The week started off slowly for what is a typically bullish week but made up for it on Tuesday and Wednesday. Wednesday's rally recovered the losses on Monday and Tuesday and nothing more was added on Thursday and Friday so the week's rally came down to just one day and now with opex influence finished it's looking like we're setting up for a pullback.
Review of Major Stock Indexes
Looking at the table above you can see that it was a good week for all sectors but as mentioned in the opening paragraph, the whole week owes its performance to just Wednesday's rally, which had started with the recovery off Tuesday morning's lows. But a rally is a rally and the bulls had a good week.
It was a mixed picture for the metals with silver up +6% while gold dropped marginally (-0.7%). Most of the broader averages finished the week up a little less than +2% but the RUT outperformed with its +3.1% finish. Oil service and transports did well, up +4% and +3.1%, resp., and they helped the small cap sector.
The three most beaten down sectors for 2016, the banking, brokers and biotechs, have had the best month so far. Biotechs have had a strong recovery this month but only a so-so performance in the past week. The brokers are the opposite -- April is barely in the green and that's only because this past week they bounced +5.7%. A little short covering perhaps?
JPMorgan is the "prime broker" for most of the world's largest hedge funds and they have reported large redemptions from these funds in March. Apparently many large investors were liquidating losing positions and in order to meet redemption requests the hedge funds had to liquidate their profitable positions. Many of those positions being liquidated were short positions and according to JPM March saw the largest volume of hedge-fund short covering since 2009. The huge rebound in beaten down sectors, and the broader market, likely came from this short covering and other than a minor new high last week we can see on the charts that the sharp rally completed at the end of March. If the sharp rally was primarily short-covering related there might not be enough buying this month to keep the rally going. This past week's minor new highs are showing bearish divergences.
The banks had a strong week, up +7%, thanks to some short covering following earnings reports from some of the bigger banks that were "less bad" than had been feared. A lot of bad news was already priced into bank stocks' prices and once the actual results were seen it caused a sell-the-rumor, buy-the-news reaction. Some banks, like JPM, are not offering forward guidance and that probably helped their stock prices (ignorance is bliss?).
The defensive sectors -- utilities (+0.1%) and consumer staples (not shown in the table but XLP finished down -0.1%) -- did not participate in this past week's rally as money was put to work in the riskier groups. Again, many of those riskier sectors had been shorted the most and likely rallied stronger on short covering. The defensive sectors were not shorted and therefore did not participate in the rally. This could be simply speculation on my part but it fits the pattern for what we're seeing and helps explain the stronger-than-usual rally off the February low (the strongest rallies are typically in bear markets because they tend to be mostly short covering).
Considering the outperformance by some of the higher-beta sectors I'm a little surprised that the SOX hasn't done better (+0.3% last week and -0.5% for the month). One of the things I often point to when trying to see if a market move could be sustainable is to look at the SOX and BKX. When they're not in synch, and clearly they were not last week or even this month, it's a warning sign that the current trend is susceptible to a reversal. In this case that means we should be wary of the rally.
A Look At the Charts
When I look at the big picture with the SPX weekly chart below, I see a big 3-wave pullback from last May into the February low. From a bullish perspective the rally off the 2009 low is still in progress and the rally off the February low is simply the next leg up in the longer-term rally. The bullish EW (Elliott Wave) count says the February low was the completion of the 4th wave correction and we're now into the 5th wave to new highs.
The leg up from February is likely completing very soon, either already or potentially early in the coming week. At that point, it could be the 1st wave of what will become a larger 5-wave move up from February and we should expect only a 2nd wave pullback before heading much higher (light green labels and dashed line on the chart below). The argument in support of this is that the U.S. is the least-smelly turd of all the turds out there and we'll attract money into this country for the next couple of years.
It's possible the bullish wave pattern could finish with this leg up from February (as a truncated finish to the bullish pattern with the lower high) and now we'll start the next bear market leg down. It's also possible the price action since last year's highs is a large A-B-C bounce correction following the August 2015 low and now we'll start a stronger selloff as part of a larger pullback correction. So many choices, so little to go on.
Actually, in either case, whether the bigger pattern is still bullish or will instead turn more bearish, we can expect at least a deeper pullback correction. Because of this I think it's best to get defensive if you're long the market and to start thinking about shorting candidates. Once the pullback gets started we'll then be able to look for clues to help identify whether it will be a pullback to buy or instead a decline where we'll want to short bounces.
S&P 500, SPX, Weekly chart
SPX has rallied up to just shy of its downtrend line from July-November 2015, currently near 2092 (last Thursday's high was a little shy of 2088). I see the potential for at least a little pop higher on Monday-Tuesday but the short-term pattern suggests it would be risky to chase it higher. I think a break above the downtrend line would likely turn into a head-fake break once the short covering completes.
S&P 500, SPX, Daily chart
The daily chart shows the rally up near the July-November 2015 downtrend line. The small consolidation below this trend line could result in at least a test of the trend line, near 2092, and potentially up to a price projection zone at 2098-2103. The bearish divergence at last week's high warns bulls not to get aggressive here.
Key Levels for SPX:
-- bullish above 2100
-- bearish below 2033
S&P 500, SPX, 30-min chart
Zooming in on the short-term pattern, to show what I'm watching for in the coming days, the 30-min chart shows a couple of channels and a possible rising wedge pattern for the rally from April 7th. The little choppy pullback from Thursday, which could extend a little lower on Monday, could then be followed by one more leg up to complete a 5-wave move up from April 7th. Upside projections for the 5th wave are near 2093 (which matches the July-November 2015 downtrend line) and then 2103. While those are upside levels to watch if we get another leg up, the risk is for Monday to start a strong decline right away, in which case I'd abandon the upside, especially if it breaks below the April 8th high near 2060.
Gann Square of 9 chart
For a quick reminder, the Gann Square of 9 chart, a portion of which is shown below, tells us SPX 2088-2089 and 2098-2099 levels are important ones. SPX 2088 is square to the May 2015 high at 2134 (not shown on the chart but 2134 is 90 degrees from the red vector, a small portion of which can be seen at the bottom right side) and 2088 is on the same vector as the October 2002 low (768), April 2012 high (1422), the October 2007 high (1576). Back in October 2007 I used this chart to highlight the importance of 1576 for a potential high and it was nailed to the point. Last Thursday's high was 2087.84 so was that close enough for government work? If it does press higher in the coming days, the next important Gann level (2098-2099) is on the same vector (blue) as the March 2009 low. It's also square (90 degrees) to the September 2014 high and October 2012 low. That would actually be pretty fitting -- the entire 2009-2016 bull market on the same vector, bottom to top (if it tops out at 2098-2099).
S&P 100, OEX, Daily chart
I've drawn a parallel up-channel for OEX's rally from February and last week's rally almost made it back up to the midline of the channel, which it crossed below during the consolidation off the April 1st high. The midline of the up-channel crosses its July-November 2015 downtrend line on Tuesday near 938 so that's upside potential for now, maybe even its November high near 944. The first bearish warning sign would be a drop below the April 8th high near 915 and the top would be confirmed in place with a drop below the April 7th low near 903.
Key Levels for OEX:
-- bullish above 944
-- bearish below 903
Dow Industrials, INDU, Daily chart
Thursday's high for the DOW, at 17962, was within 15 points of testing its November 2015 high at 17977. As shown on the OEX chart, the midline of its up-channel from February will be near 18200 by Tuesday and therefore that's upside potential for now. That's another 300 points that the bears need to think about if they're itching to get short. The first hint of trouble for the bulls would be a drop below its April 8th high at 17694 and a top would be confirmed in place with a drop below the April 7th low at 17484.
As for an upside target to keep an eye on, if reached, is 18058. This is where a large A-B-C bounce off the August low would achieve two equal legs up. The rally above its May-November 2015 downtrend line, currently near 17600, makes it more difficult to support the idea that the Dow is hammering out a big sideways triangle from May 2015 (a pattern I've shown in past weeks). This pattern called for one more leg down to complete the triangle and then start a strong rally. I think that pattern is now OBP (overcome by price), although I suppose I could argue it's an ascending triangle instead of a sideways triangle.
As mentioned for SPX, regardless of whether we have a larger bullish pattern yet to play out or if instead we're going to start the next big decline, both scenarios call for at least a larger pullback and considering the downside risk I think it would be prudent to get defensive about being long the market. It's still a trader's market rather than a buy-and-hold market. If the market starts a strong impulsive decline we'll have a better sense that something more bearish has started. But if the pullback gets choppy with overlapping highs and lows then we'd have a good idea that it's just a pullback correction and we'll know to start looking for where to buy it. A bullish pullback correction should last at least half the time it took for the rally from February so we're talking mid-May before looking to get long.
Key Levels for INDU:
-- bullish above 18,200
-- bearish below 17,484
Nasdaq-100, NDX, Daily chart
I've drawn a rising wedge pattern for NDX, the top of which will be near 4640 by Tuesday and that's the upside potential that I see presently. But between the 78.6% retracement of its December-February decline, near 4558, which is a common retracement level for this market, and price-level S/R near 4600 it could be a struggle for the bulls to make much more headway. A drop below its uptrend line from February and its 20-dma, both near 4484 on Monday, would be bearish and a drop below its April 12th low at 4435 would confirm a top is in place. As with the other indexes, the bearish divergence at last week's high is a warning sign that the rally is simply running out of buyers and without the bullish opex influence it could be a struggle for the bulls to put many more points on the board.
Key Levels for NDX:
-- bullish above 4640
-- bearish below 4435
Nasdaq Composite, COMPQ, Daily chart
It's the same picture for the Nasdaq as for NDX and the top of its rising wedge will be near 5020 on Tuesday. Bullishly, it climbed above price-level S/R near 4920 on Wednesday and is holding that level as support on a pullback on Friday. It would turn into a failed breakout if it closes back below 4920 so watch for that possibility. A drop below its uptrend line from February, near 4862 by Tuesday, is also where it would drop back below its broken downtrend line from December as well as its 20- and 200-dma, which are converging at the same level. From all this I would expect the 4860 area to be strong support on a pullback but obviously bearish below it.
Key Levels for COMPQ:
-- bullish above 4811
-- bearish below 4570
Russell-2000, RUT, Daily chart
The RUT had a big rally on Wednesday and bumped up against its 200-dma and downtrend line from June-December 2015. Thursday and Friday were spent consolidating beneath these two, currently near 1130 and 1132, resp., and in the meantime the top of a rising wedge that it's been in since March 7th is currently near 1133. It's a lot of resistance to get through and obviously it would be more bullish above 1133, which would open the door to its 78.6% retracement of its December-February decline, near 1149. The consolidation on Thursday and Friday actually saw price chop its way marginally higher from Wednesday and that's looking like an ending pattern, potentially with just one more minor new high to complete the pattern.
Key Levels for RUT:
-- bullish above 1150
-- bearish below 1088
SPDR S&P 500 Trust, SPY, Daily chart
As can be seen on the SPY chart below, it has been pushing up against the top of its BB for the past few weeks but now the BB is narrowing and flattening out. The MFI shows bearish divergence against the highs since March 18th. Trading volume has been tailing off during the entire rally and price has reached the peak in VAP, all of which suggests the rally is tired and running out of steam as it hits maximum resistance. A drop below Wednesday's open, at 208, and MFI below 50 would strongly suggest the top is in place, especially if price drops below the midline of the BB (20-dma), currently at 205.29. The narrowing BB suggests a big move is coming and I think the odds have shifted in favor of the bears.
Powershares QQQ Trust, QQQ, Daily chart
QQQ is showing the same setup as SPY with its BB and Williams %R is showing bearish divergence as well. The rally could continue but I don't think that's the higher-odds play here.
I had mentioned several times above that we could see the rally continue into Tuesday, April 19th and I provided some upside targets to watch for if the buyers can keep going for another two days. I don't believe the bulls will be able to do any better than that and watch for the resistance levels I pointed out in case the market does manage to push a little higher. The short-term bullish pattern suggests we'll see another push higher but there's a bearish pattern that suggests last week's high are all we're going to get. The downside levels noted with the discussion for each chart will provide the clues needed to know when the top is in place. The trend is your friend and it's currently up so any short plays here are counter-trend until we identify the break of the trend.
Regardless of whether we have a larger bullish pattern playing out (with much higher levels to come this year) or if the market is topping out for good (for years to come), they both suggest we should be looking for at least a short-term top and a larger multi-week pullback. Because the pullback could develop into a more serious decline I think it's prudent to be defensive here. This rally has offered plenty of higher lows to pull your stops up and maximize profits on long positions. Don't give those profits back. We're in a trader's market instead of a buy-and-hold market. Look at the market since the end of 2014 and at the larger pattern since 2000 and it's not hard to see that those who traded the market rather than just hold on are the ones who are better off. Even if you simply step away from the market during the down swings you've done better. Play the short side on the down swings and you've done much better.
The trick will be identifying a pullback as either bullish or bearish. If the market starts a strong impulsive decline we'll have a better sense that something more bearish has started. But if the pullback gets choppy with overlapping highs and lows then we'd have a good idea that it's just a pullback correction and we'll know to start looking for where to buy it (probably around mid-May).
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