The stock market consolidated today as it waits for word from the ECB (pre-market Thursday morning for U.S. markets) and its decision about what to do in its continuing effort to help boost the European economy and stave off deflation (a losing battle so far).
Today's Market Stats
Happy Anniversary! Today marks the 7th year since the March 9, 2009 low, a low that had many predicting at the time that the stock market had much further to fall as bank failures mounted. How far we've come since then! We've had two scary selloffs since last August but the market continues to struggle to hold onto the enormous gains off that low and there remains the possibility that the market will push higher this year and stretch the 7-year bull market into its 8th year. Certainly the central banks are pulling out all the stops in an attempt to keep the economy humming along and in turn keep the stock market afloat. Thursday morning (for the U.S., afternoon for Europe) we'll get to hear the latest plan from the ECB about how they intend to keep the party going.
The pullback from last Friday into Tuesday's low was followed by a consolidation today as the market waits to hear what the ECB is going to do next in their attempt to stimulate the moribund European economy. ZIRP worked so well (cough) that they're moving more and more into NIRP territory with more countries adopting negative interest rates. Many are hoping for less NIRP and more outright bond purchases, especially since NIRP has been hurting stock markets and especially banks. Mario Draghi has already promised to do more by expanding the amount of debt they'll purchase in an effort to free up capital for the banks to lend.
What the central bankers fail to understand is that people and businesses are not clamoring for more loans and therefore making more money available for loans is not the answer. More of the same is not going to help and the only thing it accomplishes is more stealing from savers and passing it along to the bankers. No matter what they try, and many will argue that it's because of central bank policies, deflation continues to gain momentum around the world.
The last global deflationary period was in the 1930s and as hard as central bankers fight it, the problem is not so much monetary as it is structural, as it was back then. There's too much debt and the credit explosion is what is responsible for much of the 7-year stock market rally (instead of it being based more on fundamental reasons). The distortion by central bankers makes the problem worse, not better, and the eventual correction will also be worse.
But a "cleansing" is exactly what our financial system and economy need so that we can get back to a healthier environment for growth. It will be a painful period but anyone who has had to go through painful physical therapy for an injury knows how important it is to ensure you get back to health. Go without the PT and you'll likely suffer ongoing and sometime debilitating symptoms. Our economy and financial system are no different and yet the Fed and other central bankers believe they can cure things with more of the same that caused the problems in the first place. The only way a drug or alcohol addict can free himself of addiction is to go through the pains of withdrawal and then stay disciplined about changing your life. The central banks are deathly afraid of the withdrawal effects.
There were no significant economic reports today (or on Friday) and the market has been left on its own to figure out what it wants to do. It's one reason why the market is reacting to overseas news, such as China's slowdown and tomorrow it will be the ECB decision on what their next move will be to goose their stock market, I mean economy. Mario Draghi has again been promising to do even more of whatever it takes and the market will be disappointed if he doesn't do something creative. The problem is that positive reactions to any action by central governments around the world are having less and less of a positive effect and any positive effect is lasting for a shorter period of time. That means a positive reaction to an ECB announcement tomorrow would likely set up a very good shorting opportunity, which is supported by what I see in the charts.
Dow Industrials, INDU, Weekly chart
The weekly chart of the Dow shows the recovery back above the bottom of its parallel up-channel for the rally from 2009, which it had broken below in January and tried to get back above it in early February. Now it's back up near price-level S/R near 17140 (with this week's high so far at 17099). The bullish pattern calls for a continuation higher to its downtrend line form May-December 2015, currently near 17700, but that would only become a higher probability if it can get above 17140 and then its 50-week MA, currently at 17287.
The bearish wave count is what suggests investors should use this bounce to significantly reduce your exposure to the stock market. A 1st wave down from last May into the August low was followed by a 2nd wave bounce correction into the December high. The decline into February would then be the 1st wave of the 3rd wave down and the bounce into the current high is the second 2nd wave correction. This sets up a very bearish 3rd of a 3rd wave down, which is typically a very powerful move and would make the first two legs down look like child's play. There's no confirmation yet that the bearish wave count is correct but I think it's very important to see the downside risk since it will basically look like a market crash.
Dow Industrials, INDU, Daily chart
From a little shorter-term perspective I see further upside potential for the DOW to reach its downtrend line from December, near 17300, by the end of the week or on Monday. But price-level S/R near 17140 and its 200-dma at 17163 are the resistance levels the bulls will need to power through. A Draghi-induced rally could do it but with an overbought market I think it could be tough resistance, especially the downtrend line from December.
Key Levels for DOW:
- bullish above 17,350
- bearish below 16,500
Dow Industrials, INDU, 60-min chart
The 60-min chart below shows the price consolidation off last Friday's high and it has formed a sideways triangle, which fits well as a 4th wave correction in the leg up from February 24th. This is a bullish continuation pattern which typically points to the last move of the trend (up in this case). The 5th wave projects to 17347, where it would equal 62% of the 1st wave (in the leg up from February 24th), which is a common projection when the 3rd wave is shorter than the 1st wave (as in this case). For an a-b-c bounce pattern off the February 11th low, it would achieve two equal legs up at 17327 and that gives us close correlation in the 17327-17347 area for a high if it rallies the rest of this week. Above 17350 would be more bullish but interestingly, the bearish setup here is for a negative opex week (next week).
S&P 500, SPX, Daily chart
SPX has the same pattern as the Dow and if we get another leg up to complete the a-b-c bounce off the February 11th low I see upside potential to 2020-2027, where it would hit its downtrend line from December (2020), its 200-dma (2021) and price projections similar to those I discussed for the Dow's 60-min chart (2022 and 2027). It would be more bullish above 2028 and especially above its 78.6% retracement of its December-February decline, at 2041, but I strongly suspect it will have trouble getting through the 2020-2027 resistance zone. If it drops immediately from here it would indicate the top is likely already in place.
Key Levels for SPX:
- bullish above 2042
- bearish below 1935
Nasdaq-100, NDX, Daily chart
On March 1st NDX had rallied strong and got back above its dual uptrend lines, from June 2010- November 2012 and March 2009 - August 2015, which are currently near 4250 and 4225, resp. Its 50-dma is currently near 4245 so NDX has plenty of support in the 4225-4250 area and the pullback from last Friday has so far held above this support zone. Bullishly this can be viewed as a back-test of S/R (yesterday's low was near 4259) and as long as that support zone holds there is additional upside potential to the 4420 area where it would retrace 62% of its December-February decline and test its 200-dma. A Mario Draghi rally could make that happen. Because I think the market is vulnerable to at least a deeper pullback before possibly heading higher I think it's risky to bet on the upside even though I see the potential for another leg up.
Key Levels for NDX:
- bullish above 4420
- bearish below 4200
Russell-2000, RUT, Daily chart
The RUT was the stronger index in the rally off the February 11th low but has also now had the strongest reversal off last Friday's high. The intraday pattern looks impulsive to the downside, which has me leaning bearish sooner rather than later. The bounce off yesterday's late-day low looks corrective (overlapping highs and lows, creating a bear flag pattern) as it fights to hold onto its uptrend line from February 11th, which is where it closed today, thanks to a final little spurt back up into today's close. I see a small bounce potential but if it can't get back above price-level S/R near 1080, which it back-tested after breaking on Tuesday, and then drops below Tuesday's low at 1067 it would indicate a top is likely in place. Friday's high stopped only about 3 points from its uptrend line from October 2014 - September 2015, which fits as the neckline of a H&S top that ran from the left shoulder in March 2014. The downside objective from this pattern is 860, although the bearish wave count suggests that would only be a speed bump on the way to lower prices. If the RUT does bounce back up, keep an eye on that neckline near 1097 for a possible high.
Key Levels for RUT:
- bullish above 1150
- bearish below 1040
Volatility index, VIX, Daily chart
With Friday's low for the VIX, at 16.05, it hits horizontal S/R and the bottom of a parallel down-channel for its pullback from its January 20th high. It also achieved two equal legs down at 17.28 and is now back above that level. It has bounced back up to its 200-dma at 18.60 so we'll see if that holds as resistance. The "bullish" setup here is for the 3-wave pullback from January 20th to be followed by another rally, which of course would mean the stock market is selling off.
KBW Bank index, BKX, Daily chart
Banks have been hurt by the central banks' efforts to keep driving rates down and now into negative territory. The central banks are trying to force banks to lend out their money instead of parking it in the Federal Reserve system. But most of the money that's borrowed is for non-productive purposes (e.g., stock buybacks) and the resulting credit boom has created a massive debt problem. It has not helped the economy and that's why the central banks are losing credibility. Most are now seeing the central banks as out of ammo and the ones who are now hurting are savers and the banks themselves.
Compounding the problem for banks is the fact that default rates are rising. Loan covenants are being ignored (there are certain requirements that a company must meet in order to stay healthy enough in the banks' eyes in order to keep their loans safe from default) and the banks are now doing what they did before the last financial collapse, such as making large mortgage loans with very little or no down payment and to people with poor or no credit. No problem -- the taxpayers will just bail them out again.
Corporate default rates are now higher than when Lehman Brothers went bankrupt in 2008. Let that fact sink in a little. Banks are being forced to place more money in reserves to account for the higher default rates, which in turn reduces their earnings. This is happening worldwide. I recently read that Australian banks are being forced to raise their reserves by more than 40%, which is a tall order at a time when they are bringing in less income. But it's an indication how worried their central bank is and they're not alone. In the meantime we're told not to worry because everything is just fine. Their message is the economy is doing fine and to just keep buying stocks and borrow more so you can keep buying cars and houses.
As for the chart pattern for BKX, you can see the a-b-c bounce off its February 11th low, which at the moment is a correction to its decline. It could develop into something more bullish, especially if it's able to rally above resistance near 66.50 (2013-2015 price-level S/R and the 50% retracement of its November-February decline).
U.S. Dollar contract, DX, Weekly chart
The US$ dropped sharply this morning after trying a brief rally in the morning and traders are showing a little bit of the jitters while waiting for Thursday's ECB announcement. I could easily argue a move in either direction so that's not very helpful. The bigger pattern suggests we'll see a continuation of the pullback off its December 2nd high and potentially down to the 93 area by the end of April before bouncing back up to the top of its consolidation range mid-year.
Gold continuous contract, GC, Weekly chart
Gold bugs have turned uber bullish on the metal following its strong rally off the December 2015 low and while they could be right I think they're going to be disappointed once again. Way too many people have turned bullish gold and the amount of money flowing into GLD has been very strong (too strong). At the very least I would expect a scary shakeout of gold bulls before continuing higher. But I think the strong rally from December is the c-wave of an a-b-c bounce correction off the July 2015 low (the strong spike is very common in this type of a-b-c bounce pattern where the b-wave pulls back to a new low before springing up in a c-wave). It could press a little higher, maybe 1285-1300 (last Friday's high was 1280.70) but it's struggling at the top of a parallel down-channel, in place since the August 2013 high, and could turn back down from here. A return to the bottom of the down-channel later this year could see gold down to 2008-2009 price-level S/R near 1000. That would get me interested in a long position on gold for the longer term but before jumping in with the rest of the gold bulls I want to see what form a pullback takes.
Silver continuous contract, SI, Weekly chart
Silver has bounced up to its downtrend line from April 2011 - October 2012, which was tested at its February 11th high and again last Friday. I see the potential for another push slightly higher but I think it's vulnerable to a turn back down. You can see how silver has consolidated in a three descending triangles since 2011 and I think the current one, since the December 2014 low, will result in another leg down. If silver drops down to the trend line along the lows from June 2013 - December 2014 we could see it down to about 10.50-11.00 later this year and then maybe a good opportunity to get into a longer-term long position.
Oil continuous contract, CL, Daily chart
Oil had another nice rally today, finishing up +4.6%. It was a little surprising that the stock market did not have a better day since the two have been pretty well connected at the hip for a while now. I see a little more upside potential for oil if it's to test its downtrend line from June-October 2015, currently near 39. Slightly higher is a price projection at 40.01 where the leg up from February 11th would be 162% of the leg up from January 20th. Currently I'm looking at the 3-wave move up from January as an a-b-c correction within its longer-term decline and that longer-term pattern calls for one more leg down into April-May, which means another leg down to a new low once the bounce completes. This is the same pattern I see for gold and silver and other commodities. Ideally we'll see a drop down to its trend line along the lows from January 2015 - January 2015, which will be near 22.40 by the beginning of May. That would be a very good setup for a longer-term trade on the long side.
The rest of the week is very quiet for economic reports and obviously tomorrow will be more of a reaction to the ECB announcement than anything going on in the U.S.
The market quickly turned from strongly oversold in February to overbought now. While I see additional upside potential I don't think the upside potential is good enough to counter the downside risk. If the bearish wave count for the indexes is correct it's very bearish, which means we could see a very strong decline in the next month or two (stronger than anything we've seen since last year's highs. We might get just a deep pullback before heading back up, to create a larger a-b-c bounce pattern but that can only be guessed right now.
If we get a positive reaction to the ECB announcement on Thursday I'd look at it as a gift to lighten up your exposure to the long side and/or get into some short positions for a directional/hedge position. Opex week will likely be negative if we see another rally leg into Friday. But if we get a negative reaction to the ECB announcement there's a possibility we'll see a sharp decline and then a bounce correction into opex, making it a volatile week. In either case it could make for an interesting week. But first we need to get through Thursday to get a better idea about what next week might be like.
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