Today's trading volume was a little heavier than we've seen recently (not good for the bulls when the indexes finish in the red) but price action continues to be choppy as the market consolidates. We're now waiting for Friday's Payrolls numbers for more clues about what the Fed might do. In the meantime traders are twiddling their thumbs.
Today's Market Stats
The stock market started in the hole this morning after futures pulled back during the overnight session and then a slight drop lower following this morning's pre-market ADP Employment report. The selloff continued into midday but then turned around and bounced back, retracing a good portion of the morning's loss. The day was basically a continuation of the choppy consolidation pattern that we've been in for what feels like the past 10 years (OK I exaggerate; it's only been the past 9 years).
This morning's economic numbers included the ADP Employment report, which came in slightly better than expected (177K vs. 170K) but less than July's 194K (revised up from 179K). It was a neutral number, which keeps the market guessing what the Fed might do with rates in September. Friday's NFP could cause a little more volatility than we saw this morning.
The Chicago PMI for August came in weaker than expected, 51.5 vs. 54.5, and a fairly significant drop from 55.8 in July. This is another sign of our economy in a long slide lower, which is making it more and more difficult for bulls to justify a higher stock market (not that they've needed any justification so far). The market was expecting a smaller decline from 55.8 to 54.5 for August so this might have been a factor in this morning's stock market decline.
Pending home sales for July, at +1.3%, was better than the +0.7% expected and a big improvement over the -0.8% for June (revised lower from the originally reported +0.2%). The health of the housing market, which is holding up so far, will be an important bell weather measurement for how well the consumer is doing. This is especially true as debt levels for consumers rise again and now we're seeing an increase in default rates on many loans, especially auto (the next subprime slime problem for the banks). Many areas of the country, especially major cities, have seen their housing markets back into bubble territory so there's a lot of concern about what will happen when those bubbles burst again, which they will (it's not different this time).
August has been a slow month as far as volume goes and the last figure I saw last week was that it was about 30% below what is normally a slow month anyway. That makes it difficult to tell if the market is consolidating in a bullish pattern or if instead there is simply no power to move this market in either direction. There's been very little effort to move the market and it seems more of an effort to simply hold things in place. Preventing a selloff could be the agenda and if the market can rally instead, all the better.
I'll kick off tonight's chart review with the Dow to highlight some upside potential if the market doesn't crater next week. And if it does neither of those then it will go sideways instead. Now that I've covered all the possibilities I guess there's not much more to review (wink).
Dow Industrials, INDU, Weekly chart
There are a few different ways to interpret the price patterns between indexes and time frames but one bullish idea is shown on the Dow's weekly chart. A not-fun possibility is for September to see price continue to consolidate over/down to the uptrend line from February-June, currently near 17900 and which will be near price-level S/R at 18200 by the end of September. Whether from here or after another month of consolidation, the bullish pattern suggests it will be followed by another rally leg into October before completing a rising wedge pattern off the January/February low. Without trying to sound like I'm from the tinfoil-hat crowd, we know the government can and does support the stock market and we also know those in political and financial power do not like Trump. Most people also know the incumbent party typically loses the election if the stock market declines in October. Do I need to spell out the rest? Unless we're seeing a rolling top pattern develop since mid-July, the sideways consolidation is more bullish than bearish. And the longer it consolidates the more bullish it will become.
Before moving to the Dow's daily chart, I want to show how well the stock market can predict the presidential election, based on its performance in the 3 months leading up to the election. When the stock market is down so is the incumbent party but when the stock market is up there's a greater likelihood the people will keep the incumbent party in power. It's another example of how the stock market is an excellent barometer of social mood. Of the past 22 elections, since 1928, the stock market's performance has accurately predicted the election results 19 times (86%). In the game of odds those are damn good and the incumbent party leaders are well aware of this. The chart below is courtesy InvesTech Research.
Dow Industrials, INDU, Daily chart
The Dow's pullback from August 15th is a choppy move with lots of overlapping highs and lows and this is what gives it the appearance of a corrective pullback. There is a way to view it as a series of 1st and 2nd waves to the downside, which calls for a hard fast break to the downside at any time now. The downside risk from the bearish wave pattern is significant and a drop below its 50-dma, at 18311, would be a bearish heads up. Below the August 2nd low at 18247 would be cause for alarm if you're in long positions. The only way a break below those levels would not be bearish is if we continue to see a choppy sideways/down move in the coming month since that would likely set us up for the October rally. If the combination of the May 2015 high at 18351 and the 50-dma at 18311 continues to hold as support we should see another leg up but what kind of upside pattern we could see is not at all clear yet.
Key Levels for DOW:
- bullish above 18,632
- bearish below 18,247
Dow Industrials, INDU, 60-min chart
The Dow's 60-min chart shows how choppy the pullback from August 15th has been. This has been a tough time for both sides since there have been so many whippy reversals. Again there is a way to interpret the price pattern as a very bearish wave count and the steepening downtrend lines, if not broken quickly, typically leads to a waterfall decline. This could lead to the Dow losing several hundred points in a heartbeat. A rally above 18450 from here would be a bullish heads up and above Monday's high at 18523 would negate the bearish wave count and suggest the next rally leg is underway. At this point in the pattern I'd suggest respect for the downside risk while acknowledging the higher-probability move from here is back up, even if only inside a large consolidation pattern that could last another month.
S&P 500, SPX, Daily chart
Another consolidation idea is shown on the SPX daily chart -- an ascending triangle following the July 20th high. A triangle has 5 waves inside (labeled a-b-c-d-e) and therefore this one requires another up-down sequence before heading higher. This would mean a sideways choppy consolidation for another 2 to 3 weeks before rallying into the end of the month. Needless to say, this would frustrate the hell out of the bears and it would also go counter to the typical September. There's been nothing typical about this year, or years for that matter, and I don't think we can go by what's "typical" for the calendar. The bottom line is that the choppy pattern for August could be a rolling top pattern or a bullish consolidation and we can't know yet which it is. The bears need a break below its 50-dma, now at 2150, and the August 2nd low at 2147 to suggest something more bearish has started (maybe).
Key Levels for SPX:
- bullish above 2194
- bearish below 2147
Nasdaq-100, NDX, Daily chart
The pattern for NDX since gapping up on August 5th looks like a bearish rolling top and a break below 4740, which would also close the August 5th gap, would be a bearish heads up. Below the August 2nd low at 4689 would confirm a more significant high is likely in place. But the short-term pattern for the pullback from the August 15th high can be viewed as a bullish descending wedge with bullish divergence and that suggests it's ready to rally from here (or maybe after one more pullback to 4740 support). As noted on the chart, MACD has pulled back to the zero line from overbought in July-August while price chopped mostly sideways. With MACD "resetting" at the zero line, a turn back up from here would be a bullish setup.
Key Levels for NDX:
- bullish above 4820
- bearish below 4689
Semiconductor index, SOX, Weekly chart
The semiconductor index has been on fire this year and it has helped lift the tech indexes. It's a good thing too since the biotechs flamed out this year. Last year the biotechs (BTK) were up about +11% (after gaining about 50% in both 2013 and 2014) while the SOX was down -3.4%. This year BTK is down -15% while the SOX is up +21%. It looks like hot money rotated out of biotechs into the semis this year. But the SOX has reached a level where caution is warranted. The weekly chart shows it has rallied up to the 127% extension of the previous decline (May-August 2015), at 807.83 with Tuesday morning's high at 808.32 (last week's high was 807.11), which is oftentimes a reversal level. At the same time it is up against the top of a parallel up-channel for the rally from February and the weekly oscillators are looking toppy.
Russell-2000, RUT, Daily chart
The RUT has been the stronger index by chopping its way higher while the others chop sideways or down, including the techs. Today's low was a slight break below its 20-dma, near 1235 (with a low at 1233), but you can see how it's riding up its 20-dma since testing it back on August 2nd. As long as it continues to hold above its 20-dma it stays bullish and for now I see upside potential to the 1270 area by the end of next week. What looks bearish here is the fact that the RUT has been chopping its way higher since July but the oscillators are showing slowing momentum (bearish divergence) and that's a warning sign for bulls.
Key Levels for RUT:
- bullish above 1252
- bearish below 1215
KBW Bank index, BKX, Weekly chart
The banks have not had a good year (down -0.6% at the moment) but they've had a good month of August and are in breakout mode. The weekly chart show the bullish break above its downtrend line from July 2015 and appears headed towards a price projection at 75.41, which is where it would achieve two equal legs up from February. With both the SOX and BKX in gear to the upside it's been good support for the broader market, even if the broader market hasn't exactly been rallying for the past two months. BKX has been in a steep rally and it looks unsustainably steep but keep its upside projection in mind and watch how it behaves if reached.
U.S. Dollar contract, DX, Weekly chart
Last week I had mentioned the US$ had dropped back down to support at the tops of two parallel up-channels (from 2008 and 2011) and that was followed by a bounce back up. It's now just under its 50-week MA, at 96.48 (this morning's high was 96.25) so that's potential resistance (as well as its 200-dma at 96.40). Above that is its downtrend line from December 2015 - January 2016, which is where the July rally stopped. Dollar bulls want to see a break of its downtrend line, currently near 97 and then confirmed with a break above the July high at 97.62.
Gold continuous contract, GC, Weekly chart
Gold's pullback from its July 6th high has brought it close to its uptrend line from December 2015 - May 2016, currently near 1307 and only a point below price-level S/R at 1308 (today's low was 1312). Its pullback is so far a sideways consolidation and two equal legs down points to 1307.4. This makes it important for gold bulls to hold price above 1307 since a drop below that level could usher in stronger selling. It's possible there might be some support at the 200-week MA, at 1291.70, but gold hasn't typically paid much attention to that MA. I continue to see upside potential at least to its downtrend line from September 2011 - October 2012, currently near 1404, but the odds of that happening will lessen if the pullback continues below 1307.
Oil continuous contract, CL, Weekly chart
After oil pulled back from its June high it dropped down to support at its 50-week MA, near 41.46 at the time, and then bounced back up to a downtrend line from June 2014 through the June high. This week's decline adds a little emphasis to the word "rejection" as resistance held. The bounce off the August 3rd low barely got MACD off the zero line and with it turning back down it could drive MACD below zero, which would provide a clue that oil is heading lower. A drop below its 50-wma, now at 41.57, would likely trigger stops on long positions and I can see the potential for a drop back down to at least its January 2000 low at 33.20.
The economic reports have been relatively light this week but we'll see more tomorrow and Friday. Following this morning's ADP employment report, which was only marginally better than the market was expecting, there has been a slight increase in expectations for the NFP report Friday morning, which is 175K, but still lower than the 217K in July. The market would be happiest with a number right around there in order to keep the Fed at bay as far as a rate increase but not showing signs of a fast slowdown in our economy. In reality this employment report is bogus since the real problem is the low-wage job growth vs. the higher-paying jobs. The average weekly earnings continue to decline and that's hurting consumer spending, which of course drives the economy. But expecting the market to care about such details seems in line with expecting my 2-year granddaughter to understand this. Tomorrow morning's important numbers will be Construction Spending and ISM Index, which will be reported at 10:00. Other than that we might see the market go on hold until we get through the NFP report.
August had lower trading volume than past months of August and it seems traders have just stepped aside and don't care anymore. We know money has been pulled from mutual funds and it seems investors are much more aware of how out-of-whack this market is seem to be a little savvier than they're usually given credit for. Some big names are shorting the market in a big way and likely trimmed long positions and raised cash levels. Some will look at large cash levels and see all that buying power. Following a long bull market I'd say it means exactly the opposite.
While I feel bearish about this market generally, I recognize there could be a concerted effort to hold the market up into the elections and I see price patterns that support that idea. If money continues to pour in from overseas and corporations continue to buy back stock (this year is going to set a record for buybacks) it will obviously add buying pressure that's not necessarily related to fundamentals. One could say foreigners have a fundamental problem investing money with negative returns and in stocks that have a weaker economic underpinning so we can't say there's no fundamental argument for a higher stock market.
There are some fundamental reasons for why the stock market could continue to rally but not necessarily from our economic perspective, including weakening corporate earnings and expected higher P/E ratios as earnings decline. But it's a Bizarro World out there and with hyper-active central banks and governments buying up stocks (through ETFs, futures and other vehicles) it has made it much more difficult to judge the stock market by "normal" fundamentals (is there such a thing?).
Follow the charts and right now they're saying the higher-odds play is to the upside. But whether that's from here or after another month of consolidation is hard to say. And while the odds point higher, stay aware of the potential for a very bearish pattern that calls for a waterfall decline (think mini-flash crash) that could start any day now. As we enter September we could get an expansion of the tight Bollinger Bands with a strong bout of volatility. Trade safe and think more about protection than capital gains (in and out quickly, otherwise known as tradus interruptus, while we wait for the larger pattern to become clearer).
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