It seemed to take forever to climb those last 100 points to 20K for the Dow but it finally did it today. Helped with an overnight rally (the best way this market knows how to deal with resistance), the bulls added buying pressure to the short covering and kept the Dow above 20K. Do I hear 30K?
Today's Market Stats
Today's accomplishment by the Dow, in reaching 20K, is seen as a big deal by many, even though it's just a number. But considering the Dow has rallied more than 2000 points since Donald Trump was elected it's hard not to be impressed, even if you have some doubts as to the sustainability of the rally. Following the month-long consolidation from mid-December we appear to be into the next rally leg and the bulls have some room to run.
While there remains further upside potential, especially if sidelined buyers decide to jump back in, we have some warning signs flashing, such as VIX at only 10.81 (when the VIX is low it's time to go). Bullish sentiment has actually backed off a bit and oftentimes that coincides with a top as the rally finds it difficult to find more buyers. Short covering probably powered much of today's rally, especially considering it started with a big gap up after the futures rallied last night to help get the indexes up and over some strong resistance levels. The market has been giddy before and there's lots of upside potential if that giddiness turns into real buying but it can also get bulls into trouble if they stop looking for signs of trouble. Breathing at high altitude can make your thinking very foggy and confused.
The Donald weighed in this morning about the Dow's achievement with a tweet saying "Great!" But this is from someone who called the stock market a bubble when the Dow was at 18K so I wonder how he feels about the stock market today. He of course can't come out and say "Wow, 20K! This is a bubble looking for a pin!" He has a lot to live up to after all the talk about how bullish his administration will be for the stock market. Based on time cycles and price patterns I see at least a little more upside potential but I also believe the hope-filled rally over the past three months is in fact a bubble looking for a pin.
The financial markets tend to swing in a cyclical pattern, matching the mood swings in investors. These can be long-term cycles (54-year Kondratieff) and down to intraday cycles. Finding those cycles can sometimes be a challenge but since the 2009 low we've had a 23-week cycle that has done a good job finding the highs in the market (for at least a decent pullback) and a few lows. These are never precise but it does provide a reason to look for the price pattern to support a possible turn date that's coming due.
The last turn week by this 23-week cycle was the week of September 11, 2016 whereas the actual high was about 3 weeks prior to that. The next turn week is the week of February 19 but if we see a high about 3 weeks prior to that week it would put us into next week. Based on this weekly turn cycle I think we should be looking for a possible high between sometime next week and right after February's opex week.
One thing to take note of on the weekly chart below is the ROC (Rate of Change), another momentum indicator. Note how dangerous it is for bulls when it reaches 10, as it now has. Buyers should be very careful from here when thinking about adding to long positions. I thinking sitting tight and pulling stops up closer is probably a smarter thing to do, especially since SPX is also close to the top of a rising wedge for the rally from February 2016.
SPX 23-week cycle
Another cycle to consider is the 50-day, which is shown on the daily chart below. I created a gap at the double bottom in January-February 2016 since the 50-day cycle seems to be working better off the February low rather than the January low. Before February 2016 the cycle starts at the March 2009 low, like the weekly cycle above. The next turn date is February 8, two weeks from today.
The 50-day cycle and the 23-week cycle coincide closely and are a reason to consider a top will be made in this period. But we need to keep in mind that the cycles are not precise and +/- a week or two needs to be considered. What we need to do is tie in the price pattern to see if and when we'll have both coming together for a possible reversal. The message from the turn cycles is to be watchful but still early for a turn.
One interesting thing to note from the chart below is where the green vertical line at February 8th crosses the top of a rising wedge pattern for the rally from February 2016, which is near 2320. As I'll show on the weekly and daily charts of SPX further below, there's another reason to consider 2320 as a good upside target.
SPX 50-day cycle
S&P 500, SPX, Weekly chart
The price pattern is not as clear as I'd like, which makes price projections more difficult but at the moment I one wave count idea that shows a projection to almost 2321. This is where an extended 1st wave for the rally from February 2016 is followed by the 3rd through 5th waves equal to 62% of the 1st wave. That projection crosses the trend line along the highs from April-July-August 2016 on February 1st, which makes a little earlier than the weekly and daily turn dates discussed above but well within the window.
The big question, assuming it will turn back down from near 2321, is whether it will lead to just a pullback before heading higher or something more bearish. We'll have to see what kind of pattern we get in the pullback/decline to help determine what it will mean in the bigger picture. SPX would be more bullish above 2321, in which case the bears would probably have to go back into hibernation.
S&P 500, SPX, Daily chart
In addition to the trend line along the highs from April-July-August 2016, which was almost tested with the December 13th high, there's another trend line along the highs from August-December 2016 (gray line) that's slightly lower. Currently near 2307, that trend line and the one slightly higher provide a resistance zone to watch carefully if reached. Today's rally took SPX up to a broken uptrend line from November-December 2016 (gray line) and one thing to watch for is a back-test followed by a bearish kiss goodbye.
A failure to hold above 2280 on a pullback, especially if that pullback is a sharp reversal back down (impulsive), would be reason to doubt further upside but it takes a drop below Monday's low at 2257 to tell us a high is in place. Keep looking higher, even if only to 2321, but hold the exit door open just in case you need to be the first one out.
Key Levels for SPX:
- bullish above 2282
- bearish below 2257
Dow Industrials, INDU, Daily chart
Today's rally had the Dow breaking out of its sideways expanding triangle, the top of which is now near 20,015. That should act as support on a pullback so we'll see if this is just a 1-day wonder rally or something more bullish. As I'll point out on the 60-min chart further below, there is a short-term projection at roughly 20,180-20,200 for an upside target for the leg up from January 19th. Keep a close eye on that level if reached in the next few days (we're due a pullback and then another leg up to get there).
Higher upside potential is to about 20,350 where the Dow would run into a trend line along the highs from April-December 2016 by the beginning of February and not shown is a trend line along the highs from August-December 2016, which will be near 20,500 by the first week of February. So there's clearly more upside potential if the Dow can get through 20,200 and only if it drops below Monday's low at 19732 would the bulls be in trouble.
Key Levels for DOW:
- bullish above 20,010
- bearish below 19,650
Dow Industrials, INDU, 60-min chart
The January 19th low fits well as the completion of the choppy consolidation off the December 13th high. Today's rally looks like it completed the 3rd wave of the rally from January 19th and ideally we'll see a choppy consolidation/pullback on Thursday before heading higher into what could be the final high early next week (end-of-month run up). Depending on where the 5th wave of the rally from January 19th starts will determine the upside projection but for now I'm showing a pullback to the top of the expanding triangle pattern, near 20,013, and then the 5th wave would equal the 1st wave at 20,183.
Nasdaq-100, NDX, Daily chart
Since the November 4th low for NDX its rally is occurring with steepening uptrend lines, which defines a parabolic rally. There's a good chance this will not end well but until the completion of the rally it's obvious bears don't want to step in front of this train. There's a trend line along the highs from April-September 2016 that's currently near 5165, only 12 points above today's high. I show a down-up sequence to finish its rally to the trend line along the highs, which will be near 5180 on February 1st. At the moment it's just speculation but for there are three points from this chart to consider -- trendline resistance is close, it's overbought and a breakdown from a parabolic rally could happen quickly.
Key Levels for NDX:
- bullish above 5100
- bearish below 5035
Russell-2000, RUT, Daily chart
The RUT is the last one to break out of its consolidation pattern off its December 9th high. The top of the down-channel from that high is currently near 1385, less than 2 points from this afternoon's high. The bulls need another gap up to get the RUT free and clear of resistance otherwise we could see a pullback before heading higher. Since December I've been looking for the RUT to make it up to its trend line along the highs from 2007-2015, currently near 1407. It would be even more bullish above that trend line but watch it carefully, if reached, to see how it reacts.
Key Levels for RUT:
- bullish above 1385
- bearish below 38
Volatility index, VIX, Weekly chart
It's time to watch the VIX closely. As mentioned in the beginning of tonight's report, it close at 10.81 today, which is the lowest closing price since July 3, 2014. It's getting close to the lows seen in 2005-2007-2014 and while it doesn't provide us a timing signal it does provide a warning sign.
There are a couple of things to watch on the chart. First is a large descending wedge since 2015, the bottom of which is just below 10. There's a 5-wave count for the move down inside this wedge, which means it's in the final move of the wedge. Second, a shorter-term descending wedge is from November and the bottom of it is currently near 10 and next week will intersect the bottom of the larger wedge near 9.90.
If the VIX drops below 10 next week I think it would be a MOAP setup (Mother of All Puts), especially if the indexes shown above are hitting their upside targets/resistance levels at the same time. Put options will be the cheapest you'll see for years. The third thing to note is the bullish divergence since April 2016, indicating waning momentum at the new VIX lows and this supports the idea that we're getting ready for a big turn.
10-year Yield, TNX, Weekly chart
With the renewed buying in the stock market it has created selling pressure in the bond market, which in turn has driven yields back up. By mid-January TNX had pulled back to its broken downtrend line from 2007-2013, as can be seen on its weekly chart below, and the bounce back up leaves a bullish kiss goodbye. This should be good for at least a minor new high and potentially up to the projection at 2.687 where the 2nd leg of the bounce correction off the January 2015 low would achieve 162% of the 1st leg. Some bond gurus say the 10-year above 2.6% would signify the end of the bond's bull market. I'd suggest a better number would be above 2.69%
The bearish interpretation for bond yields assumes the bounce is just a correction and not something more bullish. The sharp rally off the July 2016 low supports the idea that it's the c-wave of an a-b-c bounce off the January 2015 low and not the start of something more bullish. That interpretation means once this rally completes we'll then see a resumption of the decline in yields (rally in bonds) to a low below the July 2016 low at 1.336. I have long believed that deflationary pressures will drive the 10-year below 1% and until I see evidence to the contrary I'll continue to believe it.
KBW Bank index, BKX, Daily chart
Like the RUT, the banking index has not yet broken above the top of its consolidation range that it's been in since December 8th, which is near 94. Assuming it will join the race to the upside there is upside potential to a price projection at 99.47. The projection crosses the top of a parallel up-channel for the rally from February 2016 on February 6th, which is very close to the 50-day turn date discussed for SPX (on February 8th). BKX stays bearish above its January 18th low at 89.17 but questionable below that level.
U.S. Dollar contract, DX, Daily chart
With both Janet Yellen and Donald Trump beating up on the US$ (something they both happen to agree on), it's not a surprise to see the dollar losing some of its luster after peaking on January 3rd. It has now dropped below the bottom of an up-channel for the portion of its rally from August 2016 and a broken trend line along the highs from July-October 2016. It has also dropped back below the broken downtrend line from March-December 2015.
These trend lines all coincided near 100.30 and provided a little support for a bounce off the January 17th low at 100.23. But this week's decline now has it below the multiple trend lines and even though the dollar is oversold it's not showing much in the way of bullish divergence, suggesting we could see lower prices before setting up a bigger bounce. Maybe we'll see a bounce off the December 8th low at 99.49 to create a H&S top (left shoulder in November 2016, right shoulder to be created with the next bounce to a lower high).
Gold continuous contract, GC, Daily chart
Gold should have bounced about as far as it's going to go if the larger bearish pattern is going to remain the preferred wave count. If gold gets above its October 7 2016 low near 1243 it would negate the impulsive wave count for the decline from July. It could be in what will become a larger corrective move down (commodities are typically more corrective than impulsive) and that would simply make it more difficult to figure out its next move. But for now, assuming it's going to roll back over, the downside target is near 1386, which is where the 5th wave of the move down from July 2016 would equal the 1st wave. That projection crosses the midline of a down-channel on February 23rd. Perhaps a blow-off rally in the stock market would coincide with a strong drop in gold in the next month.
Oil continuous contract, CL, Daily chart
Oil is stubbornly holding onto the 51-54 area but it's looking vulnerable to another leg down, one which should drop it to at least the $49 area (two equal legs down from January 3rd. I think oil remains in a longer-term decline but it could be a slow choppy move. If oil bulls do manage to drive it back up, keep an eye on the top of its up-channel, which will be near 56.30 in early February.
A big jump in the MBA Mortgage Applications index this week helped spike the home builders today. We'll see if that good news is followed by an unexpected climb in new home sales in tomorrow's report. On Friday we'll get some GDP numbers, Durable Goods orders and Michigan Sentiment.
For what seems like forever, the market traded sideways since mid-December and that's what had me believing we'd see higher prices. That and the fact that too many pundits had turned bearish the market, saying the Trump rally was due a big correction. The market rarely accommodates the majority and today's relatively strong rally could have been more short covering than real buying but at least it broke most of the indexes out of their consolidation patterns.
The RUT and BKX have yet to break out and for a sustained rally we'll need to see them join the party. For the others, such as the blue chips, we'll want to see nothing more than a pullback to support (at the top of the consolidation ranges) and then a continuation higher. The bears obviously want to see a failure of support on a pullback and leave a failed breakout attempt. That's certainly a possibility but at this moment I think it's a lower probability. I think this rally has a little more room to run.
I need to emphasize "a little more room to run" because I don't think there's a lot of upside potential. This is likely to be the last leg of the rally from November and then the "Trump correction" will begin. Keep in mind that the rally has dropped the VIX down into dangerous territory and while I think it can drop lower, such as from today's 10.8 down to maybe 9.8, it's now lower than it's been since July 2014. It wasn't long after that when SPX bobbled a bit, made a minor new high in September and then dropped about 200 points (-10%) into October. The market doesn't repeat exactly but at the very least we have a warning sign.
The rally looks good for at least a little higher (SPX 2321 target) but when I consider the upside potential (+20 points) and the downside risk (-200 points) I know that I should be getting defensive and ready for a reversal, even if that reversal could be weeks away (or maybe next week after we close out a positive January). Trade carefully and pull up your stops on long positions. Bears need to continue exercising patience. I know you're hungry but sometimes that makes you stronger (wink).
Good luck and I'll be back with you next Wednesday.
Keene H. Little, CMT