The decline into the Thursday, March 10th low turned into another head-fake move in front of opex week and the market ripped to the upside to give us another bullish opex week. It has become a very familiar pattern and now we wait to see if the bulls can follow through in the coming week.
Review of Major Stock Indexes
The good news for the bulls is that this past week's rally brought the Dow and SPX back into the green for the year, as you can see in the table above. The transports have recovered strong, up +7.6% for the year, and the utility index has done even better (it's a defensive sector), up +13.4%. The stars of the year are the metals -- silver is +15.5% and gold is +18.3%. The metals have rallied strong off their December lows as worries about inflation build and by those who feel it's the better investment in the lands of negative interest rates.
This past week's economic reports were OK with nothing to write home about and nothing to point one way or the other about how the economy is doing. The big impact on the market, like the previous week with the ECB announcement, was Wednesday's FOMC announcement and the surprisingly dovish response by the Fed heads. Taking four to five rate increases for the year down to two was a clear sign the Fed has switched directions. It just takes time to turn the Titanic around and it's very likely they'll work it down to no more rate increases on their way to negative rates.
Even as signs of inflation start to show up (helped by higher commodity prices) and wage growth remains steady, the Fed has clearly made a shift in their focus and the stock market liked it. The week's rally came post-FOMC and it might have been due to a lot of short covering considering the volume was not as high as previous selling days.
The rally off the February low has now duplicated the rally off last September's low, in price, time and sentiment. The strong rally into the November 2015 high turned out to be mostly short covering and the November 3rd high was followed by another leg down into January. The question for us to figure out is whether or not the same kind of rally into Friday's high will have better luck getting some follow through to the upside. I'll review the price pattern for what to watch for and the kind of evidence we want to see for each side.
A Look At the Charts
Dow Industrials, INDU, Weekly chart
The strong rally in the stock market since the January-February lows has the Dow within a stone's throw of its downtrend line from May-November 2015, currently near 17665. It would be more bullish above that line of resistance but at the moment it's looking like it could finish with another lower high. There are a number of similarities between the August-September and January-February declines and the September-November and February-March rallies. The September 2015 low was a higher low than the August low, as was the February 2016 low vs. the January low. Each of those higher lows led to a strong rally and the September-November rally lasted 25 trading days and retraced 87.5% of the May-August decline. The February-March rally, through Friday, is 25 trading days and it would retrace 87.5% of the November-January decline at 17662, which coincides with the downtrend line from May-November. One more small pop up on Monday would accomplish both.
There are two ways to interpret the price pattern, both of which are short-term bearish but one is longer-term bullish following a pullback. The bearish pattern, depicted in red on the weekly chart below, calls for a powerful move down over the next few months, one which would knock the Dow well below its January low into the summer. The bullish pattern calls for a pullback to complete a sideways triangle that started off the May 2015 high.
The year-long triangle pattern could finish as early as April or May and as a bullish continuation pattern it calls for a renewed rally, one which will take the Dow to new all-time highs into the end of the year.
As I said above, both scenarios call for at least a pullback and if that pullback is choppy I'll start to become more bullish. But if the decline becomes strong and especially if it breaks below the January low (15450) it would be a time to get aggressively bearish. We can't know which scenario will come to pass until we see what kind of pullback/decline follows this rally.
Dow Industrials, INDU, Daily chart
The daily chart below shows how close the Dow is to its downtrend line from May-November and it would only take a minor pop higher on Monday to reach it. But following a bullish opex week it's been very common to see the following Monday/Tuesday to be negative. The first sign of trouble for bulls would be a retracement of this past week's rally and a drop below price-level S/R at 17140. Bulls would be in a strong position above 17670, especially if the downtrend line is used as support on a back-test. With RSI more overbought than any time since the December 2014 high, it's clearly risky to be betting on the long side as price approaches its downtrend line. Sentiment (Daily Sentiment Index from trade-futures.com and CNN's Fear & Greed index) is now more bullish than it was at the November 2015 high, which is another reason why it's risky thinking long here.
Key Levels for INDU:
-- bullish above 17,670
-- bearish below 17,140
S&P 500, SPX, Daily chart
SPX closed above its 78.6% retracement of its December-January decline, at 2041.32, which typically means it will continue to rally and completely retrace the prior move. But the September-November rally retraced 93.5% of the May-August decline so obviously a high retracement is not a guarantee of a complete retracement. Friday's candle is a small star doji and it's possible it will turn into a reversal candlestick, which would not be confirmed until it's followed by a red candle on Monday. A drop below last Tuesday's low at 2008 would confirm a top is in for now but it remains bullish above 2041. As with the Dow, we won't know if the setup here is for a strong decline to much lower lows or if instead we'll get just a deep pullback before rallying to new all-time highs this year. In the coming week, assuming we'll start a pullback, the form of the decline will provide clues for what will follow.
Key Levels for SPX:
-- bullish above 2042
-- bearish below 2008
S&P 100, OEX, Daily chart
Depending on how a downtrend line from November/December highs is drawn on the OEX chart determines whether it is slightly under it or slightly over. Essentially it's at the line and as with the other indexes, this past week's high is showing bearish divergence against the first week of March. If I look at the bounce off the January low as an a-b-c bounce pattern, the 2nd leg of the bounce achieved 162% of the 1st leg at 908.95 with Friday's high at 909.47 (followed by the close at 907.88). It's a good setup for a reversal at resistance but the bears will need to take advantage of the setup on Monday. The rally will stay bullish above 910.
Key Levels for OEX:
-- bullish above 910
-- bearish below 895
Nasdaq-100, NDX, Daily chart
NDX made it back up to its broken 200-dma, at 4420, and retraced 62% of its December-January decline, near 4415. It would be more bullish above 4420, especially if it uses its 200-dma as support on a pullback. The bearish pattern that I see for the tech indexes is an impulsive (5-wave) decline from December followed by a corrective (overlapping highs and lows) bounce. This suggests we'll see another leg down at least equal to the December-January decline. From here that points to 3570 for a downside target. That's all speculation at the moment but with the pattern for the blue chips a toss-up between the bulls and the bears, the techs tilt the favor toward the bears.
Key Levels for NDX:
-- bullish above 4420
-- bearish below 4220
Nasdaq Composite, COMPQ, Daily chart
The Nasdaq looks the same as NDX as it rallied up to its 62% retracement of its December-February decline, at 4807 (Friday's high stopped about 3 points shy), but it has a little more upside potential to its broken 200-dma at 4871. Its short-term pattern supports the idea we'll see the rally continue in the coming week so watch the 4870 area for potential resistance if reached. The next level of resistance above that is price-level S/R at 4920. The first sign of trouble for the bulls would be a drop below Tuesday's low at 4712, which would be a confirmed break of its uptrend line from February.
Key Levels for COMPQ:
-- bullish above 4810
-- bearish below 4607
Russell-2000, RUT, Daily chart
Friday's rally had the RUT closing slightly above the uptrend line along the lows from October 2014 - September 2015, which fits as the neckline of a possible H&S topping pattern. Bouncing back up to the line leaves the potential for a back-test and then bearish kiss goodbye. But a close above the line, near 1100, is bullish, especially if the line is used as support on a pullback. The 62% retracement of the December-January decline is at 1104.87 and Friday's high was 1102.98. If the buyers keep up the buying we could see the RUT make it up to the downtrend line from June-December 2015, currently near its 200-dma at 1147.
Key Levels for RUT:
-- bullish above 1105
-- bearish below 1040
SPDR S&P 500 Trust, SPY, Daily chart
Trading volume was at least building as the week progressed, which for opex week is not surprising, but it was still less than what was seen during the down days. MFI has made it into overbought and it's flattening as price pushes up against the top of its BB. It's also approaching an area of lots of price chop in November-December with high VAP, all of which means tough resistance. Further gains could be very difficult in an overbought/overloved market and that makes the downside potentially the direction of least resistance in the coming week.
Powershares QQQ Trust, QQQ, Daily chart
The QQQ also made it up to the top of its BB this past week and Williams %R is showing signs of bearish divergence and curling over. It could certainly press higher but there's lots of resistance holding back a lower-volume rally with waning momentum, none of which is a good recipe for the bulls in the coming week. But if the sellers stay away and the market works its way higher we could see QQQ head up to price-level resistance near 110.
It was a good week for bulls during opex week and I found it interesting that SPX settled at 2050.07 Friday morning -- the computers could not have nailed it much closer to the big 2050 settlement number if they had tried. Important retracement levels, 200-day moving averages and trend lines were all achieved (or nearly so) by Friday's close and the weekend papers will be able to hoot and holler about how the stock market (the Dow and SPX) has recovered all of the year's losses. All in all, it was a great job by the bulls and it completed another bullish opex week.
But now is a time for caution by the bulls. It's still arguable as to whether or not the primary source of the rally was short covering, like it was back in October 2015, and the declining volume in the rally supports that argument. The strongest rallies tend to be seen in bear markets rather than bull markets and the strong September-November 2015 rally has now been duplicated in both time and price with the February-March rally. I know the bulls were feeling pretty feisty at the November high (very high bullish sentiment) but it was not a good time to hold onto long positions as the entire rally was given up into the January low. We have the same sentiment readings today and we must think about the possibility that it too will turn into a bull trap if stops are not honored.
On the daily and intraday charts we now see bearish divergence and that's a warning sign. If we see the typical selling on Monday-Tuesday following a bullish opex week we'll probably see the oscillators turn down from overbought and from resistance, leaving a bearish divergence in place. That's what the bears want to see but obviously the bulls want to see the bears thwarted with a continuation higher on Monday. Eventually of course we'll get a pullback correction, which could turn into something more bearish.
The charts reflect two longer-term possibilities for the next few months and in the short term both expect at least a deeper pullback to begin at any time, which is the reason I think traders should be defensive if not looking for opportunities to play the short side. After the deeper pullback gets started we'll have an opportunity to analyze the price pattern to see if it will be a dip to buy or if instead we'll want to sell bounces.
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