The bulls are determined to keep the market away from the bears with their slow climb to new highs. The market remains bullish but we're not talking about a lot of strength here.
The stock market started in the hole (again) but quickly recovered and slowly chopped its way higher for the rest of the day (again). It's been a common pattern for the past week. Rinse and repeat and keep the market slowly moving higher.
Overnight the futures had dropped on news that the World Bank downgraded its global growth forecast for 2013, changing from its previous estimate of +3.0% to its newly-revised +2.4%. That's a big change -- a 20% decline in its growth estimate. As Europe continues to slow down Germany is now also lowering its own growth forecast from +1.0% to +0.4%. I believe it won't be long before they too predict a contraction instead of growth.
There were a number of economic reports released pre-market but none of them were any surprise and futures barely reacted. Inflation rates came in tame with CPI at 0.0% for December and the core rate at +0.1%. This frees up the Fed to keep up their monetary experiment.
There were several banks that reported earnings before the bell and the reaction was mixed between them -- JPMorgan (JPM), Goldman Sachs (GS), Charles Schwab (SCHW), US Bancorp (USB) and Bank of New York Mellon (BK). Again, there wasn't much of a reaction out of the futures and the banking index spent the day chopping its way around with the broader indexes.
Following Tom DeMark's call for a bottom for AAPL there was some short covering last night and then some more today. AAPL had a good day recovering some of its recent losses and its rally kept the tech indexes in the green all day (the only ones to stay in the green). DeMark believes his counting method points to a rally to $600 for AAPL, which would obviously help the tech indexes if it happens. I'm from Missouri on that one.
From a news perspective it was a quiet day and earnings are not doing much either. The market appears to be holding up for opex but with a distribution pattern that I'm seeing I have to wonder if the excessive bullish sentiment we're seeing isn't going to cause a problem for the bulls. I'll jump right into tonight's charts because there's a lot to show.
I'll start with the DOW's charts and the weekly chart to give some perspective of what it's doing here. Since the break of its uptrend line from October 2011 the DOW has repeatedly back tested it since first tagging it on December 11th. This is a very common occurrence for the DOW -- it has repeatedly done this after breaking an important uptrend line. It walks up underneath the trend line, developing a bearish divergence as it goes, until it suddenly snaps to the downside. I do not expect anything different this time around. If the DOW manages to walk up the line a little further it will run into the top of its parallel down-channel for price action following the 2002 low and 2007 high, currently near 13595. One good punch in the bear's snoot could get it there quickly (only 60 points above today's high).
Dow Industrials, INDU, Weekly chart
Zooming in on the DOW's move up underneath its broken uptrend line from October 2011 you can see more clearly how close it's getting to the top of its parallel down-channel. It stays bullish for now and turns more bullish above 13600 but it could snap to the downside at any moment now and it will turn bearish with a drop below Tuesday's low at 13445
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 13,600
- bearish below 13,445
SPX is doing the same thing as the DOW -- it has repeatedly back tested its broken uptrend line from October 2011 (viewing it with the log price scale this time) and has now made it up to just shy of its September 2012 high at 1474.51 (today's high at 1473.96 is less than a point away). Many (if not most) traders are looking for SPX to make it up to at least 1500. I suspect there will be many disappointed traders but clearly it remains possible. A couple of good days would do it. But this lethargic tortoise-like climb higher needs to change quickly. The past 4 days have produced a hanging man doji (today's was a slightly more bearish dragonfly doji) at resistance as each morning selloff is reversed and slowly recovered. That's the distribution pattern as stock is handed off to the eager retail investors. If I've got the longer-term pattern correct and the market starts down from here, those who are buying stock at these levels will not see these prices for many many years to come. It's really sad.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1478
- bearish below 1463
Following the gap up on January 2nd we've seen very little headway made to the upside. SPX has formed a shallow rising wedge pattern from its January 2rd high and it counts satisfactorily complete with the 5th wave up from Tuesday morning. The bearish divergence since January 3rd supports the bearish interpretation of the pattern here. A break below the bottom of the wedge, currently near 1468.70, would be a heads up warning and below Tuesday's low near 1463 would indicate the top is likely in place. Look for bounces to short after that happens. The vertical lines on the chart show where the two-thirds projection is located (14:30 on Thursday), which is a common place for triangles to finish (roughly between half and three quarters of the way through). It's just a guide but interesting to watch for. If it stays inside the triangle beyond that point it starts to point to the possibility for a breakout to the upside. If SPX holds up as depicted and then starts down I see the potential for it to be pinned to 1475 for Friday-morning settlement.
S&P 500, SPX, 60-min chart
It's time to review my highly proprietary trading system that I developed years ago after extensive back testing, which I call my Moon Phase Trading System. I'd be glad to sell you this black box system for a special price to kick off 2013. Just $4,999 (I accept PayPal) and you'll be off and running. Big wink and a grin. The new moon on December 13th was followed three trading days later by the December 18th high and it dropped into a low on December 31st, which was one trading day after the full moon on December 28th. We are now three trading days beyond the January 11th new moon which of course begs the question as to whether the market is ready to turn back down. My little black-box system says yes. My hindsight trading system says...well, I won't spoil your anticipation with that information. What fun would trading be if you already knew where the market was headed next?
SPX MPTS, Daily chart
There's another interesting thing about January 11th -- it was the 40th anniversary of the January 11, 1973 high, which led to one of the worst bear markets since the Great Depression. The number 40 has a lot of biblical context and is often associated with important market events so it's an interesting correlation. As you can see on the weekly chart below, the January 1973 high was accompanied by bearish divergence running from the previous highs in 1971 and 1972.
Dow Industrials, INDU, Weekly chart, 1968-1975
Now we use the same time scale and look at where we are today. First, on the chart above, the line across the tops from 1971 to 1973 is actually the start of a trend line across the highs from then and through the 1987 high. The DOW climbed above that trend line in 1995 (at the early stages of its blow-off top into 2000) and then came down and tested it in October 2002 and again with a higher low in March 2003. The DOW then broke below the trend line in 2008 and it's now back up to it for what looks so far like a back test, as can be seen on the chart below. And look at the multiple back tests -- no matter the time frame, the DOW does this repeatedly. Now note the bearish divergence running from 1971 to the 1973 peak and compare to the same bearish divergence running from 2011 to the 2013 peak. Probably just a coincidental picture, 40 years later. But if it's not just coincidental and the fractal pattern follows through, we're looking for the market to peak near here and drop below the 2009 low (6470).
Dow Industrials, INDU, Weekly chart, 2006-2013
The chart below was sent to me by a fellow trader to show an interesting perspective of SPX and the Proshares Short DOW 30 ETF (DOG). It's of course expected to see DOG as essentially a mirror image of SPX and it shows the rolling top (and bottom) pattern for both as they each follow the circle that starts from March 2009. It could be meaningless or it could be another sign that the rally has run its course and switching to owning DOG to ride it back to where they meet (not seen on the right side of the chart but the circle crosses the midline in 2016) could be a great way to take profits on longs and ride the reversal over the next few years.
SPX & DOG, Weekly chart
All of these charts are meant to show the market is potentially vulnerable to a reversal, and a major reversal at that. Combined with the extreme in bullish sentiment (Schaeffer's Investment Research site posted a chart today, showing the bullish vs. bearish sentiment, noting that with the spread reaching 30+ points it has reached the level of previous market highs (30 or more point-spread is typically a dangerous time for bulls to hang around hoping for more). Pigs get fat, hogs get slaughtered. And that's my public services announcement for the day.
Moving on to the techs, they got a lift today thanks to AAPL's bounce, which was in turn thanks to Tom DeMark coming out with his call yesterday that he believes AAPL has bottomed for now (based on his counting method) and should rally back up to 600. The shorts covered and AAPL bounced up to resistance in the 506-508 area (it closed at 506.09, up +20.17 (+4.2%) for the day). It's potentially bullish since it recovered back above its H&S neckline, near 498, which it broke below yesterday, and that's a level the bulls need to defend. Other than SPX closing in the green with its +0.29 point gain, the techs were the only ones in the green today.
The Nasdaq Composite has been cycling around its broken uptrend line from October 2012 and was stopped by that line today. Currently near 3125, if the NAZ can climb above it (for more than a day) there's upside potential to a price projection near 3200 where it would have two equal legs up from November and hit the top of its up-channel from November. As with the other indexes, a drop below Tuesday's low near 3093 would indicate the top is likely in place.
Nasdaq Composite, COMPQ, Daily chart
Key Levels for COMPQ:
- bullish above 3145
- bearish below 3093
The RUT has been battling a different trend line -- the one along the highs from March-September 2012, which is the top of its rising wedge pattern that I've shown previously on its weekly chart. The wave count can be considered complete at any time for the wedge pattern and it suggests a fast retracement back to the bottom of it, which is the October 2011 low near 600. I see some upside potential to about 895 and it would be more bullish above that level. But back below 875 would indicate the bears are taking over.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 895
- bearish below 875
As with the broader indexes I see at least a little more upside potential for the banking index. Assuming there's only a little bit of upside left before we'll get at least a larger pullback, BKX might top out around 54. If the banks show more strength in the coming week we could see the index head up for a test of its February 2011 high at 55.88, which crosses the top of its parallel up-channel from November near the end of the month. But a drop below Tuesday's low at 52.62 would tell us the rally has probably finished.
KBW Bank index, BKX, Daily chart
The TRAN achieved an upside price projection near 5639 on Tuesday, which is where the leg up from November is 162% of the leg up in June (for an A-B-C move up to complete a larger corrective wave count up from March 2009). The wave count and price projection call for a reversal back down but if the bulls haven't finished I've got a few different price projections based on the longer-term wave relationships that point to the 5730 area for an upside target. There's a lower target near 5675 (a little less than 30 points above today's high) where a trend line from the high in May 2008 through the July 2011 high currently sits. Considering the upside potential vs. the downside risk I don't think it's a good time to be considering long plays in this index (IYT is the ETF).
Transportation Index, TRAN, Daily chart
Many are excited about the fact that the TRAN has rallied above its 2012 highs and this rally has made new highs above its July 2011 high near 5628. But until the DOW also pushes above its 2012 high (13662 in October) there is a bearish non-confirmation at the moment. We've seen this on several occasions in the past few years where one or the other does not confirm a new high. Traders were excited about the new high for the TRAN in May 2008 (above its July 2007 high) only to be disappointed when both it and the DOW came tumbling down from that high (the DOW had made a lower high in May 2008). Before that the DOW had made a new high in October 2007, above its July 2007 high, but the TRAN did not. So this pattern of the DOW and TRAN not supporting each other has been common during the bear market rallies and the current new high, without the DOW, is not bullish (yet).
The dollar surprised me in the past week by not making a minor new high before pulling back, especially with the sharp drop last Thursday, which negated its bullish price pattern (it's neutral at the moment). The choppy pattern from September continues and that keeps both sides guessing at the moment what the next big move for the dollar will be. I continue to lean to the bullish side for the dollar as long as it stays above 78.80, which is the neckline of a possible H&S topping pattern starting from the left shoulder in January 2012. Below 78.80 and I'd turn very bearish on the dollar. It's possible we'll see the dollar stay inside a sideways triangle from September and finish in February before heading lower (dashed red line). It takes a break above 81 to confirm the bulls will keep the reins for at least a little while longer.
U.S. Dollar contract, DX, Daily chart
I'm going to show both the gold and silver charts tonight but start off with silver's chart because I think it has a cleaner pattern (but the two are very similar). Silver completed a clean 5-wave move down from November 30th to its January 4th low. In the larger bearish pattern that impulsive move down completed another 1st wave, leaving us with two 1st waves down from the October 1st high and once the current bounce finishes we'll get a very strong selloff in a 3rd of a 3rd wave down, a move that should take silver down to at least the $20 area before consolidating and then stair-step lower. The current bounce off the January 4th low would have two equal legs up at 31.86, right on top of the 50% retracement of the leg down from November 30th. Its 50-dma is currently at 31.99. A rollover from this area would be an outstanding shorting opportunity.
Silver continuous contract, SI, Daily chart
The bullish interpretation of silver's pattern is that the move down from October to January is a 3-wave a-b-c pullback correction within a larger rally pattern. A break of the downtrend line from October, currently near 33.60, would be a strong indication that the bullish pattern is the correct one. That would portend a move up to at least 38.60 where it would achieve two equal legs up from June 2012. So the first thing I'd try is a short on silver if it rolls over from 31.86 and I'd turn neutral above 32 and then bullish above 33.60.
As I said, gold has a very similar pattern but its move down from November 23rd is not as clean (there's overlap in the highs and lows on the way down). But its bounce off the November 4th low would have two equal legs up at 1705.90, which crosses its downtrend line from October on Friday so watch for that possibility. It has already met the minimum objective for the bounce (at 1685.73, which is where the 2nd leg of its bounce is 62% of the 1st leg). A little below the 1705.90 projection is its 50-dma, currently at 1696.80, and its broken uptrend line from November 5th, which had stopped its rally into the January 2nd high, is only slightly higher, near 1699 by the end of the week.
Gold continuous contract, GC, Daily chart
Not much has changed from last week for oil. I continue to see upside potential to the price projection at 95.37 in the next few days before starting the next selloff. It would turn more bullish above 95.40 and the bears would be back in control with a drop below 92.65.
Oil continuous contract, CL, Daily chart
Tomorrow's economic reports include the unemployment claims but the market is much likely to react to the housing starts/permits, before the bell, and the Philly Fed survey, out at 10:00. Friday we'll get the Michigan Sentiment report, which should be positive.
Economic reports and Summary
I'll add one last point about sentiment since I've been reading how bullish it is that we have seen so much money flowing into equity funds since the new year started. There's a lot of money flowing into all funds apparently since there was a higher flow of money into bond funds as well. If there's to be a large rotation out of bond funds and into equity funds it hasn't started yet. What's interesting about the flood of money into equity funds is that it's happening at arguably the top of the rally. It wouldn't be the first time and in fact it's quite common for the masses to flood back into the market at the very worst time.
The chart below shows the spike up in the first week of January, showing the huge increase in money flowing into long-only equity funds (nearly $9B). This is the biggest weekly inflow since March 2000 and we all know the DOW peaked at that time. It was also the 4th largest weekly inflow on record. It would appear many believe now is the time to chase the market higher and this bullish exuberance is typically not a good sign for the bulls.
Weekly inflows in long-only equity funds, chart courtesy MoneyGame
We have sentiment measures pegged into the bull's camp and price momentum waning and market breadth dying (the advance-decline line is dropping while the indexes make new highs, indicating fewer and fewer stocks are participating). We're getting price spikes to the downside and slow choppy moves back up -- a classic sign of distribution of inventory from the big funds to the retail crowd. Be smarter than they think you are and protect longs while making a list, and checking it twice, of your favorite shorting candidates. The market might hold up into the end of this opex week but I suspect you'll be able to play with the bears very soon.
Good luck through the rest of opex 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