We had a nice setup for a reversal of the decline into the February 11th low to give us a rally into opex week and the bulls took advantage of the setup. Now we wait to see if the bulls can keep the buying going into the end of the month.
Review of Major Stock Indexes
The stock market was deeply oversold when it dropped into the January lows and it was still oversold when the bounce correction into the February 1st highs was followed by a retest of the lows on February 11th. The weaker momentum heading into the February lows, with a price pattern that suggested the leg down from December 2nd was completing, gave us a very good setup to get long into opex week and the bulls did not disappoint. The rally into Wednesday's high was strong and it quickly retraced the February decline. Now we have short-term overbought conditions and daily charts suggesting another reversal back down could happen unless the bulls can keep up the pressure in the coming days.
There's a bullish pattern that suggests we could be looking at a multi-week rally but it might be a choppy/whippy one. We've certainly had whippy price action in the past month with the DOW swinging 1000 points multiple times since mid-January's brief consolidation. There's a big battle going on between strong support levels and resistance levels and neither side has been able to break through in the past month. This past week's stall following Wednesday's high is at resistance again and that leaves both sides guessing which direction will follow from here.
Part of the confusion for the market is mixed signals from the economy and the Fed. Some economic reports show slow growth, which obviously is better than no or negative growth, but other reports confirm the economy and corporate earnings are slowing. This past week's data was a little better than expected (maybe not so much for housing), including inflation data, and that has many trying to guess what that will mean for the Fed.
Janet Yellen is now openly talking out one side of her mouth about the possibility of negative yields while at the same time talking out the other side of her mouth about the Fed wanting to raise rates further this year. I've heard of doublespeak (Greenspan perfected it) but Yellen's doublespeak has the market very confused. The market hates uncertainty and the large whippy moves we've seen in the past month are reflective of that uncertainty.
When we've had many bullish opex weeks in the past they tended to be followed by weakness the following Monday/Tuesday. That pattern needs to be respected but there was also evidence on Friday that the Thursday-Friday consolidation could be followed by another rally leg. The best way to approach the market right now is carefully and with short-term trading since we could be in just a correction to the December-February decline and corrections tend to be choppy. There are some key levels to watch, which identify support and resistance and more importantly they identify levels where one side or the other looks to be taking the lead. In between the key levels could be a choppy mess.
A Look At the Charts
Dow Industrials, INDU, Weekly chart
There is a parallel up-channel that encompasses the Dow's rally off the March 2009 low and the bottom of the channel was punctured briefly with the sharp decline in August 2015 but it never closed below the channel. It took January's decline to close below the up-channel and the bounce into the February 1st high was a back-test of the broken channel. This past week's rally almost made it back up to the bottom of the channel again, currently near 16540, and it would obviously be more bullish above that level, especially on a closing basis. Between support near 15300 and resistance near 16550 we could see price continue to whip up and down.
Dow Industrials, INDU, Daily chart
There are a number of possibilities for price action from here and I show multiple levels of support and resistance on the Dow's daily chart below, as well as a few ideas for how the price pattern could play out over the next several weeks. But in reality we are in a correction to the decline from December and corrections are not good times to look for trend-following trades. Hit and run and base hits are the way to go. If the buying continues in the coming week and the Dow makes it back inside its broken up-channel, watch to see how price reacts to possible resistance at its 50-dma, declining but currently near 16673, and the 50% retracement of the December-February decline, at 16702.
Key Levels for INDU:
-- bullish above 16,700
-- bearish below 15,300
S&P 500, SPX, Daily chart
One common pattern with the indexes is a 5-wave move down from December 2nd, which is what sets us up for a larger bounce correction and possibly something more bullish. It could be a larger correction in time rather than price (with a choppy sideways consolidation between the recent highs and lows) or it could be a high 3-wave bounce, which is what is depicted on the chart below (bold red). This is just an idea to watch for but it will obviously have to be updated as price dictates. For now keep an eye on resistance at a downtrend line from July 2015, which was used as support in November and December but was resistance in February and again on Wednesday and is currently near 1930. MACD is back up to the zero line and if it rolls over again from here it could signal another selloff. But a rally above 1930 should lead to a move up to its 50-dma, near 1954, and the 50% retracement of its December-February decline, at 1957.
Key Levels for SPX:
-- bullish above 1957
-- bearish below 1820
S&P 100, OEX, Daily chart
OEX has been cycling around its uptrend line from October 2011 - August 2015, which was tested again on Friday (and used as support). But it's struggling with a trend line along the lows from the November-December lows, which stopped the rally on February 1st and again last Thursday. Currently near 863 that's a line the bulls need to power through. Near 872 is where it would achieve two equal legs for the bounce off the January 20th low and that could lead to another leg down but as with the other indexes, there are a number of different bounce patterns that could develop into March. The bulls need to get the OEX above 872 to also get above its broken 50-dma, coming down to 872.
Key Levels for OEX:
-- bullish above 872
-- bearish below 810
Nasdaq-100, NDX, Daily chart
I've drawn a H&S top on the NDX chart below (left shoulder in September 2015, head in November-December, right shoulder in January-February) and the neckline is an uptrend line from August 2015 - January 2016, currently near 3900. A break below that line could be significant so be careful with long positions below that line. But as I'll show you on the QQQ chart further below, volume is not supporting this H&S interpretation, at least not yet. The NDX is currently fighting to get back above its uptrend lines from March 2009 - August 2015 and June 2010 - November 2012, near 4181 and 4212, resp., so a rally above those trend lines would be more bullish. A 38% retracement of its December-February decline is at 4222, making the 4181-4222 area tough resistance for now. As is a common theme among the indexes, MACD has made it back up to the zero line and the bulls do not want to see it roll back over from here.
Key Levels for NDX:
-- bullish above 4325
-- bearish below 3900
Nasdaq Composite, COMPQ, Daily chart
As mentioned earlier, following the 5-wave move down from December 2nd we had a good setup for a large bounce correction, which could end up being a high retracement. The Nasdaq's chart below shows the idea for a 62% retracement of the decline, so a bounce up to 4807, maybe a little higher for a back-test of its declining 200-dma. A 50% retracement, at 4693, would result in a back-test of its 50-dma. Those provide some upside targets to watch if the buying continues. If it pulls back a little first, watch for support at its uptrend lines from October 2014 - August 2015, near 4400, and from October 2011 - November 2012, near 4300.
Key Levels for COMPQ:
-- bullish above 4700
-- bearish below 4099
Russell-2000, RUT, Daily chart
It's the same picture for the RUT. MACD is nearing the zero line so the bulls need to prevent it from rolling over from here. Encouraging for the bulls is the climb back above the 20-dma on Wednesday and then using it for support on a back-test on Friday. The next level of resistance is 1040, which is price-level S/R (October 2014 low) and its broken uptrend line from March 2009 - October 2011. It would obviously be more bullish above that level but the first thing I'd look for is a pullback from there, if reached, before potentially heading higher.
Key Levels for RUT:
-- bullish above 1040
-- bearish below 940
SPDR S&P 500 Trust, SPY, Daily chart
Bringing volume into the mix, the SPY chart below shows price is now inside a trading range, at 187-194.50, where there is higher Volume at Price (VAP) and that's another reason why we could find both sides battling it out for control. A rally above 194.50 would be into a lower VAP area and therefore potentially less resistance. Trading volume has been tailing off for the rally from February 11th, which is not supportive for the bulls and you can see MFI continues to struggle at the midline. Both of these suggest bulls need to be cautious and while there's at least a little more upside potential to the top of the Bollinger Band, currently at 195.47, there's likely going to be a pullback soon. If that pullback results in MFI breaking its uptrend line it would be a warning sign that a deeper pullback can be expected, in which case look for the 20-dma, currently at 189.32, for possible support, otherwise back down to price-level S/R at 187.
Powershares QQQ Trust, QQQ, Daily chart
I had mentioned the possibility for a H&S top on the NDX chart and you can of course see the same possibility for QQQ below (left shoulder in September, head in November-December, right shoulder in January or developing now). But the one thing that doesn't support this pattern is volume, which should be lower for the right shoulder but in this case it's higher. If the right shoulder develops further and does so with lighter volume, which it's currently doing, then we'd have a more legitimate topping pattern. But at the moment the volume pattern is not supporting the H&S pattern and therefore a break below the February 11th low, if it happened from here, would not provide a reliable downside objective. As for further upside potential, as long as it holds above its 20-dma (tested and held on Friday), currently at 100.69, it could rally up to the top of its BB, near 106.
The setup following the February 11th lows was for a larger bounce correction, potentially something more bullish, which should play out in the next few weeks. A typical bounce correction, if that's all we're going to get, should typically take about 62% of the time for the previous decline, which projects out to March 24th. "Typical" is of course a dangerous word in a market that has not been acting typically but it at least provides a time of reference. We could see a choppy, potentially whippy, bounce make it higher into March and that's reason enough to warrant caution by those who are anxious to short the rally.
There is the possibility that the December-February decline completed a large 3-wave pullback from last year's highs, in which case we've just started the next major rally leg. Considering some of the fundamental issues we're facing with a slowing global economy (unlikely the U.S. would avoid being dragged down by it) I struggle to believe we could see the stock market head for new highs this year but from a price pattern perspective the possibility needs to be respected. That's reason enough not to be a "sell-and-holder" for the same reason I believe now is not the time to be a "buy-and-holder."
Until proven otherwise I believe we've entered a bear market and timing the market's swings will prove much more profitable than simply riding it out in whatever positions you're currently in. At the moment, and for the next few weeks, I think the path of least resistance is to the upside to give us a larger bounce correction but we could see some whippy moves in both directions and/or a deep pullback before heading higher again. Be careful out there.
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