In the past few weeks we've seen some strong splits between major indexes and it's making it much more difficult to determine what the market is going to do next. The result has been a choppy market that's either consolidating for another bullish run or is in a topping pattern.
Today's Market Stats
The market has been chopping mostly sideways for weeks as money sloshes around from one sector to the other but without enough liquidity to get all boats rising again. A fractured market is usually not a good sign for bulls because it's usually a sign of a loss of liquidity that will soon turn to stronger selling. But there have been very few signs that the market is in a topping pattern.
Other than the noise from the White House and CNN and bellicose N. Korea, it's been relatively quiet on the political and geopolitical front. That and the lack of performance indications from companies has kept the stock market looking for something to spark a movement (we know what kind of "movement" the bears would like). The stock market continues to be resilient in the face of any kind of news and until we see selling on good news we should assume the bulls will remain in control of the tape.
This morning's economic reports included only the morning's Factory Orders and this afternoon's FOMC Minutes. The Factory Orders report showed a slowdown that was greater than expected -- down -0.8% vs. expectations for -0.5%. April showed a slowdown of -0.3%, which was a revision lower from the previously reported -0.2%. There was virtually no reaction to the news and if anything you could say the market rallied on the disappointing news. But it was the usual turnaround at 10:00 following the brief decline from the open.
There was also little reaction to the FOMC minutes since there were no surprises in the minutes. We'd already heard it before.
As for the market, there are some topping signs here and there but the bulls can easily argue there are enough signs that indicate another leg up is coming, one of which is the lack of impulsive (strong) selling. It's been hard to take a strong stance with either side and that simply means it's not a good time to make aggressive trades.
The bulls certainly can't complain about the lack of progress by the "sell in May" crowd. SPX might not have tacked on a lot of points since the beginning of May but it's about 50 points higher than it was at the end of April and that's nothing to sneeze at in a period that's supposed to be weak. If for no other reason, considering the uptrend remains in progress, we should be staying long the market until we're told otherwise.
The May lows are probably the line in the sand for the bulls -- those lows must be protected in order to maintain the uptrend. The Dow is the strongest index in regards to the price pattern following its May 18th low while NDX is the weakest. The NDX has come close to dropping below its May 18th low at 5568 with Monday's and today's lows near 5593.
As a comparison to the weak NDX, the Dow's May 18th low was 20553, which is 925 points below today's close. That's a real split in the market and the bears will argue it's been a flight to the safety of the blue chips while the bulls will argue the relative strength in the RUT, which says there's not been a flight from higher-beta stocks.
There are many other statistics that are not helping us figure out this market. I read an interesting article found on schaefersresearch.com that discussed the results from the first half of this year and what that could mean for the second half of the year. The first point in the article was bullish while the second point suggested caution by the bulls, of which there are many.
The author of the article, Rocky White, pointed out that in the first half of 2017 SPX gained 8% and the max drawdown was -2.8% between March 1 and April 13. Going back to 1929 this was only the second time the SPX has had less than a 5% drawdown. The last time was in 1995 when SPX pulled back only -1.7%. And the record is good for the bulls based on this statistic -- the second half of 1995 saw a gain of +13%. When the first half of the year has seen less than a 5% drawdown the average gain in the second half has been nearly +8%. Negative second halves have been trivial.
So is it time to load up on long positions for the second half? Unfortunately there's another statistic that urges caution -- bullish sentiment. When the weekly Investors Intelligence, a measure of bullish vs. bearish sentiment among stock advisors, is above 50% after the first half of the year the second half tends to be negative. While 81% of the years with good first halves (as measured by a drawdown less than 5%) were positive in the second half, it changes significantly if the Investors Intelligence gets above 50%, in which case it's a craps shoot (50%). In other words, too many bulls can spoil the party for the bulls and that's the situation we have currently with the II at 56.2%
One other statistic is that the Millennials have been increasing their stake in the stock market game. And it's not just stocks -- they're playing the derivatives market, just as traders did into the 2000 and 2007 highs. The Millennials have been staying out of the market and with the huge increase in new trading accounts by the Millennials it's an indication that the high-flying market is finally pulling them in. This could drive the market much higher in a melt-up but it's also another caution sign that things could be getting too frothy.
Normally this kind of confusion can be settled by the charts, which can normally provide at least some decent clues to follow. That's not the case at the moment, especially with the split between the indexes. The best we can do is follow the patterns on the charts and keep each one separate from the others and trade what you see on your chart, not what you think should happen. If nothing else you should be able to get some good trigger levels (to get in or out).
Dow Industrials, INDU, Weekly chart
Not much has happened with the market in the past 1-1/2 weeks and that can been seen in the small weekly candles as it has consolidated the previous month's gains. There continues to be upside potential to at least the trend line along the highs from December 2014 - May 2017, near 21750. The weekly uptrend remains intact until the Dow drops below its April 13th low at 20379, which would be an 1100-point decline (-5.1%).
Dow Industrials, INDU, Daily chart
You can see on the daily chart below how choppy price action has been since the high on June 19th. Today marks the 11th trading day since that date and the Dow still trades below the 21535 high on June 20th, but it hasn't been for lack of trying. The choppy consolidation/pullback keeps it potentially bullish for a run higher into early July. The first sign of trouble for the bulls would be a drop below price-level support at 21169 (the March 1st high). In the meantime, there's a confluence of trend lines at roughly 21700-21750 that provides us with an upside target zone.
Key Levels for DOW:
- bullish above 21,535
- bearish below 21,169
Dow Industrials, INDU, 120-min chart
The 120-min chart of the Dow shows a rising wedge pattern for the rally from April. It has the requisite 3-wave moves inside and we could get another 3-wave move up from June 29th to finish the 5th wave of the wedge. We might see a little further pullback from Monday's high and then head higher again but in any case watch for a rally to the top of the wedge, maybe a little throw-over, and then a collapse back down. A rally to the top of the rising wedge, which will be near 21715 early next week, would put it inside the 21700-21750 target zone mentioned above.
S&P 500, SPX, Daily chart
Since its June 19th high SPX has been looking like the Dow with its choppy pullback/consolidation. Assuming we'll get another leg up, I see upside potential to a price projection at 2481, which is also where it would run into its broken uptrend line from November 4 - April 13 and a trend line along the highs since April 26th. The two trend lines intersect near 2476 on July 11th. The first sign of trouble for the bulls would be a drop below price-level support at 2101-2105.
Key Levels for SPX:
- bullish above 2454
- bearish below 2405
Nasdaq-100, NDX, Daily chart
NDX had a nice pattern into a possible top on June 8th but the 2nd leg of its decline from that high is looking a little choppy for what should be a 3rd wave down. It's also struggling but holding onto its uptrend line from June-November 2016, which it closed below on Monday and back above today. Currently sitting near 5628, that trend line needs to hold in order to keep the bulls in control. But a drop below the uptrend line could open the trap door sitting under the bulls.
While the Dow keeps me leaning bullish, NDX keeps me leaning bearish. We're waiting for the market to make up its mind.
Key Levels for NDX:
- bullish above 5846
- bearish below 5592
Russell-2000, RUT, Daily chart
The RUT has been in a messy (choppy and whippy) pattern since December and has barely made any progress all year. The December 9th high was 1388 and today's close was 1420. That's 32 points (+2.3% over six months). But at least it's a gain and not a loss and the gains could continue if we're to see a choppy rising wedge continue into next week and get the RUT up to its trend line along the highs from 2007-2015, now near 1441. The bearish divergence and the choppy move higher tell me it's in an ending pattern and any new highs with these conditions would be a dangerous time to chase it higher.
Key Levels for RUT:
- bullish above 1442
- bearish below 1396
KBW Bank index, BKX, Daily chart
The banks have been strong since the low on June 23rd. BKX has again been testing the underbelly of its broken uptrend line from June 2016 - April 2017. The line, currently near 97.55, held as resistance when first back-tested June 12-13 and has again been holding as resistance since June 29th. If it can push a little higher it could hit the price projections at 98.12, where it would have two equal legs up for the bounce off the May 31st low. Above that is potential resistance at its March 1st high at 99.77.
Transportation Index, TRAN, Weekly chart
On Monday the TRAN closed at 9639 which was above its March 1st closing high near 9594. It added a few more points today with its close near 9646. This is a big deal for the bulls since it keeps the Dow Theory on a buy signal with both the Dow and TRAN in synch to the upside.
But it's not all sunshine and roses for the TRAN since there might not be much more upside left to the rally. I see the potential for a price projection at 9823 to be met (where the 5th wave of the leg up from January 2016 would be 62% of the 1st wave), and maybe all the way up to the projection at 10490 (5th wave equal to 1st wave). But the broken uptrend line from June-October 2016 is acting as resistance and it's showing bearish divergence against its highs since December.
A little higher for both the Dow and TRAN into next week could set up an important top for both so it pays to be cautious about any new highs from here.
U.S. Dollar contract, DX, Daily chart
The US$ made it down to the bottom of its down-channel from January and the trend line along the lows from March. Predictably, it got a bounce off that support and now we wait to see if the bounce develops some bullish legs to at least break the downtrend line from April, currently near 97.10. The 50-dma is coming down toward that level and it could meet the dollar at the trend line if it bounces strong from here.
If the dollar chops sideways/up we'll then have a good idea that the dollar will then head lower again. It's quite possible we'll see the dollar consolidate for months and make it back up to the top of its down-channel, maybe near 97.50 by September, before heading back down.
Gold continuous contract, GC, Daily chart
Gold's break of its uptrend line from December 2016 - May 2017, on June 23rd, was followed by a small back-test and then a steep decline into Monday's low. That was bearish price action and it's looking like gold will continue to head lower. It's getting oversold so there could be at least a bigger bounce/consolidation in its near future, especially as it tests its May 10-11 lows near 1217. Today's low was 1216.50. But the break through multiple support levels (20-, 50- and 200-dmas and its uptrend line) is an indication that a stronger decline is in progress.
Oil continuous contract, CL, Daily chart
Oil had spiked up strong off its June 21st low and then was able to make it back above its broken uptrend line from August 2016 - May 2017. It made it through its broken 20-dma, near the broken uptrend line, on June 30th and then banged its head on the broken 50-dma, near 46.95, on Monday and again today before selling off sharply today. If it can stay above the broken uptrend line and 20-dma, at 44.73-44.87, it will stay bullish for at least a larger bounce. Back below 44.70 could to a continuation lower, which I think has a good chance of happening.
Supposedly oil got hit hard today on the news that Volvo will be making electrically-powered cars starting in 2019 (I presume some will be hybrid). The other car manufactures are likely not far from announcing something similar and the gas consumption is expected to decrease dramatically as more consumers gravitate to electric. And if natural gas continues to be in large supply due to fracking and other methods, electric companies could continue to reduce their demand for oil. Add in a slowing economy in the near future along with growing oil supplies and the fundamentals for oil's price do not look favorable for the near future.
Thursday will be a big day for economic reports, including the ADP employment report and the ISM Services report. Whether or not the reports will move the market, and in which direction, is always the bigger question.
The stock market appears to be either consolidating for another big run higher or it's in a topping pattern. Depending on which metric or price pattern, and which index, you look at you could easily make the argument for either case. That's obviously not helpful for making trading decisions. Actually it is helpful -- when in doubt, stay out. Flat is a position and in times like this it's often the best position.
I see more potential for at least a little higher than lower in the coming week but only if the techs get on board with a rally. The pattern for NDX is bearish and maybe it will get at least a bigger bounce if the blue chips and RUT can chop their way a little higher. But if the techs continue to drop and the banks start to join them to the downside I'd be very reluctant to think long and instead start to look for shorting opportunities. By this time next week I suspect we'll have a good idea about whether or not to continue expecting new highs or if instead we have signals that the top is already in place. For now the jury is still out and we need to exercise patience.
Good luck and I'll be back with you next Wednesday. See below for a good deal on an OIN subscription.
Keene H. Little, CMT
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