Oil lost price support and has dragged not just oil stocks but the broader market lower with it. The concern is that oil is forecasting lower demand and a slower economy, which has stock investors a little worried.

Today's Market Stats

Oil has been in a sharp decline since the end of May and it lost support on Tuesday, which was followed by more selling today. The oil supply is higher than needed because demand for it is not increasing. The slowdown in oil demand, as well as gasoline, has many concerned that it's forecasting a slowdown in the economy. The divergence between the Dow and the transports is a similar warning sign. All of this is now causing more investors in the stock market to question the high valuations.

This morning's economic reports included crude inventories, which showed a decline of 2.5M barrels, which is a continuation of the decline from the previous week's -1.6M. And yet the price of oil continued to decline anyway, which shows there's greater concern than just the amount of inventories.

Some of the concern has to do with demand and a slower demand suggests we could be facing a slowing economy. The other cause for slowing demand is the continuing effort to develop alternative energy sources, such as wind and solar. As an example, when I drive back and forth across WA state I see a growing number of windmills in the mountain passes where there's a steady supply of wind.

WA is blessed with low-cost electricity because of so much hydro-electric power and yet several years ago voters still voted for the requirement for the state to produce more alternative energy. Sunshine is not that plentiful, especially in the winter months, so most of the alternative energy comes from windmills and much of that gets sent south to the power hungry Californians.

Many power-generating stations have converted from oil to natural gas, especially as so much more had become available through fracking operations. Between the higher use of NG and alternative energies there's been a significant reduction in both coal and oil demand. The government didn't need to step in and try to squash the coal industry; the market is doing a fine job on its own. Now much of the coal is shipped to China (and we west coasters get their pollution as payback, but I digress).

While the stock market has not been reflecting oil's price decline in the past month it might soon be the elephant in the living room that can no longer be ignored. However, as I'll review with the oil chart, there is a chance for at least a rebound in its price now that is has dropped down to a $40-42 support zone.

The other economic report we got this morning was existing home sales, which came in slightly better than expected and as 5.62M home sales in May it was slightly better than April's 5.56M. The report was ignored by the market.

The report is encouraging for home owners since the report also showed median sales price for existing homes of all types increased +5.8% to $252,800. This was the 63rd straight month of year-over-year gains and is now at the highest price on record. It's been a full recovery, and then some, from the heydays before 2007-2009. The median price for single family homes did a little better -- up 6.0% to $254,600 from a year ago. That's the 24th straight month of y-o-y gains for single family homes.

Total housing inventory increased in in May but it has continued to decline y-o-y for the 24th straight month and down -8.4% from May 2016. At the current sales rate there is a 4.2-month supply, which is down considerably from a typical 6.0-month supply. The tight supply has reduced the median number of days on the market to 27 days, which is the shortest time since tracking of this metric started in May 2011. Low inventory and low interest rates has continued to help sales prices. Interestingly, new home sales, inventory and prices have declined while existing homes have done better.

Kicking off tonight's review of the charts, I'll start with SPX, which has been more of a middle-of-the-road index between the strong Dow and weaker techs (although they switched roles today).


S&P 500, SPX, Weekly chart

The weekly candles for the past 3 weeks are tiny and almost indistinguishable on the chart. I'll continue to show upside potential to the 2500 area on the weekly chart but if there is to be more upside I'm thinking 2500 is going to be a challenge. It will depend on whether or not those little candles can turn into bigger white candles.


S&P 500, SPX, Daily chart

The daily chart shows a rising wedge pattern for the rally from March 27th, which is a pattern that makes sense when I look at the multitude of 3-wave moves inside the pattern. Ideally the pattern calls for one more new high and the price projection at 2465 would be a good setup for a reversal back down.

Today was a test of the 20-dma, near 2430, and the uptrend line from May 18th, which it closed on today after a minor break below it this afternoon. The bulls need to hold the line(s) here otherwise it will start to look more bearish. A drop below 2418 would confirm a top is in place while a rally above 2466 would be a stronger indication that the 2500 area will be next.

Key Levels for SPX:
- more bullish above 2466
- bearish below 2418


S&P 500, SPX, 60-min chart

The 60-min chart focuses on the leg up from May 18th and specifically the leg up from June 15th. If the leg up from June 15th is to be another a-b-c move then we need another leg up. Two equal legs points to 2465, the same projection on the daily chart for the 5th wave so there's good correlation there that supports the need for another rally leg and then the potential completion of the rally from March 27th to complete the rally from 2016 to complete the rally from 2009.


Dow Industrials, INDU, Daily chart

The Dow was one of the weaker indexes today, as weak as the RUT, and that's calling into question the ability to get up to a price projection at 21618 (where the c-wave of an a-b-c move up from March 27th would be 162% of the a-wave). That projection and the two trend lines along the highs from 2011-2014 and from April intersect on Friday, which leaves only two days for the Dow to turn today's decline around and rally 210 points.

Hurting the chances for a rally to a new high is the fact that the Dow had rallied above the top of a rising wedge pattern for the leg up from May 18th, on Monday, pulled back to the top of the wedge on Tuesday and then dropped back inside the wedge today. That creates a sell signal that can only be negated with a rally above Monday's high at 21535. Any further decline on Thursday would have the Dow dropping back below its uptrend line from November 4 - April 19, which has been supporting the Dow all month.

Key Levels for DOW:
- more bullish above 21,620
- bearish below 21,169


Nasdaq-100, NDX, Daily chart

The techs were on fire today compared to the rest of the market and the indexes were greatly helped by the FAANG stocks, all of which were in the green. Both the SOX (+1.2%) and especially the biotechs (BTK +3.8%) certainly helped. But NDX was only able to make it back up to its 20-dma and stopped short of another back-test of its broken uptrend line from April 13 - May 18, currently near 5800.

Near the trend line is a price projection near 5798 for the pattern of the leg up from June 15th (a 5-wave move where the 5th wave would equal the 1st wave and where it would complete an a-b-c bounce correction off its June 12th low). A 62% retracement of the June 9-12 decline is near 5797. With the trend line near 5801 Thursday morning we have an upside target zone at 5797-5801 to watch for a reversal to the downside.

Key Levels for NDX:
- bullish above 5800
- bearish below 5634


Russell-2000, RUT, Daily chart

The RUT's choppy pattern leaves few clues about what direction it really wants to go. However, I continue to lean short from here because of the ending pattern it made from January. The choppy shallow rise to its last high on June 9th fits as the completion of a 5-wave move in a broad rising wedge pattern and now it's going to retrace the entire rally from January. This means the selling should start to accelerate lower and if does something less than that, like continue to chop up and down, it would be a clue that another minor new high could still be due.

Key Levels for RUT:
- bullish above 1440
- bearish below 1386


10-year Yield, TNX, Daily chart

Treasuries have been consolidating for the past week and we should find out in the next day or whether or not we can expect at least a larger bounce in yields or a continuation lower. The bullish descending wedge for TNX off its May 11th high would see a bullish breakout with any additional push higher from here (from selling in bonds). At the moment it's struggling to get back above price-level S/R at 2.19 (Monday's high was 2.191) and it's broken 20-dma, also currently near 2.19.

If TNX can get back above 2.19 it will still have plenty of nearby resistance to work through, which includes its broken 200-dma, nearing 2.22, its downtrend line from 2007-2013, near 2.24, and its broken 50-dma, which is now nearing 2.24 as well. If TNX can get above 2.24 it would be at least short-term bullish and then above price-level S/R at 2.31 would be more bullish (bearish for bond prices).

With the 5-year rate rising to 1.8 (they're much more sensitive to the Fed's rate policy changes), the 10-year at 2.16 and the 30-year at 2.72 we have a flattening yield curve. The 30-year bond market is particularly sensitive to future expectations for inflation and economic growth and at the moment the bond market is telling the Fed that they don't see the inflation or economic picture the same way and in fact believe the decline in the inflation rate is something more than "transitory." At the moment the yield curve is the flattest it's been since December 2007, which was right in the beginning stages of the financial collapse in 2008.


High Yield Corporate Bonds ETF, HYG, Daily chart

A high yield bond fund, otherwise known as a junk bond fund, is the HYG. As long as it looks bullish it's a good sign for the stock market. But unfortunately HYG is now giving us the opposite signal since today it snapped support at its uptrend line from November 2016 - March 2017. This is the post-Trump rally and it's now a warning sign that the stock market is going to follow in HYG's footsteps as the euphoria that built the Trump rally starts to wither in the face of reality.


KBW Bank index, BKX, Daily chart

The message from the bond market and the flattening of the yield curve is predicting we could be closer to a recession than most are currently thinking. The flatter yield curve also negatively affects bank performance since they get squeezed between their lending rates and savings rates.

BKX was one of the weaker sectors today and it reflected the concerns brought on by lower oil prices (slowing economy) and lower longer-term yields. The a-b-c bounce pattern off the April 17th low continues to look like a good price pattern, which forecasts another leg down to at least match the March-April decline. That projection points to 83 and below that is price-level support at the July 2015 high near 81.


U.S. Dollar contract, DX, Daily chart

The US$ could still bounce a little higher but so far it's looking like just a bounce correction that will be followed by another leg down. Resistance for the current bounce is the downtrend line from April-May, currently near 97.70, and a broken trend line along the lows from December through May, near 97.95. Coming down toward 98 is the 50-dma so there's lots of resistance not far from the current price. A turn back down would likely take the dollar down toward the bottom of its down-channel off the January high and a price projection for the 3rd wave in the decline at 94.79.


Gold continuous contract, GC, Daily chart

As expected, gold has bounced off its uptrend line from December-May and its 200-dma, both near 1241.50. The bounce is only small so far but has further upside potential before turning back down. If it only consolidates in a small bounce it will look more bearish and a drop below 1241 would tell us the decline will continue. It takes a rally above its June 6th high near 1299 to suggest we're going to see a much higher rally.


Oil continuous contract, CL, Daily chart

As discussed earlier in the report, oil's price has been in a strong decline for the past month and it has now dropped down to a potential support zone at roughly $40-42 (today's low was $42.05). On the daily chart below you can see the tight down-channel it's been since its May 25th high.

With Monday's break of the uptrend line from August 2016 - May 2017, near 44.50, I have two downside targets I've been watching for and the first one at 42 was achieved today (5 cents shy of it). This is a price projection for two equal legs down from the April 12th high and that could complete a set of two a-b-c moves down from the January high and be a setup for at least a strong bounce back up.

The other price projection I show on the chart is at 40.57 and this is where the 2nd a-b-c move down (from April 12th) would equal 162% of the 1st a-b-c move down (January 3 - March 14). Oil tends to move in these 3-wave patterns and that's why we could see at least a higher bounce before potentially continuing lower.

The more bearish wave count for oil calls for a continuation lower but still find support in the 40-42 range but then consolidate for several weeks before continuing lower. My longer-range forecast for oil continues to be at least a test of its February 2016 low at 26 and likely lower.


Economic reports

The rest of this week will be quiet as far as economic reports go, with unemployment claims data on Thursday and new home sales on Friday. The market will be left to react to overseas events rather than anything going on domestically.


Conclusion

A flattening yield curve and lower oil prices is beginning to spook stock investors who pay attention to such things. Most stock buyers simply chase prices higher, regardless of valuations or future expectations. Most are momentum traders who follow the trend and it has of course been a winning strategy. But these same traders oftentimes end up holding the bag at the top because they miss the clues.

I think some of the disbelief in this rally (often called the most hated rally) comes from many investors who lived through the 2000-2002 and 2007-2009 declines and they don't believe this rally is sustainable. They in fact believe the rally could disconnect to the downside like it has done twice before in this century. Therefore we might have more investors paying attention to the other markets, like the bond and oil markets, this time around and could be part of the reason the indexes pulled back some more today.

The tech indexes did well, especially NDX, which came mostly from the volatile biotechs doing well today. That could reverse on a dime with some piece of bad news that counters today's good news (apparently Trump isn't going to go after drug prices, which would be just another step back from his many broken campaign promises -- he's learned well how to be a politician).

I see potential for the blue chips to charge a little higher but they'll need to get the buyers back in on Thursday and prevent any further selloff. One more new high could do it for them but if selling continues on Thursday it's going to look like the highs are already in place.

Good luck and I'll be back with you next Monday as Tom and I switch places next week. See below for a good deal on an OIN subscription.

Keene H. Little, CMT


 

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