Following yesterday's FOMC minutes, showing a reluctance to add more monetary stimulus at this time, it was a 'round-the-world selloff. It seems the market is not happy without more drug money.
"The initial weakness on Wall Street came as traders continued to express disappointment with the minutes of the latest Federal Reserve meeting, which were interpreted as a sign that the central bank is not likely to engage in any further quantitative easing."
Isn't that a sad commentary on our market? If there isn't blatant government and/or Federal Reserve banking interference, I mean manipulation, I mean "help", the market doesn't know what to do with itself. Yesterday's FOMC minutes showed the Fed backing off on any further easing as it waits to see how the economy will do without further monetary stimulus. The Fed of course kept the wording that they're fully prepared to do what it takes to add further stimulus if required. Well of course they are.
The market has forgotten how to trade on things like fundamentals such as the economy and corporate strength and balance sheets. The only thing it cares about is the Fed expanding its balance sheet and giving the market more drug money. Without promises of more money the market participants throw a little temper tantrum in hopes the Fed will quiet the disruptive child with bribes of more money. If the Fed thinks the economy is recovering well enough that it doesn't need additional stimulus shouldn't that be good for a rally? Nope, give me the drug money because I know I'm going to have withdrawals without it. Sad, sad commentary.
Another negative for the market today, starting with a decline in U.S. equity futures during the overnight session, was the decline in the European markets over worry about Act II in the ongoing debt debacle. Following the big sigh of relief over the bailout of Greece comes worry about a bigger problem -- Spain, a country that is too big to bail. Spanish, Italian and Portuguese bond yields are heading higher and that's the market telling us it doesn't trust those countries to be able to pay back their debts. Without the ECB's support those bond yields would already be much higher (same for the U.S. if the Fed wasn't buying more than 60% of the Treasuries issued).
The market's demand for higher yields is going to be one of those unintended consequences from Greece's rescue. When the private bond holders were forced to take a "voluntary" cut in the value of their holdings, effectively changing the contract after the fact, it told private investors in other countries' debt that they too could be forced to take a cut. To compensate for this risk they want higher yields. The European finance ministers effectively made it more difficult for the other countries to sell their debt. Congrats guys -- your interference in the market will only make things worse.
While the market started in the hole from the overseas markets being down, we did not receive any helpful economic numbers. ADP said employment increased by 209K jobs in March, which was less than the 217K expected. It was also less than February's 230K, which was an upward revision from 216K. This created some worry over what Friday's payrolls report will show.
The ISM report also came in a little weaker than expected, 56.0 vs. 56.7, and was lower than February's 57.3.
For tonight's review of the charts and what they might mean for the coming week/month, I'll state right off the bat that I'm getting too many mixed signals to confidently call a direction from here. I'll point out what I'll be watching during the coming week to help identify whether or not the market may have topped on Monday or instead rallies to at least one more new high next week if not into the end of the month.
I'll start off with NDX's weekly chart which looks bearish for at least a larger pullback into next week. We have one more day to finish the weekly candle but so far it's a rather bearish shooting star at trendline and Fib resistance. The a-b-c rally off its August 2011 low can be considered as completing its large rising wedge pattern from 2009, with the top of the wedge being the broken uptrend line from 1990-2002. The dashed line shows the possibility for a pullback into mid-April to the bottom of a parallel up-channel from December followed by one more push higher into the end of the month. So it won't become more bearish until it breaks the bottom of its channel, near 2625 next week.
Nasdaq-100, NDX, Weekly chart
Today's decline found support at the uptrend line from December-March and its 20-dma. I'm showing a continuation higher from here and into a turn date on April 19th, where the rally from 2009 will have taken 62% if time taken for the 2002-2007 rally. But with a pattern that is not clear at the moment I see the possibility for just a bounce (if that) and a continuation lower. Not shown on the daily chart is the parallel up-channel from December that is shown on the weekly chart above. The bottom of the channel is virtually on top of the 50-dma, which is another reason why a drop below 2625 would be bearish. The 50% retracement of the 2000-2002 decline is at 2805 so that remains an upside target and further upside potential is to the top of its parallel up-channel from October, near 2850 by April 19th.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 2800
- bearish below 2714
I need to reiterate that I could argue for a strong decline from here as well as a rally as shown above. The one stock to watch to help us figure out what might be next is AAPL. Since NDX is so heavily influenced by a few big-cap tech stocks, especially AAPL, and since AAPL is a great sentiment indicator, it's a very good stock to watch for signals about what traders are thinking.
I had pointed out yesterday that I thought AAPL was finishing an expanding wedge (megaphone) for its final 5th wave. It's only a slightly expanding wedge since its March 15th high (vs. a parallel up-channel) but with the overlapping highs and lows it fits as an ending pattern. A megaphone at the top of a rally is typically a topping pattern. With the requisite 5-wave move inside the wedge it was a very good setup at yesterday morning's high to be THE high for AAPL. If it rallies to a new high watch for the possibility of a brief throw-over above the top of its wedge followed by a drop back inside, which would create a sell signal.
Apple Inc., AAPL, 60-min chart
AAPL had gapped up yesterday and hit the top of its wedge, as can be seen on the chart above. Following the gap up and sideways consolidation, the day finished as a doji. This morning's gap down leaves that doji hanging at the top of its rally as an evening star, usually a very good reversal signal. Today's candle is a small hanging man doji as buyers tried to rescue the stock this afternoon. A drop below 595 would confirm the high is likely in place but it remains potentially bullish until then.
Apple Inc., AAPL, Daily chart
It's important to recognize that from an EW (Elliott Wave) perspective, AAPL's rally from 1999 counts well as a completed 5-wave move. Once 5 waves completes there will be a correction of that move. Considering the rally started from 3.19 in 1997 (nice trade if you bought back then!) we could be looking at a big retracement over the next few years. Even a "small" 38% correction would be a pullback to 392. For those who believe AAPL is headed for $1000 (sounds like calls for QCOM in 2000) it's hard to imagine a pullback to even 392, which is where it was just last December. What if it does a 50% retracement back to 318, where it was last June? That would probably coincide with a test of its 200-week MA by the end of the year. On the weekly chart, it takes a drop below 500 to leave a throw-over finish above its rising wedge pattern from 2000.
Apple Inc., AAPL, Weekly chart
Even though the RUT was the most negative today, its short-term pattern has me feeling the most bullish. Following the 3-wave move up from March 6th to the March 27th high we've now had a 3-wave pullback. Two equal legs down for the pullback from March 27th is at 815.86 and a 50% retracement of the March 6-27 rally is at 815.66. Today's low was 817.08 and the setup is for a 3rd wave higher in a large rising wedge pattern (I'm assuming it will be a wedge pattern based on the 3-wave moves). As long as the RUT does not break below 798 I think it's important for both sides to stay cautious until the bigger picture identifies itself but based solely on this pattern I'm thinking the bears will have to wait some more.
Russell-2000, RUT, 120-min chart
Taking the pattern presented on the chart above and projecting it out on the daily chart is shown below. A larger rising wedge pattern, with a 3rd, 4th and 5th wave to go, shows we could see price chop its way higher into the end of the month. It might mean another May high, just as we had in 2008 before the bottom fell out. The top of a rising wedge from the March 6th low crosses the broken uptrend line from 2009-2010 (the top of a larger rising wedge pattern) at the end of April near 872. This is also where the 5th wave of the move up from November would be equal to the 1st wave. This projection is shown as a way to keep bears patient and don't jump the gun here.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 841
- bearish below 798
As with the other indexes, the DOW's pattern since the March 16th high leaves a question mark on the market's next move. The DOW especially looks like it's been consolidating sideways since the March 16th high and the decline from Monday could be the completion of an a-b-c pullback. If true then we should get another rally leg and I'm depicting a move up to 13500 based on that interpretation. A bounce off its 50-dma near 12970 could launch another rally but stay aware that the DOW may have simply finished weak (comparatively) at Monday's high and will only get a bounce before continuing lower (dashed red line).
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 13,300
- bearish below 12,950
SPX looks very similar to the DOW except that it was able to make minor new highs each time it bounced back up since its March 19th high, whereas the DOW was not able to make new highs. The new highs for SPX may have been good enough to put in an ending pattern for the move up from March 6th. A drop below 1391 would be the first bearish heads up although I see the possibility for another low Thursday morning, one that should stay above 1383 if it's to remain potentially bullish, followed by another rally leg into next week. It's a little hard to see the dashed red line but it's showing the possibility an impulsive decline from Monday will be followed by only a bounce correction back up to the broken uptrend line from November-March early next week and then continue lower. That's shown a little more clearly in the 120-min chart further below.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1430
- bearish below 1391
The chart below shows the expectation for one more 3-wave move up into next week to complete the wave count for the rally from March 6th. I'm showing, in green, a rally up to 1429, a potential Gann number that I'll get into next, by next Wednesday, April 11. If it first drops lower tomorrow before bouncing then the pattern could turn into something like the RUT's (choppy rally higher into the end of the month, or it could bounce back up to resistance at its broken uptrend line and then lower, which would make the bigger picture more bearish since it would not fit a bullish consolidation pattern. The next couple of days should clear up which pattern is going to play out.
S&P 500, SPX, 120-min chart
With the confusing picture presented with tonight's chart it's time to turn to Mr. Gann and his wheel of time and price (Gann Square of Nine chart) to see if he can help us out since SPX is at a very interesting level on this chart. Gann stated many times that time is more important than price which is one reason I've been showing the 62% time relationship between the 2002-2007 and 2009-2012 rallies. The Gann chart shows another interesting relationship between these two rallies.
I've shown in the past but for those not familiar with this tool, I'll cover a quick review. The chart is based on a spiral that starts with '1' in the center, '2' at the 9:00 position and then rotates clockwise from there. The first square finishes at 9, hence the name "Square of Nine". Numbers on the same vector and numbers 90 and 180 degree from another often "vibrate" off each other. One circle (square) around is 360 degrees which means almost 1 day per degree and the dates are arrayed counterclockwise around the outside starting with March 21st at the 3:00 position. It's common to see dates related to prices and I'll point out one tonight. I've copied a portion of the chart below so that the numbers referenced here can be seen (sorry for the small numbers but I had to squish it to fit even just the top right section of the chart).
Gann Square of Nine chart (top right section)
Back in October 2007 I had pointed out the potential importance of 1576 because it was 6 squares away from the October 10, 2002 low at 768. The number 6 is important and 6 squares away tends to be very important. Think of 6 sides (squares) enclosing a cube as if completing a circle. That was a 5-year rally almost to the day, which can be thought of as 6 * 10 months so time and price came together then, which made for a very nice setup for a market reversal.
Along the 768-1576 vector (the red one at the 11:30 position), 1 square below, is 1421-1422 and Monday's high was 1422. I mentioned 90 degrees is an important relationship and 90 degrees from 1422 (shown with the red vector at about the 2:30 position) points to April 2 so the 1422 high on April 2nd ties time and price together.
Now moving to the rally from March 6, 2009, the low was at 666 (on the blue vector at about the 12:30 position) and 6 squares up from that level is 1429, which could be a level equally as important as the October 2007 high at 1576. With the SPX 120-min chart above I showed a 3-wave rally into next Wednesday where it would cross the top of its rising wedge pattern. Between the red and blue vectors one could say the 1421-1429 area is very important from a Gann perspective.
Midway between 666-1429, or 3 squares from each, is 1012 and a major low on July 1, 2010 was at 1011. This fits as the midpoint of the 2009-2012 rally on the Gann wheel. The 38% retracement of the 2007-2009 decline is at 1014, which is another Fibonacci-Gann relationship. The 50% retracement from the current high is at 1044, which is exactly 90 degrees away from the 666-1429 (blue) vector and therefore 1429 "vibrates" off that 1044 low on the wheel.
Not visible on the chart is 1075, which is 180 degrees from 666-1429 (blue vector at the bottom of the circle). That was "coincidentally" the October 2011 low from which the current rally was launched. Half a year is 180 degrees of the circle and October 2, 2011 low to the April 2, 2012 high is half a year. So it's clear from this Gann wheel of time and price that these prices resonate with each other and at this time. It makes it a very important time to be watching for evidence of a possible high for the market. Tying in the trend lines and EW counts adds to the credibility of a top forming here or a little higher next week (SPX 1429). It doesn't mean a top will form here but we are cautioned to look for that possibility.
Moving onto the rest of the market, I'm not getting any directional inputs from the banks which has simply marched sideways for the past 2-1/2 weeks. I could argue it's a bullish consolidation pattern as well as a rounding topping pattern. When they break out of their trading range we should get some direction for the broader market as well.
The transports are not showing any direction either. Again, I could argue for another leg up, with an upside target near 5600, or a breakdown from here. Based on signals we're getting from global economies slowing down I have a real hard time arguing a +6% rally for TRAN but I've seen stranger things with this market. A drop below 5200 would be a bearish heads up and then below its March low near 5029 would indicate the bears are in full control.
Transportation Index, TRAN, Daily chart
Following the FOMC minutes yesterday the dollar spiked higher (and the euro lower), even more than I would have expected. It was as if there were a lot of dollar bears suddenly caught off guard with the Fed's minutes showing a reluctance to add more stimulus. What planet are these traders on? With a near-record rally in the stock market, at its highs, and an economy that most economists say is not contracting enough to worry about, why on earth would the Fed waste one of their precious bullets on more stimulus? I can't help but feel there were some large institutions simply playing with traders and have been putting pressure on the dollar leading up to this so that they could let go of the beach ball underwater and watch all the crazy dollar shorts scream like little girls as they covered themselves. Whatever the reason, the dollar continued higher today and now has clearly broken its downtrend line from March 15th. It looks like it's due a pullback but should then proceed higher.
U.S. Dollar contract, DX, Daily chart
With the dollar's rally the metals have been crushed and the drop leaves a bearish kiss goodbye after the back test against its 200-dma. It should find some support at its broken downtrend line from August-November 2011 but I think the 3rd back test will lead to a failure this time.
Gold continuous contract, GC, Daily chart
While gold was down about -3% today silver got whacked for about at -6% loss. Silver tends to be the more volatile of the two (and more fun to play for that reason) and the pattern is currently set up for a strong selloff in a 3rd wave. That's not a guarantee, just the setup. Use good risk and money management, use your stops, don't eat yellow snow, etc.
Silver continuous contract, SI, Daily chart
Silver's weekly chart below keeps things in perspective -- the parallel down-channel from April 2011 is set up for the next leg down which should be a stronger 5-wave move down (for wave C) than the 3-wave decline from April to September, 2011. The bottom of the channel will be near 20 in June and is just a projection for now.
Silver continuous contract, SI, Weekly chart
Oil has had a very choppy pattern since its March high and continues to support the possibility for another leg up within its parallel up-channel from November-December. The break of its uptrend line from October-February on March 29th, followed by the back test and kiss goodbye on Monday, it looks bearish. But until it breaks below 100 there remains the upside potential (back up to about 115).
Oil continuous contract, CL, Daily chart
Thursday morning is quiet for economic reports. Because the market is closed on Friday we will not see how the market reacts to Friday's reports, specifically to the Payrolls numbers, until Monday. That makes holding positions over the weekend a little riskier than usual.
Economic reports, summary and Key Trading Levels
The weak bounce off this morning's low makes it look like we could get another drop lower in the morning. But I would be careful chasing it lower since it's possible we'll get only a quick low to complete a 5-wave move down from Monday that will be followed by at least a bounce to correct the leg down and potentially another choppy rise to a new high into next week. If the market simply starts a rally Thursday morning, with the confusing short-term pattern, it's tough to tell whether we should look for just a bounce and then head lower or a continuation higher into next week. It's simply not clear enough to determine the higher odds from here.
What the bears need to see is a bounce to correct this week's decline, whether from here or after another low Thursday morning, that's then followed by a break below this week's low. That would be a strongly bearish statement since the leg down from would in that case be the 1st wave down of a larger decline. This week's decline could fit as the completion of an a-b-c pullback from last week, which means it will be followed by another rally leg. Hence the caution.
If the market works its way higher next week, keep an eye on SPX 1429, which fits the rising wedge pattern as well as an important level on the Gann Square of 9 chart. That level is a setup (not a guarantee) for THE high for the market, potentially even more important than the 2007 high. But as of right now, both sides should be looking for hit and run plays. If you're not an active day trader (either by choice or because your account is less than $25K), keep your powder dry as we wait for the next fat pitch to get into a swing/position trade.
Good luck 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