The market swoon following last Monday's high had it looking like we might have February finishing in the red but a big recovery off Wednesday's low got many of the indexes into the green for the month. The bulls need to reverse Friday's small loss in order to ensure February closes in the green on Monday.
Review of Major Stock Indexes
Following January's rough start to the year for the bulls it was looking like February was going to make it two months in a row for the bears. But the big rally off Wednesday's lows put the majority of the indexes in the green, except for the techs which are still struggling in the red, but Monday will be important for the bulls since the small gains could evaporate quickly.
Oil had a good week, which helped the stock market since the two are currently joined at the hip (the algorithmic traders are currently using the correlation for their trading of the stock market). Oil's +10.5% rally this past week sounds like a lot but the $3.12 gain to 32.84 is not much to brag about when you consider it was trading $50-60 last year. The metals finished down for the week, especially silver (which reflects the industrial relationship vs. the more emotionally-driven gold), and commodities in general were flat.
Bonds finished relatively flat but slightly down for the week, which is supportive of the stock market rally since you like to see money rotating out of bonds and into stocks if you want to see the rally continue (it needs the liquidity freed up from bond sales).
Other than the intermarket relationships mentioned above, there wasn't much in the geopolitical arena or economic/earnings picture to drive this week's stock market. In fact the big swoon on Tuesday and into Wednesday morning, followed by the big rally that followed was done on very little news and seems to have been driven by oil's rally more than anything else. Trading volume was a tad stronger than the previous week but both weeks' gains were on lower volume than we saw during the decline, so that's a little worrisome. The rally could certainly continue but bulls would like to see some more pressure behind it.
After China lost 6.4% on Thursday it was impressive that the U.S. market did not follow. The overnight futures dipped but by the start of trading on Thursday it was basically even and then continued the rally off Wednesday's low. That provided confidence for the bulls to stick with their positions and add to it and scared more shorts out of the water. We saw some profit taking in front of the weekend with selling following Friday's gap-up start to the day but the impression I have from the pullback is that we'll see another leg up on Monday. That could give us a positive close for the last day of the month and a positive month. March might not be as good for the bulls but we'll have clues along the way before we see warning signs that the bears will do some damage.
A Look At the Charts
Dow Industrials, INDU, Weekly chart
This week's rally for the Dow brought it back up to the bottom of its broken up-channel for the rally from 2009. It poked above the bottom of the channel but then pulled back, closing slightly above it on Friday and leaving both sides guessing whether or not it will hold as resistance. Bullishly we have the oscillators turning back up after leaving a bullish divergence at the February low. The bulls want to see RSI get above the 50 line (red horizontal line) to prove this is more than a reactionary bounce following the decline. Bounces in a bear market will typically see RSI fail at or below the 60 level. You can see how RSI only pulled back to about 50 for most of the rally in 2013-2015 and did not drop below the line until last August and then back below it again in January. A rollover from the bottom of its up-channel and RSI rolling over from 50 would support the bears.
Dow Industrials, INDU, Daily chart
The daily chart shows Friday's close was marginally above the bottom of its up-channel from 2009, currently near its 50-dma at 16585. That level should hold as support if there's more work to do on the upside. On Thursday it closed marginally below its 50% retracement of its December-February decline, at 16702, and then poked above it Friday morning but closed below it. Assuming support will hold, we should see a move at least up to the next line of resistance at price-level S/R near 16900. Above that it will have to deal with the 62% retracement at 16985 and its 200-dma near 17216.
Key Levels for INDU:
-- bullish above 16,900
-- bearish below 16,165
Dow Industrials, INDU, 60-min chart
There's an interesting pattern on the Dow's 60-min chart after the three back-tests of the broken uptrend line from January 20 - February 3. You can see the rallies into the February 17-18 highs were stopped by this broken uptrend line, followed by two more attempts last Monday and again on Friday. As noted on the chart, there is the potential for this to be a "3-drives-to-a-high" topping pattern and you can see the bearish divergence at each new high. Friday's pullback looked corrective and suggests another leg up, ideally at least to the 16900 area, but keep this pattern in mind since it could be warning us a top for the bounce is in place.
S&P 500, SPX, Daily chart
SPX looks a lot like the Dow with Friday's poke above its 50% retracement of its December-February decline, at 1957, but then a close below it. It too is above its 50-dma, currently near 1943, and the important weekly close above that MA is bullish. SPX stays bullish as long as it holds above the 38% retracement, near 1922, which is also where its old broken/recovered downtrend line from July 2015 is currently located. There's upside potential to price-level S/R at 1992, which is also the 62% retracement, and it would be more bullish above that level. Short term, keep an eye on 1975 if reached since that's where the 2nd leg of the rally from February 11th would be 62% of the 1st leg and the rally could run out of steam at that level.
Key Levels for SPX:
-- bullish above 1992
-- bearish below 1891
S&P 100, OEX, Daily chart
On the OEX chart I don't show the retracements of the December-February decline but the 50% is at 874.75 and Friday's high was 874.95. It also achieved a price projection at 871.77 where it has two equal legs up from the January low (for a possible a-b-c bounce correction that finished on Friday). OEX also bumped back up to the bottom of a parallel down-channel for the first part of its decline off the November high, near 871. Closing back below 871 on a weekly basis was not bullish and while it doesn't prevent the continuation of the rally, this one looks a little more bearish than the others if only because it tagged the upside target zone at 871-875 but could hold it. The bulls would be in better shape above 872 on a closing basis whereas the bears will be back in control if Wednesday's low near 842 is broken.
Key Levels for OEX:
-- bullish above 872
-- bearish below 842
Nasdaq-100, NDX, Daily chart
NDX finally made it back above its broken uptrend lines from March 2009 - August 2015 and June 2010 - November 2012, near 4196 and 4223, resp., so that's bullish. It almost made it up to its 50-dma Friday morning, near 4293, with a high at 4275, but it has a little more work to do after dropping back into the red around midday on Friday. It would be more bullish above 4325, but the bottom line with the NDX pattern, as is true for all of the major indexes, is that we could see price chop around in a whippy correction to its December-February decline. It's an impulsive decline, which means the trend is now down. The bounce off the February low is therefore a correction to the decline and the only question is what form it will take and how high it will go. But it's not to be trusted since the upside is counter-trend now.
Key Levels for NDX:
-- bullish above 4325
-- bearish below 3900
Nasdaq Composite, COMPQ, Daily chart
The Nasdaq looks like NDX except for being marginally weaker relative to its 50-dma, currently near 4650. As long as it holds its uptrend line from February 11-24, currently near 4515, it stays bullish. But with its 50-dma 25 points higher and then its 50% retracement at 4693 the bulls have their work cut out for them, especially with the short-term overbought conditions.
Key Levels for COMPQ:
-- bullish above 4700
-- bearish below 4099
Russell-2000, RUT, Daily chart
On Friday the RUT stopped 29 cents shy of its price-level S/R at 1040 and what the bulls need now is a gap up to jump over resistance (the favorite way for this market to deal with breaking either support or resistance). Near this level is its broken uptrend line from March 2009 - October 2011 and the 38% retracement of its December-February decline (at 1043). This is a lot of resistance to break through on its first attempt with overbought conditions and I would expect at least a pullback from resistance before punching through it. Above 1040 it would likely have a clear shot up to the next resistance area at 1074-1080. As depicted on its chart, one idea to consider is a larger consolidation pattern through March, which is shown on the chart as a sideways triangle consolidation pattern. It's just an idea but it would fit as a continuation pattern in the larger move down from last year. It's a wide range but between 940 and 1040 it could be a tough area to trade.
Key Levels for RUT:
-- bullish above 1040
-- bearish below 940
SPDR S&P 500 Trust, SPY, Daily chart
SPY has made it above price-level S/R at 194.50 and into an area with lower Volume At Price (VAP) and that leaves it with less resistance to further upside movement. As you can see by the candles following the big drop from the December 29th high, especially following the gap down on January 5th, there's not much price action there. This could "suck" price up to the 200 area without much of a problem. The upper BB is being pushed higher and price could continue to push it higher before dropping back down to at least the midline (20-dma), now at 190.58. But as the MFI shows, it's been stuck near the 50 line, even for the rally from February 11th, which indicates there's not much strength behind the move. The volume for the leg up from February 11th is less than the 1st leg up off the January 20th low. These don't add up as very bullish and therefore a rally up near the top of the BB makes it a risky place for bulls.
Powershares QQQ Trust, QQQ, Daily chart
The QQQ has not yet made it up near the top of its BB, currently at 106.31, about 3 points higher. The good news for bulls was Wednesday's back-test of price-level S/R at 99.50 so it stays bullish above that level. But the two warning signs for bulls come from the two indicators at the bottom. Williams %R is now in overbought, which has more often than not led to a reversal back down. However, it's important to remember that this indicator can stay in overbought, indicating a strong rally (see last October). As for SPY, the declining volume in the rally from February 11th shows a lack of interest in real buying, meaning much of the buying could be mostly short covering and once it finishes there won't be enough buying interest to keep things going to the upside.
A push to get the indexes into the green for the month appears to be on track following the recovery off Wednesday's low. We have one more day to finish the month and then the possibility for a bullish first day or two of the new month. As long as the buyers (short covering or real buying) can keep the market from pulling back sharply we should look for higher prices. But the indexes are up against resistance, overbought and showing waning momentum, which is not a good recipe for a rally. If you're long the market and trading (not holding), trail your stops and take what the market will give you. We don't have enough evidence of a top to the bounce for the bears to get aggressive on the short side so at this point I would say it's best for both sides to trade cautiously.
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