The usual pattern of a bullish week in front of the Thanksgiving holiday held up this week and the indexes tacked on at least a few more points. The techs and small caps saw bigger gains than the blue chips and the setup looks good for at least a little higher.
The blue chips held their gains from the last couple of weeks while more money poured into the higher-beta stocks in the techs and small caps. The RUT in particular looks strong and has benefitted from the HFTs using this index for their trading. The caution with the small caps is that when the music stops we could see a move back down that is just as fast, if not faster.
Because of the holiday shortened week we had a fair number of economic reports today, which continues to show mixed results from the economy. Unemployment claims came in a little better than expected by dropping to 316K from last week's 326K, which had been revised slightly higher from 323K.
The Chicago PMI reading of 63.0 was a little weaker than last month's 65.9 but better than the expected drop to 58.0. The Leading Indicators number for October was +0.2%, a drop from September's +0.9% (revised higher from +0.7%), but at least a little better than the expected -0.1%.
The Durable Goods orders declined significantly to -2.0 in October vs. September's +4.1%, which had been revised higher from +3.8%. But again, it was slightly better than the -2.2% that had been expected. Ex-transportation, the durable goods number was also down in October to, -0.1%, from September's +0.2%, which had been revised up from -0.2%. It was expected to stay the same for October at +0.2% but the actual was a miss.
The slowing PMI and Leading Indicator, as well as the drop in durable goods orders, all point to a continuing slowing in the economy. But the stock market of course ignores all such signs and just assumes the Fed will work its magic and hold the stock market up in spite of a worsening economy. It's the reason why we're hearing more respected analysts suggest the Fed has created another asset bubble, putting us right back in the same position we were in when the stock market rallied into the 2007 high. The Fed is the perfect example of the definition of insanity -- doing the same thing over and over again but expecting different results. But this time we have the Fed (a private consortium of private banks) in the position of being too big to fail. It will be very interesting to see what happens the next time the bankers are demanding a bailout.
Heading into Monday was a very nice setup for a market reversal but like so many previous setups, the bears failed to show up and take advantage of it. Sticking with the trend (up) continues to be the trade. We of course can't blindly stick with the trend, especially one that is getting tired (bearish divergence) and overbought on all time frames so I'll continue to look for where the rally might run into trouble, even if it's just for a pullback before heading higher. Once the bearish setup into Monday failed it opened up a new pattern that continues to call for higher prices.
I consider SPX to still be the better reference for the "market" (it looks very similar to the even broader index, the Wilshire 5000) so I'll start off with its charts tonight. While the small caps and techs are outshining this index to the upside at the moment, they'll also likely pull back faster once we start a correction.
The SPX weekly chart shows how price has pushed up to resistance at a few different trend lines, which was one reason why I thought the setup into Monday's high could result in a reversal. The sideways consolidation since Monday suggests we'll see higher prices but stay aware of the potential for resistance to hold here. SPX has poked above the top of a its up-channel from 2009, near 1790, and has hit the trend line along the highs from March 2012 - May 2013. On Monday it reached the top of a rising wedge pattern for the rally from October 9th. So the risk for the bulls is that once we get through Thanksgiving we could be looking for at least a larger pullback. I show a price projection at 1845.36, which is where the 5th wave in the move up from October 2011 would equal the 1st wave, which could be reached in the first couple of trading days in December.
S&P 500, SPX, Weekly chart
The 5th wave in the move up from October 2011 is shown more closely on the daily chart below. It too needs to be a 5-wave move and that's the move up in the rising wedge. In addition to being at the top of the rising wedge it is also up to the top of a parallel up-channel for price action since June, which is shown on the chart. The projection to 1845 is shown but you can see how price is pressed up against resistance with overbought and bearish divergence on the chart. It's not something I'd feel comfortable chasing higher from here but we also know these things have not dampened the bull's spirits. It's simply a time for caution. It takes a decline below the November 20th low near 1777 to indicate a more important high could be in place.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1810
- bearish below 1777
Looking at the 5-wave move up from August on the daily chart above, its 5th wave is the leg up from November 7th and is shown more closely below on the 60-min chart. For those of you who follow EW (Elliott Wave), I've been debating whether I should be looking for an impulsive move up from November 7th or a corrective count (because of the rising wedge pattern it should be a corrective count). What I'm showing on the chart is a corrective count with two a-b-c's separated by an x-wave (the pullback on November 18-20), which is called a double zigzag. Each a-b-c would be equal at 1833.36 and in the 2nd a-b-c, which is the move up from November 20th, we'd have two equal legs up at 1833.64. That gives us tight correlation near 1833 for a potential top. That's a little less than the 1845 projection on the daily chart so I'll be monitoring it closely to see if either is likely to be achieved. A slightly lower projection near 1822 is also a level of interest if reached.
S&P 500, SPX, 60-min chart
The DOW almost reached its trend line along the highs from 2000-2007, which I know a lot of traders have drawn on their charts and may be doing some profit taking as it gets close. Monday's high stopped about 30 points shy of the trend line near 16140 and Tuesday's high got within 20 points of the trend line. Wednesday's high was a lower high. Resistance might be holding but the sideways consolidation since Monday is looking bullish and looks ready for another leg up on Friday's half-day session. Whether it will be able to get through 16140 remains to be seen.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 16,150
- bearish below 15,865
The same double zigzag wave count for the DOW, as described for SPX for the move up from November 7th, points to the 16300 area for the completion of its rally so that would clearly give us a throw-over above its 2000-2007 trend line. In fact a throw-over above the line followed by a drop back below it would give us a sell signal, something to watch for if it happens since it would be a good signal that an important high was made. For now I'll be watching to see if that upside potential looks achievable.
There are two longer-term up-channels for NDX, one from March 2009 - October 2011 and the other from October 2011 - November 2012. They're actually close together and the tops of both are currently near 3470 and 3490. The first one, the up-channel from October 2011, was tagged at today's high and could result in a pullback but with Friday morning following Thanksgiving typically bullish we could see the top of the other channel, from March 2009, tagged on Friday. But a pullback from the tops of these channels should not mean a hard selloff to follow. I think the pattern calls for a pullback and then a push higher into early December. Instead of a corrective wave count up from November 7th I'm looking for an impulsive 5-wave move, which is why I'm looking for a pullback and then what could be the final push higher (explained a little further following the chart).
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 3440
- bearish below 3359
For NDX I've been looking for a 5-wave move up from August, the same as the blue chips, and I've got us in the 5th wave, which is the leg up from November 7th. But for this one I'm using a "simple" impulsive 5-wave move and that means the 5th wave also needs to be a 5-wave move. The leg up from November 20th would be the 3rd wave and that means we need a pullback (4th wave) and then one more final high (5th wave) to complete the rally, which is what I'm depicting on the chart for the next week or two. A pullback into early next week, perhaps after a little bit more to the upside Friday morning, would then set up the final run higher to complete the 5th of the 5th wave in the move up from August. In this 5-wave move up from August the 5th wave would be equal to the 1st wave near 3514 so that's an upside target for now. A little higher is a trend line along the highs from mid-July, which will be near 3540 in the 2nd week of December. The uptrend line from October 9th, currently near 3408, should hold as support for the next pullback/consolidation but any drop below the uptrend line and then 3400 would be advance warning for the bulls.
Sometimes the RUT's pattern is clear and other times it's not. It's the latter right now and while I see the momentum players have been behind this index since last week I don't know that it can be trusted. It could jerk to the downside just as quickly. It has rallied up to just shy of a trend line along the highs from July, near 1144 on Friday but if the HFTs keep using this one for their trading vehicle there's no telling where they'll push it to. I show a pullback/consolidation into next week and then higher but it's just a guess. I simply don't have a good feel for what it's doing right now.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1144
- bearish below 1096
Bonds have been weaker than I expected to see by now and that has kept yields up. I continue to expect to see a stronger rally in bonds and a decline in yields but that needs to get started pronto. At the moment we have what can be considered a H&S pattern for the 10-year yield but ideally the November 21st high now needs to hold. Any further advance in the yield would begin to look a lot more bullish (bearish for bond prices). It would mean the market is getting ready to call the Fed's bluff. But if yields head lower from here, the first sign of bearishness of TNX would be a drop below support at 2.46% and it would then have an initial downside objective to 1.95% and maybe down to its uptrend line from July 2012 - May 2013, which will be near 1.82% in mid-January.
10-year Yield, TNX, Daily chart
The U.S. dollar is slowly working off some of its overbought indicators and could find support at its 50-dma, at 80.39, and start the next rally leg. Or it might continue lower to its H&S neckline in December, near 79.70 by then, before rallying again. It should rally again but from where is the only question in my mind at the moment.
U.S. Dollar contract, DX, Daily chart
As the dollar has pulled back since its November 8th high it has not helped the metals. Gold has continued lower during the same time and broke support at its October 15th low. For the past few days I've been thinking it's ready for a bounce to correct the leg down from October 28th but so far it hasn't started. If we do get a bounce I think it will get up to about 1300 before starting back down to lower prices. Or it might just head lower from here.
Gold continuous contract, GC, Daily chart
Several weeks ago I showed a weekly chart of silver to point out the potential for a drop down to intersecting trend lines near 15.50 by the end of the year. That would mean a fairly sharp drop in the next 4 weeks and I haven't seen anything yet to change that potential. A double bottom near 18 (the June low) could develop but for now that's just a possibility.
Silver continuous contract, SI, Weekly chart
Oil finally made it down to the uptrend line from June 2012 - April 2013, which I've been projecting for several weeks. Now that it got there we'll see if it holds as support, which is what I'm thinking. A bounce back up to the 100 area to correct the leg down from August looks like a good possibility and then the start of the next major decline in oil next year.
Oil continuous contract, CL, Daily chart
The rest of the week will be quiet as far as economic reports go.
Economic reports and Summary
As we enter a bullish period for the stock market (November-May, and especially the holiday period), there are high expectations for a continuing rally. And one can hardly fault the bulls for feeling good about the future. The winds are at their backs with the Fed's help and the market is ignoring any signs of a slowdown in the economy and company earnings. What's not to like?
A chart that Tom McClellan put together shows the tight relationship between the Fed's asset purchases and the stock market (S&P 500). It's a chart I've shown before and it's worth reviewing again. But in a little bit I'll have a big dose of caution that this is not a sustainable trend.
Fed's Total Assets vs. SPX, 2006-present
Because the Fed has added so much to their balance sheet since 2009 the decline in their assets in 2008 looks small. But that small decline, which removed some liquidity from the market, caused a bit of crash in the stock market in 2008. Since 2009 they've either been aggressively buying assets or holding steady. During the holding periods the market declined or got very volatile (2010 and 2011-2012). Since they've been on their +$85B/month acquisition plan the market has been in a steady climb. Is it any wonder the Fed feels trapped in their QE program? The mere mention of slowing the program from $85B/month to $75B/month caused a minor panic in the market during the summer. Just the fear of adding less liquidity (not reducing assets, just slowing down the addition of them) caused some panic. God help this market when the Fed is forced to curtail their purchases (by the market driving yields higher and decreasing the value of the Fed's holdings).
Recently there was a chart circulating on the trading floor that showed a comparison of the DOW's current rally (from July 2012) to the 1928-1929 rally. We of course know what happened following the rally into the 1929 high. Tom DeMark noticed the pattern and Bloomberg had posted a copy of the chart but Tom McClellan put a chart together that's cleaner and easier to see, which I'm using below.
DOW Industrials, comparing 1928-1929 to 2012-2013, chart courtesy Tom McClellan
As DeMark noted, the current "it's different this time" rally (the Fed won't let the market fall) is following a similar pattern in the 1928-1929 rally, which was also a rally based on "it's different this time" and a firm belief that the market would simply continue higher. The public in 1929 saw the stock market as their path to riches. Analogs (comparisons of price patterns) can change without notice but they do provide a heads up for what could be coming. The market might not repeat but it often rhymes.
With the Fed on its buying spree it's not hard to believe there's only one direction for the market -- up. Using the comparison between 1929 and 2013 there's also reason to believe the market will continue to rally at least into January, but then there could be trouble. Sooner or later the problem for the market becomes one of belief -- faith in the Fed's ability to hold things up in spite of more data showing the economy continues to slow and earnings continue to decline. It's going to cause more and more nervousness about an unsustainable rally. Once the faith in the Fed's ability to hold things up starts to vanish, and it will, this market will likely come tumbling down. A stock market crash, like 1929, is entirely possible as the house of cards the Fed has built crumbles from some ill winds, which is what makes the analog chart above believable. It's certainly something I'll continue to monitor.
Recently Bernanke was forced to say he did not believe the stock market was in a bubble. Something to keep in mind is that the more financial and government leaders are forced to deny something the more probable they're either lying or ignorant. I'm not sure which is worse but considering the fact that Bernanke also denied housing was in a bubble back in 2007 I'd say he has zero credibility when he denies something.
As McClellan noted on his chart above, the analog points to January 14th for a stock market high. It's interesting that it would be on the anniversary of the 2000 high, which was also January 14th. Sometimes you can't make this stuff up. Not shown on McClellan's chart is the price projection but I think it was DeMark that mentioned a target for SPX at 1850-1900. That would equate to about DOW 16600-17000. What Gann and others often pointed out was that time is more important than price but a combination of the two could provide us with something important to watch in the coming month or two.
The markets are closed on Thursday and we celebrate Thanksgiving and time with our family and friends. Lots of food, drinks, good friends and family -- there's a reason this holiday is Americans' favorite one. Many people make it into a 4-day holiday weekend and therefore trading will be very light during Friday's half-day session. If there's no real news to drive the market it could end up being a very quiet day. But the light volume also creates an opportunity for more volatility for those who want to push the market around and get a couple of good trades. Think of HFTs playing in their own sandbox.
I hope everyone has a good 4-day weekend and starting next week we'll look to see how the final month of 2013 finishes and how the 1929 vs. 2013 analog plays out.
Enjoy your time away from the market 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