The week was generally positive for the stock market, with more sectors in the green than the red but there wasn't as much unison between some sectors that would be considered typical. Earnings of some individual stocks seemed to skew the results for their respective sectors more than anything else. The mixed performance and a downturn late in the week has a whiff of bearishness but nothing the bulls can't handle by stepping back in on Monday.
Review of Major Stock Indexes
As you can see in the table above, the Nasdaq and NDX closed in the red and NDX was especially hurt by some of the bigger tech names. The FANG stocks did not do that well, especially NFLX on Tuesday (and never recovered) and GOOG on Friday. MSFT also got hit hard on Friday, down -7.2%, as did SBUX, down -4.9%. As I'll review on the NDX chart, it resulted in a big gap down on Friday and an island reversal following its gap up on April 13.
But while the techs struggled, especially on Friday, the RUT was outshining the others with a gain of +1.4% for the week. Transportation stocks (+1.4%), oil service stocks (+10%) and commodity-related stocks (+3.3%) all helped the small cap index.
The banks also did well and not so much because of great earnings but because they were "less bad" than had been anticipated. Some short covering helped lift many of the bank stocks (+5.2%) for another week. The utility sector was down (-3.3%) while the higher-beta names were up so we had signs of bullishness with risk-on doing better than risk-off. This was also reflected in the bond market, which sold off and drove yields higher (TNX +7.8%).
Taken together, the above information is bullish for the stock market and we could certainly see the indexes press higher in the coming week. But the turn down from Wednesday's highs is looking a little more bearish (albeit very small) and while the numbers in the table above show a relatively strong week, it would have been much stronger if it hadn't been for the selling on Thursday and Friday. The bounce off Friday morning's lows cut Friday's loss but as I'll review on the charts, the damage might have been done to the bulls and Friday afternoon's bounce could be just a correction to a new decline. Certainly the techs have some work to do to recover from the damage.
But the bulls have done reversed many pullbacks that have been worse than the one off last Wednesday's high and they could certainly do it again. The price action this coming Monday and Tuesday should provide the clues for what the rest of the week will be like, and potentially point the way well into May.
A Look At the Charts
S&P 500, SPX, Weekly chart
Wednesday's high at 2111 for SPX came within 5 points of testing its November high near 2116. It was also good for an intraweek rally above its downtrend line from July-November, which it closed on for the week, near 2091.50. If the bulls can hold SPX above 2092 they'll keep the bullish pattern alive. But if the bears grab hold of this market in the coming week we'll be left with a failed breakout attempt and a bit of a shooting star for the weekly candle. A red candle for the coming week would be a strong signal that the rally from February completed last week and that we'll be into at least a deeper pullback.
As I've mentioned a few times in the past few weeks, what we don't know yet is whether the February-April rally is just the 1st wave of what will become a much stronger rally this year or if instead it's the c-wave to complete an a-b-c bounce pattern off the August low. That will not become clearer until we see what kind of pullback/decline follows. A corrective pullback, such as an a-b-c pullback that retraces around 50% of the rally would at first be an opportunity to evaluate it for a long play since a 3rd wave higher would be a monster rally. But if the decline develops strength and looks more impulsive, kind of the like a mirror version of the February-April rally, then we'd know to look for bounces to short since the next decline should be more powerful than what we saw in August and January.
S&P 500, SPX, Daily chart
Following last Wednesday's high SPX dropped below its uptrend line from February 11 - April 7, near 2095 at the time and currently near 2110. You can see the little doji cross for Friday's candle, which could turn into a bullish reversal candlestick if Monday produces a white candle. That would be a bullish reversal of the bearish reversal following Wednesday's little doji star and Thursday's red candle. I would look for higher prices if that happens, potentially up to just 2116 but more than likely up to the May 2015 high near 2135. But with the reversal off Wednesday's high we're currently on a small sell signal and it won't be negated until price rises above Wednesday's high at 2111.
Key Levels for SPX:
-- bullish above 2117
-- bearish below 2073
S&P 500, SPX, 60-min chart
For a short-term perspective, to show my thinking for the coming week, the 60-min chart below shows what we should see if in fact the rally completed last Wednesday. The leg down into Friday morning looks impulsive (small 5-wave move down) and therefore we should get at least another leg down following the bounce off Friday morning's low. The bounce could be over with the back-test of the broken uptrend line from February 11 - April 11. After dropping back below its July-November 2015 downtrend line it bounced back up to it Friday afternoon. Note how it looks like a bearish back-test on the 60-min chart vs. closing on support on the daily and weekly charts. I show a depiction for a larger 5-wave move down this coming week but obviously that's just speculation based on a top being in place. The bulls could quickly negate that with another rally leg.
S&P 100, OEX, Daily chart
OEX made it up to its July-November 2015 downtrend line with Wednesday's high and then pulled back to support at its uptrend line from February 11 - April 12 on Friday. The bounce off the uptrend line Friday morning keeps the bullish uptrend intact and it would not take much for the bulls to prove the uptrend is still alive. But if the bounce off Friday's low is followed by a drop lower it would be a confirmed break of the uptrend and that in turn would tell us to expect a multi-week pullback correction at a minimum.
Key Levels for OEX:
-- bullish above 944
-- bearish below 903
Dow Industrials, INDU, Daily chart
On Wednesday the Dow rallied up to and slightly beyond its price projection at 18110 for two equal legs up from August for a large A-B-C bounce correction, as well as the top of a parallel channel for the correction, but then dropped back down and closed at 18096 that day. The decline from there into Friday broke the uptrend line from February 11 - April 7 but it was able to close above the uptrend line drawn through the April 12th low. So it's not quite clear yet whether or not the Dow is still holding inside its up-channel. A rally above Wednesday's high is needed to negate the bearish setup and confirm the likelihood we'll see at least a test of the May 2015 high at 18351. But a drop back below Friday's low at 17909 would be further evidence that the trend has turned back down. Some are reporting the "Golden Cross" (50-dma crossing above the 200-dma) this past week as a bullish sign for the market. But in fact the Golden Cross has more typically coincided closely with the end of the uptrend. Same with the Death Cross -- it typically is followed by the bottom of a decline.
Key Levels for INDU:
-- bullish above 18,120
-- bearish below 17,484
Nasdaq-100, NDX, Daily chart
As mentioned at the beginning of this wrap, NDX got creamed on Friday, gapping down about 62 points and it then sold off another 38 points before recovering about 34 of those into the close. As highlighted on its chart below, the gap up on April 13th was followed by a sideways choppy consolidation, which looked bullish at the time, and then Friday's gap down created a bearish island reversal. This is typically a strong reversal pattern and the best way for the bulls to negate this pattern is with a rally above Thursday's close near 4541, about 77 points above Friday's close. But even then it might result in only a back-test of its broken uptrend line from February 11 - April 12, currently near Thursday's high at 4558.
At the moment it's looking like an important reversal back down but even if we get a deeper pullback we still won't know for a few weeks whether it will be just a continuation of the big sideways consolidation that the market has been in since 2015 or if instead we're going to see the next leg of the bear market. Following what looks like a 5-wave move down from December into February, which fits well as the 1st wave of what will become a much more significant decline, we have a bounce correction that retraced 78.6% of the decline. If we're now starting a 3rd wave down it's going to be a strong selloff that takes the NDX well below the February low. Because of this risk I think it's prudent for bulls to get defensive and think hard about whether they really want to be a buy-and-holder or instead a trader. Bear markets reward traders, not buy-and-holders, even if all you do is step out of long positions. But trade at least a little bit short, such as inverse ETFs (trade them though, don't hold onto them since they decay over time), and you'll not just protect your account but actually increase it while others are suffering losses.
Key Levels for NDX:
-- bullish above 4600
-- bearish below 4435
Nasdaq Composite, COMPQ, Daily chart
The Nasdaq wasn't hurt as bad as the NDX on Friday and it doesn't have as clear an island reversal. But it did break its uptrend line from February 11 - April 12, which will be near 4960 Monday morning. It could go either way here although the selloff from Wednesday tilts the odds in favor of the bears until proven otherwise.
Key Levels for COMPQ:
-- bullish above 4970
-- bearish below 4808
Russell-2000, RUT, Daily chart
The RUT did well on Friday and finished the week strong, which followed a strong week the week before. This week's rally resulted in a break of its downtrend line from June-November 2015 and its 200-dma, both currently near 1129. With the RUT remaining bullish it's hard to turn bearish the broader market so it's the big caution flag for the bears. Not until the RUT drops back below its broken downtrend line and 200-dma, assuming the other indexes are also dropping, will the bears have better confirmation of a top in place. The short-term pattern supports the idea for a little higher on Monday but then a reversal back down. Any rally that does not reverse Monday morning would keep the bulls in control.
Key Levels for RUT:
-- bullish above 1150
-- bearish below 1088
SPDR S&P 500 Trust, SPY, Daily chart
We have a potentially bearish signal from the SPY chart below as it turned down from the upper band of the BB higher but with a lower low for MFI (bearish divergence). The last time we had this setup was back in November. It's certainly possible we'll see another push up against the upper band but with the large bearish divergence on MFI following an extended rally I think that's a risky bet.
Powershares QQQ Trust, QQQ, Daily chart
On the QQQ chart below you can see it's harder to identify tops than it is bottoms with Williams %R since it tends to flatten out in overbought, indicating a strong trend. But I've identified those times, with the red vertical lines, when we get a sell signal as Williams %R drops back below the 50 line, which it did on Friday. Trading volume ticked higher but is not above 50M, which is when bears need to be careful about a reversal back up. But that's usually only when Williams %R drops below -90 and price drops below the lower band of the BB, neither of which has happened yet. QQQ closed below its 20-dma for the first time since climbing above it on February 17th. This chart's indicators are confirming the sell signal that I see on the NDX chart.
Are the stars, or at least the moon, aligned in favor of the bears here? My highly proprietary trading system, the MPTS, says Friday's full moon could mark an important turning point for the market. Could the big gap down for NDX be part of the emotional event around full moons? Only time will tell but we certainly have enough important highs and lows around new and full moons to pay attention here as the big indexes test previous highs.
By most measures this current rally has stretched the rubber band and we're starting to see some deterioration in the momentum and market internals. The rally from February has been primarily a momentum-driven rally since there's very little fundamentally that's driving the market higher and the risk for buyers is that this type of rally can spin around on a dime once momentum shifts in the other direction. At a time when some of the indexes are testing previous highs (but importantly, not some of the important indexes like the banks or the RUT), it's looking like the bulls could have trouble recruiting more buyers to fill in behind those who just want to take profits. Most often tops are found simply because the market runs out of buyers.
Even if you feel bullish about this market, and certainly price action is a reason to feel bullish, now is a good time to be extra cautious and to play defense. Don't let nice profits go poof! as they head off to money heaven. Take a little and put it on red and make a little money on the downside, or at least use short positions to hedge your portfolio (maybe for tax reasons you don't want to sell). To me it's looking like the bulls are bringing their kicker out onto the field.
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