For what seems like years, each spike down in the stock market has been met with a v-bottom reversal and a rally to new highs. Last week's v-bottom reversal had many thinking the same thing was happening again but this week's decline now has many questioning whether it's going to be different this time. The volatile price swings is certainly keeping both sides jumpy.
Today's Market Stats
Last week's strong reversal off the spike low on Monday, with the large weekly hammer at support levels for the indexes, certainly looked like the typical v-bottom reversal we've come to expect in this market. But the decline was more significant than any seen since the decline into the October 2011 low and the reversal off the August 24th low had a different daily pattern, which suggested it might be different this time. This past Monday's decline followed by Tuesday's strong decline now has many questioning whether it really is different this time.
Today started with a gap up, thanks to an overnight rally in equity futures, but the market struggled following the gap up. A pullback was followed by another rally back up to the morning highs where the indexes stalled mid-afternoon. But some buying in the final 30 minutes pushed the indexes to highs for the day and most closed at their highs, which had the market looking bullish. Too bad these late-day spurts to the upside are often followed by an immediate reversal the next day (one sign of the bears).
The bounce off Tuesday afternoon's low fits best as a correction to an impulsive decline from last week's highs, both of which suggest we'll see lower prices this week. Depending on how I interpret the pattern for the decline from July (May for the DOW), I can see the possibility for just one more low (or test of last week's lows) before setting up a stronger bounce correction this month, or we could see the market stair-step lower into mid- to late-September before setting up a bigger bounce into October/November. I'll point out on the charts what to watch for in the coming week(s).
The day started with a few important economic reports this morning, starting with the ADP Employment report before the bell. It was somewhat of a goldilocks number at 190K, which was less than the expected 201K but better than July's 177K (which was revised lower from 185K). Not too hot, not too cold, but just right for the Fed to raise rates if that's what they're burning to do.
Hurting the Fed's cause (to raise rates in September) was the Unit Labor Costs (revised) for Q2, also released before the bell. It dropped -1.4%, which was below the expected -0.9% and well below the +0.5% for Q1. A decline in the labor costs reflects a slowing economy in which there is no wage pressure and raising rates would only put the economy at further risk.
Another sign of a slowing economy came from this morning's Factory Orders report, which was +0.4% for July and less than the expected +0.9%. Disappointingly, for the economy, this was a strong drop from June's +2.2% (which was revised higher from the originally reported +1.8%. A lack of wage pressure (used by the Fed as an inflation indication) and more signs of a slowing economy make it harder for the Fed to raise rates. The chart below shows Factory and Durable Goods Orders for the past 15 years and the sharp drop since last October's high has not been an encouraging sign.
Factory and Durable Goods Orders, July 2000 - July 2015, chart courtesy briefing.com
This afternoon the Fed Beige Book was released and was somewhat mixed but the bottom line is that it makes it harder for the Fed to justify raising rates this month. The report cited growing wage pressures in several of the Fed's 12 districts, although that was called into question with today's labor costs report. The report also cited the strong dollar and declining oil prices as depressing economic activity. China's slowdown was the reason given for reduced demand for wool products, chemicals and high-tech goods. China's slowdown and the impact it's having on global stock markets is a real thorn in the side of the Fed when considering a rate hike. This is especially true since the Beige Book covers the period through August 24th, just as the markets were starting a stronger selloff. The report was generally optimistic but then again, economists have been optimistic through most of this year, even as the economy has shown signs of slowing. Generally speaking they continue to expect the economy to grow at a modest pace.
The market remains on a nervous watch in front of the next FOMC announcement on September 17th. There will be plenty of important economic/inflation reports between now and then and the market will be watching them closely, especially this Friday's NFP report since employment is an important measurement for the Fed. The more that Fed heads continue to talk about raising rates in the face of signs of a slowing economy, the more the stock market will struggle to get its footing.
Jumping into the charts, I'll start with the small caps and the RUT's weekly chart. I normally use trend lines on longer-term charts using the log price scale because I think it more accurately reflects the trends (as a percentage change instead of price). But I keep an eye on the trend lines using both scales because I know many traders use the arithmetic scale all the time. For the RUT, the uptrend line from October 2011 - October 2014, using the log price scale, was broken with the snap to the downside that started August 18th, which was near 1195 at the time. But when the trend line is viewed with the arithmetic price scale it's near 1169 and only about 4 points above Monday's high. On this chart it's looking like a break of a major trend line and now a back-test on Monday. A selloff from there would leave a bearish kiss goodbye so the bulls need to get the RUT above 1170 and keep it above.
Russell-2000, RUT, Weekly chart, arithmetic price scale
The chart above shows a price projection for the current decline to price-level support near 1040 by the end of September. The 200-week MA, now at 1022, might be close to that level by the end of the month as well. The expectation following a decline like that would be for a large bounce correction into November, maybe all the way back up to price-level S/R near 1215 and another back-test of its broken uptrend line. That would then set up a strong 3rd wave down into early next year. This is assuming THE high is now in place, which is yet to be proven. Notice too that a big bounce into the end of the year would set up a large H&S topping pattern that starts with the left shoulder as the 2014 highs.
The daily chart below depicts a decline this month that will essentially be a stair-step pattern lower to complete a 5-wave move down from June. There are enough differences between the indexes that tell us this is only one bearish possibility of many so for now it's just a projection and I'll need further price action to help confirm or negate it along the way. If this week's bounce gets the RUT above Monday's high near 1165 I'd look for a move up to its downtrend line from July, near 1192 by the end of the week. Two equal legs up for a larger a-b-c bounce off last week's low points to 1183 as an upside target. But first the bulls need to break the downtrend line from August 17th, near 1148 (marginally above today's high), and then price-level S/R near 1152.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1165
- bearish below 1124
As noted on the RUT's daily chart above, it has followed the DOW with a bearish death cross (50-dma crossing down through the 200-dma). This signal is not always reliable since it often marks a short-term washout to the downside and a reversal back to the upside. But for now it's a bearish warning sign and SPX also now has its own death cross (as of last Friday's cross). Unlike the RUT's wave count, I'm using a slightly less bearish idea for SPX, which calls for only one more new low to complete a 5-wave move down from July. I show a projection to the October 2014 low near 1820 but it be just a test of last week's lows near 1867 (or even a slightly higher low). Once the 5-wave move down is complete, assuming we'll get a new low (or test), it would then be a setup for a higher bounce into October before the real meat of the decline kicks in. The differences between the RUT and SPX wave counts simply means it will be time for bears to be cautious following a new low. As long as the bounces are 3-wave (or something choppier) corrections we'll stick with the short side but it's living through the bounces that's painful for bears.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1994
- bearish below 1867
Today's bounce to 1948 retraced 50% of the decline from last week and at the same time tested short-term price-level S/R near 1948 and its downtrend line from August 19th. It was a good setup to short the bounce but it was a scary setup because of the strong spike up in the final 30 minutes to the highs for the day. The bearish play needs an immediate reversal back down on Thursday and then the downside pattern shown on the 60-min chart below has a chance of playing out (for a drop down to 1820 next week).
S&P 500, SPX, 60-min chart
The wave count that I'm tracking on the DOW is the same as I have on the RUT, even though their price peaks were a month apart (May for the DOW, June for the RUT). It suggests we'll see the market stair-step lower this month and the DOW could drop down to the 14380 area where it would retrace 50% of its October 2011 - May 2015 rally. If that plays out we'd then have a very good setup to get long into November before joining the bears again. Today's rally brought the DOW back up to its broken uptrend line from March 2009 - October 2011, near 16350 (arithmetic price scale). It's another setup only a bear could love and we'll find out quickly Thursday morning if the bears pounce on it.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 17,300
- bearish below 15,980
With all the indexes breaking long-term uptrend lines, when using the log price scale, I'm looking at them with the arithmetic price scale since it drops the trend lines lower. Using this scale for NDX as well, it broke its uptrend line from 2012-2013-2014 on August 21st, bounced back above it last Thursday, hit its broken price-level support near 4345 and its broken 50-week MA, near 4331, and then sold off again this week. The back-test of price-level support-turned-resistance near 4345 and its 50-week MA, followed by the kiss goodbye, looks bearish. Back below the uptrend line is bearish. Now today's rally has brought it back up to its broken uptrend line, near 4257, and the bears are waiting for another kiss goodbye (like the DOW's setup above). If the bears pounce we could see NDX work its way down to its uptrend line from March 2009 - November 2012, near 3600 (arithmetic price scale), before the end of the month. For comparison purposes, the uptrend line from 2009 was last back-tested at its July high, near 4680.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 4345
- bearish below 4121
While the stock market has been whipping up and down over the past week the bond market has been relatively quiet. It's like the parents watching little children scream and run around as if their hair was on fire. The TLT (20+ year T-Bond ETF) daily chart below shows a strong selloff following the back-test of its broken uptrend line from December 2013 - November 2014 on August 24th. But after three days of strong selling (rally in yields), the past five trading days have been muted. In fact it's looking like a bottoming pattern is setting up a rally in bond prices and with TLT back-testing its 50-dma at 120.83 (today's low was 120.86) it could start from here. A rally in bonds could put additional pressure on stocks as money rotates into the relative safety of Treasuries. However, if TLT loses support here we could see stronger selling in bonds and that would be supportive for stock market bulls.
20+ Year Treasury ETF, TLT, Daily chart
So many indexes and stocks have very similar patterns and therefore reviewing any more simply becomes repetitive. Keep an eye on any one of the above and you'll have a good sense about what the broader market is doing.
The U.S. dollar has been consolidating following last week's strong bounce back up but is still not yet near its downtrend line from March-August, currently near 98. I'm looking for a rally up to that line, either from here or after a little pullback correction, and then a continuation of a larger consolidation pattern into the end of the year. Next year we should see a bullish breakout (possibly sooner). As noted on the weekly chart below, as long as MACD stays above the zero line the dollar stays bullish. A return to the zero line while price consolidates, followed by a turn back up, is oftentimes a reliable buy signal (and the opposite for a sell signal).
U.S. Dollar contract, DX, Weekly chart
Gold's bounce off its July 24th low had achieved two equal legs up, at 1162.50, with a high at 1169.80 on August 24th. It tagged its downtrend line from January-May and then sold off into last Wednesday's low before bouncing again up to 1147.30 yesterday. The small bounce again looks like an a-b-c bounce correction to its decline, nearly achieving two equal legs up at 1148.30 and almost a 62% retracement (near 1150) of the decline from last week's high. From a bearish perspective, which I still have for gold, it looks like a setup for a stronger selloff to follow. It doesn't turn at least short-term bullish until it can rally above 1170 and in the meantime I continue to look for gold to drop down toward 1000 in the weeks ahead.
Gold continuous contract, GC, Daily chart
There's very little change to silver's weekly chart. While gold was trying a strong bounce off its July 24th low, silver was only able to make it back up to its broken uptrend line from November 2014 (which fits as a H&S neckline). The horizontal line of support, near 15.25, also kept getting in the way of the bulls on a weekly closing basis, all of which had me doubting gold's rally potential. When gold pulled back from last week's high silver made a new low below price-level support near 14.65, which is where it's currently struggling to hold on. A rally above its August 21st high at 15.71 would be at least short-term bullish but in the meantime I'm looking for silver to break down and work its way lower to the $12 area, potentially lower.
Silver continuous contract, SI, Weekly chart
I think the low is in for now for oil. The strong rally off Fib support at 38.41 (the August 24th low was 37.75), which is the 127% extension of its previous rally (January-May), looks like the start of at least a bigger bounce. The idea that I've been tracking for a large sideways consolidation pattern into early next year is still possible, especially if the dollar continues to trade sideways. For that pattern I show a bounce back up to about 58.50 and then back down to a higher low. But it's possible we have a completed 5-wave move down from August 2013, which would be a setup for a larger multi-month bounce correction and potentially back up to the $70-75 area before heading back down. In any case I think the short side for oil (except for short-term trades) is the riskier trade. The big bullish divergence on the weekly MACD has been warning bears not to get aggressive on the short side.
Oil continuous contract, CL, Weekly chart
Tomorrow's economic reports include the Challenger Job Cuts report, so another employment report for the Fed to chew on. The big one will of course be the NFP report on Friday. After the opening bell we'll also get the ISM Services report, which is generally stronger than the manufacturing report. It's expected to show a slowdown from July's 60.3 to 58.4 and anything significantly less than that could actually spark a market rally since it would be one more reason for the Fed not to raise rates.
Economic reports and Summary
While many think we have a strong v-bottom reversal off last week's low, which they believe will lead to a continuation of the bull market and new highs this year, I'm not seeing enough evidence to suggest that's going to happen. It of course could happen but I'll want to see some impulsive price action back to the upside and so far I'm seeing corrective price action (3-wave moves, overlapping highs and lows, etc.). The declines are sharp (impulsive) and the bounces are corrective, which keeps me in the company of bears.
The bigger question for me, assuming we've got new lows coming, is how low it could go and how long it will take, which at the moment is not very clear. Slightly different interpretations of the wave counts for the various indexes makes a difference in the projections for how low the market could go and how long it could take. We could get just a test or minor new low and then start a much larger bounce correction into the end of the month or early October, or we could see the market stair-step lower for another couple of weeks before setting up a big bounce into November.
Each leg down to a new low, assuming we'll get it, will have to be considered THE bottom that sets up a multi-week/month bounce correction (I believe we'll only be looking for a correction to the decline before heading much lower) until proven otherwise. The proof will be in the bounce patterns -- as long as we get choppy or 3-wave moves, such as the bounce off last Monday's low and the current one off yesterday's low, we should look for lower prices. If the current bounce off yesterday's low becomes impulsive (5-wave move up), I'll then look to buy the next pullback for at least another leg up.
The whole idea here is that we're into the part of the pattern that requires analysis of each leg to help determine what the next move is likely to be. Don't get married to any positions and instead look to trade quickly in and out. And most of all, don't worry about missing a trade. In this environment you're likely to miss far more than you catch, otherwise you may be getting too aggressive and acting like a gambler instead of a trader.
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