Santa might have been late to the party but he showed up this week with lots of goodies and toys for the bulls. Suddenly it's looking like the bears will be the ones with lumps of coal in their stockings. There is some concern about what happens after Christmas but right now bulls are happy.
Today's Market Stats
By the end of the day last Friday it wasn't looking like the bulls were going to get anything but lumps of coal in their stockings. With the market struggling on Monday it wasn't looking much better but then a late-afternoon rally was followed by a strong rally on Tuesday and another one today. Now it's the bears who look like they've been forced to trade their goodies-filled stockings for the bull's lump of coal.
With this week's rally SPX has made it back into positive territory for the year (+0.3%). It needs to close above 2058.90 to make it a positive year and avoid the dreaded down year for what is typically a positive year (3rd year of a president's 2nd term). This has been a year the bulls have struggled to get the market higher. Of course it's been a struggle for the bears to break it down, which under normal circumstances (without the Fed's and government's involvement), would not have been too difficult. From a fundamental perspective we have a market that is trying to hold up in the face of a struggling global economy that is dragging the U.S. economy down with it.
If the market holds up into the end of the year (lots of helping hands to make that happen), we have to seriously wonder what will happen in January. Many fund managers would probably be happy to see a strong selloff so that they can pick up inventory cheaper and have a good chance at making money with an expected rally in the coming year. At least that's what many seem to believe. I think 2016 will be a strong year for the bears instead of the bulls but obviously neither side can know how the year will go. But considering the many signs of a global economy that's in trouble, it's hard to justify why the stock market should continue to rally.
Today's rally got a good start from an overnight rally in the futures, which has been true each day this week. There's an effort to get the market to rally and it's easier to manipulate the futures market. With a lack of sellers, like yesterday, the buyers were able to slowly move the market higher throughout the day with only minor profit taking along the way. As I'll show on the charts, the indexes have now been pushed up into resistance but with the lighter-than-normal trading volume and the helping hand with the overnight futures, we could see another gap up tomorrow and an attempt to get the indexes to close as high as possible in front of the holiday weekend. But bulls run the risk of profit taking during tomorrow's half-day session as traders might want to get flat in front of a long weekend since there's still worry about potential terrorist activity.
There are a few cycle studies, including Fibonacci time ratios, which point to December 22-25 as a potentially important turn window. These turn windows can't predict which way the market will turn but it's usually a reversal of whatever the market is doing into the turn. With this week's rally it could mean we'll see a reversal back down next week, which is another reason to be cautious about the upside from here, especially since there's a possible nasty bearish pattern that could play out in the coming weeks (I'll get into it with the charts). It's been a good week for the bulls and it could continue through next week's lower-than-usual trading volume, but I'd rather wait until Monday before looking at bullish opportunities. I think protection of positions for over the weekend is the more prudent thing to do here. Having a few short positions is not a bad idea.
Today's economic reports had no effect on the market. Personal income and spending were in line with expectations -- +0.3%. Income was down from +0.4% in October while spending in November was up from 0.0%.
Durable goods orders were flat in November, down from +2.9% in October but better than the expected -0.7%. Ex-transportation orders, the number was -0.1%, a little worse than the expected 0.0% and a drop from +0.5%. It's another sign of a slowing economy, which is reflected in the poor performance of transport stocks.
Michigan sentiment ticked higher in December, likely related to the holidays, with a reading of 92.6 and an improvement from November's 91.8. New home sales were up slightly in November, hitting 490K, but October's sales were revised lower from 495K to 470K and it came in less than the 505K expected so it was actually not that great. Following yesterday's disappointing existing home sales, it's another sign of a slowing economy.
Moving to the charts, I'm continuing to track on the SPX weekly chart the intermediate bullish idea for a rising wedge pattern for the rally off the August low. As depicted in green on the chart, we could see SPX work its way higher into April and up to the 2200 area. In doing so it would also achieve the price projection at 2170, which is where the 2nd leg of the 3-wave move up from 2009 would equal 162% of the 1st leg up. I have a hard time believing this market can hold up that long but it's already held up far longer than I thought it would. Just look at the separation between commodities, which peaked in 2011, and the stock market and you get an idea how long this craziness can continue. So while I respect the upside potential I am concerned about a short-term pattern for the decline from November, which suggests the next leg down is going to be a scary one for bulls. Combining the scary bearish pattern with the December 22-25 turn window has me seriously wondering if we're going to get a downside break next week.
S&P 500, SPX, Weekly chart
The daily chart shows this week's rally has taken SPX up to its downtrend line from December 2-16, currently near today's high at 2064.73. It's also back up to its nest of 20-, 50- and 200-dmas, located at about 2056-2061, as well as its 50-week MA near 2061. That makes for a lot of resistance in this area and while a low-volume environment makes it easier for a big fund to push it over the line, there could be enough concerns by investors to not want to push their luck over this holiday period, considering the terrorist threats. Profit taking during Thursday's half-day session could have resistance holding. But if the buying can continue through next week there is the potential for a rally up to the 2120 area by year-end, which is where it would again run into its broken uptrend line from October 2011 - October 2014.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 2090
- bearish below 1993
The 60-min chart below shows one other short-term bullish possibility -- we could see a rally up to a price projection near 2089 where the bounce off December 14th low would have two equal legs for an a-b-c bounce correction before heading lower. If SPX can hold above 2065 I'd look for 2089, potentially higher, but the first thing the bulls need to accomplish is getting SPX to close above 2065 for the week.
S&P 500, SPX, 60-min chart
The S&P 500 (OEX) is very similar to SPX but this index's options tend to be used more by "smart" money traders and there was an interesting article in MarketWatch.com yesterday that showed the chart below. This looks at the Put/Call ratio and identifies those times when puts outnumbered calls by 2-to-1 (red horizontal dotted line). This is typically a sign of excessive bearishness and a reason to be a contrarian and look to fade the traders (do the opposite). But notice how the high P/C ratios tended to precede tops in the stock market, not bottoms as you'd expect to see from a contrarian perspective. The reason is smart money sees what's happening and starts betting on a top and they're more often right than wrong. The alarming signal here is that the P/C ratio has recently topped 3-to-1 and is the first time EVER in doing so. This is either an incredibly strong warning signal for bulls to get out of the way or else a lot of smart traders have suddenly gone stupid.
S&P 100, OEX, Weekly chart, 1999-present, chart courtesy marketwatch.com
The DOW looks like SPX in that it too has rallied up to its nest of 20-, 50- and 200-dmas and also closed slightly above them at about 17540-17580. The bulls would like to see something better than the 1-day rally above the moving averages on December 16th, which was followed by two strong days of selling. At the moment we have a 3-day rally, the same as the 3-day rally into the December 16th high. A close above 17580 on Thursday would be more bullish and it would suggest we might see a rally to at least its downtrend line from May-November, near 17860, and perhaps back up to its broken uptrend line from October 2011 - October 2014, near 18K next week. But like SPX, the series of lower highs could lead to a strong breakdown next week and upside potential is again dwarfed by downside risk.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 17,950
- bearish below 17,050
NDX has also rallied up to its 20- and 50-dma's, near 4630 and 4618, resp. (its 200-dma is still below), closing between them today. This week's rally in the techs has been primarily from overnight rallies in the futures, creating gaps to the upside each of the last three days, but the techs have been acting weaker than the blue chips, which is somewhat defensive for the market. If the buying can get at least a little stronger I see the potential for a move up to a price projection at 4820 by early January. But downside risk becomes much greater if it too breaks below Monday's low near 4513.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 4740
- bearish below 4513
The RUT has bounced back up to price-level S/R near 1152 and is a little shy of its 20-dma, near 1158, and its 50-dma, near 1164. Looking back a little further at its pattern, it's possible a 3-wave pullback from its November 6th high completed with the impulsive December 2-16 decline. That pattern suggests the RUT is just getting started in a new rally leg, one which will take it above its December 2nd high at 1205. A rally above 1168 would open the door to that potential. But the bearish interpretation of the pattern is that the December 2-16 decline is a 1st wave and the 3-wave bounce off the December 16th low is a correction to the decline. Two equal legs up for an a-b-c bounce correction points to 1163 and that remains short-term bullish potential. But the minimum requirement for the bounce has been met and it could turn back down at any time. A failure to close above 1152 on Thursday would be a potentially bearish setup in front of next week.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1168
- bearish below 1120
I think the most surprising thing to happen after the FOMC announced the rate increase is that bonds have done nothing. The Fed is threatening to raise rates at least a full point in 2016 (4 x .25%) and that should be sending bond prices lower (yields higher). But following the FOMC announcement bond prices actually rallied, which of course dropped yields and it's as if the bond market was blowing a big raspberry at the Fed, as if saying "we don't believe you'll be able to raise rates any further and in fact raising this time was likely a mistake." Using TLT (20+ year Treasury Bond ETF), price rallied and then pulled back this week, as the stock market rallied, and is now essentially at the same place as it was pre-FOMC.
The message from the bond market is certainly not clear at the moment, considering it has chopped sideways in a tightening range all year. The sideways triangle in which TLT has been trading this year fits as a bullish continuation pattern following the 2014 rally and while I show a little more pullback to complete the pattern, it would become bullish sooner if it breaks above it December 11th high at 124.10. But the bullish pattern would be negated with a drop below the November 9th low at 118.
20+ Year Treasury ETF, TLT, Daily chart
Following the FOMC rate hike last week we were supposed to get a strong rally in the U.S. dollar. Apparently dollar bulls failed to get the memo. After a brief short-covering rally the day after the FOMC announcement the dollar has pulled back and is trading near where it was before the announcement. Its weakness further supports the idea we'll get another pullback to the bottom of the trading range it's been since the March high. A more bullish possibility calls for a minor new high followed by a pullback and then onto new highs in the coming year (light green dashed line). While I am bullish the dollar longer term I think we'll see a larger consolidation pattern before it starts the next rally leg.
U.S. Dollar contract, DX, Weekly chart
Gold too has not moved much since the FOMC announcement. It did sell off the day after the FOMC announcement but then rallied right back up. A pullback yesterday and today is expected to be followed by a continuation of the bounce off its December 3rd low. How high the bounce might get is the big question and since I believe we'll see lower prices for gold, I think we'll get just a bounce correction into January and then start back down. Upside targets are 1118 and then 1142 and assuming we'll get a higher bounce I'll then be able to update the price targets to watch for.
Gold continuous contract, GC, Weekly chart
Oil looks like it might finally be ready for a rally and today's +4.8% rally gave it a nice boost. It is now testing the top of a bullish descending wedge that developed for the decline following the October 9th high. At the same level is its 20-dma, now near 38. It could pull back a little before heading higher and assuming it will head higher, the next question is what kind of rally to expect. A larger descending wedge for the decline following the June high calls for another leg down following a choppy bounce up to the top of it, perhaps around 41 by the end of January (light red dashed line on the daily chart below). The more bullish potential is for a stronger rally that will break above the key level for the bulls at 43.50 and it's a rally that could then take oil back up to stronger resistance near 60.
Oil continuous contract, CL, Daily chart
A chart that Tom McClellan shared with me is shown below -- it's a longer-term monthly chart starting back in 1892 and as you can see, the current decline has brought it down to price-level S/R near 35, shown by the red line on the chart below. It's hard to believe $35 was considered an extreme high for 25 years prior to the rally in 2004. It's a good place to expect at least a bounce, especially with the setup on the shorter-term pattern on the daily chart above. But keep in mind that there's more downside potential for oil if it's to drop back down to the bottom of its up-channel in the coming year. It's currently near 22.80 and in another year it will only have made it up another dollar to about 23.80.
Oil monthly chart, 1892-present, chart courtesy mcoscillator.com
Another chart from McClellan is shown below -- this time oil is priced in gold and as you can see, it's back down to support seen multiple times since about 1900. These longer-term patterns, combined with the shorter-term pattern, suggests now is not the time to be pressing bets to the downside for oil.
Oil priced in gold, Monthly chart, 1892-present, chart courtesy mcoscillator.com
Bulls finally got their Santa Claus rally (better late than never) but they'll need to do better if they want to avoid yet another lower high in the series of them since this month. This week's low volume and lack of selling, with strong assistance from overnight rallies in the futures, helped lift the indexes back up. But they've now run into resistance and it's going to be important how the indexes close tomorrow. With very light volume it's hard to judge a move but at least a close above today's closing prices would keep things potentially bullish for next week.
From a time perspective, it's not a good time to complacently expect the market to continue higher. We're now inside an important turn window, December 22-25, which includes a full moon on December 25th. Some astrologer friends tell me December 25th is also a very important "change" date. These are things that make me sit up and pay attention. We're rallying into the turn window (or was Monday's low a decline into the window, hitting it early?) and that has me on alert to the possibility that the market will reverse hard down next week. The bearish pattern, with the series of lower highs, suggests a strong decline to follow and all it needs is a catalyst to start the snowball rolling downhill.
As mentioned before, I see upside potential dwarfed by downside risk, especially considering the price pattern and the turn window. At least be safely positioned into next week and if the rally can continue we'll look for the additional upside targets. But getting into a few put positions, for either speculation or hedging, is not a bad idea here.
Also not a bad idea is to make sure you've re-upped for another year of OIN.
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To our many subscribers, thank you for your support and we obviously could not do what we do if we did not have loyal readers like you. I wish you the happiest Christmas holiday and good times with friends and family. Stay safe, be careful on the roads and most of all remember that we trade for a living (or to supplement our income and/or build a retirement nest egg) but we should not be living to trade. Enjoy the good times and if you're struggling, keep moving until you're not. Have a great weekend 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