The DOW added a few more points as if to entice the other indexes higher in an effort to get them to new highs as well. So far it's having mixed success.
The stock market started with a nice gap up this morning but wasn't able to add anything to it. The good news is that it didn't give any gains (other than techs which were hurt by both AAPL and GOOG today) and the sideways consolidation looks bullish for more rally.
Today's economic reports included the ADP employment, factory orders and the Fed's Beige Book. The ADP report showed February's +198K was an improvement over January's +192K but that number was actually a revised-lower number from the originally reported 215K. But it was better than the +150K that had been expected. Friday's Nonfarm Payrolls report is expected to show a slight improvement over February's +157K and today's ADP report probably has many expecting a little better than expected for Friday. It certainly was nothing to scare the bulls away from the market.
Factory orders unfortunately continued the slew of economic data pointing towards economic contraction. Employment changes are always months behind economic changes so if the economic numbers continue to contract it's unfortunately not a good sign for future employment numbers. Factory orders for January contracted -2% vs. December's +1.8%, which was a revision higher from +1.3%. It was also a little better than the -2.2% expected.
According to the Fed and the Fed's Beige Book, the economy expanded and the labor market improved a little in January and February. Two of the twelve districts, Boston and Chicago, reported some slowing. The report noted that "employment conditions have improved, though hiring remained constrained in many districts." Sounds like doublespeak to me, though I'm sure it's just a transitory linguistic hiccup, nothing a little more QE can't solve. Worrisome is that consumer spending is declining, which was blamed on increased taxes and higher healthcare costs (but Obamacare is supposed to reduce healthcare costs, right?).
The Beige Book noted specific declines in orders but then said "underlying figures still showed an improving manufacturing sector amid a slow economic recovery." More linguistic license to lie, I mean, restate the facts is how it appears to me. They did cite the improvement in February's ISM report, from 53.1 in January to 54.2 in February, as the reason for their optimism.
The report identified weak lending by banks as a continuing problem, despite the Fed's efforts to stuff the banks with cash for lending purposes. Here we have all these cheap loan rates but it seems people don't want or can't get the loans. The report cited "stiff completion among lenders to provide credit to well-qualified borrowers [emphasis mine]." Yea, that's one way of stating the problem. Those "well-qualified borrowers" are the ones who don't need to borrow.
It's frustrating the Fed because all the QE money is not making it out into the fractional reserve banking system and is therefore not expanding the money supply. Inflationists haven't picked up on this problem (although gold's price over the past several months has certainly indicated gold owners are starting to get it). If loan demand remains flat and it continues to be difficult to find "well-qualified" borrowers then the QE-I program and record-low interest rates will do little to boost the economy.
Other than that it was a quiet day in the stock market and it basically consolidated yesterday's big rally, which remains bullish. I'm going to work backwards tonight from the way I normally cover the first charts and start with a closer look at SPX with its 60-min chart. I'll then work out to the daily and weekly charts to show how it fits. I'll cover the SPX charts in a little more detail than usual because of what I feel is the importance of where the market is at the moment and what we need to watch for in the coming week.
To quickly recap what has happened in the past week, which makes it clearer where we are in the price pattern, it has now become clearer what the move up from November is going to be. One of the things I have been wondering since the high on February 19th was whether we were going to get just a 3-wave move up from November, thus completing the rally at that high, or a 5-wave move up from November. Depending on what the wave count is for the move up from 2009 I saw both possibilities and it's why I've been saying the pullback pattern from February 20th would tell us whether the top is in place or not.
Now with a 3-wave corrective pullback into the February 26th low and the new high it's crystal clear we're getting a 5-wave move up from November and as frustrating as it might be for bears to deal with yet another new high, this actually makes it easier to identify the end of the rally. Once a 5-wave move completes it will be corrected, meaning a large pullback at least to correct the rally from November. More bearishly the 5-wave move up from November will complete the rally from 2009.
Unless we're in some kind of larger corrective pullback pattern from the February 19th high, which suggests a sharp pullback from the current level before continuing higher, we should see the market continue higher at least into Friday/Monday. The chart below shows where I think we are in the wave count for the move up from February 26th. Today's little sideways consolidation fits as the 4th wave of the 3rd wave, which means the market should stair-step a little higher. Keep in mind that each impulse wave in a 5-wave move (the 1st, 3rd and 5th waves) will themselves be 5-wave moves. This is the fractal nature of EW (Elliott Wave) counts and it's what can help you identify where we are in the move.
So the 3rd wave of the move up from February 26th, which started on March 1st, should get another leg up on Thursday to complete. At that point we should get another larger pullback/consolidation for the 4th wave of the move up from February 26th and then finally one more rally to complete the 5th wave. This is the roadmap, shown below, that I put together on Monday and have been tracking it since. I'll know when it completes or when it deviates.
S&P 500, SPX, 60-min chart
There are a couple of Fibs located in the 1542-1543 area (127% extension of the previous decline (Feb 20-26) and two equal legs up from February 26th), which is where price has stalled. It would be typically a good level to watch for a reversal but in this case I'm looking for higher and the sideways triangle consolidation pattern supports my expectation. Assuming we'll get another rally leg on Thursday, the upside projection will be to about 1557 where the 1st and 5th waves (of the 3rd wave) will be equal. There's a lower projection near 1550 so that might be all we'll see before starting the larger pullback/consolidation. As long as the pattern of higher lows holds it will be reason enough to stay bullish this week and possibly next week. Notice the projection on the chart above completes Friday, March 15th, which is a quadruple witching expiration day.
The final 5th wave of wave-5 on the 60-min chart is projected to about 1589 if the consolidation patterns and rally legs follow closely the depiction I have on the chart. The daily chart below shows how this might look. Notice the price projections near 1550 -- two equal legs for the move up from June 2012 is at 1551 and the 5th wave of the move up from November would be 62% of the 1st wave (common when the market is tired and running out of buyers) near 1550. We need to stay alert to the possibility that 1550-ish is all we're going to get. As I'll get into a bit with the Gann Square of Nine chart and anniversary dates, we might even be putting in an important high here.
But if the 5-wave move up from February 26th plays out as shown on the 60-min chart, we'd see SPX up near 1590 by March 15th, +/- a few days. That projection crosses the top of a parallel up-channel, based on the trend line along the highs from November, on March 19th. The tops of the up-channel from February 26th and the larger up-channel from November cross near 1582 on March 13th, which would make for an interesting finish to its rally. The pattern doesn't turn bearish until it drops below 1512 from here, a key level that will be raised once the rally makes it higher.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1525
- bearish below 1512
While there's potential resistance near 1550 (remember too that the March 2000 high was near 1553) and the price projection for the completion of a 5-wave move up from November points to 1590, the bulls will first need to deal with the long-term broken uptrend line from 1991-1994-2002, which is the trend line that stopped the rally back in May 2011. Currently near 1545 it was tested today and from this longer-term perspective it could be real trouble for bulls. Regardless of my channels, EW counts and price projections, one look at the weekly chart below should have the hair standing up on the backs of bovines' necks.
S&P 500, SPX, Weekly chart
The bears are watching this long-term uptrend line with saliva dripping from their eager mouths. Near the same location, within throw-over territory, is the trend line along the highs from April 2012 (the bold purple trend line on the daily chart), currently near 1528 and which SPX broke above on Tuesday. A drop back below that line would sound the initial sell alarm. And one more trend line for good measure is the uptrend line from the March 2009 closing low through the August 2011 closing low, currently near 1537. The confluence of trend lines, shown on the weekly chart is reason enough to be very cautious here about expecting further upside (the potential is there but use lots of protection if playing the long side).
There are some other reasons to think SPX might not make it up to the 1590 area. March 6th is of course the 4-year anniversary of the 2009 low and March 12th is the anniversary date of the March 2003 low. March 24th is the anniversary date of the 2000 high. Anniversary dates can be very important to the market (such as the October 10, 2002 low being followed by the October 9, 2007 closing high and October 11th intraday high, straddling the 10th) and therefore today through next Tuesday is "anniversary week" and deserves some attention. Oh, and the next new moon is this coming Monday, March 11th. Makes me want to go hmmm...
SPX MPTS daily chart
The Gann Square of Nine chart also points to March 6 and March 11 as potentially important days and 1544 and 1546 as potentially important prices. Today's high was a little shy of 1545. The vector opposite March 6 is 1546. And a vector that is 90 degrees to the one through the 666 low in 2009 goes through 1544. The date on the vector through 1544 is September 14th, which was the prior high last year. Opposite 1544 is March 11 so there's a lot of "vibration" off 1544-1546 and March 6-11 and a reason to watch price action from here very carefully, especially if it can't get above 1550. But if SPX makes it above 1550 I'll be looking for at least 1585, which is the number that's 7 squares around from the 666 low in March 2009.
Middle portion of Gann Square of Nine chart (for a similar and larger version you can click on this link: larger Gann Sof9 chart. Ignore the old note attached to the 1429-1430 level and note 1585 just above that).
Helping the bulls a little here, if we're going to get a similar minor new high in 2013 as we did in 2007 it points to 1599. SPX hit a high of nearly 1553 in March 2000 and then added 23 points to hit a high of 1576 in October 2007. The same number of points added to 1576 gives us 1599, not much above the 1590 upside projection mentioned above. But there's a lot of resistance, be it Fibs, trend lines, previous high or Gann, in the 1544-1553 area, which is why I want to see the bulls power through this area before turning at least short-term bullish for a ride up to 1585-1600. If and when it works its way closer to that higher zone I should be able to zero in on a narrower target zone.
As shown on the DOW's daily chart below, it had formed an expanding triangle since its February 1st high, which looked like a megaphone topping pattern until the breakout on Monday. It's common to see a contracting triangle in a 4th wave position but much less common to see an expanding triangle. However it fits well as the 4th wave in the move up from November and this actually makes it easier to identify when the rally will complete. We're now into the 5th wave and even if we're going to see higher prices later this year the 5-wave move up calls for at least a pullback to correct the rally. More bearishly the leg up from November, once complete, will complete the entire rally from 2009 and will therefore be a very good reason to exit all long positions until at least seeing what kind of pullback we're going to get.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 14,200
- bearish below 14,090
The upside projection shown on the DOW's chart above calls for a rally to 14678 where the 5th wave of the move up from November will equal the 1st wave. The projection crosses the top of a parallel up-channel from December next week, March 13th (the up-channel is created from the wave ii-iv trend line and a parallel attached to the top of wave-iii). A lower price target is at 14337, only 17 points above today's high, which is where the 5th wave would be 62% of the 1st wave, a common projection when the market is tired. Is this market tired? We'll find out soon enough but it's certainly reason enough to be extra cautious at this point. The 14337 projections crosses the top of a shallower up-channel (light green) today, which starts from the November low. As noted on the chart, the MACD reversal from the zero line is bullish. But the 5th wave (the rally from February 26th) should show bearish divergence against the 3rd wave (the February 1st high) and so far that's what we have, helping to confirm the wave count.
NDX gapped up with the other indexes this morning but immediately sold off, which is not very encouraging to bulls, especially since it left a throw-over above the trend line along the highs from January 3rd, near 2801 today. As the top of a potential rising wedge pattern the throw-over and drop back inside the wedge is reason enough to be very cautious. I'd recommend shorting a pattern like this except for the short-term pattern that's similar to that shows for SPX and calling for higher into at least the end of the week. It almost closed its October 8, 2012 gap down, which requires a print at 2811.94, but missed it with a high at 2808.18. If AAPL or GOOG get out of the way it could rally up to 2864 to close its September 24, 2012 gap down and test its September high. But a drop below 2761 from here would be a bearish move.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 2783
- bearish below 2761
I mentioned GOOG pulled back today but it's been on a tear to the upside for the past week, seemingly replacing AAPL as the favored momo stock. But it has the appearance of a blow-off move to the upside, sucking in the last wannabe GOOG holders, just like what happened to AAPL as it spiked up into its September 2012 high near 705. It should be cut in half before its pullback is complete, potentially more than half. Will GOOG replace AAPL as the momo stock to the downside?
It's possible to call GOOG's rally from November a completed 5-wave move with today's high but like the broader indexes I think it would look better with one more poke higher in the next few days to complete its pattern. That would get it closer to tagging its price projection near 853 for two equal legs up from June 2012, which in turn would complete the 5th wave of a rising wedge pattern for its rally from July 2010. That would in turn complete an A-B-C bounce off its November 2008 low, shown on its weekly chart below.
The significance here, as with the broader market, is that the A-B-C bounce off the 2008 low (at 247) is very likely to be completely retraced as it heads for new lows in the next bear market leg down. That's not the kind of "pullback" I'd like to hold through. Buy and holders will not do well and there's a big reason why "market timing" comes back into vogue in a secular bear market. And just when most accept this concept we'll get back into a secular bull where you'll want to dollar cost average into buy-and-hold positions.
Google Inc., GOOG, Weekly chart
The RUT is starting to lose relative strength to the blue chips, which is a sign of defensiveness by money managers. They're transferring their positions to the safety of blue chips in an effort to stay in invested (required by many funds) and yet be ready to bail when the time comes. I see the potential for a move up to about 960 next week but more likely not much more than just above its February 19th high at 932 for a back test of its broken uptrend line from November-December, near 939 by the end of the week.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 920
- bearish below 899
Getting back to the Gann Square of Nine chart for the RUT, there's a reason why the 931 level is important. Just as the 1576 level was very important for SPX at the 2007 high, so too is 931 for the RUT. For SPX, 1576 is 6 squares up from the 2002 low at 768. Six squares encloses a cube and turns out to be a significant level on the chart. For the RUT, 6 squares up from its 2009 low at 343 is 931, which is shown on a close-up view of the portion of the Sof9 chart containing these numbers. So the high at 932 on February 19th, which was immediately followed by a hard selloff the next day, might stand (maybe just a retest).
Gann Square of Nine chart for the RUT's numbers
The trannies have had a good week although they sold off after gapping up this morning, leaving a shooting star candlestick for the day. The short-term pattern supports the idea we'll get a new high by the end of this week or early next week and I'd like to see it achieve a price projection at 6271 where it would have two equal legs for an a-b-c move up from October 2011. That would complete its W-X-Y bounce correction off its 2009 low. One projection that was met this week is the one near 6110, which is where the a-b-c move up from October 2011 (wave-Y) is 62% of the 1st a-b-c move up to the July 2011 high (wave-W). Between the 6110 and 6271 projections I expect to find a top for the TRAN.
Transportation Index, TRAN, Weekly chart
The dollar rallied strong today and pushed back up to last Friday's high at 82.58 with a high of 82.55 (it's higher in after-hours this evening). It should at least test its downtrend line from June 2010-July 2012, currently near 82.85. Above that trend line I have 3 price projections to watch -- 82.99, 83.43 and 83.63. The move up from Friday should complete a 5-wave move up for the rally off the February 1st low and that will set up at least a larger pullback correction. There is a bearish wave count that calls for the resumption of selling in the dollar once this rally leg finishes so at the very least it will soon be time to be defensive about the dollar.
U.S. Dollar contract, DX, Daily chart
Below is the weekly chart of the dollar to show the overall choppy price structure of the dollar's rally from the May 2011 low. This is not in support of a strong start to a bull market in the dollar but it doesn't prevent it from making new highs, which is what I'm projecting for this year. I think it will chop its way higher to the downtrend line from March 2009, currently near 87.75. If I were to step out to a monthly chart I'd show a very large sideways triangle pattern that appears to be playing out, which will ultimately be very bearish for the dollar. But that looks to be years from now. For the time being the dollar remains bullish for this year even if it could be a whippy ride up.
U.S. Dollar contract, DX, Weekly chart
Silver's pattern is clear at this time and since last week's update we get the next leg down as expected, which tagged the trend line along the lows from November. That looks like a good completion of a 5-wave move down from January and should set up a decent bounce before heading lower again. What the dollar does from here could obviously have an impact on the metals.
Silver continuous contract, SI, Daily chart
While silver made a new low on March 1st gold made a higher low, which would be a truncated 5th wave to match up with silver's pattern. Based on that we could see a higher bounce in gold before it too heads lower. It takes a rally above its January low near 1626 to turn the pattern at least short-term bullish. Another possibility is that both gold and silver will chop lower this month before they'll be ready for a larger bounce/consolidation. I think it's too early to be bottom picking, which I hear a lot of pundits recommending.
Gold continuous contract, GC, Daily chart
Oil's pattern is a bit messy but if the dollar can make it a little higher before a larger pullback it supports the idea that oil will drop to the bottom of its up-channel, near 88.30, before getting a bigger bounce in March before heading lower again.
Oil continuous contract, CL, Daily chart
Tomorrow we'll get the unemployment numbers some productivity and labor costs numbers and then in the afternoon the consumer credit number. The big number will be Friday's nonfarm payrolls numbers.
Economic reports and Summary
The short-term price patterns for the stock indexes support the idea that the market will push higher on Thursday, consolidate and then one more final push. Depending on how quickly, or slowly, this plays out I see the potential for the rally to finish as early as Friday afternoon or as late as the following Friday, the 15th (opex Friday). At the moment, based on the various index patterns I'm thinking Monday could be an important high for the market if in fact it manages to rally tomorrow and/or Friday.
I laid out the reasons why I think the market could be in trouble if SPX cannot get above 1550 (and stay above, not just an intraday pop and then close back below), which it really needs to do on Thursday to keep the bulls alive for at least a few more days.
But with a completing wave count that suggests this is going to be an extremely important high, it's not at all a good time to be complacent about the upside. Upside potential is dwarfed by downside risk and this market has a nasty habit of selling off very fast when the high is in place. It's tough to get out of long positions without giving up a large chunk of profits and it's hard to get into a short position during the day without fear of a gap down spiking back up against your position. If we make into opex Friday with new highs, great, but I'm thinking that could be a difficult task. Stick with the higher lows for now but use a break of the higher lows as an important signal to get out/protect/get short.
I'll have a MUCH better idea what the market will do next by this time next week, especially if it tops out this week or by Monday. In the meantime good luck with the upcoming opex week (quadruple witching so watch for volatility related to it) 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