The market has had a helping hand for a long time from the Fed and government (and globally from all central banks and governments) and today looks to have been another example of that helping hand rescuing the market from another scary 1-day selloff on Tuesday.
Wednesday's Market Stats
Bears that did not look both ways before crossing the street got slammed by the northbound bus today. Road kill is never pretty. But that was after the bulls got body-slammed yesterday by the bears before they sauntered off and got hit by the bus. Now both are lying there wondering what hit them. As for traders watching this slugfest, it's just more of the same choppy whippy price action we've seen since February as the indexes remain trapped inside a relatively small trading range.
As far as keeping score, Tuesday's selling was stronger than today's buying across the various indexes. Yesterday's trading volume was stronger and the internals were weaker, which shows the selling continues to be stronger than the buying. Yesterday's saw more than 5:1 down volume vs. up volume whereas today saw about 3:1 up volume vs. down volume. But short covering continues to be the bear's worst enemy and today was no exception. Except for the tech indexes making new highs and the RUT climbing back above yesterday's close, the blue chips produced inside days and SPX pulled back after closing yesterday morning's gap down. The techs got a big lift from a strong performance by the SOX, which was up +3.9%. The net result is we'll need to see how the next couple of days go before we'll get a better idea as to whether Tuesday's decline was a head-fake move or if instead today's rally was the head fake.
There was very little in the way of economic news this morning and the opening bell was followed by a very brief bout of selling before the buy programs hit. The indexes were popped higher but the initial surge stopped after about 25 minutes. From there the DOW struggled the rest of the day while the others continued to tack on some more points. So what prompted the buy programs just after the open? Need you ask? "Someone" got nervous with yesterday's selloff and decided the market needed a little help in reversing that. Put in some buy programs, throw in some short covering and voila, another rally is born.
Some will say the Greek tragedy prompted today's buying since it's "good" news that they're crafting together some kind of bailout deal. Others credit the news about some kind of Broadcom (BRCM) deal and rumors about Netflix (NFLX) and NVidia (NVDA), all of which had strong days today, which lifted the tech indexes. But some of their bounces look like they could be completions of corrections so how much they'll help the techs tomorrow is another question. With today's slightly lower trading volume, it looks like a lot of today's buying might have been short covering. But there was also some real buying, especially since some strong support levels held against yesterday's selling. The net result, unfortunately for us traders, is more of the same choppy price range that we've been in for a long time.
The weekly chart of the Wilshire 5000 index, shown below, is a good example of how tight the weekly trading range has been -- look at the small, and getting smaller, candles since the February 25th high. Price has been chopping its way higher but there's simply no strength behind the move. The bearish divergence on the momentum indicators (MACD and RSI) is a warning sign to those who wish to chase this higher. It could break out to the upside with a sudden and unexpected catalyst but at the moment that's looking like a lower-odds probability. The rising wedge with bearish divergence warns us that a breakdown, when it happens, will likely go very fast. However, betting on the short side has been an exercise in frustration and today's rally probably just shoved a few more bears to the sidelines. There is potential for the W5000 to rally up to the top of a rising wedge, the top of which is the trend line along the highs from last July, currently near 23000, but again, keep in mind that this could suddenly break down at any time.
Wilshire 5000 index, Weekly chart
Inside the rising wedge shown on the weekly chart there is another one for the choppy move up from the March 11th low, the top of which is near 22600, and is shown on the daily chart below. For the moment I'm showing an expectation for one more leg up to complete a 5-wave move up from March but last week's high fit well as the completion and therefore a new high is not a guarantee. It's possible today's rally completed just a high bounce correction to the decline off last week's high, which suggests another reversal of a reversal (to thoroughly confuse both sides) and start a stronger decline on Thursday and Friday. A break below yesterday's low near 22450 would be bearish while a rally above 22610 would be more bullish.
Wilshire 5000 index, Daily chart
You can see the strong similarity between the W5000 and the SPX daily chart below and the only minor difference is that SPX found support yesterday at its uptrend line from March 2009 - October 2011 while the W5000 was slightly above its trend line. Also, the W5000 tagged its 50-dma yesterday while SPX remained slightly above its 50-dma, but these are minor differences. The bullish setup yesterday was the pullback to support (50-dma and uptrend line) and in an uptrend the bulls did exactly what they're supposed to do -- buy support in a pullback. In a downtrend you want to sell bounces to resistance. If the buyers can keep up today's buying, even if it's after a pullback, the upside potential for SPX is to at least the 2140 area where it would run into the top of its rising wedge pattern for the choppy rally from March (the trend line along the highs from March 23 - April 27, which is where last week's rally stopped). But if today's rally was just a strong bounce correction then a break of support near 2100 would be a bearish sign since last week's high would then look good as THE top.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 2142
- bearish below 2099
The 60-min chart below shows today's rally made it above price-level S/R near 2121 so that's a bullish accomplishment. But knowing how many times this market has flushed the stops on both sides I wouldn't be a bit surprised to see the market drop right back down from here and head for new lows. Neither direction from here would surprise me and that makes picking a direction a problem at the moment. Last week's high fit well as the completion of a 3-wave move up from May 6th to complete the 5-wave move up from March (the rising wedge calls for all 3-wave moves for each of the 5 waves inside the wedge). But it's possible we'll get a larger 3-wave move and that's why a new high is certainly possible. It turns more bullish above 2132 and a rally above 2140 would point to 2150-2170.
S&P 500, SPX, 60-min chart
The DOW has been the weaker sister the past week and as I'll show later, the TRAN is even weaker, both of which are another warning sign for the bulls. Coming out of the gate this morning the DOW jumped up about 100 points in the first 25 minutes of trading, hitting a high of 18161. From there it struggled to add 30 more points the rest of the day until just before the close when a selloff dropped it back down to where it was before 10:00 AM, so it netted zero after the initial morning spurt. Not exactly a lot of bullish follow through today on that one. It closed at its previously broken trend line that marked the top of its sideways triangle, as can be seen on its daily chart below, and that leaves a potentially bearish back-test today if it's followed with a kiss goodbye on Thursday.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 18,350
- bearish below 17,990
NDX made a new high today and is now only about 11 points from a new intraday high above its April 27th high. It did make a new closing high for its current rally and has upside potential to the 4600 area where it would run into the top of the rising wedge for its rally from February (the top of which is the trend line along the highs from March 2 - April 27). It reached the top of a smaller rising wedge for its rally off the May 6th low and we could see it chop higher inside this smaller wedge and not reach 4600 before topping out. A rally above 4620 would be a bullish move (if it can hold above) whereas a drop below yesterday's low (4456) would be a bearish heads up and a drop below its 50-dma would also be a break of its uptrend line from March 2009, both currently near 4431.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 4620
- bearish below 4430
The RUT struggled a bit this morning but then when it looked like the rally was going to hold we saw some more buyers come rushing in and push it much higher throughout the day. It finished near its high for the day, which is another sign of short covering (or late-to-the-party bulls). It stopped a little shy of a new downtrend line from April 27th, currently near 1257.50, so a climb above that level, followed by a break above last Thursday's high near 1261 would keep the bulls in the driver's seat. The bears need to see the RUT below yesterday's low near 1233 in order to show us there's a new downtrend for the bulls to contend with.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1261
- bearish below 1233
Initially today the bond market was selling off while the stock market rallied, which was supportive of the stock market. But that reversed around 10:00 AM and the buying drove yields back down to yesterday's lows (the 30-year dropped lower). This is not supportive of the stock market and one more reason to suspect today might have been more about manipulating the stock market, to get some short covering, than about real buying interest.
Two weeks ago, on May 12th, the 30-year yield (TYX) had rallied up to the price projection at 3.089% (with a brief morning high at 3.099) and then was repeatedly tested over the next 5 trading days before dropping over the past week. Yesterday's and today's decline has it back below its broken downtrend line from December 2013, near 2.9%, and so far it's looking like it could continue lower into the summer. The pattern hasn't developed enough to rule out another rally to at least test the May 12th high but the risk from here (for bond bears) is a continuation of the rally in bonds and a decline in yields.
30-year Yield, TYX, Weekly chart
As mentioned earlier, the TRAN has been a warning sign to the bulls and continues to be. Today's rally was relatively strong, up +1.1%, but it was only good enough, so far, for a back-test of its broken uptrend line from March 2009 - November 2012, which it broke yesterday. It remains to be seen if yesterday's break was a head-fake break or if today's bounce back up to support-turned-resistance will be followed by a bearish kiss goodbye. A rally above the trend line along the lows since December 2014, near 8500, would at least be short-term bullish but the bulls will need to see a rally above its May 19th high near 8770 to negate the bearish pattern here.
Transportation Index, TRAN, Daily chart
The U.S. dollar has had a nice bounce off channel support (the top of its broken up-channel from 2008) but it's hard to know if from here it will head immediately to a new high or instead continue to consolidate for months before heading higher. I've been thinking we'll see a multi-month consolidation and at the moment I do not see a reason to change that expectation.
U.S. Dollar contract, DX, Weekly chart
Gold consolidated today following yesterday's relatively strong selloff. Currently it's holding its uptrend line from March 17th so there's still the potential for another bounce up to a minor new high for its bounce (green dashed line), perhaps up to the 1238 area by mid-June. I could see this happening with a stock market rally, if we get one. Otherwise a further breakdown below its uptrend line, near 1184, and its June low near 1179 would likely lead to more selling. I show a decline to about 1155 and then a bounce back up to its broken uptrend line next month before selling off more strongly. That's obviously a guess at the moment but it's a pattern I'll be tracking and I'll update it as price tells me to.
Gold continuous contract, GC, Daily chart
Oil's 3-wave bounce correction off its January low looks like it's finished and could lead to at least a test of its low near 42, if not a minor new low. That would likely be accompanied by a bullish divergence and a good setup for a multi-month trade on the long side. But it's possible we'll see oil trade sideways through the summer (for example, in a sideways triangle as depicted with the red dashed lines) before dropping lower. As with the dollar, it could be a choppy ride for traders over the next few months.
Oil continuous contract, CL, Daily chart
Tomorrow's economic reports will not likely move the market. Pending home sales could move things a little but the market hasn't been paying much attention to housing data. Friday's GDP, Chicago PMI and Michigan Sentiment will be looked at closely.
Economic reports and Summary
The frustration with a market that causes traders to sing "I can't get no satisfaction" continues. The bulls can't get it up and the bears can't get it to go down (get your minds out of the gutter). The choppy price range continues and both sides continue to get whipsawed out of their positions. Selling options above and below resistance and support has worked well and some day traders have done well with the volatility, taking small base hits and getting out of the way. There have been no swing trades for months and it's getting very old.
The first chart I showed tonight, the weekly Wilshire 5000, says it all -- the choppy move higher has been on slowing volume and a narrowing trading range. Momentum is slowing and up volume is not as strong as down volume. We've got all the classic telltale signs of a market top. But tell that to the bulls (and the shorts who keep getting scared out their positions) who don't want to let a good buying opportunity go to waste. As for volume, the declining trading volume can be seen on the SPY daily chart below.
SPDR S&P 500 ETF, SPY, Daily chart
Trading volume has been in decline since last October's volume peak (on the decline) and it's indicative of a problem for the bulls. Lower volume does make it easier to manipulate the market, like this morning, but sooner or later it's going to need stronger buying volume in order to sustain the rally. There's a reason why we're seeing so many rising wedge patterns -- they're very typical at the tops of rallies that have gone too far and when they break they tend to be retraced much faster than it took to build them. The one from last October's low, about eight months, could be completely retraced in a month or two, maybe faster if we get another flash crash in there (a strong possibility since liquidity is drying up).
All of this means bears need to respect the upside while bulls get defensive against a break to the downside. A flash crash will not give you an easy exit from long positions, which is a reason why it makes sense to trim your positions and move to cash. Upside potential is dwarfed by downside risk and you have to ask yourself, when considering holding a position, whether or not you'd be willing to enter a new trade here (in this case on the long side). If not then consider trimming.
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