After a one-two punch on Tuesday and Wednesday the market is holding up well. Hope that Bernanke will do something next week is credited for the lack of a selloff.
Tuesday the market was clobbered with more bad news out of Europe and bad economic news. Wednesday the market had to deal with bad news out of AAPL and a few other bad earnings reports. More bad news from other tech stocks was an opportunity for the bears to take advantage of the negative sentiment but they couldn't do much. With all the bad news knocking the stock market off its feet it's refusing to go down and a lot of credit for the lack of a selloff has to do with the hope that the Fed will sprinkle some more pixie dust over the market next week and pull another QE program out their hat. Hope springs eternal but there could be trouble if Bernanke doesn't give the market something.
New home sales were reported this morning and the number was terrible. It's getting harder and harder for the National Association of Realtors (NAR) to spin the numbers to make them look good. The sales number declined -8.4% to 350K from last month's 382K and worse than the expected 375K. There's been a lot of hope and bullish expectations for the housing market over the last few months but the data is not supporting that hope. With another downturn in the housing market there is going to be a significant drag on the economy (again).
Helping the DOW outperform to the upside today were earnings reports from Caterpillar (CAT) and Boeing (BA), both showing improvement with better than expected earnings and guidance. Unfortunately auto sales are not keeping up and Ford (F) disappointed as they reported a slowdown in European sales (and that was a surprise?). F has now closed below its October 2011 low at 9.05 with a closing price of 8.97 today. Our very own auto company (since we own stock), GM, also closed down and also below its October and December 2011 lows at 19.05 and 19.00, resp., with a closing price of 18.80 today. Sure wish we could have had a stop order for our shares. The government makes a lousy investor (among other things). Our "investment" is now half what we put into the company. Well, at least the unions were taken care of.
There's not a lot to discuss about what's going on in the market right now. European problems with debt and economic contraction continue, earnings have been all over the board but generally weak, economic conditions continue to deteriorate and basically there's no reason why the market should rally. In fact it should be selling off hard instead of hanging near the highs, especially when you compare the U.S. indexes to the rest of the world and to commodity indexes. Something is out of whack and that something is called the Fed. Promises of more free money that will make its way into the stock market is the hope and that hope is keeping the bears away and it has the bulls buying in anticipation of the Bernanke put working. We'll have to wait until we get through next week's FOMC meeting to see if B-B-B-Benny and the Feds bless us with another QE program (I'm still on record as saying he will not).
Between here and next week at this time I could argue both a bullish and bearish case for the indexes. I see a very vulnerable setup that only requires one spark to blow things sky high and crash the market. But with all the choppy and whippy price action, along with key support levels holding (in most cases), I can see the potential for a rally into early August before the bottom falls out. Both scenarios are bearish but the question is timing.
I'm going to start off tonight's review of the charts with a look at the NYSE. We've got an interesting fractal pattern that's playing out and I think it could be important for the longer-term pattern. Many don't like to use the NYSE for analysis because it includes a lot of foreign indexes (ADRs) and therefore isn't as representative of the U.S. market as say the SPX. But my response is that the foreign representation may be the key to evaluating more of a global market rather than just the U.S. indexes, which have been holding up stronger than most global indexes and diverging with other important indexes. The NYSE has been the weaker major index and that's providing a heads up for us. It appears the U.S. indexes are out of synch with the rest of the world and that should be concerning to the bulls. Instead they would rather disqualify the NYSE as "irrelevant." Whenever I hear that I look for what they don't like and therefore are ignoring.
So with that let's take a top-down approach to the index to see this multiple-degree fractal pattern. Basically they're H&S patterns, starting with a big one from the left shoulder formed in 2000. The head is the high in 2007 and the right shoulder is the high in 2011. The height of the head above the neckline says the next decline will drop the index into negative territory and that we'll play submarine for a number of years. Call me a Doubting Thomas but I don't think that will happen. But for an A-B-C decline from 2007, with the A-wave the low in March 2009 and the B-wave the bounce into the 2011 high, a C-wave that matches the A-wave in percentage terms would mean another 60% decline from the May 2011 high. That would target the 3500 area, about 700 points below the March 2009 low. The move down from 2011 should be a 5-wave move.
NYSE Composite index, NYA, Monthly chart
Notice also the trend line through the middle of the price swings since the 2000 high. Sometimes these internal trend lines can measure the "balance" of the market and it's interesting to see how many times it's acted as support/resistance. At the July 3rd high, 7903, it missed tagging the line by less than 30 points. If the bulls aren't quite finished with the bounce off the June 4th low we could see a test of that mid-trend line as well as the downtrend line from 2007, near 8100 in early August.
Getting in a little closer with the weekly chart below, you can see a little more clearly how many times that internal trend line from 2000 has been tested. The rally from March 2009, which created the right shoulder at the May 2011 high, shown on the monthly chart above, has also created a H&S topping pattern. The left shoulder is the first high in April 2010, the head is the May 2011 high and the right shoulder is the March 2012 high. And now at one lesser degree of the wave count we've got another H&S topping pattern for the right shoulder. So at this point we have a H&S topping pattern for the right shoulder of the large H&S pattern on the monthly chart and another H&S topping pattern for the right shoulder of the right shoulder, hence the fractal pattern. If all these H&S patterns are correct, it's going to be a painful time for the bulls in the years ahead as all of these play out to the downside.
NYSE Composite index, NYA, Weekly chart
Now we get in even closer with the daily chart and look at the price action since the June low, which is the very small bounce on the right side of the weekly chart above (the smaller right shoulder). It has formed yet another H&S pattern for an even smaller-degree 2nd wave (labeled wave-ii at the current high on the chart above and wave-(ii) on the daily chart below). From a short-term perspective I see the potential for a bounce back up to the broken uptrend line from June 4th, where it could also back test its 200-dma, near 7723, and its 20-dma in a couple of days. But it's currently struggling to get back over its 50-dma at 7614 and could drop lower from here.
NYSE Composite index, NYA, Daily chart
So we've got several degrees of the wave pattern, from monthly down to daily, showing very similar topping patterns at major reversal points, including the one for the bounce off the June 4th low. These fractals are often a very good guide to follow and right now it's telling us the market is at risk for dropping hard at any moment. The short-term question is whether or not we've got one more bounce before it lets go.
Using the SPX chart I am making the argument that we'll see another rally into early August before the bounce off the June 4th low tops out. Just keep in mind that this is only a possibility that's losing potential as the market works its way lower, especially if it stays below its broken uptrend line from June 4th. Keep in mind that a 5-wave move down from April has been followed by what can easily be seen as a very choppy rally (overlapping highs and lows, unlike the decline into the June low). An impulsive move down followed by a corrective move up will be followed by at least one more impulsive move down (below the June low). The only question right now is whether or not we get one more new high as depicted, or just a bounce to a lower high before dropping, or no bounce and drop from here. But drop it will. If the bulls can manage a new high I like the overlapping price projections (based on the wave relationships within the bounce pattern) in the 1392 area. If that were to happen on a post-FOMC rally I'd be all over it like a bear into honey and get myself a big short position up at that target.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1380 but likely only to 1390-1405
- bearish below 1320
On the 60-min chart below I'm showing the very bearish wave count that calls for hard down right from here. With a (i)-(ii), i-ii wave count to the downside from the July 19th high, it's calling for a 3rd of a 3rd wave down, which is typically a very strong move. A fast drop (1 to 2 days) to 1270 before consolidating would be typical and all it needs is a match to set off this tinderbox. While I recognize the risk and would not want to be long here, I'm thinking a crash scenario is going to wait until at least after next week's FOMC meeting. Just keep it in mind -- if the market starts to sell off strongly from here there will be very few bounces and only little ones.
S&P 500, SPX, 60-min chart
The DOW's pattern shows the same setup as SPX. It was a stronger index today (thanks to CAT and BA) and yesterday it successfully tested its 200-dma and closed on its 50-dma. Today it closed above its 50-dma and back above its broken uptrend line from June 4th. Yesterday's low was also a test of the bottom of a parallel up-channel from the first pullback following the June 4th low, on June 11th. It's a very corrective wave pattern for the past two months and I'm just waiting for confirmation that the bounce is over (with a break below 12490). One more trip back up to the top of the channel would also be a monster shorting opportunity.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 12,960
- bearish below 12,490
Some big tech stocks got slammed today and considering the damage I'm surprised NDX lost "only" -18 (-0.7%) today. AAPL was of course one of the culprits, finishing down -25.95 (-4.3%). PCLN got slammed lower and finished down -34.54 (-5.2%) and NFLX got annihilated with a loss of -20.11 (-25%) and it closed below its June lows. AMZN did relatively well losing only -5.99 (-2.7%). So for NDX to lose only -0.7% it was quite an achievement.
NDX formed a doji today, as did SPX and it formed it right on its uptrend line from June 4th. But it only back tested its broken 50-dma near 2564 today, after it did the same to its 20-dma on Monday and Tuesday so price action around its MAs is bearish so far. It has support at its uptrend line from March 2009, near 2525 (log price scale), and then its 200-dma near 2507. Needless to say, a break below all of its MAs and uptrend lines, confirmed with a drop below 2500, would be bearish. But there remains the possibility for one more new high into next week so bears be careful too.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 2618
- bearish below 2500
The RUT also looks bearish now that it has broken below its 50- and 200-dma "bowtie" near 775. As long as it stays below 775 I think the bears stay in control and the downside projection shown on its chart is for the next 5-wave move down. The downside projection for now is back down to its June low by mid-August (potentially much faster and deeper). Two equal legs down from its July 5th high is at 766.63, which is holding and could indicate it's just an a-b-c pullback that will be followed by another push higher (green dashed line). I don't count the bulls out but they can't waste any time getting going here.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 809
- bearish below 765
Tonight I'll look at the bond price instead of the yield. A look at the daily pattern of ZB, the 30-year emini futures, I see the possibility that it might have topped last night. It hit a new high at 153'11 and pulled back sharply from that high in the overnight session (mirroring the rally in equity futures) before bouncing back up during the day to a lower high (so far). The move up from June 29th counts well as a 5-wave move which does a nice job completing the 5th wave of the move up from March, which in turn completes an A-B-C rally off the April 2011 low.
As shown on the weekly chart below, the new high following the September 2011 high is showing bearish divergence and it has reached the trend line along the highs from August 2010. There's still a little more upside potential to hit a Fib projection where wave-C would equal 62% of wave-A at 153.81 (153'26) and the upper trend line from August 2010 is currently near 155'00. A drop below the July 19th low at 150'11 would signify the top is in place (bottom for yields).
30-year bond price (emini futures), ZB, Weekly chart
If bonds are ready to start down we could see stock prices head higher for at least a while. I suspect bonds and stocks will get in synch to the downside but that switch hasn't been made yet. For a number of years they've been counter-trend and therefore a decline in the bond market could still be accompanied by a rally in the stock market. I'll be watching this carefully for clues.
Banks are right on the edge of letting go. BKX is trying to hold above its 50-dma at 44.37 but has remained trapped this week below its broken uptrend line from October-November, currently near 44.75. I see the potential for a higher bounce to the 45.77 area if it doesn't drop from here.
KBW Bank index, BKX, Daily chart
On Tuesday the U.S. dollar ran up to the trend line along the highs from January-May and today pulled back substantially. It could be a high for a while and one pattern calls for a sharp decline to the 80.55 area before starting the next rally leg. A break below the July 19th low would improve the chances of that happening but until then we can see the dollar is clearly in an uptrend. If the dollar does pull back as shown, it would support a stock market rally.
U.S. Dollar contract, DX, Daily chart
Every once in a while I like to show the bigger picture of the dollar so that we keep things in perspective. I've been showing an expectation for a large sideways triangle that plays out from 2008 to about 2017 before heading lower, as shown on the monthly chart below. This is obviously speculation but with the corrective price action and the larger wave pattern it fits nicely. It would also mean fiat currencies are basically toast by the time we make it into the 2020s. But that's a long ways off (wink).
U.S. Dollar contract, DX, Monthly chart
Speaking of triangles, if the bearish wave count that I've been carrying on the gold chart is correct it should be ready for another leg down soon. There are some smarter people than I who are predicting a gold rally and I am therefore very nervous about calling for a decline. But I'll let price prove me wrong, first with a rally above 1643, and then above its downtrend line from September 2011, near 1675. Otherwise the sideways triangle pattern suggests another leg down and a drop below 1530 would indicate a strong decline is coming (down to at least 1350 in the next month or two).
Gold continuous contract, GC, Daily chart
Oil has finished a 3-wave bounce (a-b-c) last week and that could be all the correction of the March-June decline that we'll see. It was a 50% retracement that also back tested its broken uptrend line from 1998-2001. The next big move should be a decline at least equal to the March-June decline (which would target the $60 area). But there are still a couple of bounce ideas that could play out so I want to see an impulsive decline to help determine that the trend has switched back to the downside.
Oil continuous contract, CL, Daily chart
Tomorrow's economic reports include durable goods orders, which are not expected to improve from last month, and pending home sales. One of the problems with pending sales is that many of them fall through due to lack of funding. So I consider that number rather worthless.
Economic reports, summary and Key Trading Levels
AAPL hurt the techs by falling on its face yesterday after the close and it finished down almost -26 (-4.3%) today. After the bell today Facebook (FB) did another face plant and got pummeled after the close, dropping about $3 (-10%) before rebounding slightly. Did earnings leak early? It's not due to report until tomorrow, with a conference call after the bell. But today's after-hours plunge says somebody knows something. The after-hours low broke its July 17th low at 27.15 with a low of 26.50 but it looks like the previous low is going to hold. That would create a bearish 5-wave move down from its June 22nd high and while it would be a setup for another bounce it should be to a lower high and then look out below. It's too hard to say whether FB will have much of an effect on the broader market. Sentiment is already pretty sour and hope for a Fed rescue is about the only thing holding it up.
Going into today's close I mentioned it was pretty much a coin toss for tomorrow but if forced to choose I would rather be long. It's as much a gut feel as anything else -- I don't see a bad news event acting as a bearish catalyst before the FOMC meeting next week. But I'm fully aware of the significant downside risk from right here. I might prefer to be long but it would take very little to flip me around into a raging bear.
The intermediate (weeks to months) and longer-term (months to years) patterns are bearish and from that perspective I'd rather be short the market and just ignore the noise and the possibility for one more new high. But in an effort to help pinpoint a bearish entry, using short-term (days to weeks) patterns, I have to respect the potential for another new high in the next week or two. If we get the new high I'll be growling enough for everyone to hear me. If the market plunges instead I'll be looking for just small bounces to get short. Playing the upside from here is risky, especially if you can't watch the market every day and during the day.
It's been a very choppy and whippy market and could continue through at least next week. Trade lightly, if at all, and just know that this last two-month period had been one of the more difficult periods but it will get easier again (and very likely to the downside so pick out your favorite bearish play and be ready).
Good luck and I'll be back with you next Thursday since Tom and I have switched writing days next week.
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