News that Germany is considering additional financial aid to Greece gave the stock markets a lift. This is an on-again/off-again concern by the markets and the end result is just more of the same choppy whippy price action.
Wednesday's Market Stats
This morning's strong rally came courtesy of news out of Europe that Germany might, perhaps, maybe, possibly support financial aid for Greece so that they won't default (yet) on their loans. That's all the stock market needed to hear and it shot higher out of the gate this morning, likely greatly aided by short covering. At the moment it's unclear whether or not it will be a 1-day wonder rally since prices remain inside the 4-month trading range. As for help for Greece, I'm reminded of the old woman on the old Wendy's commercial who looked inside the hamburger bun and yelled out, "Where's the beef?"
Germany is apparently now saying Greece needs to agree to just one of several economic reforms and will then OK the next loan package. To me it sounds like Germany is capitulating and that's apparently a good thing for the markets. It really is amazing how excited the market gets about the game of kick the can. But after four days of selling it's hard to know if today's rally was just an oversold reaction (dead cat bounce) or the start of another rally leg that will take us to new highs. At the moment it looks like the rally should see some follow through after a pullback correction.
There were no significant economic reports this morning so the only news event to spark today's rally was the Germany-Greece news. But helping the market today was news from the Commerce Department's Quarterly Services (QSS) survey, which suggests consumer spending might be a little stronger than had been initially reported last month with the 2nd GDP estimate. That has economists thinking the 3rd estimate, to be published June 24th, will show an improvement by as much as 0.4% to 2.2% annual rate. Viewed slightly differently, the contraction in Q2 could be revised up to -0.2% vs. the 2nd estimate of -0.7%. So it's still a sign of slowing but it could be "less bad." Of course if that's true then the Fed could have an easier path to its first rate increase and the market will probably react badly to any news from the Fed that they're on track to raising rates in September. So it's questionable how a "less bad" GDP number will affect the market, including today's rally.
The market is at a critical point here and the price action on Thursday could tell us what to expect next week and for the rest of the month. As I'll point out on a couple of the short-term intraday charts for the DOW and SPX, what kind of pattern we get off Tuesday morning's low will provide clues for the larger pattern. One points to a rally to new highs next week (opex rally) while the other points hard down from here.
Other than the RUT's relatively stronger picture over the past couple of weeks, the other indexes look similar so analyzing one of their patterns gives us a good idea about the others as well. I'll start tonight's chart review with a look at the most-watched index, the Dow Industrials.
The decline from May resulted in a break of the DOW's uptrend line from February, near 17950 at the time, and that looked like a bearish break below the bottom of a rising wedge pattern. Today's rally has the DOW back up against its broken uptrend line, near 18000, which begs the question -- is this rally going to lead something that will take it to a new high in the coming week(s) or is it just a bounce up to resistance before heading lower?
Dow Industrials, INDU, Weekly chart
As can be more easily seen on the daily chart below, today's rally had the DOW poking above its broken uptrend line from February and its 50-dma, near 18021, but closed on its trend line. The bulls need to see a recovery above this line as well as its broken 50-dma. The bears want to see this back-test followed by a bearish kiss goodbye and stronger selling. The winner of this debate tomorrow should set the tone for next week and the rest of the month.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 18,168
- bearish below 17,715
From an intraday perspective, with the 60-min chart below, we have a slightly different picture. The break of the uptrend line from February was followed by a pullback to the line so it fits as a bullish back-test and the bulls will want to see a morning rally take it up to a new high. But a new high would then likely lead to a drop back down S/R near 18000 and that would scare away some bulls, just in time for a stronger rally to follow (explained with the chart after this one). If the bears step back in tomorrow and drive the index back down it will keep the bearish pattern alive (labeled in red). This one says this morning's rally was just an oversold short-covering rally to finish another upside correction before selling off strong in a 3rd of a 3rd wave down in the decline from May.
Dow Industrials, INDU, 60-min chart
I don't normally get into studying the veins on the leaves in a market wrap but I think it's worth reviewing what will be important to watch for Thursday morning. The DOW's 10-min chart below shows the rally off Tuesday morning's low and so far it's a 3-wave move up to this morning's high. For the bearish pattern that says it's just a high a-b-c bounce that will be followed by a strong selloff. I think if the DOW gets below 17900 it would negate the bullish pattern (green). The bulls want to see another leg up to give us a 5-wave rally from Tuesday, in which case we'd have a trend reversal back to the upside. Following a 5-wave move will be a corrective (3-wave) pullback, probably into Friday (pre-opex head-fake move?), and then we'd look for another rally leg (strong rally in a 3rd wave higher). This is why Thursday morning's move will be important to watch and see how this will set up the next move and help define what next week will probably go.
Dow Industrials, INDU, 10-min chart
SPX looks the same as the DOW but with different trend lines, none of which were in play today. SPX managed to climb back above its broken 50-dma, near 2102, but stopped short of its 20-dma, near 2111. But we've got the same setup for Thursday as shown for the DOW, which is shown on the 30-min chart after the daily chart below. A rally above 2121 would strongly suggest new highs are coming whereas a drop below Tuesday's low near 2072 would be the fat lady singing the blues for the bulls.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 2121
- bearish below 2072
If SPX drops below S/R near 2099 it would keep the bearish pattern alive. But if the bulls can drive the index at least marginally higher, preferably up to its broken uptrend line from March 2009 - October 2011, near 2115, it would give us a bullish move off Tuesday's low. A back-test of the broken uptrend line and then a deeper pullback (to at least 2100) would give the bears a reason to jump in short but it would likely be a big mistake since the pullback would likely lead to a stronger 3rd wave rally as all those bears get chased back out. The next couple of days could look like more of the same choppy whippy volatility that we've seen for more than four months now so traders will need to be careful.
S&P 500, SPX, 30-min chart
Monday's and Tuesday's selloff in NDX had it looking bearish after it broke both its 50-dma and its long-term uptrend line from March 2009 - June 2013, both near 4446 at the time. But bulls made a late-night attack on the bear's camp and caused them to retreat today and both the 50-dma and uptrend line, now near 4450 and 4460, resp., were recovered and that keeps the bulls in the game. But they were only able to back-test a broken uptrend line from February 2 - April 6, which was broken last Friday, as well as its broken 20-dma, both near today's high at 4497. The bulls would look better with a sustained rally above 4500 while the bears would look better with NDX below 4440 and confirmed very bearish below Tuesday's low at 4392. Above 4540 would open the door to new highs, potentially up to the top of a rising wedge pattern near 4660 by the end of the month.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 4540
- bearish below 4392
The RUT is now presenting us with an interesting setup, one I've been watching for the past couple of weeks. The pattern since the low on May 6th I've been watching the development of what looks like a bearish rising wedge. Even though the RUT was holding up better than the other indexes it was looking like a bearish pattern and today's rally gave it a little throw-over above the top of the wedge (on news, a typical way these finish). It closed at the top of the wedge near 1267 so it could go either way here. The bulls want to see a sustained rally above 1270, which would be a bullish breakout from the wedge and that would point to a strong rally to follow. But a drop below Tuesday's low near 1242 would confirm a breakdown from the wedge and give us a strong signal that the RUT has seen its final high. Again, the next day or two could give us the answer.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1276
- bearish below 1242
A look at a bigger index, the NYSE Composite, doesn't provide any clearer signal at the moment, except to say it looks bullish if only because important support held in an uptrend. As can be seen on its daily chart below, Tuesday's low was a successful test of support at its 200-dma and uptrend line from December, both near 10884. Today's rally is now approaching its broken 20- and 50-dma's, which are about to cross near 11100 (today's high was 11080). The bears need a break below 10800 otherwise the bulls stay in control and we could see a rally up to the top of a rising wedge pattern (trend line along the highs from November 2014 - April 2015, near 11330 by the end of the month (+2.5% from here).
NYSE Composite index, Daily chart
Key Levels for NYA:
- bullish above 11,150
- bearish below 10,800
Bond prices gapped down this morning which popped yields higher. But the bond market traded sideways following this morning's move and both the 10-year and 30-year yields stopped at/near resistance with little dojis for their daily candles. The TYX daily chart below shows the rally off its January low up has now made it up to the top of a parallel up-channel and today's gap up with a doji could lead to an evening star reversal pattern if today's rally is followed with a gap down and red candle on Thursday. Once again, even for the bond market, Thursday could provide an important clue for what will happen next. TYX would be more bullish above 3.23% but bearish if it gaps down and it would be confirmed bearish (bullish for price) below its May 29th low at 2.842% and its 200-dma, currently 2.843% (and soon to be crossed by its upward trending 50-dma).
30-year Yield, TNX, Daily chart
The TRAN continues to look like the weakling among the bunch. It got a bounce with the market today but its remains in a bearish pattern, especially following the back-test of support-turned-resistance last week near 8515 (price-level S/R and its broken uptrend line from March 2009 - November 2012) and the bearish kiss goodbye that followed. I do see the potential for a higher bounce in the next few weeks, perhaps up to its 200-dma, currently near 8750, before heading lower but that's not how I'd bet on it at the moment.
Transportation Index, TRAN, Daily chart
The U.S. dollar pulled back today, which was supposedly due to an expected debate around the G7 summit regarding the strength of the dollar vs. other currencies. It's all part of the currency wars and there are several countries, especially emerging ones, that are very worried about a stronger dollar. If their currencies are pegged to the U.S. dollar it makes their products much more expensive to export. If the Fed raises rates, as they're threatening to do, it would increase the value of the dollar further and so the discussion about rates and the dollar's value. As for the dollar's pattern, I think it's not going to change value much for the remainder of this year as it hammers out a sideways correction (just a guess about that at the moment but it would fit the larger price pattern) before heading higher.
U.S. Dollar contract, DX, Daily chart
Following last week's low for gold I thought it was ready for a bigger bounce to correct the decline from May 18th. Today's rally had it tagging its broken uptrend line from March-May and that might be all the bounce we'll see. But it would look a little better with a small pullback and then another leg up to again test its broken uptrend line, maybe up near 1200 next week, before starting a stronger decline. Above its June 1st high at 1204.70 would be short-term bullish and above 1245 would make it more bullish but at the moment I'm looking at a bounce in gold as a shorting opportunity.
Gold continuous contract, GC, Daily chart
Oil has been hanging tough since its high on May 6th by trading sideways at price-level S/R near 58.50. The month-long sideways consolidation looks bullish and if oil rallies above the May 6th high at 62.58 it would look bullish for a move up to its broken uptrend line from 1998-2008, near 69.25. Its 50-week MA is coming down toward that level and it makes for a good upside target if it does rally. Otherwise, like the dollar, I see the potential for a big sideways triangle this year before it breaks down next year.
Oil continuous contract, CL, Daily chart
Tomorrow's economic reports include unemployment claims data, retail sales, export/import prices and then business and natural gas inventories. The retail sales data will be important since there's currently a discussion about whether or not the 3rd GDP estimate will be raised based on some improvements seen in consumer spending. That's not what we're seeing in retail sales so a bad number in the morning could torpedo today's rally attempt. But a stronger-than-expected number would help the argument for a "less bad" GDP estimate.
Economic reports and Summary
The stock market got a big boost today and that saved the indexes from confirming a bearish break of important support levels. The recovery keeps the bulls in the game but as shown on the RUT's chart, there is the possibility today's rally was the last hurrah for that index (to finish its rising wedge pattern). And if the market sells off on Thursday it would leave bearish patterns in place for the other indexes as well, which would suggest a strong selloff to follow.
From a short-term perspective Thursday morning's move will be important. A minor new high for the move up from Tuesday, following today's post-rally consolidation, would be bullish. It will lead to a larger pullback correction but that pullback will be a buying opportunity for a stronger rally into opex. It would even fit as the pre-opex head-fake decline followed by an opex rally. But an immediate selloff would keep the bearish pattern intact and I'd be reluctant to buy that kind of pullback since it could lead to much stronger selling into next week.
The bottom line is that we remain inside a 4-month trading range that has been full of choppy whippy price action with little follow through in either direction. Traders get chopped to pieces in this kind of market so it's important to remember rules for capital preservation during times like these.
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