The stock market rally that followed a Trump election victory has defied the opinions of most market analysts. It was another example of how the market will embarrass the majority who are in agreement on something. Now we have to wonder if it's just a knee-jerk response (short covering) or something more bullish.
Today's Market Stats
Heading into the election I saw a poll of market analysts about what they believed would happen if Trump or Clinton won the election. The majority, like 93% of them, believed the stock market would sell off if Trump won. When I saw that number, plus a chart setup that supported the bulls (which admittedly had me wondering if Clinton would win), I thought they're probably going to be proven wrong. Paradoxically that then had me wondering if Trump would win the election so that we would get the rally.
This is the challenge we face when trying to figure out how the market will react to the news, not what the news might be. At any rate, the 93% were proven wrong with a market rally after a Trump win, proving once again that when the majority agree on something about the market it's often best to fade them. It was another important lesson in using contrarian opinion when thinking about market direction.
In today's market we had a large spread between indexes with the INDU and RUT up strong (+1.2% and +1.6%, resp.), NDX down hard (-1.6%) and SPX up marginally (+0.2%). The Dow was helped by a few heavyweights, such as a couple of the big banks, Pfizer (PFE), CAT and IBM. NDX was hurt by the FANG stocks (FB, AAPL and AMZN, NFLX and GOOG), which were seriously defanged today. Much of the rotation between sectors is based on what investors think the Trump administration policies might be and where his promised infrastructure spending will go.
Like yesterday, today's trading volume was very heavy, about twice what we've typically seen lately. But the day saw a lot of rotation between sectors and the result was up volume only nudged out down volume but advancing issues were less than declining issues. As will be shown on the charts, the risk for bulls is that all this churning is happening up against some strong resistance levels and it's incumbent upon the bulls to keep up the buying pressure, or at least not allow any serious selling pressure to take hold. A rally or a day of consolidation on Friday is what the bulls need to see. But any sharp decline back down could leave the charts looking vulnerable to stronger selling.
Equity futures had chopped sideways/up last night and this morning opened with a gap up. That was followed by about 15 minutes of buying before the sellers smacked the market back down with selling that lasted about 45 minutes. Following that was a recovery effort that lasted most of the day. Other than the Dow and RUT, which did make it up to new intraday highs, the other indexes struggled to regain their morning losses. I think the next day or two is going to provide some important clues about what the rest of the month might be like.
SPX was the "neutral" index today so I'll start off with a review of it with a look at the weekly, daily and 60-min charts.
S&P 500, SPX, Weekly chart
This week's rally now has SPX back-testing its broken uptrend line from February-June, near 2180 (today's high was 2182). From just a chart perspective, this is a classic back-test of broken support and is a shorting opportunity. The stop should be kept fairly tight and not much above today's high. A continuation of the rally could see it head much higher over the next few weeks, with an upside target zone of 2250-2300. One potential target, especially if we see SPX nuzzle up underneath its broken uptrend line for a couple more weeks, is near 2223, which is the 127% extension of its previous decline (May 2015 - February 2016). This extension is a common target/reversal level. But if the market rolls back over from here we could see SPX drop down to price-level support at 1992 in the next few weeks.
S&P 500, SPX, Daily chart
Today finished with a long-legged doji as SPX finished in the middle of a large-range day. It broke through its downtrend line from August, currently near 2168, tagged its broken uptrend line from February and closed below both. With the long-legged doji at its broken uptrend line and with the VIX climbing today it has me wondering if the doji is a reversal-in-the-making and signaling a coming strong decline, which would mean this week's rally is setting a bull trap. I like the setup for a short play but it has to be on a short leash considering the upside potential if the rally continues.
Key Levels for SPX:
- bullish above 2183
- bearish below 2125
S&P 500, SPX, 60-min chart
The 60-min chart shows a closer view of the price action around the broken uptrend line from February-June and the broken downtrend line from August-September. The rally off last Friday's low is currently just a 3-wave move and as such it could be just a sharp a-b-c bounce correction that will now be followed by a resumption of the decline. Today's double back-test of the broken uptrend line looks like a stronger sell signal since the intraday break of the downtrend line was not able to hold into the close. Based on the bearish setup here it looks like a good opportunity to short SPX against today's high. If we get just a choppy consolidation on Friday it would be a signal for bears to step aside since a consolidation following a rally should lead to another rally. You don't want to hold short if SPX rallies above 2183 since the upside potential is significant (2250-2300).
Dow Industrials, INDU, Daily chart
The Dow rallied much stronger than SPX this week but it too managed only a back-test of its broken uptrend line from February-June. It broke it intraday but pulled back and closed marginally below the line. Today's high stopped just shy of a trend line along the highs from November 2015 - August 2016, near 18905. RSI quickly made it up into oversold territory and while it could easily remain there with an extended rally it is a warning sign that a reversal back down is possible at any time.
Key Levels for DOW:
- bullish above 18,925
- bearish below 18,250
Nasdaq-100, NDX, Daily chart
The bulldog named FANG had some dentist work done today and the dog was defanged today. Collectively FB, AMZN, AAPL, NFLX and GOOG finished down more than -3% today and that was an improvement from earlier in the day. NDX finished down -1.6% and it had been down -2.9% earlier in the day. This was while the Dow was up more than +2% and the RUT was up more than the +1.6% where it finished. That's a split that you don't often see. The daily candle for NDX is a bearish engulfing candlestick, which is an outside down day and usually a good reversal indication. With the candle following a back-test of the bottom of its broken rising wedge pattern off the September low it has "SELL!" written all over it. It was able to hold price-level support at 4740 for the close so it remains possible we'll see at least a bounce correction but I'd short a bounce against today's high near 4856. This morning's gap up and quick morning high looks like a bull trap.
Key Levels for NDX:
- bullish above 4860
- bearish below 4656
Russell-2000, RUT, Daily chart
As mentioned previously, the RUT was up relatively strong today, as it was yesterday, and since it's been a leader for the stock market (up and down) it's worth watching closely here. Today it broke above its downtrend line from September, near 1235, and made it up to a downtrend line from June 2015 - September 2016, which at 1259 is a little shy of its September high near 1263. Now we wait to see if resistance is broken, which would be confirmed with a rally above 1264 (and holds above), or if today's breakout turns into a failed breakout with a drop back below 1235.
Key Levels for RUT:
- bullish above 1264
- bearish below 1188
10-year Treasury Note emini futures, ZN, Weekly chart
Treasuries have made a big move this week, much larger than normal, and it appears the bond market is more convinced the Fed will raise rates in December. There's been strong selling, as can be seen on the weekly chart of the 10-year Note (emini futures), and that has driven rates higher. But bonds bear watching here since ZN has dropped down to a long-term uptrend line from the low in June 2008 and as can be seen, this uptrend line acted as support twice in 2015. If the line is broken it will be a strong signal that more selling could be coming. But if it holds as support it's possible a reversal back up would be supported by selling in the stock market (rotating from stocks into Treasuries).
High Yield Corporate bond ETF, HYG, Weekly chart
The other bond fund to watch carefully is HYG. I've recently been showing its weekly chart to point out the fact that it recently broke down from its rising wedge pattern off the February low and that was an early-warning sign for the stock market. This week it has sold off while the stock market rallied and it sold off strongly again today. It has made it down to its broken downtrend line from June 2014, at 84.25, so it could get a bounce but any further selling would be that much more of a negative message for the stock market. If traders are taking off risk by getting out of HYG it means buying in the riskier stocks, such as the small caps, could be a bad move.
KBW Bank index, BKX, Weekly chart
The banks have been on fire this week, especially yesterday and today (+3.8%). At last week's high BKX was starting to look a little weak, with bearish divergence, on its daily chart, and much of the rally the past two days could be short covering once it broke above last week's high (yesterday). Or perhaps it's a stronger belief that the Fed will now feel free to raise rates since the election is over (higher rates help the banks make more money). Whatever the reason, this week's rally has BKX up more than +13% from last Friday's low. Too much, too fast? It could be and it has achieved a price projection at 82.19 (with today's high at 82.60) for two equal legs up from February. It has also achieved a 62% retracement of the 2007-2009 decline, at 81.65, which was almost tagged at its July 2015 high. A failure here would leave a big double top against the 2015 high but there is still more upside potential if the bulls can keep up the buying pressure. The trend line along the highs from April 2010 - July 2015 will be near 86.60 by the end of the month.
U.S. Dollar contract, DX, Daily chart
The US$ got a boost this week and after some volatility around the election results it has rallied back up to the October 25th high at 99.09 with today's high at 99.08. It could pull back again within its up-channel from May, the bottom of which was tested with a quick spike down to 95.90 Tuesday night (just above its 200-dma at 95.86), but the upside target for the move up from May continues to be a little over 100 before heading back down for the last leg of its consolidation pattern since March 2015.
Gold continuous contract, GC, Daily chart
Gold's pattern has been choppy (corrective) and therefore short-term projections are very difficult. But based on its back-test of support-turned-resistance at 1308 last week and again on Monday that's been followed by a drop back down it looks like a bearish kiss goodbye that should lead to lower prices. A break below its October 7th low near 1243 should usher in more selling. The next price-level support is down near 1182, or maybe the May 31st low at 1199, before we could see a bigger bounce correction. But another rally above price-level resistance near 1308 would likely see a larger rally and potentially up to the 1400 area.
Oil continuous contract, CL, Daily chart
Last week's decline for oil had it dropping back below its broken downtrend line from June-August, which created a failed breakout attempt. That rally attempt left behind a double top with the June high. With the drop back below the broken downtrend line last week it also broke below its uptrend line from August so it was a double breakdown signal. This week's bounce was back up to its downtrend line and today's selling leaves a small back-test and bearish kiss goodbye. If the sellers drive oil below its 200-dma, currently at 43.50, we should see oil drop down to its August low at 39.19 and potentially much lower.
There were no market-moving economic reports this morning and only one report Friday morning -- Michigan Sentiment will be reported at 10:00. No big change is expected and I doubt the market will pay much attention to it.
The election results fooled the majority of the political "experts" and then the stock market fooled the majority of the financial "experts." It's been a wild week and today's stock market simply added to the confusion with the mixed messages from the different indexes. But even with the large differences between the main indexes I see similar setups where they've rallied up to potentially strong resistance and either sold off from there, such as NDX, or are potentially ready to sell off.
The bulls need to at least hold the market up on Friday to maintain the potential for a higher rally. A choppy pullback/consolidation would keep things looking bullish. But a sharp (impulsive) decline would suggest this week's rally might have set some bull traps and it would be a message to traders to not hold onto long positions since a stronger selloff could occur from here (and then prove the experts correct). We should have a much clearer picture in the next day or two and in the meantime stay nimble in your trades.
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