The market started off in the hole and it was just another dip-buying opportunity. In January, in which we've now had 16 trading days, we've had four days that started with a big gap up (giving us the most of the gains for the month) and 10 days that initially sold off but then rallied into the afternoon. Much of the buying effort has actually been spent rescuing the market from starts to the downside. I'll show a chart of the banking index that does a particularly good job identifying this pattern.
The stock market has been rallying this month in spite of itself. What I mean by that is that down volume has actually been higher than up volume and yet the stock market is higher. We know that much of the rally is due to the four gaps to the upside (January 3rd, 10th, 17th and 19th) and other than those gaps there haven't been many additional points added to the board. It's come from overnight gains in the futures, which is a much easier market to move, and then the cash market simply starts at a new high. The market has clearly been held up and pushed up in a very unusual pattern and most of it has been based on hope that the Fed won't let us down.
The big news for the market today was the FOMC rate decision. Would it shock you to learn that the Fed kept the rate at 0.25%? Yea, I know, it was a shock to me too. The market is of course not expecting any rate changes and the Fed reiterated today that it will remain "highly accommodative" for as long as it takes and at least until 2014, which is an extension of their previous guidance for the low rate into the middle of 2013. The market apparently thought this was a very good thing. But is it? What is the Fed seeing that tells them that they'll keep rates artificially low for more than a year beyond what they previously promised? It certainly can't be good but the market only cares about one thing right now and it's not a slowing economy. They just want more cheap money to stay available for longer.
Many believe this extension in time for the low rate was a precursor to additional monetary easing. To me this sounds a bit like "well, they didn't give us additional quantitative easing this time, but next time they will for sure." The market loves to rally on hope. At Bernanke's press conference he continued to jawbone the market higher by explaining that they still have options for further large-scale bond purchases. This was to be expected -- no QE3 at this time but by golly, they're ready to do whatever it takes and they have plenty of tools in their arse(nal). All they have to do is move their head out of the way.
As Bernanke stated, "If inflation is going to remain below target for an extended period and employment progress is very slow, then there is a case for additional monetary stimulus." This is apparently better news than the Fed's lowering of their growth projection to 2.2%-2.7%, which is down from their 2.5%-2.9% projection just last November.
The Fed also said they would continue to roll out their shorter-term debt maturities to longer-term ones with their Operation Twist. They also reiterated their policy of reinvesting in housing debt and mortgage-backed securities (MBS). This should have been more welcome news for the banks and yet they did not participate in the afternoon rally in the broader indexes. Hmm...
The only dissenting vote was by Richmond's Jeffrey Lacker whose only difference in opinion was that he "preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate." This was probably done as a way to show the public that they're actually thinking about all this and that there's some disagreement as to how.
The stock market has been rallying since December partly based on the hope that the Fed would inject additional stimulus now rather than later. It did not get that but instead got promises to do more if required. The market responded with "OK, we can accept that, let's RALLY!" Now the question is whether this afternoon's rally will hold tomorrow, especially since the typical pattern is a reversal of the post-FOMC reaction the following day.
The market could react negatively tomorrow after analyzing the Fed's comments and predictions and decide the rally has gone too far too fast again without the underpinnings of a strengthening economy, and especially with additional worries about Europe. As I've been saying, the Fed has never proven itself to be proactive; it is instead reactive. Only when Europe starts defaulting on their loans and their slowdown spreads to the U.S. will the Fed take additional easing steps. I half jokingly say that when BAC is back down to $5 we'll see the next easing announcement from the Fed. Watch for it to happen and you'll see what I mean.
When we look at the charts we see many indicators telling us the market should be rolling over and yet it hasn't. It begs the question about where the money is coming from since the market appears to be propped up on such low volume, especially when that volume is mostly to the downside.
There's been much speculation about this, and that's all it is because the Fed, ECB and banks are notoriously secretive about what they're doing. But we know the Fed is lending money to the ECB, which can't print more money without Germany's approval (it is against the treaty rules), and the ECB is then lending the money to the European banks who are then buying the sovereign debt at the bond auctions. It's the back-door method for the Fed and ECB to bail out the European banks and getting European bonds for collateral (which are about as good as the subprime slime that the Fed already has on its books and taking on more).
It's why I say the entire global financial system is more at risk than at any other time. A butterfly flapping its wings in Africa will cause a devastating hurricane/typhoon in another part of the world (chaos theory) -- little ol' Greece defaulting on its loans could be the first domino that knocks down the whole line of them that twist and turn throughout the entire global mess that's been created.
But in the meantime, that money that the Fed and ECB are lending is being leveraged about 30:1 by the banks and all that liquidity is making it into the stock markets. Since the U.S. is considered "less bad", it has been the beneficiary of the liquidity surge in Europe. That's the theory anyway. Trying to prove it is another matter.
Kicking off tonight's charts is a weekly view of the SPX chart, which shows how close the rally is to the 2007-2011 downtrend line, currently near 1328. A break above that level would obviously be bullish although there are more than a few reasons to believe we might get just a head-fake break if it happens (a break above the line followed by a drop back below the line would be a no-questions-asked shorting opportunity, with a stop at the high). For the intermediate term, assuming we'll see the market start at least a pullback soon (if not from here), I'm showing with the light red dashed line a pullback to the uptrend line from October, near 1280 in mid February, and then a final high into March, which would be fitting from a cyclical standpoint (March being a turn month several times in the past). That bullish possibility will be evaluated based on the pattern of the next decline.
S&P 500, SPX, Weekly chart
Joe Granville was interviewed on Bloomberg on Monday (link further below) giving his reasons for a bearish year this year, and Tom DeMark was also interviewed on Bloomberg giving his reason for looking for a market top this week. You can read and watch his interview here: DeMark's call for a top. He's been sticking to his forecast for SPX to top out around 1340 even though the timing hasn't worked out like he thought it would (first in December then on Friday's interview he called for Tuesday to be the high). But by his method, today should satisfy his completed 13 count and make a high. We'll certainly know how he did in the next few days.
Ed Carlson wrote a book, George Lindsay and the Art of Technical Analysis" in which he discusses Lindsay's timing method for the market. I recently read Carlson's book, which is very good, and he used Lindsay's method in an article written last Thanksgiving in which he called for a top on January 23rd. It's fascinating how the timing model works out, which I'll let you read for yourself in the Financial Sense article: Carlson call for a top.
So we've got some heavy hitters calling for a significant market top here -- Granville (link below with the DOW charts), DeMark and Carlson (using George Lindsay's model) -- and they'll all be very wrong or else the post-FOMC rally today may have been the last hurrah.
As for the 2007-2011 downtrend line that SPX hit today, at 1328, everyone and their brother who can draw a downtrend line on their chart sees this line of resistance and knows it will be resistance until proven otherwise. So how to deal with it? Gap over it of course. A jump above 1328 would be bullish for a potential run to DeMark's 1338-1342 upside target but any jump over the trend line that then fails to hold above the trend line on a back test would be bearish. A break below 1290 would mean the top is in and then we'd be looking for a test of the uptrend lines from November and October.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1330
- bearish below 1290
In addition to hitting its 2007-2011 downtrend line, SPX hit the top of a rising wedge pattern for this month's rally. In addition to the declining volume as the rally has progressed we can also see bearish divergence at today's high. It's an ideal place for a reversal and the only thing that bothers me is that it's too ideal (obvious). I show one idea with the light red dashed line for a small pullback and then another choppy move higher into the end of the week to tag DeMark's upside target. That would fit with an effort to hold the market up into the end of the month. The market handlers are going to ensure January closes positive so that traders will add the January barometer to their list of reasons why they should be long this year (add it to the Presidential election year cycle). A drop below yesterday's low at 1306 would indicate the top is in for now.
S&P 500, SPX, 60-min chart
I mentioned earlier Joe Granville's market prediction. He was out on Monday talking about his indicators, including OBV (On Balance Volume) and believes the DOW will lose 4000 points this year. He has a very good long-term record so it pays to at least listen to his argument, which can be found at this Bloomberg link: Granville's prediction). He believes the DOW will drop toward 8000, which would have it back down to where it was consolidating briefly in May-June 2009 (the March 2009 low was 6470).
Looking at the weekly chart below, a downside projection from today's high, where the next leg down would be 162% of the 1st leg down (the May-October decline), gives us 8849, close to Granville's prediction. As shown on the chart, a drop to that level by June would be followed by a consolidation into November and then another leg down into early 2013. By the completion of the year it's quite possible by this pattern that we'll see Granville's prediction come true. Notice the quick decline in volume since the bounce started in October, which is part of what Granville is talking about. It's a classic volume pattern for a correction.
Dow Industrials, INDU, Weekly chart
The daily chart is looking bullish in regards to its break through the 2011 H&S neckline, near 12550, and its 2007-2011 downtrend line, now near 12600 and tested today (and held, which is bullish). It's now trying to break resistance at its July high at 12754 (closed about 3 points above it today thanks to an end-of-day push higher into the close). The next line of resistance is the May high at 12876. The next level of resistance would be the May 2008 highs at 13137. The bears obviously want to see resistance hold, especially on a weekly closing basis, and a drop back below 12550, which would indicate a top is in. The next downside test would be the uptrend line from October, near 12180 by the end of the month (which will coincide with its 50-dma by then).
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 12,750
- bearish below 12,550
NDX rallied up to the top of a parallel up-channel based off the uptrend line from October and the parallel line attached to the December high. These channels are often very good trading guides so today's close at the top of the channel is warning us that price could reverse back down from here. The proof will be in the next few days and the bears need to see yesterday's low near 2423 broken in order to confirm we've probably seen the high. A choppy pullback for the rest of the week would likely point us higher into the end of the month.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 2470
- bearish below 2423
AAPL was of course the big reason for the gap up in the tech indexes this morning. AAPL is the largest weighting in the indexes, especially NDX. But AAPL presented an interesting shorting opportunity this morning, which I looked at last night after its earnings report. Looking at its weekly chart I had pointed out that it's been in a very steady rally since its March 2009 low and has respected the top and bottom of its parallel up-channel, the top of which is near 460. Yesterday's after-hours reaction to its earnings had it spiking up to 468.95 before quickly pulling back and settling near 451. This morning's pre-market high was 459.50, which could yet be retested during RTH (regular trading hours) over the next day or two but the risk from here is for AAPL to at least start a pullback. Note the continuing weakening in momentum at the new highs since 2010. Eventually that bearish divergence will matter.
Apple, AAPL, Daily weekly
Looking at AAPL's daily chart below shows why I was recommending a short play on AAPL at this morning's open (which is obviously not for the faint of heart on such a strong stock). The move up from November is now a 5-wave move and the 5th wave equals the 1st wave at 452.64. For this reason I felt 453-460 was going to be AAPL's upside target zone to short. With the 5-wave move up to the top of its parallel up-channel there is a high probability that the 453-460 zone will hold. Whether AAPL only pulls back and then heads higher again, or starts a decline that will break down from its weekly up-channel, to correct the 2009-2012 rally, will only be known in hindsight but I'm thinking the decline will be more significant than just a pullback. This afternoon's rally in the indexes was not mirrored by AAPL and that's another warning signal for holders of this stock right here. If it tries again for 460 this week it would present another shorting opportunity.
Apple, AAPL, Daily chart
The RUT has now reached the top of its rising wedge pattern for the leg up from December and achieved the price projection at 792.33 for two equal legs up from November (the 2nd a-b-c in the double zigzag wave count from October). The 2nd leg up, which is the c-wave up from December, is now a 5-wave move and can be considered complete at any time. It has pushed marginally above its 2011 H&S neckline that's near 785 so that's bullish but with the pattern looking complete it looks ready for a reversal back down. Note the bearish divergence at the current high. A drop back below 785 would leave a head-fake break above resistance and a drop below yesterday's low near 775 would tell us the top is in place.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 796
- bearish below 775
Bonds had a bit of a wild day. The first reaction was a lot of buying in the bonds which I thought unusual because the dollar was selling off and stocks and commodities were rallying, both indicating an expectation for more inflation. In that case bonds should have sold off. Then about an hour after the FOMC announcement it was like someone flipped a switch and started yelling "SELL Mortimer, SELL!!" The quick drop in yields was reversed into the close and as you can see on the 30-year yield (TYX), it left a long-legged doji and almost a hanging man at resistance (the top of its parallel up-channel from December (bear flag?) and at the level where the bounce off December's low has two equal legs up at 3.174%. A break above 3.18% would be bullish (bearish for bonds) while a break back below today's low at 3.037% would be bearish. If yields rally it could help stocks rally some more as well, although there hasn't been a tight correlation between the two since October.
30-year Yield, TYX, Daily chart
The banking indexes have been in a very choppy sideways/up pattern since the high on January 11th. While the main indexes have been working their way higher this month the banks have been holding back. And a choppy move higher at the end of a rally is an ending pattern. Where the rally will end has been a tough call but there are a couple of upside targets I've been watching for the BKX. An upside target zone is at 44.22-45.06, which includes its 50-week MA (44.18), the 50% retracement of its February-October decline (44.22), a projection for two equal legs up from October (44.43), its broken H&S neckline from 2009-2010 (44.82) and a projection for the 2nd leg of the move up from November where it will equal 162% of the 1st leg up (45.06). There is tight correlation in the 44.18-44.43 area and the high so far, on Monday and Tuesday, is 44.01. I don't see a whole lot more upside than that and there is the possibility of a breakdown at any moment. The sideways price action since January 12th could be a bullish consolidation and if BKX breaks above 45 it's going to be bullish for the stock market. Otherwise a break below 42.30 would be bearish.
KBW Bank index, BKX, Daily chart
I've been pointing out the amazing ability for this market to recover from morning declines. If the market hasn't gapped up in the morning it's usually been an initial decline that gets reversed within the first hour of trading. These market rescues consumes a lot of buying power and I think it's what's reflected in the waning momentum we're seeing in the market. BKX shows this gap-or-dip pattern rather well and as pointed out on the chart below, this morning's recovery marked the 10th time this month that buyers have stepped in to rescue the banks (and in turn the market). Do you suppose Daddy Warbucks might be at work here? One note on the multiple uptrend lines -- when an uptrend starts to roll over you can draw trend lines through the lows as I've done and usually a break of the 4th one, which is through yesterday's low, means the top is in place. It was tested this afternoon and held.
KBW Bank index, BKX, 60-min chart
The Transports got a nice bounce today but the TRAN remains below its January 19th high. So far that's bearish non-confirmation of the DOW's push to a new high for the current rally. The decline from the 19th looks impulsive (5-wave move down) and the bounce off yesterday's low is a 3-wave correction so far. That suggest last week's high will hold and the TRAN will continue lower from here. A break below 5094 would confirm we've seen the high and a break of yesterday's low near 5142 would be a bearish heads up. Otherwise at continuation higher into the end of the month could see the TRAN reach a price projection at 5394.
Transportation Index, TRAN, Daily chart
As the talk of QE3 picked up speed prior to the FOMC announcement, with many big institutions talking about it as a done deal, we saw the dollar declining and the metals rising. The fear of further easing is higher inflation, which in turn kills the dollar and raises the prices of commodities. While the Fed didn't announce further QE efforts, their language of extending the low interest rate (which makes the dollar less desirable for investments) and continuing their plan to roll out into longer-dated securities hit the dollar hard this afternoon. It dropped from a back test of the bottom of a broken up-channel from early November and that could mean a further drop in the dollar before the bulls step back in. But with the potential reversal setups that I see in many other charts tonight, and an expectation for a further rally in the dollar, I'm wondering if we'll see support near 79.75 hold (minor break today). At the moment it's not clear.
U.S. Dollar contract, DX, Daily chart
Gold spiked up to potential resistance near 1710 today, following the spike down in the dollar this afternoon. Gold's rallies often end with a spike up and then reverse with a v-top (just the opposite of stocks which tend to spike down and then reverse with a v-bottom). Today's spike up might have finished its bounce off the December low. As noted on the chart, the break of the downtrend line from August is bullish if it holds, so that's what gold bulls want to see. But if it drops back below the downtrend line, near 1693, it will leave a head-fake breakout. Below today's low at 1649 would be a confirmation that the bounce is finished and the next leg of the decline has started.
Gold continuous contract, GC, Daily chart
Silver has been a little stronger than gold recently (it's a more volatile metal) and has retraced a greater percentage of its decline from the end of October (just shy of 78.6%). But it got stopped at the top of a parallel down-channel based off the line along the lows from May to October (where it found support in December). Near the same location is a broken uptrend line from October. It's a good setup for a reversal back down. With gold and silver both at resistance levels and looking like good setups to reverse back down, it could be that the stock market and the metals will be in synch to the downside (or upside if each continues to rally). Different chart patterns and yet they each are set up to reverse. Interesting setups.
Silver continuous contract, SI, Daily chart
Oil could dance to the beat of its own drummer for a little longer. Its choppy pullback from early January suggests we'll see another leg up, and if the shallow rising wedge pattern is correct it won't make it much higher than its November and January highs before starting a more serious decline. If it manages to start showing some impulsive price action that breaks north of $106 I'll turn into an oil bull but not before. Bearish divergence at the January high suggests possible trouble at any time.
Oil continuous contract, CL, Daily chart
Tomorrow morning's economic reports could be market moving so stay aware of them. The home builders have been doing well so the new-home sales numbers could be important to their behavior. The Durable Goods orders before the bell and the LEI at 10:00 could also move the market but I think the market is more focused on what's coming out of Europe and what Uncle Sugar Daddy can provide.
Economic reports, summary and Key Trading Levels
One last chart to show -- the VIX. Recently I mentioned the extreme in sentiment that we're seeing in the market. We're hitting levels not seen since the May 2011 high, such as the spread between bullish and bearish sentiment on the AAII survey, very low put/call ratios (indicating heavy call buying) and the very low VIX (showing complacency). The VIX finally accomplished closing its July 23rd gap today by dropping down to 17.52 (today's low was 17.15). In so doing it also dropped below the bottom of a bullish descending wedge and then bounced back up to close inside. That's a buy signal (sell signal for stocks). The wave count for the descending wedge now looks complete as well and the A-B-C pullback from August looks complete. In other words, today put it into gear and now all the bears need to do is step on the gas pedal.
Volatility index, VIX, Daily chart
The pieces are in place for a significant market reversal. Frankly I'm at the point where I'll believe it when I see it. Who knows how much money will continue to flow in from Europe's QE efforts and the Fed's monetization efforts. But on those questions I can only speculate. Going with the charts I have to say I'm strongly recommending shorting the market here, especially if yesterday's lows get taken out. The rising wedge patterns call for a complete retracement of the rally from December and quickly. That means SPX back down to 1200 and it could happen in less than a week. We've got just the opposite picture from the VIX's descending wedge pattern, which of course is bearish for the stock market.
I've cried "bear!" several times recently but the market ignored my calls and the bulls stomped all over me. But I have to say I'm particularly pleased with the bearish setup here and planning on dining on some steak tartar. Making money on the downside happens a lot faster than on the upside. This month's rally has been torture for both sides as the gaps leave everyone behind (unless you've been willing to stay long in overnight positions, something I consider particularly risky at the moment) and the morning dips have probably shaken out more than a few longs.
Trade carefully as we head into the end of the month, which could see some more propping, and we should know by next Wednesday whether or not I got to taste some bull or if instead I get trampled again and only get to taste dirt. At least I'm in good company this time (Joe Granville, Tom DeMark and Ed Carlson (George Lindsay). Good luck and I'll be back with you next Wednesday.
Key Levels for SPX:
- bullish above 1330
- bearish below 1290
Key Levels for DOW:
- bullish above 12,750
- bearish below 12,550
Key Levels for NDX:
- bullish above 2470
- bearish below 2423
Key Levels for RUT:
- bullish above 796
- bearish below 775
Keene H. Little, CMT
In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying