Following last week's highs the market has been in a steady downtrend (lower highs and lower lows) and it could develop into a stronger downtrend. But the choppy move lower shows the bulls fighting the decline and there's still strong support that the bulls could use to launch another rally leg. We're nearing a decision point about which side is going to win.
Today's Market Stats
Happy Veteran's Day and to all our veterans and thank you for your service to our country and your willingness to defend against our enemies, both foreign and domestic. Now if we could only get rid of the politicians who refuse to defend our Constitution. Oops, sorry for the political jab, it just flew out of my mouth (I hate it when that happens).
The day started with a small pop to the upside, thanks to an overnight rally in equity futures. It could have been a stronger gap up had the overnight rally held but following the pre-market high at 8:00am, where ES hit a high at 2087.25 (+9.25), futures started to sell off and ES had given up half the overnight gain at the open (+4.50) and immediately sold off from there, which of course dragged SPX back down following its small gap up.
This morning's selloff was smaller than the previous five mornings but it did continue the pattern of morning declines (this morning being the 6th straight day) followed by bounce attempts. This pattern looks like a distribution pattern and unless we get some stronger upside signals, this could be building a much stronger decline to come. The bulls need to negate the downtrend by stopping the series of lower high, starting with a rally above last Friday's close.
Following this morning's initial decline there was another bounce to minor new highs for the day but not anywhere close to last Friday's lower highs. The indexes then rolled over into and tested or broke (RUT) the morning lows. It was a sideways consolidation day but as part of the sideways/up choppy consolidation since Monday morning's low it's looking like a bearish continuation pattern.
There was nothing exciting in economic reports and overseas news was quiet, which might have had something to do with today's relatively quiet market. I'll just jump into the charts and see what they have to say and what we should be watching for in the coming week.
Starting with the SPX weekly chart, I see a couple of bearish and bullish things. One bullish thing is the climb above the 50-week MA on October 23rd (when it also climbed above its 200-dma) and now it's pulling back for what could be a bullish back-test, at 2062-2064, before pressing higher. But at the moment it's fighting to hold onto price-level S/R at 2075 (where it closed today) and a drop below that level could be more trouble for the bulls. Resistance at the cross of the broken uptrend line from October 2011 - October 2014 and the top of a parallel up-channel from 2009, near 2087, is also holding after last week's break above them. Assuming the market is ready for at least a larger pullback correction, if not a strong decline, the jury is still out about which one to expect.
S&P 500, SPX, Weekly chart
The daily chart below shows today's back-test of the broken uptrend line from October 2011 - October 2014, which SPX had climbed above on October 28th but then dropped back below it on Monday, which left a failed breakout attempt. Today's back-test is what could be followed by a stronger decline if multiple support levels between 2064 and 2075 are broken. As for what the decline could turn into (just a pullback correction or something stronger) we'll have to see how the pattern develops. So far it is a choppy pullback, which supports the idea for just a larger multi-week pullback correction before heading higher again (green) in December. It might chop its way down to the 2045 area this month before starting another rally into the end of the year. Do you think there is someone who would love to see the market close at its high for the year, someone with lots of (free) money to throw into the market? The Fed is not bigger than the market but all they need is to keep bullish sentiment alive for a little longer. Verbally backing away from a rate increase this year would do it.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 2135
- bearish below 2064
The 60-min chart below shows an expanding triangle for the move down from the November 3rd high, a pattern that can be considered a correction to the rally. At this point last Friday's high near 2099 is the key level to the upside. Stay short below it and long above it. In the meantime, the bears have a lot of work to do to plough through multiple support levels at about every 20 points. A break below 2020 would open up things to the downside for them.
S&P 500, SPX, 60-min chart
On November 2nd the DOW was also able to climb back above its broken uptrend line from October 2011 - October 2014 but then lost it again on Monday. It's finding support this week at its broken downtrend line from May-July, near where it closed today at 17702. This followed today's back-test of its broken downtrend line with today's morning and midday highs. So it's a battle between the trend lines but as with SPX, this week's consolidation looks bearish and we should see another leg down in the pullback from last week's high. The bigger question for me at the moment is what kind of pullback/decline we should expect in the coming weeks, a question we might not have a clear answer to for at least another few days of trading.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 17,978
- bearish below 17,540
With NDX's gap up on October 23rd it had climbed back above its broken uptrend line from 2012-2013-2014, near 4578 at the time, and this week it has dropped back down to it, currently near where NDX closed today at 4637. The bulls want to see this back-test followed by a bullish kiss goodbye whereas the bears want to see the bottom of the gap, near 4600, broken since that would also be a drop below its 20-dma. It would be especially bearish if NDX gaps down below 4600 because it would leave an island reversal, which would tell us the decline is likely to be sharper instead of a multi-week choppy pullback. At the moment it's a bit of coin toss as to which way it's going to break and that means traders need to be short-term oriented.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 4738
- bearish below 4600
The RUT continues to be the index to watch for bullish clues. Right now it's testing its uptrend line from October 2nd, near 1179, which fits as the bottom of a rising wedge pattern for the leg up from September. It would not surprise me to see another leg up inside the rising wedge, although that's not the way I'd be betting here. A rising wedge tends to break down quickly when it goes and therefore playing the long side has a poor reward:risk ratio. But if the bulls are able to drive the RUT above 1216 it would become more bullish.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1216
- bearish below 1177
Another index with a bullish setup is the NYSE, which can be seen on its daily chart below. On October 28th it broke its downtrend line from June but then ran into trouble at its trend line along the highs from August 28 - September 17 on November 3rd. A pullback from there was expected but now it's at rice-level S/R at its 2007 high, at 10387, and its broken downtrend line, also at 10387. A rally above this morning's high at 10460 would be a bullish heads up and then above last Friday's close at 10513 would confirm the bullish setup here. For those who like the long side, buying support here could work, especially with a tight stop at 10350. Just be sure to honor your stop if hit since the downside risk is significant and a failed bullish setup here could fail hard.
NYSE Composite index, NYA, Daily chart
The bond market was closed today for Veteran's Day (how come they get all the holidays off?) but I wanted to show where the 10-year yield is currently trading. Last Friday there was a strong reaction to the NFP report (selling in bonds in anticipation that the Fed has more rope to hang itself, I mean raise rates) and then Monday's minor new high above Friday's had TNX tagging its downtrend line from 2007-2013, near 2.38%, with a high at 2.377%. If it can break above the downtrend line and rally above 2.4% I think it could then test its June high near 2.49%. But if this week's candle turns into a reversal, such as a shooting star, we might see the "big correction" coming with a sharp decline. That would be an indication the bond market over-reacted and cooler heads are thinking that the Fed has no wiggle room to raise rates. That's my guess what will happen and we should soon find out.
10-year Yield, TNX, Weekly chart
I'm not getting much from the banking index chart at the moment since I could make an argument either way as what we should expect next. But the broker index (XBD) is showing us an interesting setup here. In July it had achieved a projection at 202.04 (with a high at 202.88) where the c-wave of the big A-B-C bounce off its 2008 low was 162% of the a-wave. Prior to that high, the December 2014 high at 187.52 achieved the 62% retracement of the 2007-2008 decline, at 185.68. Then in August it fell below its up-channel for the leg up from April 2014. Now the bounce off its October 2nd low has made it back up to resistance at its December 2014 high, the bottom of its up-channel, the 62% retracement of the 2007-2008 decline and its 50-week MA, all in the 185-188 area. This week's high so far is 188.15 and there's a lot of resistance for the bulls to climb over. Can they do it after the strong spike up from its October 2nd low? I would guess not and that makes it a good shorting opportunity. Another leg down equal to its July-October decline targets 144, where it would also test its 200-week MA.
AMEX Securities Broker/Dealer index, XBD, Weekly chart
The U.S. dollar blasted off last week, adding to its strong rally off the October 15th low, and it made it up to the top of a parallel down-channel off the March 2015 high. I see a little more upside potential to a price projection at 100.16 (this week's high so far is 99.60) and maybe a retest of the March high at 100.78. The dollar could surprise me to the upside but I think we'll see another leg back down before setting up a larger rally (maybe another down-up-down sequence before setting up the rally early next year).
U.S. Dollar contract, DX, Weekly chart
On November 4th gold broke its uptrend line for the bounce off its June low and is now approaching that low near 1072, a break of which would point to 1000 as the next downside target. But I think gold should be ready for a bounce correction and possibly back up to price-level S/R at 1142 and/or its broken uptrend line from June, near 1132 by the beginning of December.
Gold continuous contract, GC, Weekly chart
Silver has broken price-level S/R at 14.65, which it has done repeatedly since July, and one of these times the break is going to stick and silver will drop down to a projection near 12. Like gold it could be ready for a bounce correction, perhaps back up to price-level S/R at 15.25, but I think it's ready to break lower.
Silver continuous contract, SI, Weekly chart
I had been thinking oil was going to give us another leg up for its bounce off the August low but it's looking like we'll first get a test of the $40 level before potentially starting back up. I show a projection on its daily chart below at 40.02, which is where the pullback from October 9th (note the perfect bearish back-test of its 200-dma on that day) would have two equal legs down. From there the larger a-b-c bounce expectation off the August low would achieve two equal legs up at 53.15. All of this assumes oil will continue to march sideways in a large consolidation pattern into 2016 before heading lower but it's possible oil will head lower sooner rather than later.
Oil continuous contract, CL, Daily chart
Tomorrow morning we'll get the usual unemployment data as well as the JOLTS Job Openings report, none of which will be a market mover, so the market will be left to react to whatever is happening overseas. Friday will be busy with more inflation data, retail sales and Michigan Sentiment. The first two will be part of the Fed's "data dependency" as relates to their December decision about whether to raise rates or not (they won't but that's obviously just my opinion).
Economic reports and Summary
The pullback from last week's highs remains choppy enough to suggest it's going to be just a correction to the rally and that it will be followed by another rally leg once the pullback correction completes. We could see the month of November spent in a correction phase (no fun to trade except for perhaps selling options/spreads) so be careful of whipsaw moves. But the more bearish potential is for the distribution pattern we've seen since last week suddenly let go to the downside once fund managers realize they can't hold it up while carefully selling into rallies.
The short side looks better than the long side at the moment, although as shown on the RUT and NYA charts, today's lows provide a good setup for the bulls if we're to see another leg up, or at least a higher bounce in what will become a larger sideways/down correction. The bears need to see a strong decline to show the breakdown is real and not just a pullback correction. A breakdown has the potential to quickly drop below the August lows, which is why caution is urged on the long side (I know I don't need to urge caution for the bears).
I'm hoping the pattern will be a little clearer this time next week so that we have more solid setups for some good trades. In the meantime, keep your trading short-term oriented and good luck. 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