This being one of the more bullish weeks of the year it may have been disappointing to see a down day but so far it's just a pullback.
This week is typically the strongest week of the 2nd quarter and one of the strongest weeks of the year. Opex weeks tend to be bullish (or very bearish when they're not bullish) and the 2nd quarter earnings run tends to keep the bulls interested. Perhaps the biggest influence is tax day. The Treasury is expecting to pay down about $48B in short-term bills on Thursday. That frees up money for the holders of the paper and they'll want to put it to work somewhere (possibly right back into Treasuries). But money typically makes it into the stock market from this and the anticipation of this money will often have fund managers buying to take advantage of the rally. So far the pattern is working, even if today was a disappointment. Last year the S&P gained 56 point in the 7 days following tax day, which this year was April 17th.
We've had two decent days for the market, especially yesterday. To get a relatively small pullback to correct the rally shouldn't scare too many people and in fact we saw very little movement in the VIX and the equity put/call ratio did not reflect any worry (in fact call buying was heavier than usual). When we look under the hood and the price pattern there could be reason to worry but we'll review that with the charts.
Helping to spark an initial rally off the gap-down open was another upgrade for AAPL's stock. Goldman Sach's Bill Shope raised his price target price for AAPL again, now to $750 from his previous target at $700. It helped give the stock a boost this morning but it was immediately sold into. I'm sure Shope made his call because he really believes AAPL is worth the higher price. I'm sure the goal was not to get buyers to come in and take inventory from GS (cough). I'm sure the selling into the morning spike was not GS (cough, cough).
The AAPL upgrade helped NDX quickly recover from its gap down this morning and the other indexes tried to follow but were unable to close their gaps. Another afternoon attempt to rally the markets resulted in a lower high before selling off again so the bulls have some work to do to keep from losing Monday's and Tuesday's gains. So far it's just a pullback but as we'll review with the charts, the potential could be a more significant decline from here if the bulls don't step back in tomorrow.
Acting as a Debbie Downer on the market is the continued worry over European debt. More money flowed into U.S. Treasuries, as we've seen since March 20th, which has resulted in a strong turn back up in prices (back down in yields). The 10-year Treasury dropped back under 2%, closing at 1.98% today. German bunds are also seeing more buying interest and its auction on 2-year debt attracted strong enough interest to drop the yield to a record-low 0.14%. Investors will soon be paying to have the stronger governments hold their money for safe keeping.
In the meantime Spanish government bonds are once again under pressure to be sold and yields are on the rise. Non-performing loans at Spanish banks are on the rise and hit a 14-year high today. The chart below shows the Spanish 10-year bond on the rise again after spiking up to about 6.7% last November. The spread between Spanish and German yields had spiked up to about 4.8%. Then the ECB stepped in with much fanfare with their 1T euro LTRO package to help banks purchase their governments' debts. All was well with the world again, especially since Greece "solved" its debt crisis, and yields on Spanish and Italian bonds dropped.
Spanish bond yields and credit spread
The ECB fix was supposed to last for at least a year but it appears they got only about 3 months out of the deal. A rate over 6%, which is where Spanish 10-year bonds are now threatening to climb over, is considered unsustainable and it's what got the ECB involved with the bailout plan last time. They didn't want a bigger Greece on their hands. Well they got it anyway and don't have much to show for their 1T euros.
And while Italian bonds are doing relatively well it appears the bond market is most concerned about Spain's ability to pay down its debt. Compounding the problem is the fact that private investors are less reluctant to buy sovereign debt when they know the contract can simply be voided and stick the investor with the loss. It's that unintended consequence thing biting the European financial authorities in their collect derrieres.
Tomorrow we'll get another data point on the chart above to see how well Spain is doing. They will auction 2- and 10-year debt before the U.S. market opens. Based on all eyes on this auction we'll see plenty of "support" to ensure its success, and that in turn would make a failed auction (much higher yields) that much more bearish. This fear was probably part of the reason for today's market decline, especially late in the day when traders seemed more interested in protecting profits than looking to add to their positions.
Deutsche Bank's Jim Reid and Nice Burns were in the news today as they discussed their worry over the European debt. They mentioned the credit-default swap (CDS) prices have risen to the point that at least four European countries fact a "credit event", such as having to restructure their debt (Greece on steroids all over again). They cited the Markit iTraxx SovX Western Europe Index of contracts on 15 governments, including Spain and Italy, has jumped 26% in the past month. That's a huge and scary move.
Reid and Burns suggested that the next five years of corporate and financial defaults, should these implied defaults come close to being realized, will make the last five years look "relatively calm." They note that the last five years saw default rates stay in line with historical norms because of the "unprecedented intervention" of U.S. and European monetary policy decisions.
This is all in line with the huge debt overhang we have to deal with. Whether it's personal, corporate or government there is simply too much debt that has to be worked down. It's a process but that process may soon start to accelerate if defaults start to march higher.
One factor making it worse for Spanish debt is that money is fleeing the country. As investors withdraw money from the banks there is less money for the banks to buy the government debt. So the money the ECB lent to the Spanish banks is fleeing the country and going elsewhere (stronger countries, helping their markets). The chart below is from Citi that shows the sharp decline in domestic deposits since the beginning of 2011 while borrowing from the Eurosystem (ECB, other EU countries and the IMF) has risen dramatically. This is clearly an unsustainable path.
The bond market of course sees this happening and they're becoming more fearful of Spain's ability to pay back their debts. Many call them bond vigilantes and accuse them of making the problem worse. It's like blaming speculators for driving oil prices higher. There are of course traders who sense the vulnerability and trade that (shorting Spanish bonds in this case) but mostly it's simply a case of bond investors looking to protect their investments and when the risk increases it requires a higher yield to compensate for the risk. Personally I wouldn't touch Spanish bonds with a 10-foot pole, especially since we know how well private investors fared with Greek bonds.
As the situation worsens in Europe we can be sure the ECB will come out with another LTRO program (or two or three or five) as they struggle to keep the dam from bursting. Of course at some point they will simply be unable to taken on any more debt themselves. Their (U.S. and ECB) balance sheets have already ballooned over the last couple of years (months for the ECB). They're the last in line for bailouts since who's left to bailout the central banks? The taxpayers of course.
Each time the central banks try another rescue program we'll see a little euphoric response from the market and each time it will last for a shorter and shorter period as most begin to realize there's nothing the ECB or the Fed or anyone else can do to stop the correction. The market is too big to bail and the sooner it's allowed to correct the sooner we'll get to the other side and be able to start trading the market again without the interference of governments and central banks. It will be very painful period of transition (and the U.S. will have to do the same) but I look forward to the other side and the golden opportunities that we'll find.
Starting with the SPX weekly chart tonight, you can see how it dropped down to its October-November uptrend line last week and has bounced off the line. This was to be expected and now all we're waiting for is a decision by the market as to whether it will try for a new high or start a bigger pullback at a minimum. A drop below last week's low, near 1357, would be a bearish heads up. From a weekly perspective the market will not be in more serious trouble until SPX drops below 1320.
S&P 500, SPX, Weekly chart
I mentioned earlier that looking under the hood should cause bulls some concern about the bounce attempt off last week's low. The volume has tailed off since the April 10th low and that's not supporting a rise up to a new high. It can of course happen on low volume, as we saw the rally this year happening on lower volume than usual. But it's a warning sign. So far we've got a 3-wave a-b-c bounce off the April 10th low and for that reason a drop back below Monday's low at 136.58 would be bearish (it would leave a confirmed 3-wave bounce). It would also leave a confirmed failure of the back test of the broken uptrend line from October-November (bearish kiss goodbye).
SPDR S&P 500, SPY, Daily chart
For another daily perspective, I've drawn some parallel lines on the rally from December to show how price could work its way higher this month to the top of the lower channel and achieve the Gann Square of Nine target price of 1429. That will remain a possibility as long as Monday's low near 1365 holds. At the moment the 20-dma near 1394 is holding as resistance.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1415
- bearish below 1365
The more immediately bearish wave count calls for a resumption of the selling right away on Thursday (from a bad Spanish bond auction?). The 3-wave bounce off the April 10th low fits as a 2nd wave correction to the 1st wave decline from April 2nd. I see the possibility for at least another leg up for the bounce as long as 1365 is not broken and it would become more bullish with a rally above 1408.
S&P 500, SPX, 60-min chart
I'm continuing to use the DOW to show the "one more new high" scenario that calls for a new high into the end of the month or early May, which would set up a repeat to May 2008. If the April 10th low was the completion of the 4th wave of the move up from November then the two upside projections for the 5th wave are at 13344 (5th wave = 62% of the 1st wave) and 13736 (5th = 1st). A drop below the April 10th low would negate that bullish possibility.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 13,100
- bearish below 12,700
While several of the individual big-cap tech stocks look to have topped or are within days of topping the NDX pattern supports the idea we'll see at least a minor new high next week. This backs up the DOW's bullish possibility shown on its chart. A parallel up-channel from December, drawn with a trend line along the December 5 - March 28 highs (potentially the 1st and 3rd waves of the move up from November) and then attaching a parallel line to the December 19th low (2nd wave), shows where the 4th wave will typically find support, which it did on Monday. The 50-dma is located at the same level, which clearly added support. The choppy pullback from March 28th looks like a bull flag.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 2750
- bearish below 2660
If NDX can get above its 20-dma near 2740 it would help the bullish pattern calling for a new high into next week and I'm showing a projection to about 2810 where it would again hit the long-term broken uptrend line from 1990. As noted on the top of the chart, hitting 2805 would also have it achieving the 50% retracement of the 2000-2002 decline. A drop below Monday's low near 2660 would look more bearish even though it could be just an extension of the bull flag (a drop out the bottom of the flag would be the signal the bears will want to see).
I mentioned that there are a couple of big-cap tech stocks that appear to be in trouble and for that reason I have to wonder if NDX has a chance to make a new high. PCLN is one example -- on Monday it broke down from its up-channel from January, which was also a break of its 20-dma, something it had not even tested since January. PCLN has now bounced back up to the bottom of its broken up-channel from January, near 735. Its 20-dma is a little lower, near 729, so a failure at both will be a failed back test (kiss goodbye).
Priceline.com, PCLN, Daily chart
It's a nice setup for a short play on PCLN if resistance holds. But right now what the bulls have in their favor is that the pullback from the April 10th high is a 3-wave move. If it's just an a-b-c pullback then we'll see PCLN make a new high before finishing, perhaps even up to the $800 area. As noted on the chart, those who shorted the last high and/or the breakdown will get squeezed while the 2nd mouse that shorts the new high will get the cheese. A break below $700 would say the 2nd mouse will have to short the breakdown instead of waiting for a new high.
AAPL is of course another one of the big-cap tech stocks and one that's a favorite among those who believe stocks have much higher to go. It's a great sentiment stock. Calls for $1000 for AAPL are very reminiscent for those of us trading into the 2000 high when we heard similar calls for QCOM. I've shown AAPL's pattern recently and mentioned I was looking for the completion of the final 5th wave of its rally from 1997. I think we got it.
On Friday AAPL broke below its up-channel from January, its 20-dma and the bottom of a slightly expanding triangle from mid-March (a megaphone topping pattern). Today it made it back up to the bottom of its megaphone (the uptrend line from mid-March) but immediately pulled back some, leaving a back test followed by a bearish kiss goodbye. It also failed to hold a retest of its broken 20-dma. The chart below is with the log price scale and interestingly, using the arithmetic price scale shows the uptrend line from January was also retested today. It's a bearish setup against this morning's high at 620.25.
Apple Inc., AAPL, Daily chart
Peter Brandt wrote an update on AAPL last week in which he stated that he saw a pattern that Jesse Livermore had identified as one of his favorite short-play setups. He used a chart of AAPL and compared it to Livermore's, shown below. Livermore called it an "accumulation cylinder with widening mouth", which is an expanding wedge. Normally this is a topping pattern, which for AAPL occurred in the 2nd half of 2011 but instead of topping it led to an explosion higher. This is a good example of when a pattern fails it tends to fail hard (the spike up into the April high). Once the high is in (point 10) you look for a pullback (point 11) and then the bounce (point 12) to get short. That's the setup we have right here.
Peter Brandt's comparison between Jesse Livermore's setup and AAPL's current chart
The RUT's pattern is similar to the others in that the bounce off the April 10th low fits as an a-b-c correction to its decline. So far it has not been able to bounce back up to its 20- and 50-dma's, which are now crossing near 819. Between those MAs and a downtrend line from March 27th, near 824, watch for resistance if tested. If the RUT drops below 791 it's probably not going to go any higher.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 835
- bearish below 791
I mentioned earlier that money has been running back into U.S. Treasuries as investors seek higher safety. That has dropped yields back down and TNX is approaching the bottom of a potential ascending triangle pattern, currently near 1.86%. I'll continue to show the potential for another leg up within the triangle to finish it before heading lower later this year. A break below the January low at 1.79% would tell us it's headed lower now, not later.
10-year Yield, TNX, Daily chart
The dollar has been in a very messy pattern for past two weeks and while I continue to believe the next big move will be to the upside I must admit to wondering what it's doing here. It should not be wasting any time getting going to the upside if a 3rd wave is about to start. But there is the possibility for a little further pullback before the rally gets started so it needs to prove it's ready to go with a rally above 80.40.
U.S. Dollar contract, DX, Daily chart
Like the dollar, the metals and other commodities, have been chopping around and not showing any desire to head off in one direction or the other. Unless gold gets back above 1718 I think we'll see lower from here but not necessarily a hard selloff until another month or more.
Gold continuous contract, GC, Daily chart
If oil drops below 100 we should see a quick test of its 200-dma at 96. If it's able to push above 105 and get above Tuesday's high as well as its 20- and 50-dmas we could see a run up to at least the 110 area. At the moment it's a coin toss.
Oil continuous contract, CL, Daily chart
Tomorrow we'll get the unemployment claims data before the open and then at 10:00 AM we'll get the existing home sales, the Philly Fed numbers and leading indicators. They all might not mean much if the market is down on a bad Spanish debt auction so take your cues from the pre-market futures.
Economic reports, summary and Key Trading Levels
Depending on the index or leading stock that I look at I could argue for another rally leg into next week or a selloff right from here. If the market can continue to push higher I think we'll see new highs before the end of the month. It would be the final high since the wave count would run out of alternative wave counts at that point and the final 5th wave would be a clear signal to look for a short play.
But the final 5th wave looks to have been made on some key stocks and indexes, which have been followed by impulsive declines (indicating a trend change to the downside). This has been followed by a 3-wave bounce to resistance (trend lines or moving averages) and is setting up a bearish kiss goodbye following a back test if we get a selloff from here. Monday's lows, and certainly the April 10th lows, are key levels for the bears to break -- get short if that happens
The bottom line is that there might be some further upside but it is insignificant compared to the downside risk. Holding long positions overnight is now a very risky position. One "credit event" is all it will take to unhinge this market. It could go either way here but as usual, the downside will likely happen much faster so be careful.
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