.7% and -0.4%, respectively, which probably frustrates the Fed since it's further evidence of "disinflation." Import prices dropped -0.4% in March, much of which was "blamed" on the drop in oil prices but with the strong bounce back up in oil (+43% from about 42 to 60) they can't use oil as the excuse for an even larger drop in import prices. Global deflation anyone? Nah, the Fed, ECB, BOJ, and the other tens of central banks will surely "protect" us from that with all their money printing.
In reality, despite what the central banks have been attempting to do, the drop in prices shows what a powerful force deflation is and how the central banks have only been able to slow it down (and drag out the correction that could have already been over by now if they let the market dictate the rules). With all of the government debt they're all trying to inflate their way out but they're all failing and the piper will soon have to be paid. The best thing we can all do to be prepared for deflation is to be out of debt since the value of debt increases while all other asset classes depreciate in a deflationary environment.
Heading into today it was important for the bulls to at least prevent any further selling in the techs. I'll start tonight's review with the NDX to show the short-term bullish setup to complete its longer-term rally. But the bulls need to keep the rally going in the coming week in order to prevent it from turning bearish sooner rather than later.
The weekly NDX chart below shows that since August 2014 price has been pressing against the top of its parallel up-channel that it's been in since 2010. From a wave count perspective there are a few ways to count the move up from its low in November 2008 but the best fit has it in its final 5th wave of a big A-B-C corrective rally, which is the leg up from the February 2nd low at 4094. That low was another test of its uptrend line from the March 2009 low through the June 2013 low (labeled in green). The line has been supporting each pullback since February, including Tuesday's low, and it's currently near 4388. Since the November 2014 high it has been making marginal new price highs but with bearish divergence as it hammers out a rising wedge for the final leg of its rally.
Nasdaq-100, NDX, Weekly chart
The rising wedge since the November 2014 high can be better seen on the daily chart below. All of the choppy price action we've seen since last November helps confirm that this final 5th wave, starting off the February 2nd low, is an ending diagonal (rising wedge) and the negative divergence supports the bearish interpretation that we're into the final wave. Ideally we'll see one more new high to complete the pattern, which is depicted in green and points to a final high near 4600, possibly next week.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 4511
- bearish below 4333
At the moment NDX is struggling with its short-term downtrend line from April 27th, which it marginally broke above this morning (thanks to the gap up). The failure to close above the line, currently near today's close near 4427, has it looking vulnerable to a further decline but it can't tolerate much more selling before turning more immediately bearish. Two equal legs down from Monday morning's high points to 4372 so a drop below that level would be a bearish heads up, especially since it would be another break of its uptrend line from March 2009. Below 4343 would suggest we're into a least a much larger pullback and further upside would be in doubt.
Nasdaq-100, NDX, Daily chart
Yesterday morning SPX tested its 2009-2011 uptrend line, currently near 2090, and got a strong bounce off it, although the rally then fizzled a bit following the strong buy program and SPX wasn't able to hold above its broken 20-dma, near 2102. Today it gapped up above its 20-dma but again wasn't able to hold above it and instead chopped sideways before dropping back below it this afternoon. It's hard to decipher any small movements in this frustratingly choppy market but so far the pattern remains bullish if the bulls can defend yesterday's low at 2085. One more leg up to about 2135 would do a nice job finishing off the shallow rising wedge pattern for the rally off the March 11th low (bold blue lines on the daily chart below).
S&P 500, SPX, Daily chart
Key Levels for SPX:
- stay bullish above 2078
- bearish below 2067
I hesitate to show anything less than a daily chart because of all the choppy price action. Trying to predict the next move out of this mess is very difficult but I'll try anyway (because I'm a market masochist). In the shallow rising wedge shown on the daily chart, which is shown closer with the 60-min chart below, the 5th wave (the leg up from May 6th) should be a 3-wave move (or something a little more complex but still corrective) and I've currently got it labeled as an a-b-c, with the c-wave being the leg up from Tuesday morning. This afternoon's low held the uptrend line from May 6th and if the buyers return Thursday morning we should see a rally that will likely at least test the 2120 resistance level again.
S&P 500, SPX, 60-min chart
On the chart above I depict a small rising wedge for the final move up from Tuesday but that's obviously just a guess at this time. The way it's starting is what has me thinking it will chop its way up to a final high. Two equal legs up from May 6th points to 2135, which is close to the top of its shallow rising wedge (bold blue line). Note that this pattern suggests a break above 2120 resistance will turn into a bull trap of the worst kind -- a very strong decline should follow it and trap all those who buy the breakout and don't use stops. This of course assumes that we'll get the rally as depicted.
The DOW looks the same as SPX and NDX -- it has been chopping sideways since its March 2nd high but in reality it has been chopping its way marginally higher since jamming higher off last October's low. It too looks to be in an ending diagonal (rising wedge) for its final 5th wave. The final leg up should be the rally off the May 6th low and I have two upside projections for it at 18397 and 18506. Assuming we'll get the rally as depicted I should be able to get a tighter target zone as the rally pattern develops a little further. The bulls would be in serious trouble if the DOW instead breaks down through the May 6th low at 17733.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 18,289
- bearish below 17,733
The RUT remains odd man out. It's sharp decline from April 27th could have been the 1st wave down in what will become a much more significant decline, in which case the bounce off May 6th low will only be a correction to the decline before heading lower in a 3rd wave. Two equal legs up from May 6th points to 1250.81, which is only slightly higher than price-level resistance near 1248. There's a way to interpret the May decline as the completion of a pullback correction and the RUT will join the others to a new high but at the moment I'm reluctant to suggest the RUT will see a new high from here. Instead I'm watching for a bounce setup to short the RUT.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1262
- bearish below 1206
Bond prices have been crushed over the past 3 weeks and that has driven yields higher. The Fed might not be ready to raise rates but it appears the market is ahead of them on that. But at the moment I'm not sure if the rise in yields is going to hold. I haven't yet abandoned my opinion that we'll see lower yields into the fall of this year but the recent rally in yields is now near a make or break time for the bond market.
The weekly chart of TYX (30-year yield) below shows a price projection at 3.089%, which is where the bounce off the January 30th low has two equal legs up. That level was achieved yesterday with a brief morning high at 3.099% before reversing hard for the rest of the day. Today's rally in TYX (selling in bonds) got it back up to 3.081% so we'll soon find out if the rise will continue or if instead the 3-wave bounce correction off the January low will be followed by another decline, which is what I'm depicting on the chart. TYX has broken its downtrend line from December 2013, near 2.93%, so any pullback to that level and then higher again would leave a bullish pattern and I'd back off my expectation for lower yields (higher bond prices).
30-year Yield, TYX, Weekly chart
The 10-year yield (TNX) has the same pattern as TYX but it hasn't made it up to its similar projection for two equal legs up from January, at 2.451% (yesterday's high was 2.335%). However, yesterday it did tap its downtrend line from December 2-13 and the hard reversal left a bearish candlestick at resistance.
TLT, the 20+ year Treasury ETF, is also near an important level -- 117.23 is where the decline from January 30th would have two equal legs down. Today's low was 118.64 so it's getting close but with short-term bullish divergences staring to show there is the potential for at least a bounce back up. If TLT does start another rally from here it would have an upside target at 141.71, which is where the 2nd leg of its rally from December 2013 would be 62% of the 1st leg. It's also where it would again test the trend line along the highs from December 2008 - July 2012 (and it would likely leave a bearish divergence against the January high).
20+ Year Treasury ETF, TLT, Weekly chart
The banking index, BKX, has a very interesting setup here and we could soon find out which direction it will head. It has now pushed right up against the top of an expanding triangle for price action since March 2014, shown on its weekly chart below. At the same location, near today's high at 75.73, is its broken uptrend line from March 2009 - October 2011. There's also a broken uptrend line from October 2013 - May 2014 (gray) that it's back-testing. That's a lot of trendline resistance for the bulls to punch through. But as highlighted on MACD and RSI, the downtrend lines from August 2013 are now being broken and that's a bullish sign. Now all the bulls need to do is keep the rally in the banks going, which would be a positive sign for the broader indexes.
KBW Bank index, BKX, Weekly chart
Countering the potentially bullish picture for the banks (although admittedly I wouldn't be buying the banks with the index pressed up against resistance) is the potentially bearish pattern for the TRAN. How many times can the TRAN pound on support before it breaks? That's the question that comes to mind as it once again tests price-level support near 8580, which it closed marginally below today. If it breaks below its April 6th low near 8527 it would be a bearish heads up for the rest of the market. I would expect the TRAN to at least then drop to its uptrend line from March 2009 - November 2012, near 8395. Give the bulls a few more Cheerios here and see if that helps.
Transportation Index, TRAN, Daily chart
The U.S. dollar has also now reached an inflection point now that it has dropped back down to the top of its parallel up-channel from 2008-2011, near today's low at 93.50, which is shown on its weekly chart below. The top or bottom of a channel is usually support/resistance after price breaks through and comes back for a retest so the bullish setup here is for the dollar to start back up. Since its March high I've been looking for a multi-month consolidation and we could see price stay trapped between 93.50 and its March high at 100.78 for the rest of this year. That's the bullish pattern. It would turn at least potentially more bearish if it drops below 93.50, in which case I would expect to see it drop down to a price projection and its 200-dma, both near 90.50, over the next couple of weeks, before either setting up another bounce or consolidating before heading lower.
U.S. Dollar contract, DX, Weekly chart
Gold's strong rally today has it looking like it will head for at least the 1251.30 projection for two equal legs up from March 17th. That would be a little better than a 62% retracement of its January-March decline, at 1244. At the moment gold is close to testing its 200-dma near 1220 and if it breaks above it I don't think it will last any longer than it did back in January.
Gold continuous contract, GC, Daily chart
This morning's crude inventories report showed another decline of 2.2M barrels but that didn't help price, which dropped today. After peaking at 62.58 last Wednesday oil pulled back and broke its uptrend line from March 18th, indicating its rally is likely done or very close to being done (it might have one more minor new high to back-test the broken uptrend line and show us bearish divergence in the process). It did find support at price-level S/R near 58.50 on the pullback into last Friday's low but I think the bounce attempt will fail and a drop back below 58.50 will likely lead to another decline. The downside potential is for at least a retest of its March 18th low at 42.03.
Oil continuous contract, CL, Daily chart
Tomorrow morning we'll get some inflation data through the PPI reports before the bell. They're not expected to change from the March readings of +0.2% for both PPI and Core PPI. The market might react a little if the number is way off the mark, especially if the number comes in much higher than expected (prompting worry about the Fed raising rates) but more than likely the market will already be reacting to whatever goes on overseas.
Economic reports and Summary
The market remains a choppy mess and there's very little to recommend at the moment. The larger price pattern suggests to me that we will get one more new high in the next week or two to complete the bull market rally off the 2008/2009 lows. The longer-term setup is therefore very bearish since I don't believe the market highs, once they're put in, will be seen for many years (possibly decades). Predicting the next move this week is hard enough so predicting the next move over the next several years is obviously extremely difficult. But the multi-decade pattern suggests those who hold through the next decline will rue the day they decide to just buy and hold and keep buying on the way down. In the next few years those with capital will have a buying opportunity of a lifetime but we're soon approaching the time when I think we'll have a selling opportunity of a lifetime.
Shorter term (this week and possibly into the end of the month) I'm continuing to expect higher prices but we could see those new highs come with more chop and whipsaw price action. Based on this and the downside risk I don't think it's worth trying the long side. Upside potential is dwarfed by downside risk, especially if new highs don't come in the next week. Keep an eye on the TRAN and RUT since they could be the bear's canary indexes. Playing the short side will take a unique set of brass ones because the central banks around the world will keep trying to goose the market back up, either verbally or with actual money (probably both) and that will mean strong short-lived rallies and then the resumption of selling once the buying fails to get follow through. You'll need to decide how you want to play those moves (sell-and-hold vs. trying to catch all the squiggles). In the meantime let's see if Ms. Market can give us a new high and set us up with a shorting opportunity.
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