W.D. Gann was a strong proponent of using time rather than price to help identify market turns. He would often say that when time is up the market will turn, not when price targets are hit. Between Gann and Fibonacci we have some important timing events to consider.
The market has passed some potentially important milestones relating to time and with the stock market turning down from some time relationships it's time to look for the possibility that the market has made a final high for the year. But the longer-term uptrends remain intact and therefore it's a time for caution for both sides as we carefully study price movements/patterns from here and try to get some longer-term clues.
The day started out quietly after consolidating for most of the overnight session and the dip buyers tried to do what has worked so well for them for so long -- buy the dip. But the morning dip turned into yet another opportunity for the sellers to get a little better price. Since mid-September it's become more evident that the market has been under distribution and that continues. Buying momentum was waning and the October 5th high showed significant bearish divergence. This combined with afternoon selling and now selling of bounce attempts it has become clear that big trading houses are distributing stock rather than accumulating. That could quickly change once they've got their portfolios where they want them but so far there's no evidence of that happening.
Earnings kick off this week and Alcoa (AA) started off last night with decent numbers but they lowered their forecast. And forecasts are going to be important this cycle. We're all hearing about a global slowdown and the guidance from the individual companies is going to be important. Inside selling continues to swamp insider buying, at a ratio that has market previous market highs, and that's also telling us company insiders do not like what they see coming down the pike. AA lowered their growth forecast (at least it's still growth) from 7% to 6%. But Cummins (CMI) cut their forecast significantly and announced it will be reducing their workforce by about 3.5% (1500 jobs). This morning two electronic houses, Avnet (AVT), a parts distributor, and OCZ Tech (OCZ) joined in the chorus of companies lowering next quarter forecasts. We can expect to hear a lot more of the same and it's going to be hard for the bulls to justify current market prices no matter what Bernanke wants.
The Fed's Beige Book report did not have any surprises and shows a slight expansion in economic activity for the 12 Fed districts. The housing numbers are looking a little better although they didn't get into the reports about an increase in foreclosures and what that could do to the nascent growth in this industry.
Even though the Fed has been working overtime to manipulate the stock market higher (the Fed's self-imposed 3rd mandate), it's interesting to see how the market still continues to cycle around some Fibonacci and Gann time sequences. From a Fib perspective, the number 55 is a Fibonacci number and as you can see on the chart below, using NDX, we've had a very consistent cycle of 55 (+ 3 or 4) weeks between major turning points, including the last one at the September high. Another 55 (+3) weeks from the April high puts us out in May 2013 and from September the next turn is at the end of October 2013. Two other things of note on the chart is the fact that the April and September highs were tests of the 50% retracement of the 2000-2002 decline. And the September high has left a bearish divergence at a double top.
Nasdaq-100, NDX, Weekly chart
I've shown the Gann Square of Nine chart several times in the past and it's again showing us why the September high was very likely an important one and potentially THE high for the year and potentially for years to come. Below is a scrunched version of the chart and a larger version can be viewed at this link: Square of Nine chart. I've drawn vectors through a couple of important prices and dates (prices spiral around clockwise from the center while dates are around the outside running counter-clockwise, starting with the spring equinox at the 3:00 position).
Gann Square of Nine chart
I've referenced the highlighted levels in the past but for review, the October 10, 2002 low at 768 is 6 squares (revolutions) from the October 11, 2007 high at 1576. As a side note, the October 5, 2012 high is essentially an anniversary date with these prior October dates, something that is statistically important in the market, kind of like a birthday. The April 2, 2012 high is on the same vector (red), 1 square from 1576. An important relationship typically can be found with numbers that are 6 squares from each other (an "enclosed" square is a cube, which is 6 squares). The March 6, 2009 low at 666-667 is 6 squares from the 1429-1430 (blue vector) and while the market did not stop there it did act as support on September 26th and is the valley low between the September and October highs. A break below 1430 would be a confirmation of the double top pattern.
Another important relationship is shown with the green vector pointing to the March 6, 2009 low and where 1469 "squares" with this date. SPX was able to pierce that level twice (at the September and October highs) but was unable to close above it. Opposite this date is September 7th.
The blue vector is 90 degrees (another important relationship) from the one through the 667/1430 vector and on the left side it points to September 13/14. The September high was on the 14th. Not shown on the Sof9 chart, at the bottom the blue vector crosses through 1076 and the October 4, 2011 low was slightly below 1075.
The closing high on October 5th, at 1460, is 90 degrees from the red vector through 768/1422/1576. So once the April high at 1422 was exceeded the market did a "throw-over" to the 90-degree number at 1460. Opposite that it points to October 5th. You can't make this stuff up. These are the kind of timing vibrations that Gann would refer to and instruct market participants to not ignore them. As he would say, "When time is up, the trend turns."
Between the blue and red vectors and the dates that are 90 degrees to the prices, it would appear that the square-outs are coinciding with what looks like a double top on the square-out dates. The double top for SPX will not be confirmed until it breaks below 1430, which it came close to doing today (but held).
So far the timing of the Fed's latest monetary easing program, their QE to infinity and beyond from our very own Buzz Lightyear Bernanke, has been perfectly timed with the top of the stock market. All other previous attempts to inflate the economy (and stock market) have occurred at or near market bottoms. It's one reason why I believe the QE-Infinity program will be a failure and it will be the Fed's undoing. They have been successful in raising bullish hopes because of the faith in the Fed's ability to do what they say they can do. It's been more VI (verbal intervention) than anything else. By shooting what could be their last bullet at the top of a rally they have exposed themselves to a colossal failure and the loss of faith in the Fed will be their undoing. "When time is up, the trend turns."
Moving to the regular charts, the SPX weekly chart shows price turning down from the top of what counts well as a rising wedge pattern for the c-wave of a large A-B-C bounce off the March 2009 low. The September high shows a bearish divergence. But certainly there's no arguing that from a weekly perspective, other than a warning of potential trouble, the uptrend remains well intact. The risk for bulls who hold through a "correction" is that the rising wedge pattern will likely be retraced quickly, which would be a loss of 400 points potentially before the end of the year.
S&P 500, SPX, Weekly chart
I don't show it on the above chart but there's an interesting Fib relationship with the September high at 1474.51 -- when dragging a Fib retracement up from the 1974 low and placing the 50% retracement at the October 2002 low the 100% level is at 1474.94. Throw this in with the other Fib and Gann time/price relationships discussed above and it's hard to ignore the potential importance of the double top we might have here between the April and September highs (and the September/October highs on the daily chart).
Along with the double top between the April and September highs, with bearish divergence, we have a potential double top between the September and October highs, with bearish divergence. SPX hit a low of 1430.64 today, testing the September 26th low at 1430.53. A break below 1430 would confirm the double topping pattern and the downside objective out of it would be the height of the tops above the valley, which gives us a target near 1387, which is about where the uptrend line from October 2011 will be by the end of this month. A drop below 1425 would be a break of its 50-dma and uptrend line from June. Until that happens there is no denying SPX is still in an uptrend and all we have so far is an a-b-c pullback from the September high. Bears need to be careful right here.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1471
- bearish below 1425
The chart below shows a shallow down-channel for the pullback from September 14th, the bottom of which is currently near 1427 and two equal legs down would be at 1426.98. It's now also where the uptrend line from June is located. An A-B-C pullback would be a bullish setup for another rally leg into the elections and while I do not think we'll see that happen it's clearly a risk that bears need to consider. It's certainly a good setup for at least a stronger bounce. From a shorter-term perspective there is a tight parallel down-channel for the leg down from October 5th. A break below 1425 would likely lead to at least the 1415-1420 area if not lower toward 1400 so use the channel as a guide if short the market and trailing your stop lower.
S&P 500, SPX, 60-min chart
The DOW's double top in September-October has marked with shadows above the daily candlesticks, which is a sign of distribution as selling knocks the rally attempts back down. Again, lots of bearish divergence at the October high, which was a new high for the DOW, unconfirmed by any of the other indexes. It dropped down to the May and August highs at 13338 and 13330, resp., today and used those highs as support. Only slightly lower now could be stronger support at its 50-dma and uptrend line from June, near 13300-13310. The next support below that is Fib support near 13200 and then down to 12900-13000. But once again, the uptrend from June remains intact and some good news could spook the bears back into the hibernation for the rest of the month.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 11,860
- bearish below 11,530
With yesterday's decline in NDX it broke its H&S neckline (left shoulder September 6th, head September 21st and right shoulder October 5th). The downside price objective from the pattern is to about 2650, which is near its uptrend line from March 2009. That's also near the price projection at 2668 where the 2nd leg of the decline from September 21st would be 162% of the 1st leg down. The 200-dma is working its way up toward that area as well, currently near 2632. From there we could see the bulls mount a new assault on the bears but the longer-term pattern says the best they'll do is a bounce/consolidation above trendline support before breaking down again. But bears need to be aware that they'll be pressing their luck if they try shorting the market once NDX gets below 2700. Of course what's driving NDX is AAPL and it has also broken the same H&S topping pattern as NDX. Its downside objective is slightly below 600 (low so far is near 623) and the neckline is near 650 so back above 650 would be bullish for NDX. The semiconductors have also been acting weak for some time now and they've been telegraphing trouble for the market.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 2846
- bearish below 2650
The RUT dropped down to its 50-dma, near 825, and bounced off it today. This follows multiple attempts to get back above its broken 20-dma since September 26th. For a while it looked like the spike off today's midday low was going to lead to a rally into the green but the dipsters were beat back by the bouncers (sellers taking advantage of bounces to sell into). I would not be at all surprised to see at least another bounce attempt on Thursday, which could lead to something more bullish, especially if it gets back above last Friday's high near 854.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 854
- bearish below 800
If the banks remain relatively strong, as they have recently, that would be good for the bulls. Keep an eye on the BIX since it's at strong support and a break lower would be quite bearish. It's at its 20-dma, price-level support at its April 2010 high and its uptrend line from June. A drop below today's low at 165.69 would be a break of the three supports and probably lead to a quick drop to its September 26th low at 162.30. A drop below 162 would confirm its double top, which also shows a significant bearish divergence. Bulls who hang on too long could look back at this pattern and wonder what they were thinking trying to hold out for more.
S&P Banks index, BIX, Daily chart
The Transports have been telegraphing trouble for a while, even though I've been reading a lot of analysts saying "it's different this time" and why we should not trust the Dow Theory relationship with the Trannies any longer. It's similar to the chorus we were hearing when the Baltic Dry Index (BDI) was crashing -- it was different this time because too many ships were being built and that was depressing the prices of shipping goods around the world. Funny how the Shanghai Composite index has followed the BDI so closely and is also knocking on its March 2009 low. The only indexes not following the Tranports and global indexes are the U.S. indexes because there's been a belief (hope) that Ben Lightyear can save us.
The TRAN spiked up this morning but was immediately beat back down by the sellers and driven to a new for the week before getting a little bounce back up into slightly positive territory. Last week it had rallied back up to its broken uptrend line from June and gave the line a kiss goodbye. Today's rally attempt was a back test of its broken longer-term uptrend line from March 2009, followed by another kiss goodbye. There is simply nothing bullish about the price behavior in TRAN and it's a huge warning to the bulls. It would recover with a broader market rally but right now that's not what the chart is telegraphing.
Transportation Index, TRAN, Daily chart
Following the brief pullback last week it's looking the U.S. dollar should resume its rally, but first it needs to break its downtrend line from July. It almost did it today but closed back down on the line. A drop back below last week's low at 79.18 would be bearish but until that happens I believe its longer-term pattern is bullish from here.
U.S. Dollar contract, DX, Daily chart
After repeated attempts to get through its broken uptrend line from 2008, with bearish divergences in October, it looks like gold may be ready to start the next big leg down. Because the pattern since mid-September has been so choppy I can't rule out another rally attempt (dashed line), especially if the stock market rallies as well. But a break below 1738 would tell us the top is in place.
Gold continuous contract, GC, Daily chart
Oil got a 3-wave bounce off last week's low and made it back up to just shy of its broken 50-dma today at 93.80 (day's high was 93.66) and its 50% retracement of its March-June decline, at 93.91. The pattern is set up for a continuation lower from here and the next leg down, if the bearish wave count is correct, should quickly take it below the June low near 77.
Oil continuous contract, CL, Daily chart
There are no market-moving economic reports tomorrow morning and I don't believe there are any from overseas either. Unless we get some surprise news out of Europe we shouldn't see any big overnight or morning moves.
Economic reports and Summary
Short term the consolidation off today's lows looks like a pattern for another stair-step lower, which is why I show a little lower on the SPX 60-min chart before another bounce/consolidation and then lower into the end of the week before setting up a larger bounce. There's not much in the way of bullish divergences at the current pullback and therefore the dipsters are having a tough time with their previously-winning game plan. Those who are buying the dips are now providing the bear fuel for additional declines, the opposite of what we were seeing for so long to the upside.
So it looks lower from here but the indexes are at/near some potentially strong support and I think it would be risky to press bets to the downside. If you've been riding the market on the short side I think it's a good time to trail stops closer, giving it room to run while protecting against a big short-covering rally.
From a slightly longer-term perspective (next few weeks), with the discussion at the beginning of tonight's wrap about all the Fib/Gann/anniversary timing I think the market is at risk here for the bulls. October highs have not been kind to bulls over the ensuing weeks/months and at the moment with too much faith in the Fed's ability to control the market (and prevent a selloff) I think complacency has placed too many investors at high risk. With so many fund managers fully invested and looking to buy dips so that they can beat out their competitors, or the S&P, there's the potential for them to get scared all at once and the exit door could narrow quickly. It's what creates the flash crashes and too many believe that can't happen again. Think again.
At the moment large speculators are at an all-time record net-long position, as a percentage of total OI, while commercial traders are at an all-time net-short position (data from InsiderCapital.com). The commercial traders could be wrong but it's usually a bad idea to bet against them. They tend to be early since they build their position over time but they're almost always correct in their positioning as they prepare to take money from the speculators. Don't be one of them -- join the commercials instead.
I see bounce potential in the coming weeks but the bounce better get started from here or from not much lower. If the selling starts to accelerate and we get a waterfall decline going then you'll want to get out of longs quickly and jump in short (it will be a scary trade). At the moment it's a risky spot for both sides so play it carefully and watch to see how well support holds and whether or not we start impulsing back to the upside. Corrective (choppy) bounces like we've been getting will more than likely lead to lower prices.
Good luck and I'll be back with you next Wednesday.
Keene H. Little, CMT
Technicians look ahead. Fundamentalists look backward. The true language of the market is technical. - Joe Granville