The market did not expect anything to change from the FOMC announcement today but it's always hopeful there will be more help (money). There were no changes to either the rate or the monetization effort and the market threw a little fit in the afternoon.
Even though the market did not expect any changes from the Fed this afternoon, it still harbors hope that the Fed will see something that demands more money creation. With the FOMC announcement and the confirmed "no changes" the market felt disappointed in their rich uncle and sold off. Whether that selling was just a little profit taking or the start of something bigger to the downside is not clear yet. We'll probably have a better idea of that before the weekend.
This morning's updated GDP report showed a weakening economy and it probably had many traders thinking the Fed might decide to do a little something more to help out. With a shrinking economy (GDP declined -0.1% vs. expectations for a drop to +1.0% for Q4 from the +3.1% in Q3) there are many questioning whether the Fed and government are doing enough. They're actually making things worse but that discussion is for another day.
In addition to the plethora of reports of a slowing economy we can now add the contraction in GDP. But never fear, the Fed tells us it's only transitory and that it was caused by bad weather. Damn that weather, I hate it when it does that. I think "transitory" is Bernanke's new favorite word. Whenever we have an upswing in the economy it's structural and permanent but when we have a downswing it's transitory and weather related. One could argue that many of the unemployed are without jobs because of a structural change to our economy but again, that discussion is for another day.
Speaking of employment, the ADP report was at least somewhat positive in that it showed +192K jobs for January vs. the expected +175K and an improvement from the 185K in December (but that number was a revision lower from 215K). Friday's payroll numbers are expected to be in the same ballpark.
Not surprisingly, the market has held up into the end of the month but now that we're inside the T+3 settlement window it's not surprising to see some profit taking. The danger for bulls is that when the market gets extended to the upside the profit taking can turn into some strong selling, especially by those who were late to the party and don't have the stomach to withstand any pullback.
I don't watch CNBC (haven't for the past 10 years) but I hear they're constantly reminding their viewers how close we are to the 2007 highs, with the understanding that it's a foregone conclusion that the market will pass those highs. I watched an emailed video clip of one of their analysts and one of the first things out of Maria Bartiromo's mouth (which is usually just more evidence that she has no clue what she's talking about) was a question about how long this person thought it would take to exceed the highs. So to say that there's a high-level expectation by the public that new highs are coming is probably a gross understatement. We all know what happens when too many expect the market to do something.
In the beginning of January I had shown a chart of the Commitment of Traders (COT) and it showed a very large difference between the commercial traders and the public traders. The one caution about using the COT report is that there's so much arbitrage and hedging going on that it can skew the picture. But when we have a huge difference between the two it still warrants at least a raised eyebrow. The chart below shows the circled values as of the end of December and the most current that I have through last week.
Commitment of Futures Traders, as of January 22, chart courtesy cotpricecharts.com
The small speculators (the retail crowd, which includes mutual fund managers), indicated with the white bars, have spiked up to an even larger net long position while the commercial traders (black bars) have spiked down to an even larger net short position. Something could happen that catches the commercials on the wrong side of this market and the recovery by them would create a huge blow-off top for the market. But is that the way you want to bet your money? Betting against smart money is usually not a good idea. Certainly the odds are not in your favor. When and how this resolves is anyone's guess but it will resolve and probably in the direction favoring smart money -- down.
Starting tonight's review of the charts I want to look at a simpler view of the SPX weekly chart than I've typically shown in the past and why today's high may have been THE high. Normally I use candles on my charts and I use the highs and lows for all my chart analysis. But if you look at a line chart on the weekly chart, which is based on closing prices (weekly closing prices being important), you can see that price reached the top of its rising wedge pattern, near 1510. As far as Fib projections, I use the highs and lows from the candles and interestingly, the 62% projection for the c-wave of the A-B-C move up from 2009 is at 1509.71. This morning's high was 1509.94. I'd call that close enough for government work. The EW (Elliott Wave) pattern is clean and it shows the corrective structure of the bounce off the 2009 low, showing why it will likely be revisited if not broken.
S&P 500, SPX, Weekly line chart
Now we look at the regular weekly chart that I've been showing and you can see how the weekly candle, so far, has formed a doji (it's hard to see) at its broken long-term uptrend line from 1994-2002, which stopped the 2011 and 2012 rallies. Will it be different this time? It could be if we're going to get a stronger blow-off top but at the moment that would be betting on something that's not at all certain. It needs to be treated as resistance until proven otherwise.
S&P 500, SPX, Weekly chart
In addition to the price projection at 1509.71, mentioned above with the first chart, SPX has also met its projection at 1502.76 for two equal legs up from November. There's a higher projection at 1521.47 where the move up from December 31st would have two equal legs up so any further rally could achieve that level. That would also have SPX testing its trend line along the highs from April-September 2012.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- stay bullish above 1490
- bearish below 1468
There's another price projection for SPX that was met yesterday -- the 127% extension of the previous decline (September-November) at 1505.67, shown in red in the above chart. This is a common "reversal" Fib so a decline from here would fit. Looking at the Gann Square of Nine chart, 1506 is an important number since it's opposite the 2009 low at 666 (blue vector from the 7:00 position running up to the 1:00 position). From a time perspective it's 90 degrees from the September 14, 2012 high. Gann liked these time/price relationships and would consider this a potentially important setup for a reversal.
Gann Square of Nine chart (bottom left portion)
So far SPX has hit a high of 1509.94, about 4 points above the 1506 level. Nice little throw-over so far (wink). Between the Fibs, trend lines, Gann and sentiment we certainly have a good setup for the bears. Whether they take advantage of that setup is anyone's guess but I suspect we'll find out soon.
From a shorter-term perspective, this morning's high at 1509.94 came within 18 cents of a price projection at 1510.12, which is where the 5th wave of the move up from January 8th (the low of the only pullback in the January rally) is equal to the 1st wave. That short-term projection lined up very nicely with the 1509.71 projection on the first weekly chart shown above. Today SPX fell out of its up-channel from January 15th, the bottom of which is near 1503 near the end of the day so watch for a possible small bounce and a back test and failure if the bears are now in control. If SPX drops below 1498 it would tell us the high is in (even if just for a larger pullback before heading higher again). But price held the shorter-term up-channel from last Thursday (it closed at the bottom of the channel) and the pullback from this morning's high is only a 3-wave move so far. That means it could be followed by an immediate rally Thursday (it's actually a common pattern to see a reversal of the post-FOMC afternoon move) so both sides need to stay nimble here. If we do get another rally leg on Thursday I'll be watching for a move up to the 1515-1521 area for a final high.
S&P 500, SPX, 60-min chart
There are two other timing tools that call for a reversal of the rally -- the moon and the stars. The Bradley turn model is based on astrological events and one of the two important turn dates this year is January 29th (yesterday). The new and full moons have also coincided with important highs and lows for the market and we just passed the full moon on January 27th. As can be seen on the chart below we have an interesting pattern with the new and full moons. The April and June 2012 high and low were on full moons. The September and November high and low were on new moons. Maybe we'll switch back to a high and the next important low on a full moon. As a side note, I also added the 127% extensions of the previous declines on the chart to show how effective this extension is when it comes to looking for reversals. The 1505.67 extension has now been reached and it's just one of several now that point to the 1500-1510 area as potentially important for a high.
S&P 500 MPTS, Daily chart
The DOW's weekly chart below shows the confluence of trend lines just below 14K, making for a tough area of resistance for the bulls to break through. If it does break through 14K I think it will be a piece of cake to challenge its October 2007 high at 14198. But there are 4 trend lines offering resistance right here: one is the long-term trend line along the highs from 1971-1972-1987 through the 2002 and 2003 lows (did you ever wonder why the DOW stopped where it did back then?); the second is the trend line along the highs from April-September 2012; the third is the top of a parallel up-channel from 2010; and the fourth is the broken uptrend line from October 2011. Breaking through these lines is a lot to ask of the bulls after spending so much energy in January to get to this point.
Dow Industrials, INDU, Weekly chart
Key Levels for DOW:
- bullish above 11,860
- bearish below 11,530
Amazon's (AMZN) performance this morning helped NDX get an initial bounce above its resistance level at 2750 but it was unable to hold above that level. AMZN gapped up and hit a high of 284.20 (+23.85, +9.2%) and tested last Friday's high at 284.72. But it immediately sold off, gave back most of its morning gain (but it didn't close its morning gap) and then chopped sideways for the rest of the day, finishing at 272.76 (+12.41,+4.8%). With their lousy earnings report there are many people scratching their heads in amazement that the stock didn't tank instead. I read an interesting analysis on AMZN's earnings by Karl Denninger at The Market Ticker this morning (hat tip to Aaron), providing a quick explanation of what AMZN's numbers really mean: Did You READ The Report? It makes it all the more astounding how investors just love this stock but with few sane reasons to want it as an investment (one more example of how sanity and funnymentals have nothing to do with stock prices).
On NDX's weekly chart I show a resistance band at 2750-2770 and it has been struggling at or beneath this band for the entire month of January. It would be bullish above 2770 for a move up to at least 2800 where it would again back test its broken uptrend line from August 2011 (that trend line was broken in November has been resistance since December). There's a lot of work the bears need to do before proving NDX is forming a H&S top here but that's clearly the potential.
Nasdaq-100, NDX, Weekly chart
The chart above is with the arithmetic price scale, which shows the uptrend line from 2009-2011 acting as support. The daily chart below uses the log price scale and that same trend line sits above, currently near 2890, which could be an upside target if the market has a lot more rally left. The January sideways consolidation in the move up from December 31st easily fits as bullish and if it's the half-way mark then another leg up to 2900 and the 2009-2011 trend line fits well for that. Never say never with this market. That would also have the DOW and SPX pushing above their 2007 highs, another thing that could be on the "agenda."
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 2770
- bearish below 2685
I'm taking a slightly different look at the RUT than past weeks and instead of a rising wedge pattern for its rally from October 2011 it's looking like it could be topping out at the upper end of a parallel up-channel from the February and June 2012 high and low, which is shown on the daily chart below. Within this up-channel there are two equal legs up from June at 902.30, which was tagged last Friday. A higher projection at 916 is where the move up from November would have two equal legs. But the reversal from the top of the channel and the close below 902 could be the indication that the rally has finished. Confirmation of that doesn't come until it breaks its up-channel from November, the bottom of which is currently near 884.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- stay bullish above 884
- bearish below 884
I want to take a look at HYG tonight, which is the high-yield (junk) corporate bond fund. When traders are feeling bullish and willing to take on more risk for a higher return they'll invest in this fund. The price patterns and projections for HYG reached an inflection point last week and in my weekend update I showed why we could be looking for a reversal this week. It rallied up into a Fibonacci cluster near 95 and it was a setup for either a bullish breakout or a bearish reversal and so far we're getting the reversal. As goes HYG so too will go the stock market so I'm watching closely.
There's a fascinating relationship in the wave pattern (fractals) of the moves from 2009 and the 62% projection is repeating in a way that can't be ignored here. Below is an explanation of the wave pattern if you're interested. If not, the bottom line is that there are multiple 62% projections lined up in the 95 area, which is where HYG has stalled.
There's a 3-wave move up from 2009 that flattened out after the initial 2010 high and the entire bounce structure looks a little more complex than a simple A-B-C, which I've labeled as (w)-(x)-(y). Wave-(y) is the move up from October 2011 and is itself made up of smaller-degree w-x-y moves. Keep in mind that a w-x-y move is like an a-b-c but has no impulsive (5-wave) legs. The leg up from October 2011, wave-(y), has formed a rising wedge with all the requisite 3-wave moves inside the wedge (all these 3-wave moves is what has Elliotticians pulling their hair out trying to figure out what the wave count is). The top of the rising wedge is currently near 95.10.
High-Yield Corporate Bond ETF, HYG, Weekly chart
I've got 3 different Fib projections showing on the weekly chart below, the first being for wave-(y), the leg up from October 2011, which would be 62% of the 1st leg (wave-(w) from 2009 to April 2010) at 95.71. For the leg up from October 2011, I've broken it into a 3-wave move (labeled W-X-Y) and again wave-Y would be 62% of wave-W at 95.23. Wave-Y, which is the move up from June 2012 is another 3-wave move and wave-y, the move up from November, is 62% of the 1st leg at 94.83. That gives us a tight correlation of wave relationships between 94.83 and 95.71 for a potential completion of its bounce. Friday morning's high was 94.97 and the move down since that high is making it look like it might have topped out.
The daily chart below zooms in on the move up from November, which is the small wave-y on the weekly chart. The 2nd leg of the rally would be 62% of the 1st leg at 95.08. The 2nd leg up formed a small rising wedge pattern, which fits very well as an ending diagonal to complete the larger pattern. The breakdown from it on Monday has been followed by a strong selloff, which is typical when the pattern finishes (a rising wedge is typically retraced very quickly). I'm sure it's just coincidental (wink) that all these 62% projections happen to line up within a point of each other and share a common (fractal) pattern from the weekly chart down to the daily chart. If HYG starts to break down from here, as it appears to be doing, it's going to be an important message for the stock market (it's our canary).
High-Yield Corporate Bond ETF, HYG, daily chart
The TRAN did not have a good day today and was the leading sector to the downside (-1.5%). Whether it's the start of a reversal to the downside is too early to tell. We could see a week or two of consolidation before heading higher again and above 5917 would be bullish. On its weekly chart below I've shown the price objective out of 2012's sideways rectangle (height of the rectangle projected above the rectangle) and that projects to 5917. Last week's high was 5884 so we of course wonder if that was close enough. It stays bullish above the trend line across the highs from 2008-2011, near 5685, potentially bearish below that level and confirmed bearish below the top of the rectangle, near 5380. It's a good setup for the completion of its 3-wave move up from October 2011 but obviously it will need more price action to confirm it. So far the TRAN has rallied above its 2007 but it remains unconfirmed by a new high for the DOW and it keeps the Dow Theory sell signal intact until that happens.
Transportation Index, TRAN, Weekly chart
The dollar's inability to rally when it needed to has me turning bearish on it. But I think it's going to continue chopping around for at least another month before it makes a move one way or the other. But from a larger timeframe perspective I'm beginning to think the sideways consolidation since last September is a bearish continuation pattern. A drop below 78.80 would be more immediately bearish.
U.S. Dollar contract, DX, Daily chart
If the dollar is going to be bearish this year it's going to support the gold bugs' argument that gold will head higher as inflation worries increase. I remain unconvinced of that argument because I think we're fighting deflation and will be for the next couple of years. But the price pattern will tell us more when it breaks out of its choppy pattern. The bearish wave count calls for a continuation lower as long as it holds below 1700. A rally above 1706 would put it on a bullish trajectory. Below 1653 would keep the bears in control.
Gold continuous contract, GC, Daily chart
Oil is providing some large swings to trade but you've got to be good to catch them. It's currently swinging between support near 80 and resistance near 106 and that trading range could narrow a bit this year. The sideways triangle pattern shown on the weekly chart below is a bullish pattern and remains so as long as oil stays above 80.
Oil continuous contract, CL, Weekly chart
Thursday and Friday will be big economic reporting days with Friday being the more important day because of the Payrolls reports. Thursday morning we'll get the unemployment numbers and personal income and spending numbers. The latest consumer sentiment numbers have been declining and if we see spending also on the downswing it's not going to be market friendly. Shortly after the bell we'll get the Chicago PMI, which had been revised lower to 48.9 from 51.6 in December. Expectations are for 50 or slightly higher but anything below 50 would just add another data point showing the economy is slowing.
Economic reports and Summary
From a time and price perspective now is a good time for the market to at least take a rest. I could easily make the argument that the market needs at least a couple of weeks and some points to consolidate the gains off the December low before heading higher. That's the bullish expectation. The bearish expectation, and the direction I continue to lean, is that the bounce patterns off the 2009 lows are ending and might have finished today. Multiple sectors and indexes, even with different patterns, are lining up as potentially important ending patterns.
This suggests the correction off the 2009 low is completing and that the cyclical bull within the secular bear may be coming to an end. A new cyclical bear within the secular bear may be about to begin and if the pattern of the 1970s repeats we're going to have the worst leg down in the bear market (like what happened following new high in January 1973, which led to a new market low in October 1974, below the 1970 low). Only time will tell on that scenario but stay aware of the potential since it means you'll want to think twice before you decide to hold on through a "correction." We've got a tumultuous year ahead of us and I don't think it's going to be market friendly.
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