Hints of an agreement on the fiscal crisis launched a big rally on Monday and the passage of the agreement on Tuesday night launched the futures even higher when they opened at 6:00 this morning. The can has been successfully kicked down the road and now we wait for the next battle (debt ceiling, which will include demands for spending cuts).
The futures gapped up when the futures market opened at 6:00 this morning and the rally was essentially finished when the cash market opened, which is an all-too-familiar pattern we've seen and it leaves traders looking for a trade where there isn't one (unless you were already positioned for it).
Not that anyone cared much today, the two economic reports this morning, ISM index and Construction Spending, show were not that great. The ISM at least improved marginally in December from November's 49.5 to 50.7. But construction spending slowed down by -0.3% in November, which followed a downwardly revised October reading of +0.7% (lowered by half from the originally reported +1.4%). This is old data but the slowdown in construction is not a good sign. Tomorrow's reports on the Challenger Job Cuts and the ADP Employment Change will add more information about how the economy is doing. As if the market cares right now. The funnymentals will matter when they matter.
Market breadth has been strong although Monday's rally was on normal volume. Today's volume was a little stronger than Monday's pre-holiday volume but for such a strong rally it didn't have that much behind it.. Not surprisingly, with this morning's huge gap up we saw some unusual numbers in the new 52-week highs/lows. I can't remember the last time we had 340 new highs and 0 new lows. That corrected somewhat by the end of the day, which finished with 898 new highs and only 93 new lows. Talk about bullish enthusiasm! With a market that has a very tight correlation between individual stocks and the indexes (thanks mostly to index and ETF trading), it's becoming more common to see the market quickly head to one side and then the other. It's part of what's making the market whippy and difficult to trade. Very few investors are bothering to look at fundamentals and are instead simply trading the market's moves. This is especially true for the HFTs (high frequency traders).
Monday's TRIN closed at a very low reading of 0.22, which indicated a very bullish day and in fact a very low reading like that at the end of a rally can be within days of a market high. Today's TRIN closed at a neutral 1.03 and not more bullish. Was that a warning sign? The day was spent mostly consolidating this morning's gap up so that's what TRIN might have been reflecting but for such a strong point gain I would have liked to see more volume going into advancing issues in order to get the TRIN to a lower reading. For now it's simply an indicator that's a warning to the bulls.
The utter collapse in the VIX, down 4.70 (-20.7%) on Monday and down another 3.34 (-18.5%) to 14.68 today, from a high of 23.23 last Friday, is another indication of a move that's gone too much too fast. It's just a feeling, backed up by some things I'll point out on the charts, which tell me to not trust the rally. Price is of course king and that's what we have to go by so pushing feelings aside I'll point out what to watch for the rest of the week. I'll also start out with two bullish charts that were leading the way in the bullish pattern. They'll be important to watch as well.
As I had mentioned last week, there is a potentially important turn window on January 2-3, so today-tomorrow. As a reminder, this is based on the Gann Square of Nine chart which shows January 2nd to be opposite the October 2002 low, the October 2007 high and the April 2012 high. I had also mentioned that some important cycle work points to two important turn dates in 2013 -- January 2nd and August 13th. We're rallying into this turn window and therefore a reversal points to a move down from here. Where "here" is will have to be identified but we should stay aware of the possibility that the news-related spike up on Monday and Wednesday could be the completion of the rally (capitulation by the bears and all-in by the bulls). As always, we'll look to the charts for clues in that regard but until we get through this week and see the market still rallying next week I would stay very cautious about further upside. The "all-in" crowd could suddenly turn into sellers.
Now that the December highs have been exceeded we're looking for upside targets. I'll start off tonight's chart review with the two charts that were pointing us higher and were the correct ones to follow -- the banking index (BKX) and the home builders (DJUSHB). Watching these two charts should keep us on the right side of the market and importantly, if these two indexes show any kind of bearish reversal it will need to be taken seriously.
Last week I showed the weekly chart of the home builders with an upside target zone near 500 to complete the 5th wave of the rally from October 2011. The rally from October 2011 is the c-wave of an a-b-c bounce off its November 2008 low. The daily chart below zooms in on the final move of the c-wave. There were two Fib projections and a retracement that lined up there. With a high of 462.88 today it's getting closer but I'm beginning to wonder if even 500 might be a bit of a stretch for it. The move up from November has developed what looks like a rising wedge (common for the final 5th wave) and top of the wedge lines up with the broken uptrend line from October 2011, near 472 on Friday. That would be a 3rd attempt at its broken uptrend line and 3-drives-to-a-high is a common reversal setup. Based on all this I'm thinking 480 could be a stretch for the index and since the wave count can now be called complete there is the risk for a reversal at any time. Back below its December 27th low near 432 would indicate the top is in place.
DJ Home Construction index, DJUSHB, Daily chart
Another chart that I showed recently was the BKX weekly and daily charts showing the potential for one more leg up to complete its rally from November and in turn the rally from October 2011. There is a Fib projection at 53.35 for the leg up from November, which is a 62% projection of the previous rally leg (June-September), as that leg was itself 62% of the previous rally leg (October 2011 - March). These two projections are shown on the daily chart below. I'm also showing a projection to 52.97 which is where the 5th wave of the rally from November would be equal to the 1st wave. That also matches the trend line along the highs from March-September, which is the top of a rising wedge pattern for the rally from October 2011. So the trend lines, Fibs and EW count line up for a top in the 52.97-53.35 area, which means a little more upside potential but I'm watching carefully for a top followed by a reversal. BKX closed at its high at 52.93, only 4 cents from the first upside target so it's getting critical for the bulls not to back off here. Back below 50 would confirm the top is in place.
KBW Bank index, BKX, Weekly chart
Those are the two bullish charts, or at least will probably do a good job in identifying the top of the rally if it's close. Another chart that's not so bullish, which I've shown recently, is the comparison of SPX to the commodities index (CRB). Normally a healthy stock market rally is accompanied by a rally in commodities. Depending on where we are in an economic cycle we'll see the commodities rally with the stock market because a rally in commodities is usually a good indication that we're in an inflationary cycle, which is good for stocks. But at the moment the dollar is holding up (it reversed its morning gap down and closed near today's high and slightly in the green) and the commodity index closed only marginally higher. The split between the CRB and SPX widened further today.
SPX vs. CRB, Daily chart
While the stock market has pushed higher since November the CRB has been motoring sideways, patiently waiting for the stock market to get the silliness out of its system and then join the CRB in heading lower. This split will be resolved with either a rally in commodities or a decline in the stock market and I believe it will be the latter. The dollar and gold are telling us inflation is not what we should expect. The stock market could join the CRB in a heartbeat if there's any disappointment to follow the euphoria surrounding the fiscal agreement.
I mean did anything get solved? Really? We have a massive spending problem with about $4T of debt that needs to be rolled over/funded in the coming year and the $600B of new income over the next 10 years is spitting into the wind. Against that $600B in new income we'll add another $4T in debt over the next 10 years (data from the Congressional Budget Office). Most Americans don't have a clue what's happening. The Tax Policy Center estimates 77% of American households will see an increase in their taxes this year (from Obamacare to other forms of taxes). Woohoo, let's rally!
OK, we know the market can remain irrational far longer than we can remain solvent fighting it but I suspect the bulls will soon be saying the same thing as the market drops relentlessly in the face of more "good" news. There are a few reasons why I'll be watching the SPX 1460-1467 area to see if it becomes a wall of resistance for the bulls.
Looking at the Gann Square of Nine chart to see which levels could be important I see 1460 on a vector that's 90 degrees to the one through the October 2002 low and October 2007 high. This 90-degree vector is also the one pointing to the dates of the multitude of October highs and lows since 2002 and the April 2012 high. Then we've got 1467 on the vector that's 90 degrees to the one through the March 2009 low and it's the time vector pointing to the September 2012 high.
Moving on to my regular charts, the SPX weekly and daily charts below are a bit of a mess with all the trend lines but I want to point out more reasons why 1460-1467 could be a tough resistance zone (today's high was 1462). I've got a Fib projection, some trend lines, a previous high, an EW pattern and important Gann Square of Nine levels all pointing to this range as potentially important. Time and price on the Gann chart line up with lines of resistance on the charts.
First, using the weekly SPX chart, I'll point out an upside target that gives the bulls some room to run. I'm looking for an a-b-c move up from November, which fits as the 5th wave in a rising wedge pattern for the move up from October, 2011. Two equal legs up from November points to 1506 so that's our upside target if the bulls can hold and add to this week's rally. Slightly higher next week is the trend line across the highs from April-September, near 1515. Run with the bulls if they can break above 1468 and hold above.
S&P 500, SPX, Weekly chart
The bears will see an obvious problem for the bulls on the chart above. First, the broken uptrend line from October 2011, which stopped rally attempts since November, is again being tested (near 1460). There's also a trend line along the highs from May 2011 through the April 2012 high, currently near 1466, which SPX broke above in September-October but failed to hold. And near 1467 is the broken uptrend line from March 2009 through the August 2011 low. So we've got a few trend lines that could offer resistance to any further gains. But it's also why it would be bullish if SPX gets above 1468.
The daily chart below shows a closer view of these trend lines. Added to the mix is the top of a parallel up-channel from November, near 1466 on Thursday. For the a-b-c move up from November, the c-wave would be 62% of the a-wave at 1462.78. Today's high stopped 35 cents shy of that projection and it sounds a little like the setup for BKX -- do or die time for the bulls.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1468
- bearish below 1417
A closer view of the rally from November and the parallel up-channel is shown on the 60-min chart below. The bold green line is the broken uptrend line from October 2011 and SPX closed marginally above it today with the end-of-day push higher into the close. Studying the veins of the leaves I could argue for two more consolidations/pullbacks and minor new highs following each (similar to today's), which could put us into Friday with a high near 1470 so a break above 1468, if done in a choppy manor, would not necessarily be bullish. A choppy climb from here into Friday could be an ending pattern instead. It's what I'll be watching closely during the day to see when a top might be forming. It's possible today's high will be the final one or a pullback and then final high on Thursday. That would also fit the January 2-3 turn window, which I consider very important until proven wrong.
S&P 500, SPX, 60-min chart
I'm looking at the DOW's rally from November with a similar wave count -- an a-b-c bounce but with a different larger wave count. As long as its October high near 13661 is not exceeded I can count the a-b-c bounce as a 2nd wave correction to the 1st wave down (the October-November decline). From a market psychology perspective this actually fits very well. Most market participants view a 2nd wave bounce correction as the beginning of a new bull market leg up and it sucks in a lot of bulls. The 3rd wave down becomes so strong because traders begin to recognize they got sucked in on a bounce and then start bailing en masse. Further, the c-wave of the a-b-c 2nd wave correction is often completed on a news-related spike. Place a check in that box as well. This wave count, and the market psychology behind it, says look out below for the next move, which could start at any time, including on Thursday. Don't buy the dips if this starts impulsing to the downside.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 13,475
- bearish below 13,025
But if the bulls keep the rally alive and hold the DOW above 13475, which would be a break above the broken uptrend line from October 2011 (note how the December rallies were stopped by this trend line) it would be much more bullish. That trend line is currently near 13460 and this would be the 3rd test (counting the December 11-12 tests as one), which would also fulfill the 3-drives-to-a-high reversal setup. It's going to be interesting from here.
NDX gapped above resistance at its 200-dma, near 2673, its downtrend line from September, near 2691, and its price-level resistance at 2700. The c-wave of an a-b-c bounce off the November low, at 2725, was also exceeded. All around a bullish day for the NDX. Further upside potential is to the projection for two equal legs up from November, pointing to 2803. Its broken uptrend line from March 2009 through the October 2011 low is currently near 2830. So the bulls have room to run as long as they don't let today's gap get closed, near 2691.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 2725
- bearish below 2600
My best guess on the RUT's pattern is that it's in the final stages of an a-b-c bounce off its March 2009 low. The c-wave is the move up from October 2011 and all of the overlapping highs and lows since that October low is indicative of an ending pattern and not something more bullish. The best wave count that I can see is an ending diagonal (rising wedge) for the c-wave, which calls for a 5-wave move and I think the rally from November fits as the 5th wave. Once complete it will complete the a-b-c bounce from March 2009 and set up the next bear market leg back down. Notice the bearish divergence at the highs since January (and since February 2011 on RSI). This is another reason to believe the bounce has been a correction looking for an ending rather than something more bullish.
Russell-2000, RUT, Weekly chart
The RUT is at least more bullish than the other indexes since it has rallied above its September high at 868.50, confirming that at least for this index the bounce off the November low is not a correction to the September-October decline, which is also the interpretation off the weekly chart. The leg up from November fits, which is the 5th wave in a rising wedge, should be a 3-wave move (or something more complex). An a-b-c move up from November would have the c-wave equal to 62% of the a-wave at 882.68, which is just shy of the top of its rising wedge (the trend line along the highs from January-September, near 886. So there's a little more room to run above today's high at 873.99 and it would be more bullish above 886. But notice on the weekly chart above and the daily chart below that it has now run into the trend line along the highs from July 2007 - May 2011 and is close to tagging the top of its parallel up-channel from November, near 878 tomorrow. As with the other indexes, a reversal back down from here is the potential.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 886
- bearish below 843
The Trannies have had a good two days as well. Last week the TRAN had dropped down to its broken downtrend line from March-May for a successful back test and left a bullish kiss goodbye Monday morning. Today's rally took it up to the top of a parallel up-channel for its rally from November. The wave pattern from November looks like a completed 5-wave move and therefore could reverse at any time even if it will be just a pullback to correct the rally before heading higher later this month. But the 5-wave move up fits as the c-wave of an a-b-c bounce off the June low and by that wave count is ready for the start of a more significant decline to lows below June's, near 4800.
Transportation Index, TRAN, Daily chart
When the stock market gapped up this morning the dollar gapped down. But while the stock market held its gain and added to it at the end of the day, the dollar reversed its gap down and closed marginally higher for the day. That was bullish price action for the dollar although it continues to do battle with its broken uptrend line from October 2011, currently near 79.86. I continue to look for a rally in the dollar but recognize it has a lot of work to do to even get above its December 7th high near 81, which is needed to confirm a new rally leg is underway.
U.S. Dollar contract, DX, Daily chart
Gold bounced up to its broken uptrend line from November 5th, near 1692.80, and then backed off. An a-b-c bounce off the December 20th low achieved two equal legs up at 1693.20, making the 1693 level tough resistance. If the bearish wave count is correct it's very bearish -- looking for multiple degrees of 3rd waves to the downside. Strong selling is about to hit gold if this count is correct. A rally above 1693 would be the first bullish sign for gold. Then it would need to tackle resistance at its 50-dma, near 1704 and then its downtrend line near 1720. Above 1725 would confirm the corrective pullback and point gold much higher. We should see the dollar collapsing at the same time if that happens.
Gold continuous contract, GC, Daily chart
Oil broke out of its parallel up-channel from its November 7th low, which is clearly bullish. If it were to drop back down to it, currently near 91.50 (slightly below its 200-dma at 91.82), and use it for support that would add to its bullishness here. But so far the bounce off the November low is an a-b-c correction to the September-November decline and has now retraced almost 62% at 94.17 with a high of 93.87. Above 94 from here would be bullish and I suspect oil will stay more in synch than not with the stock market from here.
Oil continuous contract, CL, Daily chart
The remainder of economic reports for this week might not be accurate in the list below since I was getting different information from two different sources. But tomorrow and Friday we'll get the employment numbers and they could be market moving. That is unless the market remains mesmerized by what our politicians say. I suspect things will be quiet on the political front and that means the market will be left to fend for itself. Whether it's ingested a little too much bull will soon be known.
Economic reports and Summary
We've had a bullish week so far and while it should not have been unexpected it was certainly late (the final week of December and first few days of January tend to be bullish). It seems the past two trading days made up for lost time from the last week of December not being bullish. And now that the market got its "agreement" that accomplishes nothing except kicking the can further down the road we'll quickly find out if the 2-day rally was more about short covering than real buying. The subdued volume suggests it may have been more short covering but that will be better known in the next two trading days.
Keep in mind the January 2-3 turn window that we've now entered. We've rallied into the turn date and depending on the chart I can call the bounce correction to the September-November decline or the final leg of rising wedge patterns as complete (here or marginally higher). The market psychology is ripe for a reversal so that's another factor that has me watching carefully for signs the rally will continue or reverse here. If we make it through this week without a significant pullback then I can see some bullish potential for more rally next week. But if the market starts to drop sharply I'll start looking for evidence of impulsive price action to the downside to indicate the market has reversed inside the turn window.
Trade carefully the rest of the week since we could be at an important turn. It's for the bulls to lose here -- they're in control until proven otherwise. 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
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