The Dow is about the only broader average index that has consistently pushed higher for the past 4 weeks while the others bounce around looking for direction. Even the weaker tech indexes spent the week chopping up and down, finishing with a doji.
Review of Major Stock Indexes
A review of the indexes above shows the broader averages finishing mixed with the Dow again positive (one of the few that stayed in the black for the past 4 weeks) while the techs and RUT pulled up the rear. Hurting the techs last week were the semiconductors (SOX was down -2.1%). Hurting the RUT was the weak performance in the energy sector. The commodity sector, including the metals, also did not do well for the week.
We have a fractured market right now where it's looking like money is rotating from some of the big-cap techs (FAANG) and other higher-beta stocks into the relative safety of the blue chips, especially the bluest of the blue chips, the Dow. Money managers who are required to stay invested in the stock market will often move money to the safety of the bigger and more stable big caps because it's easier to sell out of them in a down market than the other more volatile stocks.
Moving money into the Dow is a defensive play and probably a good signal to pay attention to as far as how aggressive you want to play the long side. The trend of the stock market is up and it pays to stick with the trend rather than fight it, but there are times when the signals from the market provide a warning sign and right now I'm seeing plenty of them.
It's one of those times when it's a good time to get yourself into a larger cash position while still enjoying any upside left to this market, especially since a melt-up situation could provide some outsize benefits if you're long. Bears could soon have a turn at the feeding trough but depending on the index they could be attempting to catch rising knives here.
Other than the usual tweets from the White House and more news about "off with his head" (comic Kathy Griffin's stunt done in poor taste), it was a quiet week from both a political and geopolitical perspective. We're not dealing with earnings and the week's economic reports were mixed. Without much to react to, the market was generally quiet and spent most of its time consolidating.
Depending on your perspective and which index you're looking at, the consolidation can be viewed as either bullish or bearish. I think we're at the point where the price action in the next 2-3 days will determine the direction for the rest of the week and month. I'll take a top-down look at SPX to show what I'm watching for.
A Look At the Charts
S&P 500, SPX, Monthly chart
SPX looks to be in the 5th wave of its rally from 2009, which is the leg up from January 2016. The 5th wave would equal the 1st wave at 2516, which is the projection shown on the monthly chart below. That's the upside target based on the EW pattern but it's important to remember that the form of the pattern can be considered complete at any time.
Notice too that SPX is nudging up underneath its broken uptrend line from 1990-2002, which is where the rally into the 2015 highs stopped. The bearish divergence against those 2015 highs fits with the 5th wave interpretation.
For longer-term buy-and-hold investors, or for when to get into cash, SPX is still on a buy signal (or hold signal) while the 8-month MA is above the 21-month MA. The green arrow in August 2016 would not turn to a red arrow until the 8-mma drops below the 21-mma, currently near 2177, which is something that's not likely to happen for a while. You can see from previous occurrences how this system would have kept you out of the severe downturns, with the relatively small risk of getting whipsawed, such as between February and August 2016.
S&P 500, SPX, Weekly chart
The weekly chart looks more closely at the 5th wave of the rally from 2009, which is the leg up from January 2016. It too is now a 5-wave move with the 5th wave being the leg up from March. The rally from January 2016 has created a rising wedge (and therefore 3-wave moves inside the wedge) and the downside risk is that wedges tend to get retraced much faster than the time it took to build them.
The 5th wave of the rising wedge pattern would be 62% of the 1st wave at 2506, which is close correlation with the 2516 projection on the monthly chart for the 5th wave of the rally from 2009. It will be an interesting setup to watch carefully if and when SPX makes it up to the 2500 area, especially since so many analysts are calling for that number and it could be a reason many would start taking money off the table and wait for a better buying opportunity in the fall.
Along with the bearish divergence on the monthly chart you can also see the bearish divergence against the March 1st high on the weekly chart. This again fits well with the 5th wave interpretation. We have the 5th of the 5th wave in progress and once it completes, which could be any time (not necessarily up around 2500), we'll see at least a very large pullback correction, if not something more bearish.
S&P 500, SPX, Daily chart
The leg up from March should arguably be just a 3-wave move (inside the rising wedge from January 2016) and by that interpretation might have completed at June 9th high. This suggests a stronger breakdown early in the coming week, which is one of the reasons why I said we'll likely know early in the week whether or not a top is now in place.
A variation of the corrective wave count calls for another leg up and that's why a further sideways consolidation in the next 2-3 days would be a bullish sign. A break above 2447 or below 2415, the June 9th high and low, will likely provide the direction of trade.
Key Levels for SPX:
-- bullish above 2447
-- bearish below 2415
S&P 500, SPX, 60-min chart
The 60-min chart shows the sideways triangle idea that I'm currently watching. A pop up Monday morning followed by another pullback inside the triangle would then lead to a setup to get long for the next rally leg. The bullish triangle would be negated with a decline below 2415 whereas a rally from here above 2447 could lead to the new rally leg. But watch the trend line along the highs from April 26- June 2, near 2460, for a possible high.
Bullish Percent index for SPX, Daily chart
While SPX has proceeded higher since March 1, after chopping sideways, the number of participating stocks in the index has been declining. This can be seen on the bullish percent index (how many stocks are in a bullish Point & Figure configuration). The bulls need to see the downtrend line on the BP chart, currently being tested, broken in order to show better support for the rally. At the moment this is bearish divergence.
Dow Industrials, INDU, Daily chart
The Dow's rally from its May 18th low has produced a bearish rising wedge pattern, the top of which is currently near 21420. There's further upside potential to the trend line along the highs from May 2011 - December 2014 and a price projection at 21,618. The projection is where the 2nd leg of the rally from March would be 162% of the 1st leg up.
The price projection at 21,618 crosses the 2011-2014 trend line this coming Friday, June 23rd. It could be easily accomplish in 5 days but it first needs to break through the top of its rising wedge. Above 21450 would have me looking for the 21618 target but beware of the bearish rising wedge since it could get retraced very quickly.
Key Levels for INDU:
-- bullish above 21,450
-- bearish below 21,159
Advance-Decline Line for the Dow, Daily chart
The advance-decline line remains very strong for the Dow so it's firing on all 8 cylinders. But (there's always a but) the a-d line has created a bearish rising wedge for the rally from January 2016 (similar to the one for the price pattern for SPX). This reflects slowing momentum for the rally and with RSI of the a-d line in overbought territory it's a risky time to be betting on the upside.
I drew in vertical lines where the RSI got into overbought and you can see how it coincided with at least short-term tops. The top that's coming has the potential to be much more significant
Wilshire 5000 index, W5000, Weekly chart
Reflecting a larger segment of the stock market, the weekly chart of the Wilshire 5000 shows how it also has created a rising wedge pattern for its rally from January 2016. It too is in its 5th wave, which is showing bearish divergence against the 3rd wave (the March 1st high). It can continue to press higher but that seems like a risky bet from here. Pulling stops up tighter and getting ready to short/go to cash seems like the more appropriate positioning.
Advance-Decline Line for NYSE, Daily chart
I couldn't find the advance-decline line for the W5000 but the one for the NYSE is a good one to look at. This one shows a bearish rising wedge for the rally off from November 2016. NYA, at the top of the chart, is above its uptrend line for the rally so everything's still good. But like the man who jumped from the top of a 20-story building, passing the 10th, he could be heard saying, "I'm still good."
W5000 vs. New 52-week highs and Advance-Decline Line, Daily chart
Another way to look at the strength of the market is to look at new 52-week highs and a daily running of the advance-decline line, both of which are shown below. The W5000 has been climbing to new highs this year but you can see the deterioration of the number of stocks participating. This can go on for a long time but eventually there will simply be not enough stocks to push the indexes higher.
Powershares QQQ Trust, QQQ, Daily chart
Another way to look at the NDX, which has been in trouble since its June 9th high, is the QQQ. This one provides volume data and can be instructive. The first thing I see on the QQQ chart is how it dropped quickly to the bottom of its Bollinger Band and its 50-dma, both currently near 137. Volume has spiked significantly and past instances of a volume spike in a decline has marked bottoms. The combination of the volume spike and price at support suggests we could see the techs get at least a stronger bounce.
But one thing I've noticed about the volume in previous corrections is that the volume quickly tails off as a new rally gets started. This time we have elevated volume even during the consolidation following the sharp decline. There's a fight going on between sellers and buyers and the consolidation at support, with high volume, is a change of behavior from the past. It might in fact be telling us something more bearish is about to happen. A breakdown below 137 would be bearish but until that happens look for a bounce off support.
Advance-Decline Line for NDX, Daily chart
The advance-decline line for NDX formed a parabolic rise during the rally from February 2016. This was obviously a strongly bullish sign but it does raise the risk for what happens next. Parabolic rallies never end well and while the parabolic line hasn't been broken yet (it's close to being tested while price tests its parabolic line), look out below when it breaks. Needless to say, the QQQ 137 level takes on greater importance in light of this.
We have mixed performance between the indexes, which shows us money is rotating and in this case from riskier stocks to more stable stocks, and that's a bearish warning sign. Bearish divergences in many indicators tell us to be very careful about the upside from here. At the very least we're being warned to lighten up on long positions and raise some cash for better buying opportunities in the future (how far in the future is the big unknown).
While we have plenty of warning signs we don't have any strong signals that a top is already in place or that a top will form in the coming week. Respecting the trend, the place to be is long and not short. But being aggressively long is when we're coming off lows. Being cautiously long is when we're making new highs without the support of strong technical indicators. We're in the latter period so caveat emptor.
Trade safe, have a good week and good luck with your trading.
Keene H. Little, CMT
Technicians look ahead. Fundamentalists look backward. The true language of the market is technical. - Joe Granville