We are seeing more chop and whipsaws than any strong move in either direction but for now the bulls maintain control of the tape. The short-term pattern looks like we could see at least a positive start to opex week next week but after opex week it's looking doubtful that the bulls will be able to do more.
Today's Market Stats
It was another quiet day in the markets and the bears could be forgiven for thinking the rally is simply running on fumes and is about to tip over at any time. But the price pattern remains more bullish than bearish and as we get ready to head into opex week it's looking like we should see higher prices.
But the bears could soon have their turn. Depending on the index and projected price targets I see the potential for a market top in the coming week and therefore it's not a good time for bulls to be complacent, which is what the VIX is currently showing us (it closed below 10 again).
There wasn't much news, geopolitical or otherwise, today and the market was left on its own. This morning's economic reports included some inflation data with the PPI reports before the bell. That caused a minor pullback in the equity futures and a small pop up in bond futures when the numbers were released at 08:30, but it was only a small reaction. The reaction may have been because the numbers came in a little higher than expected and that might have had some thinking that the Fed has a greener light to raise rates again.
PPI came in at +0.1% vs. expectations for a -0.1% decline and a tick up from 0.0% in May. The Core PPI was weaker than expected, coming in also at +0.1% but less than the +0.2% expected and a drop from +0.3% in May. The drop in the core rate, which excludes food and energy, is what the Fed uses to judge what's happening with inflation. The picture shows a taming of inflation, with hints of deflation, I mean disinflation, and that's likely to keep the Fed on watch rather than thinking aggressively about raising rates.
The chart below shows the past 3 years of inflation data and you can see how it has turned down this year from highs near 2.5% (Total) and about 2.1% (Core). Uptrend lines for both are converging near 1.5% and a drop below that in the future would indicate "disinflationary" pressures were increasing. I suspect the Fed would become increasingly worried if PPI drops below 1.5% (Core PPI is currently near 1.9%), especially since they're doing everything they can to get it above +2%.
PPI, July 2014 - June 2017, chart courtesy briefing.com
As already mentioned, today's quiet consolidation keeps things looking bullish for the stock market but there will be some important upside levels to watch carefully (assuming the indexes will press higher into next week). I'll kick off tonight's chart review with a look at SPX.
S&P 500, SPX, Weekly chart
I apologize for the busy weekly chart of SPX below but there are a few things that are important to highlight and it's difficult to cram it all onto one chart. From a trendline/channel perspective, ever since the February 2016 low SPX has not been able to climb above the midline of the up-channel for price action following the October 2011 low. This is typical price behavior for a 5th wave, which is how I'm interpreting the wave count for the rally from 2009 -- the rally from February (actually January) 2016 fits well as the 5th wave of the rally and that's the terminal part of the wave pattern.
For the rally from January 2016 I believe we're in the 5th wave. In other words we're into the 5th of the 5th wave and once it's complete we'll start a much more serious "correction" of the rally from 2009, potentially retracing it over the next couple of years. There are several Fib projections based on the wave count that suggest SPX could make it up to the 2475-2516 area and for now I'm depicting a rally to the 2516 projection before mid-August.
The 5th wave of the rally from 2009 would equal the 1st wave (very common) at 2516. In the 5-wave move up from January 2016, the 5th wave would equal 62% of the 1st wave near 2507. This is a common projection for a move that is simply running out of momentum, which can be seen on the oscillators -- bearish divergence against the March 1st high. This also helps confirm a 5th wave. Another common price projection for a 5-wave move is where the 3rd through 5th waves equals 162% of the 1st wave and for the move up from January 2016 that projects to 2475.
The midline of the up-channel from October 2011 is currently near 2485 and this adds to the importance of the 2475-2516 zone of resistance that the bulls will have to power through in order to make it up to the trend line along the highs from April 2016 - March 2017, currently near 2540, which will be near 2580 by mid-August. That would be about the most I would expect out of this rally leg from March 27th. Again, once this leg completes we should get a much larger pullback/decline started. I think we're close to a major high but not there yet.
S&P 500, SPX, Daily chart
Wednesday's rally had SPX breaking its downtrend line from June 19th as well as its broken 20-dma, both near 2432. Either should now hold as support, if back-tested, in order for the bulls to maintain control. Without getting bogged down in the gritty details of a corrective wave pattern (corrective because we're inside a rising wedge pattern from January 2016), I have two projection areas for the completion of the final leg of the rally from March 27th. The first projection is at 2470-2475 and the second projection is near 2509. Note how these coincide nicely with the projections on the weekly chart.
The rally doesn't have to make it up to either of those upside projections; nor does it have to stop at either one. It could fail at any time or simply blast higher toward 2550-2600. But for now we simply have price projections to watch for a possible high, especially since the subsequent move is likely to be at least a deeper retracement than we've seen all year.
Key Levels for SPX:
- bullish above 2454
- bearish below 2405
S&P 500, SPX, 60-min chart
It's looking like SPX could reach for its June 19th high near 2454 before potentially consolidating and then heading higher. For the rally from July 6th it's looking like we're in the 3rd wave, which would achieve 162% of the 1st wave (common) at 2452 and that gives us another reason to expect the rally to stall in the 2452-2454 area, if not right here.
A day of consolidation leads to a pullback to about 2440 we could then see another rally early next week to the 2464 projection shown on the 60-min chart. That's where the 5th wave of the rally from July 6th would equal the 1st wave. This is a little lower than the projections discussed on the weekly and daily charts so for now it's simply a level of interest if reached.
These are all of course speculative projections but they would fit the wave pattern and provide a pattern and prices to watch to see if it plays out as depicted. Once the leg up from July 6th completes, whether it's at 2454 or above 2500, it should be a good setup for the bears to take their turn at the feeding trough. The completion of a 5-wave move up from July 6th followed by an impulsive move back down would be the first clue that a top is in place. We could be close but not yet.
Dow Industrials, INDU, Daily chart
The Dow's rally from April 19th appears to be in its 5th wave, which has become choppy and looking more like an ending pattern than something more bullish. It's a fitting pattern for the final 5th wave and it's showing the expected bearish divergence for it. I show a projection to about 21830, which is based on trend lines (using log and arithmetic price scales) but I would not be surprised to see it struggle in a choppy rising wedge off the June 29th low and finish around 21630 by the end of next week. It stays bullish until it's not and it would no longer be bullish below 21169 (price-level support and below its 50-dma).
Key Levels for DOW:
- bullish above 21,830
- bearish below 21,169
Nasdaq Composite index, COMPQ, Daily chart
On June 27th the Nasdaq broke down below its uptrend line from November 2016 - April 2017, near 6200 at the time. At the same time it broke below its 20-dma and then proceeded to break support at its 50-dma a couple days later. Things were not looking good for the bulls. But they bounded back into the pasture to gorge themselves once again and quickly recaptured the 20- and 50-dmas with Wednesday's big gap up. The Naz is now approaching its broken uptrend line from November-April, currently near 6300 (log price scale), about 19 points above today's high.
The bulls would be in stronger shape with the recapture of the broken uptrend line but until that happens they'll have to be careful about a possible back-test followed by a bearish kiss goodbye. I show a rally up to the trend line along the highs from April 2016 March 2017, which will be near 6400 by the end of next week, to complete its 5th wave of the rally from February 2016. There is of course higher potential (some weekly price projections to 6550-6650) or the rally could complete at any time. But for now, I like the 6400 area for a possible top by the end of opex week.
Key Levels for COMPQ:
- bullish above 6342
- bearish below 6081
Russell-2000, RUT, Daily chart
For those of you who have ever gotten your car stuck in a rut, be it a muddy or snowy one, you can appreciate the fact that the RUT's name is appropriate. It has been stuck in a rut since last December and now it's been chopping sideways in a tighter range since June 9th. The good news for the bulls is that the consolidation since the June 9th high looks like a bullish continuation pattern. The pattern would look more complete with one more pullback to the bottom of the triangle, near 1400 before setting up the next rally.
I'm showing a projection to 1452 for a final high for the RUT by the end of the month. This is clearly speculation but it's based on the wave pattern and a typical price projection for the final wave in a rising wedge pattern. The trend line along the highs from 2007-2015 is currently near 1441 and therefore we have a 1441-1452 target zone to watch for. The RUT would turn much more bullish with a sustained move above 1453 but would turn more immediately bearish if it drops below the June 22nd low near 1397.
Key Levels for RUT:
- bullish above 1453
- bearish below 1396
Russell-2000, RUT, Weekly chart
It's important to keep the big picture in mind with the RUT since I think it's especially bearish, especially if the big megaphone pattern built over the past 3+ years is the correct interpretation. As can be seen on the RUT's weekly chart below, the consolidation off the December 2016 high has been followed by a choppy climb higher and that has it looking like an ending pattern to the upside, especially with the bearish divergence since December.
Notice also the importance of the uptrend line from February-November 2016, currently near 1400. When the RUT breaks down I suspect it will happen quickly. The bulls need to see a sustained break above 1460 and then drag the oscillators up with price in order to negate the bearish divergence. At least tighten your stops if long this index (such as IWM).
Volatility index, VIX, Weekly chart
As mentioned earlier, the VIX again closed below 10 today (9.90) and it's again nearing the bottom of its large descending wedge pattern that's it's built since August 2015. One of these days this descending wedge, with the corresponding bullish divergence, is going to mean something and when it breaks out of this we'll likely see a very fast move back above 30.
It's hard to say what the stock market will be doing at the same time the VIX is spiking to 30 but I think it's safe to say the bulls will be running around with their fur on fire. Maybe we'll first see a little throw-under below the bottom of the wedge, currently near 9.46, next week to complete the pattern. Bears will be cleared in hot if we get a throw-under and then a bounce back up inside the wedge.
10-year Yield, TNX, Daily chart
Since the June 14th high for bond prices (low for yields) we've seen a fairly strong selloff and the 10-year yield jumped from 2.1% to 2.35% (a +12% rise) by July 7th. In the process TNX rallied back above price-level S/R at 2.30-2.31 and has now pulled back to that support level for what appears to be a back-test of support.
The wave pattern for the rally off the June 14th low would look best as a 5-wave move and that means another push higher following the current back-test of support. A new high could be good for just a test of the May high at 2.423 or it could make it up to 2.50 and result in a back-test of the broken uptrend line from July-September 2016 next week. A selloff in the bond market could help give the stock market a boost into opex next week.
Following the completion of the leg up from June 14th, hopefully after another push higher, it could then be the completion of an a-b-c bounce pattern off the April 18th low. That would be a setup for the resumption of the decline in Treasury yields (depicted with the bold red arrow). I am still part of the minority that believes we'll see lower yields into next year but I'll change my mind if we get a decent pullback from the current rally that is then followed by another rally to new highs, especially if it gets above 2.50%.
Transportation Index, TRAN, Weekly chart
The TRAN has pressed to new highs this week with the Dow, keeping alive the Dow Theory buy signal. But the TRAN could be close to finishing its rally if it will only be able to make it up to 9823 (today's high was 9742), which is where the 5th wave of the rally from January 2016 would be 62% of the 1st wave.
There's higher potential to 10499, where the 5th wave would equal the 1st wave. That's also where the TRAN would hit the top of its rising wedge pattern (10499 crosses the top of the wedge in the first week of September) but I'd want to see the negation of the bearish divergence that's currently on the chart.
U.S. Dollar contract, DX, Daily chart
Not much has changed over the past week for the US$. It's been consolidating off its June 30th low and while it could make a minor new low I continue to believe we'll see a larger choppy bounce/consolidation over the next couple of months. The descending wedge from March suggests we could get a stronger bounce and possibly a quick return to the top of its down-channel from last December, currently near 98.65, but the larger wave count suggests more of a choppy sideways/up correction into August/September before heading lower.
Gold continuous contract, GC, Daily chart
Since gold's low on Monday its bounce looks more corrective than impulsive, which continues to point lower once the bounce correction has finished. The first sign of strength for gold bulls would be a rally above its broken MAs, the highest one being the 50-dma at 1247. A continuation lower following the current bounce could see gold drop to its uptrend line from December 2015 - December 2016, near price-level support at 1180.
Oil continuous contract, CL, Daily chart
Off Monday's low oil made it up to a downtrend line from May 25th through its July 5th bounce high as well as its broken 50-dma again, currently at 46.55 (today's high was 46.28). If it's able to break above its 50-dma it could then target its broken 200-dma, currently at 49.49. Two equal legs up from its July 5th low is at 48.92 so we'd have a target zone for the bounce, if that's all it will be, at 48.92-49.49. But a turn back down from resistance here would likely lead to a decline to price-level support at 39-40.
Friday morning we'll get some more inflation data with the CPI reports, which are expected to have ticked up slightly from May. The PPI numbers ticked down instead so we'll see if the CPI numbers are telling the same story. We'll also get the Retail Sales report, Industrial Production and Capacity Utilization, all of which are expected to show some improvement. The Michigan Sentiment report, at 10:00, is not expected to have changed much.
The choppy pullback between the June 19th high and July 6th low was a strong indication that we would get another rally leg and that's what's currently underway. The rally should continue into next week (opex) and potentially finish next week. The wave count for the rally from January/February 2016 is setting up for completion with the leg up from March. That leg is setting up for completion with the leg up from July 6th, which makes a possible high next week an important one.
With an expected new high for SPX next week we should see the VIX drop to new lows and in so doing it would likely drop below the bottom of its bullish descending wedge built over the past 2-1/2 to 3 years. That followed by a bounce back up inside the wedge would give us a buy signal for VIX and a sell signal for the stock market. Watch to see if we get that setup next week.
The bulls remain in control of the tape and as long as that remains true it means bears need to stay away until it's their turn. We have a coming setup for the bears but that's all it will be until we see some price evidence suggesting a turn back down in something other than just another pullback correction. There remains the possibility we'll see much higher prices in a melt-up phase (like the late-1990's) and while I don't see that happening I know never to say never with this market. Liquidity coming into this market is still supportive of a rally continuation.
Good luck and I'll be back with you next Wednesday.
Keene H. Little, CMT