The market had rallied on hopes there would be more money coming from the Fed (now that the taper talk has been put aside) but following the post-FOMC disappointment the week finished flat. Now waiting for the next catalyst.
The numbers in the table below show the mixed and flat results for the past week. The RUT finished weak, as did the home construction index, down -2% and -3.3%, respectively. The metals, oil and commodities index also finished weak, down about -3%. The month of October though was much stronger than had been expected. While the gains were not that great, up about +0.25%, it was at least green for most indexes (not the RUT, SOX or home builders). YTD performance has been nothing less than stellar. Can the bulls hold these gains, and maybe even add to them, in the final two months of the year. It's very rare for the market not to at least test its January 1st level at least once during the year, something this market has not done. That would essentially mean a collapse in the market in the next two months and while that seems very unlikely it's a risk.
Week ending November 1
The RUT and commodities were weak on Friday, capping off their weakness for the week and month. The techs were lifted back up into Friday's close otherwise they would have closed lower for the day as well. It was looking like money was leaving the riskier stocks and heading into the bluest of the blue chips -- the DOW was the stronger index on Friday.
Friday, November 1
The past week finished with a doji candlestick for many indexes, which reflects indecision. The week started off strong as the market anticipated additional evidence from the Fed's FOMC scheduled announcement Wednesday afternoon. There had been a very steady lift higher from the October 23rd low, peaking Wednesday morning. There was some nervousness into the FOMC announcement and then selling following it.
Price action was quite a bit more volatile after Wednesday's high than what we saw for the five days preceding the high and it was only a Friday afternoon rally that saved us from a worse week. The resulting doji for the week marks either consolidation before pressing higher or it's the middle candle of a 3-candle reversal pattern, which needs a red candle for the coming week to give us a sell signal. As I'll review in this weekend's charts, there's reason to believe we're at a turning point but it's too early to tell.
Last week was a busy one for economic reports and they were mixed, which adds to the multitude of opinions about what the Fed will do next. Where bad is good, economic slowing is somehow good for the stock market because it means the Fed will keep its foot on the gas pedal. Never mind nothing the Fed has done has helped the economy, the only thing the stock market cares about is how much money will be printed and given to the banksters to then stuff into the stock market and other assets.
Lending and borrowing is still way down and the velocity of money shows the Fed continues to lose the battle with the money supply equation. They're shoveling money into the wind and it's not getting to where they want it to go. The banks are benefitting and the stock market is benefitting but it has unfortunately built another asset bubble that has no fundamental underpinnings. The dot.com bubble was built on hype and no earnings and it collapsed. The housing bubble was built on the idea that housing prices will always go higher. The collapse, even after a bounce, has left millions of home owners upside down with their mortgages.
Now we have a stock market where everyone believes it can only go higher as long as the Fed keeps pumping money into it. There seems to be little realization, again, that it's not the money doing to the trick; it's sentiment and it's bullish thinking the Fed is this all powerful entity. When that faith is lost, and it will be, the Fed will try printing more money to correct the problem (just more of the same that's not working now and will only exacerbate the problem later). When it doesn't help and the stock market realizes it was just another bubble there won't be enough Fed money to stop the damn from breaking.
The next "too big to fail" bank will be the Fed itself. The central bank has been in an all-out effort to bail out the government's profligate spending and it won't be long before they're going to be demanding the tax payer bail out the private consortium of bankers known as the Federal Reserve System. We'll hear all about financial Armageddon and how we have to bail out the banks again (this time much louder demands and threats of contagion) and it will be interesting to see what the people have to say about it and how much they'll revolt if Congress again fails to listen.
Bullish sentiment is very high again, along with measures like NYSE margin debt, as the market hits many overbought indictors. Now that we've made it through what is typically a rough period for the market -- September-October -- there is general agreement now that the market will simply melt higher into the end of the year. That's clearly a possibility and while there is the potential for last Wednesday's highs to be THE highs, we have no confirmation yet. In some years we've seen major highs in October and we have the same potential this year.
October has the reputation for being the bear killer -- many bear markets have completed in October, followed by v-bottom reversals and the start of the next bull market run. October 2002 and October 2011 were v-bottom reversal. The November 2008 low was followed by a big flush in October. But one of the most important highs in the last decade was the October 2007 high. In fact following the October 11, 2007 high for SPX the NDX hit its high on October 31st. Going way back, the final high in 1929 was in October. It was not a good time to be in the market for the rest of the year from that high. Not quite as far away, the 1987 crash followed a high in October. One could easily say October is as much a bull killer as it is a bear killer. Projecting highs into the end of the year, just because September-October was bullish, is not necessarily a safe thing to do.
There are other time relationships in play between previous major market turns and the current one. SPX made a high on July 16, 2007 and then 62 trading days later it topped out on October 11th. This year SPX made a high on August 2nd and then 62 trading days later made a high on October 30th. There were 60 months between the October 2002 low and October 2007 high and now we're another 60 months to October 2013. From the March 2003 low it was a Fibonacci 55 months to the October 2007 high. The same 55 months from March 2009 is October 2013.
So we've got time pointing to the potential for a major market high and now we need to see if price agrees. In last Wednesday's wrap I showed the DOW's weekly chart with a wave count that supports the idea for a further rally into the end of November and an upside target near 16200, if not higher to price projections near 16700 where the top of its parallel up-channel from October 2011 intersects the projections at the end of the year. So that bullish potential needs to be kept in mind and so far we don't have any kind of confirmation that last week's high was the final high. It was a good setup for a high on Wednesday for multiple indexes but price action since Wednesday's high leaves the potential for higher prices yet.
The use of up-channels for the various indexes shows us it's the DOW that stands alone in showing more upside potential. While the other indexes could see minor new highs we don't have the same bullish potential shown on the DOW's chart. Perhaps we should use the granddaddy of the indexes, the Wilshire 5000, to see where the "market" might be headed next.
The weekly chart of the W5000 shows a parallel up-channel from March 2009 and then shorter-term up-channels from October 2011. There's also a price projection at 18831 for two equal legs up from 2009, for a large A-B-C rally. The tops of the channels and the price projection all intersect near the current price at the current time. At the same time price is up against resistance we're seeing bearish divergence at each of the two highs since May 2013. A 5-wave move for the c-wave up from October 2011 also looks complete. While this is no guarantee that the market will top out here and now, it's not a good setup to be betting on the long side.
Wilshire 5000 index, Weekly chart
Getting in closer with the daily chart, the tops of the up-channels, as well as a trend line across the highs from May-August-September, it's easier to see how price has been reacting to the trend lines. Price rallied above the top of the up-channel from 2009 (the blue line) this week and made it up to the top of the up-channel from October 2011 (green line). It then pulled back to the trend line along the highs from May (gray line) and bounced Friday afternoon to close at the top of the up-channel from 2009. If the bears are grabbing hold of this market we should see a drop below Friday's low at 18653 and continue lower. We've got the setup for it but not the confirmation of a top yet, which needs an impulsive (5-wave) move down from last week's high. The next couple of days will help us identify whether or not the bulls are too tired to drive it back up.
Wilshire 5000 index, Daily chart
For the Wilshire 5000 index I mentioned the price projection to 18831 for two equal legs up from 2009. The rally to Wednesday morning's high was to 18928 and from there it immediately sold off and closed at 18782. It closed below the 18831 projection on Thursday and Friday as well. For SPX the same projection for two equal legs up points to 1778 and Wednesday morning's high stopped 3 points shy of it at 1775. But the 1775 high was good enough for a tag of the top of its parallel up-channel from March 2009, as can be seen on its daily chart below. The trend line along the highs from August-September should not be an important trend line (from an EW perspective) but many traders are watching it and thinking we've got a bullish breakout. That trend line is currently near 1750 and therefore a drop below that level would leave a failed "breakout" and therefore likely be followed by more selling.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- Stay bullish above 1750
- bearish below 1740
One of the reasons why I say we don't have confirmation of a top in place yet is because we don't have an impulsive (5-wave) decline from the high. So far it's only a 3-wave pullback, which could be just an a-b-c correction before heading higher on Monday. The bearish interpretation of the pattern is that we have a 1-2, 1-2 wave count to the downside and Monday will see a stronger decline as the pattern develops into a 5-wave move down, as labeled on the chart. Friday afternoon's rally into the close managed to tag its new downtrend line from Wednesday and therefore it's a good setup for the bears to pounce on Monday. I show a potential bullish descending wedge pattern from last Wednesday's high but as noted for MACD, there's no bullish divergence supporting this pattern. A rally above Thursday afternoon's bounce high near 1769 would leave a confirmed 3-wave pullback and point higher whereas a drop below 1740 would confirm the 5th wave in the move up from October 9th did in fact finish on Wednesday.
S&P 500, SPX, 60-min chart
Stepping back a lot further, the monthly chart of SPX below shows a Bollinger Band and a line chart (reflecting monthly closing prices) and the times price has pushed above the BB. As with many technical indicators, this does not tell us price will turn down from here, especially as we see price has pushed the BB higher many times before, but with it poking above the top of its BB we know price is stretched and it's happened as RSI has pushed up to the downtrend from 1996. So on a monthly basis it's overbought against BB resistance (as well as the tops of its up-channels mentioned earlier) and making new price highs with bearish divergence. This setup tells me we're in for more than just a pullback correction before heading higher again; when it breaks it's likely to break hard to the downside. This market is stretched too much to the upside with weaker market breadth and momentum than previous highs. It's another bubble looking for a pin.
S&P 500, SPX, Monthly chart
The DOW's test of its September high has so far left a bearish divergence and a potential triple top as the oscillators threaten to roll back over from overbought (especially on a weekly basis). It's too hard to show it on the daily chart below but an uptrend line from October 9th through Thursday morning's low was broken Thursday afternoon and Friday's bounce only managed to come back up to the line, which it tagged heading into Friday's close before dropping back down a little. A selloff on Monday would leave a bearish back test and kiss goodbye, which would help confirm the bearish setup on the daily chart. But if the bulls step back in and push the market higher next week we'll be able to see how the DOW handles the trend line across the highs from August-September, near 15765.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 15,800
- bearish below 15,360
NDX has been trying hard to get through the tops of its up-channels from December 2012 and a shorter-term one from June, both intersecting near 3410 in the coming week. It has formed a small rounding top over the past nine trading days, shown more clearly on its 60-min chart after the daily chart below. With the oscillators rolling over from overbought it's looking like the back and forth price action is being won by the bears, also evident in the string of red candles as it attempts to hold up.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 3410
- bearish below 3300
The rounding top for NDX can be more clearly seen on its 60-min chart below. This is how tops typically form, vs. the typical v-bottom reversal, as the bulls and bears duke it out for control. Commodities often make v-tops and rounded bottoms since the fear of missing the move higher generally see a capitulation of buyers in the commodities, marking a top with a sudden reversal. Look at gold's daily chart back in August and September 2011 and you'll see what I mean. Bottoms in the commodities tend to be messy affairs like tops in stocks. If NDX can break out above the top of this rounding pattern and above the tops of its up-channels, near 3410, it would be a bullish statement. But if it breaks the short-term shelf of support near 3367 I think it's going to be lights out for the bulls.
Nasdaq-100, NDX, 60-min chart
A weekly review of the RUT below shows the drop from resistance at the trend line along its highs from September 2012 and the price projection at 1119.49 where its A-B-C rally from March 2009 has two equal legs up. It tried 6 times to get above that 1119.49 projection and each day it closed below it. Once the buyers gave up it was the sellers who took control and the distribution pattern over the previous 6 days leading up to Wednesday's high was followed by stronger selling and the RUT finished weak. Weekly and daily oscillators have rolled over from overbought and it's looking like a top. Better confirmation of that will come with a break below its uptrend line from November 2012, currently near 1075, and its 50-dma near 1071.
Russell-2000, RUT, Weekly chart
Key Levels for RUT:
- bullish above 1124
- bearish below 1070
Bonds sold off following the FOMC announcement on Wednesday as the bond market realized the Fed might not add to its bond purchases, as had been speculated (once the taper talk was off the table). Now there's worry that the Fed might be reconsidering tapering as early as next April, which spooked the bond market a little. The Fed will likely try to talk bonds back up in an effort to keep yields low. TNX (10-year) spiked up as I had thought it might and Friday banged its head on its broken H&S neckline at 2.62, where it closed. Now we'll find out if the bond bears will continue to show strength vs. the bond bulls. I show the back test followed by a kiss goodbye in the coming week as the bond bulls show back up and drive price up, yields down. There's room for a little higher for TNX, up to about 2.656 where it will hit its downtrend line from September 5th and it would be more bullish for yields above 2.66 (bearish for bond prices).
10-year Yield, TNX, Daily chart
The dollar had a strong bounce on Thursday and Friday and it broke out of its bullish descending wedge that it's been in since the July high. The small break below its H&S neckline at the end of October ended up being a head-fake break and it caught more than a few dollar bears leaning a little too heavily into it. A bullish back test of its broken downtrend line from July, currently near 80.28, would be better confirmation of a breakout.
U.S. Dollar contract, DX, Daily chart
The strong bounce in the dollar was hard on the metals and other commodities and gold has now dropped back down after hitting resistance at its downtrend line from February-August. If gold is now able to rally back above its October 28th high at 1361.80 it would be a bullish move, in which case I'd expect it to drive up to the 1500 area into the end of the year. Otherwise the bearish pattern calls for a resumption of gold's decline and a drop down to at least the 1150 area, if not lower.
Gold continuous contract, GC, Daily chart
Silver's weekly chart below shows it too bumped into resistance last week at its downtrend line from February-August and dropped hard on Thursday. The bearish pattern calls for a drop down to the bottom of its down-channel from 2011 by the end of the year, with a downside target near 15.50 where it would hit intersecting trend lines, including its uptrend line from 2003-2008. I'd be a buyer down there. There are several resistance levels between 23 and 28 but the first thing the bulls need to do is take out last week's high at 23.09.
Silver continuous contract, SI, Weekly chart
A weekly perspective for oil is shown on its chart below and it's now not far from its next level of support, now that it broke and back tested its 200-dma at 98.70, near 91.60. Its uptrend line from June 2012 - April 2013 and its 200-week MA are both near that level and should provide support if reached. It could then head higher but I think even for the longer-term bullish pattern for oil calls for a larger 3-wave decline to the uptrend line from October 2011, which will be near 82.80 in March 2014. From there the bullish pattern calls for the start of a significant bull run for oil. But at the moment I'm leaning toward the more bearish wave count that calls for an eventual break below its October 2011 low at 74.95 and then potentially down to its 2009 low at 33.20 before the next bear market is finished, which is the one that will hurt all asset values.
Oil continuous contract, CL, Daily chart
The coming week will not be quite as busy for economic reports as was last week's, especially in the beginning of the week. Monday we'll get the Factory Orders, which are expected to improve (hopefully not just in inventory build-up), and Tuesday we'll get the ISM Services. The rest of the week will be relatively quiet except for a possible market reaction to Q3 GDP number on Thursday. The big report will be the nonfarm Payrolls number on Friday. Friday will be busy with personal income and expenses, PCE prices and the Michigan Sentiment. In the Bizzarro World in which we live now, where bad is good, how the market reacts to the numbers is far more important than the number itself.
Economic reports and Summary
There are plenty of reasons to believe last Wednesday's marked an important high for the stock market. With the dollar looking bullish, assuming it will stay bullish, it will add to the selling pressure for stocks and other assets. We say the metals, oil and commodities take a hit last week and that could continue as well. Time and price have come together for a reason to be looking for a market high rather than a continuation higher. There are too many bulls now expecting the market to continue rallying into the end of the year, especially with the belief that the Fed has our back.
The bullish sentiment could certainly keep the market heading higher and a continuation of the rally in the coming week would leave yet another failed bearish setup. Wednesday's highs made a good setup for the bears and so far they've at least stepped back in gingerly, but there's no evidence yet of a market turn. Some indexes look more bearish than others, such as the RUT, while the DOW maintains the potential for bullishness to continue into November, if not into the end of the year.
There was a short-term setup on Friday afternoon for an immediate reversal back down on Monday and that would increase the probability that the high is now in place. Otherwise a really back above Thursday afternoon's highs would strongly suggest we've got new highs coming. Let price lead the way and trade accordingly but keep trades short term now -- upside potential remains dwarfed by downside risk and it's better to hit and run right now. Once a downturn is confirmed it will then be a good time to start thinking about longer-term short positions. Trade carefully in the meantime.
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