The bounce into the end of January was not followed by a bullish first week for February. Instead we had a down week to start the new month and it's prompting more to wonder if the January decline is going to be followed by a deeper one.
Review of Major Stock Indexes
A look at last week's performance by the indexes in the table above shows that most did not have a good week. The Dow was relatively stronger than the others, declining only -1.6%, while the techs and small caps got hit hard, with NDX -6.0% and the RUT down -4.8%. The big-cap tech stocks were hit hard, many of which have already broken below their January lows. NFLX broke below its August 2015 low. But the utility sector, which is a defensive sector, added to its January rally and is now up +8.1% for the year. Interestingly, the Transports rallied +0.5% last week but unfortunately Friday's decline has it looking like a bearish kiss goodbye following last week's back-test of its broken uptrend line from March 2009. All in all, it was not a good week for the bulls, again.
The metals had a good week, thanks partly to the weakness in the US$, which finished the week down -2.7%. Both gold and silver finished the week almost 4% higher. But the weaker dollar did not help oil, which dropped -8.1% for the week and that's after a strong bounce on Wednesday. Oil remains below its downtrend line from last November, having tested it for the 4th time (on Thursday) in the past 6 trading days. And if oil drops back down for at least a test of its January 20th low it will likely drag the stock market down with it.
More and more market analysts are finally starting to understand the strong link between the weak oil market (with the massive debt accumulated by the oil producers), significant credit issues and banks. The banks had another rough week, down -3.9%, and they're down -16% for the year so far. Just another 4% and they'll be in "official" bear market territory. As always, we should follow the money.
The one index that continues to get thrashed is the biotech sector. They lost another -5.4% last week and that sector is now down -28% for the year, well into bear market territory. But this sector needed a serious correction after seeing gains of about +50% in 2013 and again in 2014 and then another +11% in 2015. And if you look at the BTK index you'll see it's now approaching its uptrend line from November 2008 - October 2011, near 2600 (log price scale), which is "only" another -5% below Friday's close. It also tested its 200-week MA at 2648 with the low at 2650. It also effectively achieved two equal legs down from its July 2015 high at 2642. I'm not one to go looking for sharp knives to catch but this index could use a bounce.
A Look At the Charts
Friday finished weak and the question on many traders' minds was whether or not that would lead to weakness on Monday. Weakness could certainly beget further weakness, especially if oil continues to drop lower, and we should find out soon on Monday if the sellers will continue to hit harder. The relative strength in the blue chips could continue and I'll start off the weekend review with them, but interestingly, the weaker techs have a chart pattern that suggests bears needed to be a little cautious heading into the weekend, which I'll show on their charts.
Dow Industrials, INDU, Weekly chart
On Wednesday the Dow dropped down to price-level S/R at 16K and that level held all week. It's not even close to retesting the bottom of its longer-term up-channel from 2011, currently near 15630, as it did with the January 20th low at 15450. The bounce pattern off the January 20th low looks corrective, which normally points to a continuation of the preceding trend (down in this case) but the bullish sideways triangle can't be ruled out yet. This is depicted with the light-green dashed line on the chart and shows how we could remain in a large corrective pattern for most of this year before resuming the longer-term rally. I believe this is a lower-probability scenario because other indexes have already negated this potential but I'll track it until the Dow's pattern negates it with a decline below 15430 in a pattern that might look like the bold red path.
Dow Industrials, INDU, Daily chart
The choppy bounce off the January 20th low is shown more clearly on the daily chart below. The bounce could develop into a larger one but at this point it can only be guessed that it will happen. If the Dow does make another stab higher I see upside potential to the bottom of its previously broken down-channel, near 17650, and maybe up to price-level S/R near 16900. But Friday's selloff has the potential to continue down to at least a retest of the January low, at 15450, if not down to price-level support at 15315-15370, which encompasses the 38% retracement of the October 2011 - May 2015 rally (15315), the February 2014 low (15340) and the August 2015 low (15370). One thing to note on MACD is how it has made it back up to the zero line after coming out of oversold at the January low. If it curls back over at the zero line that's generally a good sell signal (or a buy signal in the opposite scenario). You can see in the recent past how a reversal in MACD at the zero line led to a tradeable reversal.
Key Levels for INDU:
-- bullish above 16,510
-- bearish below 15,863
Dow Industrials, INDU, 60-min chart
The Dow's 60-min chart below shows the parallel up-channel for the bounce off the January 20th low. It fits as an a-b-c bounce correction to the previous decline, forming a bear flag, and the expectation is for the Dow to drop out the bottom, currently near 16100. I show the potential for a decline to 15340 before the end of the coming week but it could certainly take longer. If it does decline as depicted we'd have a setup to get long into opex week, which is typically a bullish week. But while other indexes have already dropped out of their up-channels, as long as the Dow holds above 16100 there is the potential for another rally leg to the top of the channel.
S&P 500, SPX, Daily chart
A similar up-channel for the bounce off the January 20th low for SPX is shown on its daily chart below. As you can see, SPX dropped out the bottom of the channel on Friday and almost made it down to Wednesday's low near 1872. A drop below 1872 and price-level S/R at 1867 (its August 2015 low) would be a stronger indication that a new low is coming. It's possible we'll see a drop down to its March 2009 - October 2011 uptrend line this coming week, near 1760. There's not much support below the January low at 1812 but I think there's a good chance SPX will find support between 1760 and 1800 so don't press short bets if SPX makes it down to that area. As with the Dow, MACD is getting ready to roll over from the zero line.
Key Levels for SPX:
-- bullish above 1945
-- bearish below 1867
S&P 100, OEX, Daily chart
OEX is splitting the difference between the Dow and SPX but looks more similar to SPX with its minor break below the uptrend line from January 20th. Its weekly close was also back below its October 2011 - August 2015 uptrend line, near 847. The previous Friday closed with the strong white candle above this uptrend line and the failure to hold it left a bearish message on the chart. Other than the January 20th low near 810, there could be support near its 200-week MA, near 798 as noted on the chart below. A rally above Thursday's high at 860 would be the first indication that the bounce is going to make it higher before turning back down.
Key Levels for OEX:
-- bullish above 865
-- bearish below 825
Nasdaq-100, NDX, Daily chart
As mentioned earlier, it's interesting that the blue chips were the stronger indexes last week and yet now look vulnerable to the downside, especially if the Dow drops below 16100. The techs were far weaker and yet the setup into Friday's close had me wondering if we'll see a stronger bounce sooner rather than later. The pattern I'm showing for all indexes is a 5-wave move down from December 2nd but because of the new high for the techs on December 2nd, vs. the November 3rd highs, once the 5-wave move down completes we could be setting up for a stronger bounce than just another choppy sideways/up consolidation as I'm depicting for the blue chips. And the 5th wave of the move down from December, which is the leg down from February 1st, could be close to finishing. NDX is close to testing its uptrend line from March 2009 - August 2015, currently near 3985, as well as its January 20th low at 3992. A drop below the uptrend line could result in a stronger selloff to its August 2015 low at 3787 but first keep a close eye on 3985-3992 for support.
Key Levels for NDX:
-- bullish above 4201
-- bearish below 4050
Nasdaq Composite, COMPQ, Daily chart
The Nasdaq is approaching its uptrend line from October 2011 - November 2012, currently near 4285, which crosses its August 2015 low at 4292 at the end of the coming week. In one sign of weakness, the week closed below its uptrend line from October 2014 - August 2015, near 4387. A drop below 4285 would point to its October 2014 low at 4099 as the next support level but at the moment it's looking like we should see support just below 4300 if reached. The potential is for a strong bounce into March after the completion of the leg down from February 1st so don't press your downside bets (trail your stop if short).
Key Levels for COMPQ:
-- bullish above 4637
-- bearish below 4280
Nasdaq Composite, COMPQ, 30-min chart
There's another reason why I felt it might be risky to hold short over the weekend and that has to do with the correction pattern off the January low, which I show on the 30-min chart below. The short-term bullish setup here is for another leg up to create a larger bounce pattern off the January low before it will be ready for the next leg down to new lows. The Dow holding inside its up-channel also supports the idea for a higher bounce pattern and therefore watch carefully to see if the Naz holds above support at 4285-4292. The pattern below shows a 3-wave move up from January 20th into the February 1st high and now we have a 3-wave move back down. Two equal legs down from February 1st is near 4334, only 16 points below Friday's low and slightly above the 4290 support zone. This pattern supports the idea for a strong rally in the coming week or two, potentially up to the 4800 area (the light-red dashed line on the daily chart above). You don't want to be short and fighting that kind of move. But if the Nasdaq breaks below 4280 it will increase the probability that we'll see 4100 before setting up a larger bounce correction.
Russell-2000, RUT, Daily chart
On Friday the RUT also closed below the bottom of its up-channel for the bounce off the January low, currently near 998. It's also holding inside its down-channel for the decline from December and as depicted on its daily chart below, if the decline continues we could see a drop to at least the trend line along the lows from February-October 2014, currently near 960, and perhaps down to the midline of the down-channel, near 930. You can see the rejection at its broken uptrend line from March 2009 - October 2011 (bold green) following the previous Friday's close at the trend line. This week's selloff leaves a bearish kiss goodbye at the broken uptrend line.
Key Levels for RUT:
-- bullish above 1040
-- bearish below 960
SPDR S&P 500 Trust, SPY, Daily chart
The bounce off the January low took SPY up to slightly above the midline of its Bollinger Band, which is about how far previous bounces have made it since the November high. What the bulls would like to see here is a pullback to the bottom of the BB, like it did last September, and then start another big rally off a double bottom. But unlike the bounce off the August low, the bounce off the January low did not result in MFI making it back above the 50 line and is showing us the initial bounce attempt has been weaker and now it doesn't have the same opportunity to pull back to the 50 and launch into a rally. This bounce is weaker and therefore riskier for bulls to go bottom fishing.
Powershares QQQ Trust, QQQ, Daily chart
Because the techs have been weaker, especially the NDX, the QQQ has dropped sharply back down and has already dropped back below the bottom of its BB. Williams %R has quickly dropped back toward the -90 line while volume spiked above the 50M level, which in the past has led to sharp reversals back up. With the potentially bullish setup shown on Nasdaq's 30-min chart I'll be watching closely for a reversal, especially if the January 20th low at 97.25 holds as support for QQQ.
Following the a-b-c bounce correction off the January 20th lows I've been expecting the indexes to drop down to new lows, or at least to test the January 20th lows. Depending in which index you look at we've seen the January lows either broken, such as the banking index, or not yet tested. The bearish pattern calls for the market to work its way lower this week, potentially setting the market up for a rally into opex. But some indexes, such as the Dow and techs support the idea that we could see another rally leg for a higher bounce this coming week.
Unfortunately, with the choppy pattern that we've been in since the January lows it's very difficult to determine which short-term pattern (for this week) will play out but I suspect we'll have a better sense following Monday's trading. I think the higher-odds scenario calls for lower lows this week, especially with some bearish closing prices on Friday, but watch those key levels to the downside and as long as they are not broken we still have to consider the potential for a higher bounce this week before heading lower.
Trade safe, have a good week and good luck with your trading. I'll be back with you next weekend.
Keene H. Little, CMT
Technicians look ahead. Fundamentalists look backward. The true language of the market is technical. - Joe Granville