As is typical, we've had a bullish opex week so far. The indexes bounced off support on Monday and are now hitting resistance. The next move is going to be an important one.
Like a slingshot being pulled back, the market's pullback last week led to short-covering this week as buyers stepped back in and shoved the bears back out. That has taken the indexes from support to resistance and now we wait to see if buyers can keep up the pressure.
After last night's dismal showing by IBM and INTC in after-hours trading, following their earnings reports, the techs started off in the hole this morning but it was just another opportunity to fry the bears. There was a sharp rally to a minor new high above yesterday's and then chopped sideways for the rest of the day. The posted sign was easy to read -- NO BEARS ALLOWED HERE.
Causing some of the gyrations was news out of Europe, especially surrounding Spain and what it might do. Spain was going to request a bailout, which is something many are anxiously awaiting so they can see how it's going to work, but then decided it would not seek a bailout unless Italy asked for a similar bailout. Later in the day it was reported that Spain would be offered a lower line of credit than the previously announced 100 billion euros. This will of course be a continuing saga out of Europe.
Other than the little bit of news out of Europe and the mixed reactions to some earnings reports it was a relatively quiet day. It appeared at times the market was simply being manipulated in front of opex (I know, that's shocking to hear) and the choppy price action probably whipped a few traders out of their positions. Opex week has become a week where I don't even open my broker window. So I'll jump into tonight's charts to see what this week's action might mean for the longer term price patterns.
Starting off with a look at the DOW, the weekly chart looks identical to the SPX chart shown last week. The price action since May 2011 has formed a rising wedge pattern with bearish divergence suggesting this wedge will likely be quickly retraced once price breaks down from it. With all the massive intervention in the stock market there's been enough to hold the market up but not enough to demonstrate real buying interest. The wedge pattern is for the c-wave of the A-B-C bounce off the March 2009 low, which is a correction to the 2007-2009 decline (albeit a very high correction). The initial move expected out of this pattern would be a trip back down to the start of the wedge, near 10400, in much less time than it took to build the wedge. I'm thinking early 2013 and then a bounce to a lower high before breaking down into the end of next year. The more immediate question is how high the current bounce will get.
Dow Industrials, INDU, Weekly chart
The top of a parallel down-channel for price action since the 2002 low and 2007 high is where the DOW has been futzin' around since mid-September. A projection for the 5th wave of the move up from July 2010, where the 3rd through 5th waves would equal the 1st wave, is at 13666. The October 5th high was just shy of 13662 so a minor new high would at least tag that 13666 target. Numerologists would have fun with the fact that SPX made a low of 666 in 2009 and the DOW could make its 2012 high at 13666.
The top of the rising wedge pattern, which is the trend line along the highs from May 2011, is shown on the daily chart below and yesterday's and today's highs were tests of that trend line again, currently near 13560. A little higher, near 13620 now, is the top of the 2002-2007 parallel down-channel. Today's hanging man doji at trendline resistance is potentially bearish but obviously it needs confirmation with a red candle tomorrow. In the meantime the bulls have held the uptrend and a break above 13670 would be bullish to at least the price projection at 13714 if not all the way up to the projection at 13972 (call it 14K to hit the top of the up-channel from June). Bulls want to see the downtrend lines on the oscillators broken to the upside to help confirm new highs are coming.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 13,670
- bearish below 13,300
SPX looks bullish here -- it bounced off support at the bottom of its bull flag pattern for the pullback from September 14th, which was also its uptrend line from June and its 50-dma. It was simply too tempting a spot for bulls to ignore. The short-term pattern for SPX supports the idea that it will make it to its broken uptrend line from July 24th, near 1467 Thursday morning, before pulling back. The big question then would be whether it will be just a back test followed by a bearish kiss goodbye (shown in red) or just a pullback before heading higher again (shown in green). At the moment, with the high and impulsive bounce off last Friday's low it's looking like we're going to see new highs (so a pullback and then higher next week). The a-b-c pullback from September 14th gets the nod at the moment but stay cautious about the potential for a triple top. It takes a decline below Friday's low near 1426 to put the bears back in control.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1471
- bearish below 1426
The leg up from last Friday has created a clean 5-wave count, shown more clearly on the 30-min chart below, and this afternoon's rally is the final 5th wave of the leg up (the bearish divergences since Tuesday's highs helps confirm the wave count). I have projections for the 5th wave at 1461, 1464 and 1469, which is where the 5th wave would be 62% 100% and 162% of the 1st wave, resp. The upper projection coincides up with trend lines about 11:00 AM on Thursday. It's possible it finished at this afternoon's high so longs are at risk here for at least a pullback. Once a 5-wave move completes we'll get a correction of it, likely into Friday and possibly early next week, before heading higher again. But there remains the risk that the impulsive move up from last Friday will complete the longer-term rally and therefore bulls should be defensive until we see what kind of pullback pattern we get (choppy and corrective, which would be bullish, vs. an impulsive decline, which would be bearish).
S&P 500, SPX, 60-min chart
As compared to SPX using its 50-dma as support, NDX is finding its 50-dma to be resistance, and its 20-dma will be dropping to its 50-dma on Thursday, adding to the resistance near 2786. This is just one example of why traders are feeling confused by this market -- one index uses its 50-dma for support while another is finding it to be resistance. The recent strength in the banks has helped SPX while the weakness in the techs is more worrisome -- I would argue the techs offer a better "tell" as far as what's happening in the economy vs. how the Fed is helping the banks. But as I had mentioned yesterday when the banks were underperforming the broader averages, the rally needs the banks onboard otherwise the rally can't be trusted. So the banks obliged today.
NDX will obviously be bullish above its 20- and 50-dma's with a rally above today's high. But I suspect we'll see at least a pullback first and then we'd have to figure out whether or not it will make another assault and climb over resistance, in which case new highs should be next (or at least a test of the high). A drop back below its H&S neckline (thus far negated with Tuesday's rally), near 2757, would be more bearish and a drop below last Friday's low near 2714 would be much more bearish.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 2790
- bearish below 2714
The RUT made it back above its 20-dma today, thanks to an afternoon rally following a drop back down to the 20-dma, which is something it wasn't able to do during the bounce from September 26th to October 5th (intraday poke above but not a close above). Now all it has to do is break out of its bull flag pattern, the top of which is near 845. With the other indexes looking ready for a pullback (possibly after a new morning high for the current bounce) I suspect the RUT will also pull back from resistance before climbing above it next week. But if the bears grab hold here and drive the RUT below 815 the price pattern would turn very bearish and I would expect a sharp decline from there.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 854
- bearish below 815
Bond yields rallied strong today (bonds sold off) and that had TNX (10-year) rallying up to its downtrend line from March and its 200-dma, both at 1.81%. Obviously it would be bullish above this level (although there will be potential resistance at its downtrend line from April 2011, near 1.852%, and then its September 14th high at 1.892%) but with short-term overbought conditions it would be natural for at least a pullback here. That could result in some rotation out of stocks and into bonds for the next couple of days. If the bounce off the September 28th low is to be just an a-b-c bounce correction it will be followed by a strong selloff from here (strong buying in bonds and likely strong selling in stocks). So it's a potentially important inflection point here. As with the stock indexes, the bulls want to see the downtrend line on MACD broken to the upside.
10-year Yield, TNX, Daily chart
The banks had a good day today, correcting some of the strong decline over the past week. The BIX broke its uptrend line from June last Friday, found support at its 50-dma and uptrend line from October 2011 and then broken both yesterday. Today's strong rally (+1.8%) got it back above its 50-dma and trend line, recovering from yesterday's head-fake breakdown. I've drawn in a support zone at approximately 158-159, which is where it bounced off of so as long as that holds we could see another rally leg following the 3-wave pullback from September. But a drop below 158 would be a bearish move and strongly suggest the top is already in place.
S&P Banks index, BIX, Daily chart
Another index that looks very confused is the transportation index. Since June we've seen the TRAN make multiple +/- 6% sharp moves up and down and there's clearly disagreement from market participants. At the moment I see upside potential to about 5200 where it would again run into its downtrend line from July 2011 and achieve two equal legs up from its September 28th low. Back below 5082 from here would leave another confirmed 3-wave bounce and suggest lower prices but for now neither side is in control of this mess.
Transportation Index, TRAN, Daily chart
The dollar has basically chopped sideways since its September 14th low, which is of course when the stock market made its high. If the dollar continues to sink lower from here it will likely help boost the stock market to new highs. Today's decline in the dollar had it testing the uptrend line from October 2011 through the September 14th low (therefore an untested trend line except for today). If today's low holds and the dollar rallies back above its October 10th high at 80.31 it's going to be a bullish move. But if the dollar continues lower below today's low at 78.97 there is support near 78 and then lots of air down to 75.
U.S. Dollar contract, DX, Daily chart
One bearish signal on the dollar's chart is the 50-dma crossing down through the 200-dma last Friday. The last time the two crossed was back in October 2011 and the dollar rallied from there into the high in July.
Considering the dollar's weakness gold has been acting weaker. After multiple attempts to get through its broken uptrend line from October 2008 it then broke its uptrend line from August and its 20-dma last week, bounced back up for back test and kiss goodbye and dropped to new lows for its pullback this week. So far that's all bearish price action and I'm not seeing a reason to get bullish and buy this dip. At a minimum I expect to see gold drop down to its 50-dma, near 1720 tomorrow, and then possibly giving us a bigger bounce. But the pattern would then be confirmed bearish at that point and I'd be looking for a multi-day bounce to turn into a shorting opportunity. Gold bulls need to drive gold higher from here and get it back above 1777 to turn the pattern bullish again.
Gold continuous contract, GC, Daily chart
For oil I'm showing its weekly chart below so that I can show a possible bullish sideways triangle that might play out into next year (green path). While I consider this to be the lower-probability move I can see a lot of merits from a strictly price pattern perspective. It calls for another rally leg to the downtrend line from May 2011, currently near 107 and then another leg down that stays above 80 before it would be ready to rally to new highs in the latter part of 2013. The more bearish pattern calls the September 14th high the completion of the correction to the February-June decline and the next leg down should break well below 60. A drop below the October 3rd low at 87.70 would be likely confirmation of the bearish wave count (red).
Oil continuous contract, CL, Weekly chart
The dollar's weakness in the past week has not helped the commodities index much. As a side note, the CRB Index, with all its history, is no longer being tracked (something about low volume not making it worth ICI's effort to keep it going, which we might find happening more and more as trading volume takes a dive). The next best index is the Dow Jones UBS Commodity index, which I show below, as it is very similar in form. There are a couple of important things to note about the index and why it's going to be important for the stock market to see the commodities continue to rise (indicating inflation is taking hold, which helps stock prices).
The most obvious thing at the moment is the triangle pattern and a break out the top or bottom will likely be a tradable direction. The September 14th high was a one-day break above the downtrend line from July 2008 followed by a sharp reversal (on the daily chart you can see an island top with the gap up on September 14th, a little spinning top doji, and then a gap down on September 15th and back below the line). The retracement of the previous decline -- April 2011 to June 2012 -- was slightly more than 50%, replicating the retracement of the 2007-2008 decline at the April 2011 high. The vertical lines show the Fib relationships between the length of time for the February 2009 - April 2011 rally and the subsequent pullback, which took 50% of the time, and the September 2012 high, which took 62% of the time. The first reversal occurred at the February 2012 bounce high at the 38% time projection. These Fib price/time relationships should not be ignored and it could be a good signal that September's high will stand (bad for stocks but good for our pocket books in that case). The next important time projection is in July 2013, which is the 100% projection.
DJ UBS Commodity index, DJUBS, Weekly chart
Tomorrow's economic reports include the usual unemployment claims numbers (watch for a possible correction to last week's steep decline) and then the Philly Fed index and Leading Indicators, as well as existing home sales. The trouble with these economic reports is that we can never know how the market will react to them. If the numbers are terrible, indicating a faster slowing in the economy, it would normally knock the supports out from under the market. But in this bizarro world of ours, where bad economic news is good because it helps the Fed continue to help the stock market, I mean economy, we can't predict what will happen. So we have to unfortunately ignore economic news and simply react to what the market is telling us, which in actuality is what we've always had to do anyway but with today's market distortions it's become much more difficult. In fact there was a good article in MarketWatch about this: Bizarro World
Economic reports and Summary
Other than the U.S. economic data, as well as reactions to earnings reports, we could have some fireworks before the open if China's reports create/alleviate economic concerns. They'll be reporting their GDP, real estate prices, industrial production and retail sales. We'll also have the results of Spain's efforts to sell 3-, 4- and 10-year notes and considering all the concern surrounding their bailout request the results could be market moving (which direction is the challenge).
It's opex week and we know it tends to be bullish, which this one has been. The decline on Thursday, Friday and into Monday set the bear trap and the short-covering fuel has helped propel the indexes back up for a bullish week (so far). Will real buying come in behind the short-covering? Time will tell but at most I'd expect a quick new high for the bounce on Thursday morning and then the start of at least a pullback into Friday before heading higher next week and possibly through the elections (which is a common pattern although October typically pulls back more than it has before rallying into elections).
Watch for a pullback, which could offer a trading opportunity on the short side, but depending on the form of the pullback we may be looking for a better trade on the long side next week. What it means for the next two days, to finish up opex, is that we could see some choppy whipsaws. The other possibility, which is common, is for the market to go dormant on us from Thursday afternoon through Friday. Don't force trades and end up just feeding your broker.
Good luck and I'll be back with you next Wednesday with hopefully a clear signal as to whether the market is likely to rally higher into the elections or instead start or more serious decline.
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