We're getting decent price swings (with relatively low VIX readings for all the price volatility) but we're stuck waiting for something. We're all here and ready to trade but the market is making us wait to see if there will be any follow through either up or down. So far there's been no answer from the market.
Today's Market Stats
The market started off strong this morning after an overnight rally in equity futures due to encouraging economic news out of Europe and Asia and then the pre-market ADP report that was weaker than expected -- yes, weak is good since it keeps the Fed off the raise-rates button. The DOW was relatively weak, thanks to Disney, while the others were doing well. SPX was the middle of the road, while techs were strong, but after being up nearly 20 points this morning, the sellers took over, driving SPX back down about 13 points to close +6 in the green. The DOW finished -10 points in the red. We continue to wait for direction.
Before this morning's open we received the ADP Employment report, which came in at 185K, weaker than the expected 220K and a drop from June's 229K (which had been revised lower from the originally reported 237K). After more worry about the Fed kicking off its rate-raising campaign (one of the reasons for yesterday's rally), the weak ADP report, and what it might mean for this Friday's NFP report, had traders feeling more bullish about the Fed being forced to back away.
After this morning's open we received the ISM Services report and it was strong than expected. At 60.3 it was better than the 56.3 the market expected and a big jump up from June's 56.0. It's also the highest it's been since August 2005. Hmm, maybe the Fed will pick up on that as a reason to justify a rate increase. I'll believe a rate increase when I see one.
Other than the two economic reports and some earnings reports, which knocked indexes around but left them bifurcated, there apparently wasn't much to keep the buyers coming in. That suggests the rally may have been more short covering than real buying and any weakness tomorrow would suggest the market is weaker than it is strong. But Thursday could continue to chop sideways as it waits to get through Friday morning's NFP report
With the choppy sideways move this year it's been difficult getting a sense of direction, other than sideways, and putting trend lines around it has been challenging to say the least. What typically works in a sideways market is price-level S/R but even that hasn't worked very well. One of the trend lines that appears to be in play is the longer-term uptrend line from October 2011 - October 2014, currently near 17735. The DOW poked above this line last week but was unable to close above it with the important weekly closing price. On a weekly chart, intraweek breaks of S/R are not as important as the week's closing price (same as intraday breaks not being as important as the daily close). If the DOW drops back down near last week's low at 17553 it would be a test of the bottom of a parallel up-channel from February and a trend line along the lows from March 26 - July 7. A little lower, near 17270 is the trend line along the highs from 2000-2007, which it broke above in October 2014 and back-tested in February. There is still the potential for that trend line (purple on the weekly chart below) to hold as support but below that level and then its February 2nd low at 17037 would be confirmation we've seen THE high. Until that happens, especially in this choppy market, it could go either way, or should I see one of 3 ways -- up, down or sideways (or any combination of those possibilities). I've highlighted the MACD break below the zero line, which is bearish since bullish consolidations generally see MACD hold above the zero line (coming back to the zero line and turning back up is typically a good buy signal).
Dow Industrials, INDU, Weekly chart
Thanks to Disney (DIS) and its disappointing earnings report after the bell yesterday, it held the DOW back today, which made it one of the weaker indexes in today's rally attempt. DIS finished down -11 (-9%) and single-handily had the DOW finishing in the red today while the others stayed in the green. Last week the DOW tried 3 times to get through its broken 200-dma, only to be rejected each time. Friday's red candle followed a bearish dragonfly doji on Thursday and that gave us a 3-candle reversal pattern at resistance. Monday followed with a down day and a confirmed failure to climb back above its uptrend line from 2011-2014. This morning's high was a back-test of its broken uptrend line from October 2014 through the July 7th low, currently near 17660. Of all the indexes, the DOW best supports a very bearish wave count, which is a series of 1st and 2nd waves to the downside off the May high. The series of 1st and 2nd waves could be just a corrective pullback, which in this case would mean a correction to the longer-term rally that will be followed another rally. But keep in mind that market crashes come out of bearish wave counts like this, as well as oversold condition, and therefore the potential for a huge downside move needs to be respected.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 17,784
- bearish below 17,399
Those who trade the Dow Industrial index, such as through the Diamonds (DIA), were likely watching the downtrend line from July 20-31 and maybe even the uptrend line from October 2014 through the July 7th low, both of which crossed today near 17660. The first thing the bulls need to do is rally the DOW above that level. But in the land of chop we wouldn't know if that would lead to a bigger bullish move or just more of the same 3-wave moves that lead to reversals.
Dow Industrials, INDU, 60-min chart
Unlike the DOW, SPX has been chopping more sideways than in a choppy downtrend. This morning's rally had it popping above its downtrend line from July 20th, near 2108, but it was unable to hold above, which left a bearish failure. The large tail above today's candle body is a clear sign of a failure to rally and is bearish. It also closed below both its 20-dma (near 2100) and its 50-dma (near 2098), also not bullish. If it does drop lower from here we could see a decline to about 2073-2076, where it would meet its uptrend line from July 7th and its 200-dma. The last time it touched the 200-dma, on July 27th, it led to a 50-point rally in 4 trading days. But it would be the 3rd test of that support in about a month and might not stand up to another test. However, the bottom line right now is that we do not have enough clues to help determine which way this is going to break. But whichever way it does break it's likely going to be a big move.
S&P 500, SPX, Daily chart
The techs were the stronger sectors today, thanks to a few high-flyers, but they too failed to hold their rallies. As can be seen on the Nasdaq's chart below, today's candle is a shooting star. The good news is that it closed 7 points above price-level resistance at 5132. The bad news is that the bearish candlestick is basically still at resistance. If the Nasdaq continues to rally this week I'd watch for the possibility that it will close the July 22nd gap down, near 52.08. Two equal legs up, for just an a-b-c bounce off its July 28th low, points to about 5210 so we've got an upside target at 5208-5210 and it would be bullish above that level. But a drop back below its 50-dma, near 5082, would be a bearish move.
Nasdaq Composite index, COMPQ, Daily chart
Key Levels for COMPQ:
- bullish above 5132
- bearish below 5025
Looking at the RUT's daily chart reminded me of the children's way of picking between something -- Eeny meeny miny mo, pick an animal by the toe, if he hollers let him go ... If the animal whose toe you pick is either a bull or a bear I think your chances of getting mauled are quite high. The same could be said for picking a direction on the RUT. Price has been oscillating the past 4 days around its H&S neckline (uptrend line from May-July) and today it closed on the line with a doji (albeit a slightly bearish one). The 20-dma is about 12 points above the line and the 200-dma is about 13 points below the line. Flip a coin since a trade has a 50/50 chance of going your way here, which of course means you should take a pass and not enter a new trade here. Entering a trade here is gambling, not trading. However, if it continues to chop sideways for a couple more days then I would see that as a bullish consolidation. Friday's NFP report could prevent any consolidation beyond Friday morning.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1263
- bearish below 1205
I've been watching Treasuries because they've been showing strength (yields dropping) while the stock market has been holding up (other than the DOW with its shallow choppy decline). This could be a message from the bond market that says the Fed will not be raising rates anytime soon, which has helped the stock market at least stay afloat. But yields and stock prices follow each more than they do not and the decline in yields since the high at the end of June suggests stock prices could be on borrowed time here. As the TYX (30-year yield) daily chart below shows, the decline from last week broke the uptrend line from January-April, near 2.94% at the time, and today's rally has brought it back up to the broken trend line, near 2.96%. It's also testing its downtrend line from July 13th. A rally above the July 29th high at 3.025 would be a bullish move but at the moment we could see a bearish kiss goodbye at resistance, in which case a test of its 200-dma, near 2.82, would likely be next. The further yields drop I think the more pressure we'll see on stock prices.
30-year Yield, TYX, Daily chart
The banking index, BKX, has been struggling to hold near its high since the latter part of June. The June highs and the July 23rd high were tests of the top of a parallel up-channel for price action since October 2013, which is currently near 80.60. Next week the top of the channel will cross the broken uptrend line from March 2009 - October 2011 at the 61.8% retracement of the 2007-2009 decline, at 80.87. The July 23rd high tagged this retracement level to the penny. On an intraday chart it looks like an impulsive decline from the July 23rd high and so far a corrective bounce that has retraced 62% of the July 23-28 decline and therefore it could be ready to start the next leg down. It could achieve at least a minor new high but with bearish divergence I would expect nothing more than a 3-drives-to-a-high topping pattern.
KBW Bank index, BKX, Weekly chart
The TRAN got a strong rally off its July 27th low but after two days it stopped. It was still looking bullish with the sideways consolidation following the rally and it looked like today we'd get the follow through. But a 113-point rally was given back and it closed only about 10 points in the green. The resulting shooting star (or a more bearish version called a gravestone doji) at resistance does not look promising for the bulls. The line of resistance is price-level S/R near 8515 and today's high was 8530. Today's strong rejection at resistance looks like a back-test followed by a bearish kiss goodbye and a short position with a stop just above today's high looks like a good setup.
Transportation Index, TRAN, Daily chart
The U.S. dollar has made it up to a downtrend line off the two highs in March-April, currently near 98.20 (today's high was 98.33) and is showing some bearish divergence against its July 20th high. Not shown on the weekly chart below, it's also back up for another back-test of its broken uptrend line from June 18th and therefore it's possible the dollar's bounce off its May low will end here and we'll see the start of another pullback inside what I believe will become a large sideways triangle consolidation pattern through the rest of this year. I see the potential for a little higher for the dollar, perhaps near 99, but at this point I think the long side for the dollar is the riskier side.
U.S. Dollar contract, DX, Weekly chart
Since gold dropped to Fib support at 1090, on July 20th, it's been consolidating in more or less a sideways triangle pattern, which is a bearish continuation pattern. It suggests support at 1090, which is the 50% retracement of its 2001-2011 rally, will soon break. It would be short-term bullish above the July 31st high at 1103 but the bulls need to see gold back above price-level resistance at 1141, which was a shelf of support from November 2014 through July. In the meantime, the next downside target for gold is near 1000.
Gold continuous contract, GC, Weekly chart
Watching silver for some clues, especially since it's currently showing bullish divergence on its weekly chart, I'm not yet seeing anything that says I should be looking for a rally. It's consolidating like gold and a weekly close below 14.65, which is price-level S/R from back in 2006-2010, would likely indicate the next leg down has started. Until I see evidence to the contrary I continue to look for silver to drop down to the $12 area before potentially setting up a very good buying opportunity.
Silver continuous contract, SI, Weekly chart
In the beginning of the year I started showing an idea for sideways triangle consolidations for the dollar and oil. Oil I'm a little less sure about since it looks like we get a minor new low (no lower than 40) to finish a 5-wave decline from August 2013, which could set up a big bounce or a big sideways choppy consolidation. For now I'm leaning toward a sideways triangle similar to the dollar and the projection I've had for it since the May high has been back down to near 44 and it's now nearing that level (today's low was 44.83). The bullish divergence shown on the weekly chart suggests caution by those who are short oil. I wouldn't try catching falling knives here but nor would I be looking to short it this close to possible support. If oil consolidates near support for a few weeks then I'd be looking for another leg down to finish the decline, probably above 40. But if it just keeps selling off below 44 then we could be looking for a test of the January 2009 low at 33.20.
Oil continuous contract, CL, Weekly chart
Tomorrow's economic reports include the Challenger Job Cuts, which could add to the angst about what Friday's NFP report might look like. Just keep in mind that the reaction to the NFP report will likely be backwards -- what's bad is good and good is bad. Any confirmation of weakness in the jobs market will force the Fed to sit on their hands.
Economic reports and Summary
Know when to trade and when to sit on the sidelines. I've been seeing that recommendation from more trading analysts and I think it's good advice (the secret to Jesse Livermore's success, when he was successful). We have a choppy and whippy market and there continues to be lack of follow through in both directions. Active traders, which most of you are, hate sitting on the sidelines since you feel like you're wasting your time. Time is money and when money is not on the line it's not making any. The trouble is most traders lose money in this kind of environment so if you're one of those then you need to stand up, take a big breath of clean air, grab both of your butt cheeks and sit down while holding them. It's the best way to keep your hand off the mouse and it helps keep you out of trouble. Boring, yes, but right now capital preservation is more important than capital appreciation.
If you can't help yourself and you must trade, try paper trading some new ideas. Trade light and trade quick and see how quickly base hits can compound into big gains. Making $100 on a trade might not be as satisfying (from an instant gratification perspective) as making $1000 or $5000 but losing $100 sure feels a lot safer than losing $1000. Read and research your next trading ideas so that you're ready for the next big move. The market has been chopping sideways and many are expecting an upside breakout, which is a typical expectation when the consolidation follows a rally leg. The rally will likely be big if it breaks out to the upside (always be careful about a head-fake breakout) since the spring is getting wound tight. But if the market breaks down instead, which I think it will, a failed bullish pattern typically leads to a strong bearish move. In other words, we'll have plenty of opportunities to make some good money in a big move. But that will only happen if you've still got some capital to trade. So if you're bored and feeling like you need to trade, just keep the bigger move that's coming in mind and "save yourself" for that special move.
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