Following the small decline off last week's high the market had essentially gone on hold (except the RUT, which kept rallying) while waiting for today's FOMC announcement. No significant changes from the Fed resulted in a muted reaction from the market.
Today's Market Stats
The stock market indexes were able to bounce marginally off Monday's lows (the RUT more strongly so and to new highs above last week's) but the choppy price action looks more like a bounce correction than something more bullish. This afternoon's post-FOMC reaction, while slightly bullish, still leaves us guessing what the next big move will likely be.
The pending home sales report for March, released shortly after this morning's open, was better than expected (+1.4% vs. +0.3%) but a significant drop from the +3.4% in February. Other than the crude oil inventories (increased 1.99M) it was a quiet morning for economic reports and the market wasn't focused on any of the reports anyway. For the past several days it's been more concerned about the hints from the Fed about future rate hikes. No one expected them to raise rates today, and they didn't, but the language about future rate hikes is still important to the market.
There was a slightly positive reaction to the 14:00 announcement but nothing to write home about. It was the usual pop higher (following the initial spike down) to shove the shorts out of the market and keep the Fed from being embarrassed by the market but not much more than that. Tomorrow could be more telling as far as providing the clues needed to help us determine the next bigger move.
The Fed stated "Economic activity appears to have slowed" and "Growth in household spending has moderated" and did not give any indication when the next rate increase might happen. The dovish comments helped pop the market up in the afternoon because after all, everyone knows a more accommodative Fed is much more important than slowing corporate revenue and earnings, a slowing economy and slowing consumer spending. I mean it must be true since the market did not sell off (yet) on the not-encouraging economic news from the Fed.
Missing from this month's statement is their assessment of a "balance of risks," which they've consistently stated when measuring risks to the economy vs. expected growth. And once again it's that "transitory effects of declines in energy and import prices" that's keeping inflation from reaching their 2% target (no mention of the 73% increase in oil's price since February; that's one of those inconvenient truths). Not helping the Fed is the fact that the Atlanta Fed has lowered their growth expectations to just 0.6%. The end result of this and their dovish statement is that the market believes a rate hike in June is off the table and that's a reason to celebrate.
Between the longer-term chart patterns showing a lot of whippy up and down moves and now the shorter-term charts showing the same thing it's making it more difficult to get a bead on this moving target. The only thing I can do is watch for the completion of some patterns and/or support and resistance lines to see how prices react and then trade accordingly. I'll start tonight's review with SPX.
S&P 500, SPX, Weekly chart
SPX has nearly retraced its entire November-February decline, stopping last week at 2111, 5 points shy of its November 3rd high near 2116. It has broken its downtrend line from July-November 2015, currently near 2090 but it's been chopping around the trend line since breaking above it on April 18th. That's not exactly bullish price action but it's not bearish yet either. A drop below Monday's low near 2077 would be a little more bearish since it would leave a failed breakout attempt but the bulls still have the potential to drive this at least up to 2116 if not the May 2015 high near 2135. The challenge for bulls is an overbought weekly chart up against tough resistance with a daily chart showing bearish divergence.
S&P 500, SPX, Daily chart
The daily chart below shows how SPX has been chopping around its July-November 2015 downtrend line and while the consolidation can be considered bullish, Monday's break of an uptrend line from February through the April 12th low has been followed by only back-tests of the trend line. The bounce pattern is also choppy and that has it looking a little more bearish than bullish but the bulls could easily overcome that with a stronger rally on Thursday.
Key Levels for SPX:
- bullish above 2111
- bearish below 2073
S&P 500, SPX, 60-min chart
The SPX 60-min chart below shows the bounce off Monday's low, which is so far just a 3-wave move and as such could be just an a-b-c bounce correction to the decline from last week. This interpretation says we should get ready for the next leg down, which could start right away Thursday morning or after a brief pop higher (two equal legs up from Monday points to 2101.66).
Dow Industrials, INDU, Daily chart
The Dow has the same pattern as SPX and following last week's achievement of the 18110 projection (two equal legs for a possible A-B-C bounce off the August 2015 low) and the top of a parallel up-channel for the price action since last August, it then broke down slightly and broke its uptrend line from February 11 - April 11. The bounce off Monday's low looks like a correction but it would achieve two equal legs up at 18108, only 2 points shy of testing the 18110 level again. It would be more bullish above 18120 but at the moment it looks vulnerable to a stronger decline.
Key Levels for DOW:
- bullish above 18,120
- bearish below 17,484
Nasdaq-100, NDX, Daily chart
NDX suffered a bearish event last Friday when it gapped down as a result of some key components suffering a negative reaction to earnings. It happened again from some more disappointing earnings reactions, namely AAPL, this morning. But it is last Friday's gap down that created an island top reversal after it had gapped up on April 13th, ran sideways and then gapped down last Friday. This is typically a strong reversal signal so it's currently on a sell signal and the first thing the bulls need to do is negate it by getting back above 4525, which is the little support shelf between the gap up and gap down. Today it gapped below its 200-dma, near 4424, but found support at its 50-dma near 4394 and made it back up to its 200-dma this afternoon before dropping slightly into the close. Was that the back-test to be followed by a bearish kiss goodbye tomorrow? That's the bearish setup. If it does drop lower, there could be stronger support near 4343, which is where two uptrend lines cross, one from June 2010 - November 2012 and the other from March 2009 - August 2015 (using the log price scale here).
Key Levels for NDX:
- bullish above 4600
- bearish below 4435
Russell-2000, RUT, Daily chart
As mentioned above, the RUT has been showing relative strength recently, especially compared to the techs, by continuing to push higher while the others either consolidate or pull back further. It's now only 4 points away from price-level S/R near 1160, which includes its December 29th high near 1161. But it's still well below its November high near 1204 while the blue chips challenge their respective highs. The RUT has rallied up to the top of a possible rising wedge pattern, the top of which will be close to the 1160 S/R level tomorrow and therefore it's worth watching closely to see if it will be strong resistance.
Key Levels for RUT:
- bullish above 1162
- bearish below 1119
10-year Yield, TNX, vs. KBW Bank index, BKX, Daily chart
The 10-year yield has been closely correlating to the prices of the bank stocks, as can be seen on the chart below. This makes sense since the higher the bond yields the more profitable the banks (many loans, including mortgages, are pegged to the 10-year yield while savings rates are being kept near zero). So if you want to know the probable direction of bank stocks just keep an eye on TNX.
There is a warning sign currently for bank stocks and that's because yesterday's high for TNX is so far a lower high than its March 11th high but not so for BKX, which has gone on to make a significantly higher high in April. Is it getting ahead of itself in anticipation of higher yields? Will the bond market support the Fed's efforts to raise rates further? Will the economy support the Fed's efforts? At the moment the bond market is telling us lower rates are coming, despite what the Fed wants, and that bank stocks have gotten ahead of themselves.
Notice the last divergence back in June-August 2015, where TNX started coming down but BKX held up into August and then crashed lower to "catch down" to TNX. Now we have an even wider disconnect and the warning here is that BKX could once again "catch down" to TNX.
KBW Bank index, BKX, Weekly chart
Taking a little longer-term look at the banking index, the weekly chart below shows it has almost made it back up to its 50-week MA at 71.23 with this afternoon's spike up to 71.09. Following this afternoon's spike up it then spiked back down so it's not clear if that was a little blow-off move or if there's still higher prices coming. Two equal legs up from February (for a possible a-b-c bounce correction) points to 72.13, which is a little shy of its downtrend line from July-December 2015, currently near 72.65. So there's at least a little more upside potential even for the bearish pattern but it doesn't turn more bullish until, and if, it can climb above 72.75. Watch TNX from here and see if it can recover today's decline to at least support BKX moving a little higher.
VIX Short-Term Futures ETF, VXX, Daily chart courtesy Tom McClellan
There's an interesting sentiment indicator when looking at the number of VXX shares outstanding, which as Tom McClellan describes it, acts as a "double-contrary indicator." Back in February he had pointed out how low the VXX shares outstanding had dropped, which showed a lack of interest in holding onto shares of an ETF that would benefit from a further selloff in the stock market (a further selloff in the stock market would spike VXX even higher). But instead of viewing this as a contrary indicator (lower interest in VXX, more bearish for the stock market) it should instead be viewed as a "smart money" indicator -- smart money gets in and out of VXX at important turning points for the market and the higher the number of outstanding shares the more likely the stock market is going to turn back down and vice-versa.
Yesterday Tom tweeted "VIX futures ETF extremely popular now. Can this possibly end well?" And if you look at his chart below you'll see the extreme spike as the stock market rally has progressed off the February low. This is smart money saying "I don't think so" when it comes to believing the stock market rally will continue. Can the market push higher? Absolutely. But this is another example of why you should be very cautious about the upside in an overbought market that has indexes pushing up against potentially strong resistance with bearish divergence (waning momentum). The market has been holding up very well, despite all the fundamental reasons why it shouldn't (unless you consider the Fed a fundamental reason for bullishness) but the problem is when it lets go it could do so with a bang and result in a selloff worse than what we saw in August and January.
U.S. Dollar contract, DX, Weekly chart
The US$ gyrated a little after the FOMC announcement this afternoon but then settled slightly higher than it was pre-FOMC. But it was somewhat meaningless and we're still waiting to see if the dollar is going to hold support near 94 or instead drop to about 93 before setting up a bounce back up toward the top of its year+ consolidation range, near 100. There's no change to my expectation for more consolidation this year before heading higher next year.
Gold continuous contract, GC, Weekly chart
On gold's daily chart I see a possible bullish sideways triangle since its March 11th high, which fits as a bullish continuation pattern. But on the weekly chart, shown below, I see price stalled at the top of a parallel down-channel from 2013 and the potential to roll over at any time. It could certainly be viewed as a bullish consolidation at the top of the channel as it prepares to break out so I'm ready for that possibility but I'm not sure a breakout would result in much more than a test of its January 2015 high near 1308 before starting a deeper pullback (possibly something more bearish). For the short term I think gold remains vulnerable to at least a larger pullback as long as it stays below last week's high at 1272.40. But a rally above 1273 could lead to a rally at least up to 1308.
Silver continuous contract, SI, Weekly chart
Since their highs on February 11th both gold and silver went sideways but silver's rally off the April 1st low for both of them led to a new high and that has had many precious metals analysts pounding the table about what a great buying opportunity this is for both gold and silver. I wonder if they're pounding the table because they want people to buy their metals so they can take their profits (you don't make money as a trader until you sell). Silver played catch-up in April and it too is now at the top of a parallel down-channel from 2013, near 17.60. Silver spiked up to 17.72 last week before dropping back down and it's been trying to bounce back up since Monday's low at 16.81. Along with the top of the down-channel there's also a price projection at 17.60 for an a-b-c bounce pattern off the August 2015 low and that was achieved last week. Until there's a breakout I think it's best to pass on the "opportunity" to buy silver here. Let it first prove it's going to be able to break out.
Oil continuous contract, CL, Weekly chart
Oil is looking a little stronger now that it has been able to break out the top of its down-channel from 2014, which is slightly above its 50-week MA at 43.24. As long as oil is able to hold above that level on a pullback it stays bullish. I'm not seeing bearish divergence on either its weekly or daily charts so that's a good sign for the bulls. The strength in oil has helped the energy stocks as well and that in turn has been helping the RUT. So if this can continue it could be the driver behind another rally leg for the stock market. The next level of resistance for oil is near 51, which is where it would test its October 2015 high and achieve two equal legs up from February (it could still be just an a-b-c bounce correction coming off very oversold in February). For now it looks bullish but keep in mind that it's getting overbought.
Thursday's economic reports are few and non-market moving. Friday we'll get the PCE numbers, personal spending and income, Chicago PMI and the final Michigan Sentiment numbers.
There's usually a head-fake move around the FOMC announcement followed by a reversal that carries into the close and then another reversal the following morning. That could mean this afternoon's rally attempt will be reversed Thursday morning. In reality all we have is a bunch of small corrective moves in both directions since last week's decline and that leaves the short-term pattern about as clear as mud as far as helping determine the next big move. The decline from last week looks impulsive and the bounce following it looks corrective (overlapping highs and lows) and that points to at least another leg down to follow the bounce. For this reason I give the nod to the bears but that means we should see a decline on Thursday. There might be a little pop higher at the open but the bearish pattern says it will be reversed quickly. So we should find out quickly whether or not the bears are going to get another chance or if instead the bulls are going to snatch the ball away them again.
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