Following yesterday's big day we saw the indexes trade in a very narrow range, absorbing the recent gains. That's bullish price action except that the consolidation is at/near potentially important resistance levels. The bottom line is bulls are still in control.
The overnight trading session was relatively flat and today's market opened near the flat line and finished near the flat line. NDX was bullish, thanks again to AAPL, but the small caps (RUT) were down nearly -1%. SPX was hurt by commodities but held up by financials. The DOW was help up by the financials. All in all it was a mixed and quiet day and the consolidation following yesterday's strong rally can certainly be viewed as bullish. The bulls continue to run this show until proven otherwise.
This week's rally has done a nice job cleaning up the wave pattern and now it's very obvious we have a 5-wave move up from November and this is good for traders. Identifying the end of a run is easier when you've got a 5-wave move since you are then alerted to the fact that the run will soon be ending and you'll have an opportunity to trade the other direction (for either just a correction of the 5-wave move or something more significant if the 5-wave move is completing a larger move. That's what we'll evaluate in tonight's charts.
The question on most people's minds is what could possibly stop this rally now. Europe is quiet, the Fed has the market's back and there's very little to fear (that actually makes the market dangerous). Since there seems nothing on Earth that can stop this north-bound train, maybe the reason for the turn down will come from the stars. We have a combination of the sun's activity and planetary alignments that could thwart the bulls' efforts to drive the market higher. We have the sun's solar flares and a Bradley turn date headed our way.
We've been hearing about the stepped-up activity of the sun and its sunspots. We're entering the next 11-year period where we'll see increasing sunspot activity and it's a fact that many market turns have occurred around major solar flares with strong coronal mass ejections (CME). It can play havoc on our communications and other electronic gear and apparently it can do funny things to our brain's circuitry.
Space Weather News issued a warning today about another major flare and this one is Earth-facing: "INCOMING CME: Sunspot AR1429 unleashed another strong flare (category M7.9) on March 13th. The explosion produced a significant coronal mass ejection (CME), which forecasters say should reach Earth on March 15th. Geomagnetic storms are possible when the cloud arrives. Check http://spaceweather.com for updates." The fact that this CME is earth-facing might mean it's going to have a greater impact on earth and us human beings.
The chart below is the Bradley siderograph, which was developed in the 1940s by Donald Bradley to forecast the stock markets. He assigned numerical values to certain planetary constellations for every day, and the sum is the siderograph, which he had intended to use as a predictor of the stock market moves. Arch Crawford is probably the most well known of those who use astronomy for predicting market behavior and while I don't understand how it's done I can't argue with his success (although admittedly no one has correctly predicted a market turn since December). The next major turn date is this Friday the 16th (bold date). Note that the direction of the turn is not the prediction but only a potential turn. Since we're rallying into this date we can assume the turn would be to the downside.
A George Lindsay timing model (3 Peaks and a Domed House pattern) calls for a market high on Sunday, March 18th so by this we can say it will be Friday or Monday. Some Fib timing models point to a range between March 13th and 22nd. We have quadruple-witching expiration on Friday, March 16th and that could finish the current move. The Spring Equinox is Tuesday, March 20 and in the past this has often marked a change in trend in the markets (I've mentioned previously that March has been a pivotal month for the market). So there are a lot of timing models pointing to a turn this month if not this coming week. The price patterns, as I'll review, are coinciding with this turn window. Will it turn? That will be obvious in hindsight and I still have not been able to perfect my hindsight trading program but I promise you'll be the first to hear about my success with it. At the moment we've got a reason to watch for a possible turn but it doesn't mean it will happen. Proof will be in the pattern of the next pullback (that lasts more than a day).
So with that let's get to the chart patterns themselves, along with some upside targets, so that we can watch for the levels of interest.
The weekly chart of SPX shows it's nearing some potentially important resistance and an upside target near 1408 (there's a higher target near 1450 that I'll discuss with the daily chart). The broken 2006-2008 neckline, shown in bold blue, might not be important even though the May 2011 high was just short of that trend line. SPX is now back up to the line, currently near 1402 and only 3 points above today's high. And only a few points above that, near 1408, is a projection where the 3-wave move up from June 2010 would have two equal legs (to complete a complex corrective pattern from the March 2009 low). Clearly the chart is bullish and remains so as long as price stays above the uptrend from October, a break of which would be confirmed with a drop below 1340.
S&P 500, SPX, Weekly chart
Looking at the move up from October, which should complete as an a-b-c move, the c-wave (the leg up from November) is a 5-wave move. The new high this week actually cleans up the pattern nicely and now we get to figure out where the 5th wave could finish. The first upside target is shown at 1407.02, which is where the 5th wave is 62% of the 1st wave. It would achieve equality at 1448.43. From a daily perspective, the 5th wave can now be considered complete at any time and therefore bulls have to be prepared for a reversal at any time. The bears have to recognize the bulls have done nothing wrong yet and therefore hold your fire.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1408
- bearish below 1363
The 5th wave of the move up from November, starting from the March 6th low, is shown up close on the chart below. It will ideally form a 5-wave move and so far it's a 3-wave move up. Today's pullback fits as a 4th wave and should be followed by another push higher in a 5th wave to complete the leg up from March 6th. That in turn would complete the 5-wave move up from November which in turn would complete the a-b-c bounce off the October low which would in turn complete the complex correction off the March 2009 low. We should be down to the wire here, getting ready to put in THE high of the 2009-2012 rally.
S&P 500, SPX, 120-min chart
Yesterday's rally in the DOW had it poking above its trend line along the highs from October. Today it formed a little doji at the trend line. It would be a bearish reversal pattern with a red candle tomorrow and a break below 12900 would confirm the high is in place. In the meantime, today's consolidation should be followed by another new high, as per the EW count explained for SPX. An upside target for the 5th wave is to 13369, which is where the larger 5th wave of the move up from November would be 62% of the 1st wave.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 13,400
- bearish below 12,900
NDX's strength (thanks to AAPL) is in its leg up from November. Whereas the other indexes are doing a little better than equality in the two legs up from October (except the RUT which hasn't quite achieved that level yet), NDX is pressing up towards the 162% projection at 2748.76, shown on its chart below. The 5th wave of the move up from November has already achieved 62% of the 1st wave at 2694 (yesterday) and would be equal to the 1st wave at 2767.52. Near this upper target is the long-term broken uptrend line from October 1990 through the October 2002 low, which is where NDX stopped in February 2011. So the 2750-2770 area makes for a good upside target zone. Currently it's pressing against the trend line along the highs from December 5th and poked slightly above it today, potentially leaving a throw-over finish. NDX remains bullish above Monday's low near 2635.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 2770
- bearish below 2635
As I've pointed out previously, the RUT's A-B-C bounce off the October low has two equal legs up at 833.91, which is shown on its chart below. The February 3rd high came the closest at 833.02. It is now attempting it again but failed a little short of the target with today's high at 831.61. If the broader market makes a new high into Friday there's additional upside potential to a Fib projection near 839 (5th wave equal to 62% of the 1st wave) and then to trendline resistance near 850. A drop below Monday's low near 811 would tell us the high is already in place.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 834
- bearish below 811
There was a big move in Treasuries today, which now has TYX (30-year yield) testing its declining 200-dma at 3.41%. Slightly higher is its October high at 3.45%. It will look bullish if it breaks above October's high but it's hard for me to feel bullish about the very choppy climb up from December. I think we might still see a large triangle consolidation pattern from October but now it's looking like it might be an ascending triangle (flat top, rising bottom) rather than a symmetrical triangle. One other thought is an a-b-c bounce with two equal legs up at 3.54%, as shown on the chart. But the choppy bounce off the December low is still what bothers me about that one. In any case, it would clearly be more bullish above 3.54%. In the meantime I'm looking for evidence that it will turn back down inside the triangle pattern. For now, the selling in bonds (rise in yields) has been helping the stock market rally.
30-year Yield, TNX, Daily chart
Just as a comparison, I'm showing the possibility for a symmetrical triangle for TNX (10-year yield, assuming today's high was it for the bounce off the late-January low. A turn back down from here would target the 1.85%-1.9% area before bouncing again to finish the triangle pattern, possibly by late May or June. But if bonds continue to sell off, which would be bullish for the stock market, we should see TNX make it up to at least the 2.508% projection for equality in an a-b-c bounce off the September low. Above 2.51% would be bullish for TNX (and likely have the Fed very worried since it would be much more expensive to roll out the short-term debt and we'd start hearing comparisons to the other European countries seeing their government yields heading higher). Until I see proof that says otherwise, I continue to lean toward the deflationary scenario, which suggests lower yields, especially since the Fed will continue to do everything it can to hold rates down.
10-year Yield, TNX, Daily chart
The banking indexes ripped to the upside yesterday (a little less than +5%) and then tacked on another point today. In so doing the BIX has now achieved a Fib projection for the leg up from November, the top of a potential rising wedge pattern and the downtrend line from its April 2010 high. The 3-wave bounce off the August 2011 low has wave-c = 162% of wave-a at 153.21 (todayâ€™s high was 155.05). Its downtrend line is near 154.20. This is a bearish setup and all it has to do is reverse back down (something this market has forgotten how to do).
S&P Banks index, BIX, Weekly chart
The other banking index, BKX, is also pressing against trendline resistance but its daily chart shows it has a little more upside potential if it's to achieve equality between its 1st and 5th waves in the move up from November, which is at 48.95. I'm showing that's where it will get to before it reverses back down but keep in mind that the 5-wave move up from November can be considered complete at any time and therefore is setup for a reversal at any time.
KBW Bank index, BKX, Daily chart
The TRAN is the index that has been questioning the DOW's rally, as if to say, "yo, DOW, you realize what kind of trouble you're in up there?" As noted on the TRAN chart last week, the low on March 6th was a break below the high on December 5th, thereby negating the bullish wave count looking for a 5th wave up. Unless we've got some kind of larger corrective pattern in play, which could only be guessed at here, the TRAN has seen its high (February 3rd, along with the RUT). Yesterday's bounce up to the bottom of its broken up-channel from December was a good setup for a back test followed by a kiss goodbye. Today's selling looks like the kiss goodbye. It's possible we'll see another minor new high for the bounce if the broader market makes it higher but that's questionable from here. Note the back test of the broken uptrend line on RSI as well.
Transportation Index, TRAN, Daily chart
The dollar's pattern for the rally from its March 8th low supports a continuation higher, with an upside target near 83 before pulling back next month and then higher again into the middle of the year. The pattern will remain bullish as long as it stays above 79.
U.S. Dollar contract, DX, Weekly chart
I've been expecting to see a longer-term correction to gold's 1999-2011 rally and the 1400 area is the first downside target I think we'll see by midyear. There is the possibility that the 3-wave pullback from last year's high will lead to another push higher but that won't become the preferred wave count until gold is able to get back above Monday's high near 1717. In the daily chart below you can see how traders are using the trend lines. After being rejected, twice, at the broken uptrend line from 2008, it got a small bounce off its uptrend line from January-September 2011 on March 1st, broke that line on March 6th, back tested it on March 9th and has now dropped down to its broken downtrend line from August-November 2011. Between that trend line and the 62% retracement of the December-March rally, at 1626.58, it should be good for a bounce. The bounce could develop into something stronger but until it can get back above 1718 (negating the bearish wave count) I think bounces in gold are to be shorted.
Gold continuous contract, GC, Daily chart, log scale
The above chart is using the log price scale and the chart below is using the arithmetic price scale, which is another example of why you want to check both scales when using trend lines, especially if there's been a big price change. The longer-term uptrend line from 2008, which was resistance in early and late February, could now act as support near the 62% retracement (1626.58). Note how the broken downtrend line from August-November crosses the same level. Again, that should be good for at least a bounce (if no bounce then look for a hard selloff).
Gold continuous contract, GC, Daily chart, arithmetic scale
Silver's pattern is similar to gold's but the 3-wave moves up and down since its April 2011 high supports both the bull's and the bear's arguments. If the dollar's bullish pattern is correct then we'll see the bearish wave count in the metals win out, which is what I'm showing as the preferred count in both gold and silver. A large A-B-C pullback from April 2011 for silver points to 13.91 for a downside target, where wave (a) = wave (c), but the first downside target will be 22-23 where it will hit the bottom of a parallel down-channel and its 200-week MA. But one bullish possibility is for a drop down to 29.35 (two equal legs down from February 29th) to be followed by another rally leg. Assuming it will drop below 29, a drop to the bottom of a down-channel by midyear would have dropping down to about 20. The downside risk for the metals is that it could break much lower and much faster.
Silver continuous contract, SI, Daily chart
While the metals have been getting sold off we've seen oil more or less consolidating near its recent high. If the choppy consolidation makes it down to its uptrend line from October (as well as its 50-dma collocated near 102.50) it could launch another rally leg into early April and back to the top of its rising wedge pattern (green dashed line). From here I can argue just as strongly for that scenario as I can for a stronger selloff from here. Oil remains bullish above 102.
Oil continuous contract, CL, Daily chart
Today's quiet day for economic reports will be followed by a little busier day tomorrow, which includes the Empire Manufacturing survey and PPI numbers before the bell and then the Philly Fed survey at 10:00 AM.
Economic reports, summary and Key Trading Levels
This week's rally has done a nice job clearing up the wave pattern for the rally from October-November. The clean 5-wave move up from November now gives us some good upside targets to watch for if the rally can keep going for at least another day (to complete a shorter-term 5-wave move up from March 6th). The pattern can now be considered complete so while I've provided some upside targets to look for, we might not see them reached (and of course they could be exceeded in this market that has forgotten how to correct a rally).
I didn't get into some sentiment readings but there are several indicators, including the VIX, that have now reached extremes not seen since the October 2007 high (exceeding even the readings at the May 2011 high). In other words complacency is at an extreme. The resolution of the Greek tragedy, along with the firm belief the Fed has our back, has most participants scoffing at the idea that they need downside protection. The shorts have run for cover and the bears are in hibernation. This is when the bulls are most vulnerable to a surprise attack, when they least expect it.
Selling might not start from anything obvious either. Most people are wondering what news event could shock the market into selling off. Sometimes the selling simply starts because some want to take profits. AAPL got hit with a big sell program this afternoon just before it was able to reach $600. Why? No real reason except someone wanted to take profits. AAPL bounced back up (3-wave correction so far and could head immediately lower tomorrow) and could still head higher but the point is the market is now full of sellers-in-waiting. Give them an excuse and they'll sell and that excuse may simply be a stop getting hit.
Multiply one selling to take profits by millions more and all of a sudden the selling gets extreme. The pundits will be sitting in front of the camera and making up an excuse for the selling but in reality it may be nothing more than someone started taking profits and then soon enough more and more start taking their profits. So don't think we need some kind of "event" to shock the market into selling. It's a great spot to trim your positions unless you're OK with a downside surprise some morning and forced to get out on a big gap down.
Good luck as we finish up the quadruple-witching expiration week (the effect of which could roll over into the early part of next week) and I'll be back with you next Wednesday.
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