The sellers hit the market a little harder today and the indexes broke some potentially important support levels. But we're nearing the typically bullish period for December and opex week as well.
As of the close on Tuesday the indexes were parked on support and needed the bulls to immediately step back in this morning. They failed to do so and the bears went on the attack. During the day we saw only small bounces that were then followed by more selling. The indexes finished near their lows, leaving both sides wondering if the selling will continue on Thursday.
The RUT was the weaker index, which is never a good sign for the bulls, but it's also the more volatile index and might have simply reflected the selling to a greater extent and not necessarily mean anything. We could still be dealing with just a pullback correction to the bull market that will be followed by another rally into year-end. I'll spend a little more time in tonight's wrap on the RUT to show what each side needs to look for.
It was a quiet day as far as economic reports and there was nothing to get the bulls excited enough to buy. That left the door open for the bears and they poured through. Not even the "good" news about a budget deal announced last night could hold the market up today. Perhaps because it's the same old thing -- the mandatory sequestration spending cuts were reduced by $40B, which would lower the government debt by about $20-$23B OVER TEN YEARS! That works out to about $2B/year on a trillion-dollar budget. We're talking less than a drop of water taken out of full bucket. The lack of honest effort from our representatives is pathetic.
But I digress. The market didn't care, or certainly it wasn't bullish. Even bond prices sank back down today so there's not much concern that the added budget costs will force the Fed to monetize even more debt. As usual I've got a lot of backup information as to why the market is due for a spanking but it's more or less funnymentals kind of stuff. At the moment I'd rather stick with the charts and let them tell me when the market is about to get spanked. It remains bullish until proven otherwise, so let's just dive into the charts.
The RUT has been a good index to watch as we look for evidence for which way the market is likely to head next. As long as traders are feeling positive and bullish about the market they'll continue to pour more money into the small caps in an effort to get a bigger bang out of their buck. But the higher volatility works both ways and when traders want to reduce their risk we'll see a stronger decline as they sell the higher-beta stocks like the small caps. Couple this with what the HFTs (High Frequency Traders) are doing and the RUT becomes a good canary index to watch. Whichever way the RUT moves it's likely to move bigger because the HFTs use the IWM (small-cap ETF) as their vehicle of choice for trading -- it's a good momentum "stock" for their program trading.
The recent weakness in the RUT is a little worrisome for the bulls but so far it's nothing that can't be reversed back up just as quickly as it's come down. Today the bulls defended a support zone that needed to be defended -- 1100-1105 (the low into the close was 1099.74 before bouncing a little to close at 1101.50). The next move from here should tell us what we need to know about how the rest of the month might go.
Starting off with the weekly view of the RUT, the pullback from its November 29th high is trying to hold support at its uptrend line from November 2012. Depending on whether the log or arithmetic price scale is used, the uptrend line has either been broken or is slightly below the current level. From a weekly perspective (log scale) it's looking like the uptrend line could hold if the buyers jump back in. A rally from here could see the RUT rally to a new high into the end of the month. If it makes it up to the trend line along the highs since September 2012 we could see the RUT hit 1185 by early January. But a drop below its November 7th low at 1079 would be a problem for bulls and below its October 9th low at 1037 would be a final nail in the coffin for this bull market.
Russell-2000, RUT, Weekly chart
The move up from June has overlapping highs and lows, which makes the rally look like an ending pattern. I have it labeled as an unwinding of 4th and 5th waves, but it's not clear whether the last one was finished with the November 29th high or if there's one more to go. The daily chart below shows the RUT has broken support at its 50-dma, at 1105, which follows the strong break of its uptrend line from October 9th, both of which are worrisome. This chart is using the arithmetic price scale and you can see the uptrend line from November 2012, near 1088, has not been threatened yet.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1136
- bearish below 1079
If we do get another rally into year-end it might be good for just a minor new high and a back test of its broken uptrend line, which will be near 1155 by the end of the month. But if the RUT drops below 1100 we could see it complete a 5-wave move down as shown, perhaps completing next week (opex) before starting a bounce correction into the new year (a late Santa Claus rally?)
There's another uptrend line from June-August that is not on the daily chart above (it makes it too crowded and messy) but I show it on the 60-min chart below. Along with a test of the 50-dma at 1105 today the decline tested this uptrend line, held for a bit but then broke later in the afternoon. Again, not a good sign for the bulls. I show it will be followed by another rally but the bulls can't waste any time on Thursday getting it going. A price projection at 1100.51 is where the pullback from November 29th has two equal legs down and this is potentially important since the pullback fits well as just an a-b-c correction to the rally. A 3-wave move down, if that's all the bears are going to see, will be followed by another rally leg to new highs. This is why I had mentioned earlier today that the 1100-1105 is a strong support zone for the RUT that must be defended by the bulls.
Russell-2000, RUT, 60-min chart
If the RUT drops below 1100 it will likely head down to the 1080-1085 area before consolidating and then drop lower again next week, which would give us the 5-move down depicted on the daily chart (and light red dashed line on the 60-min chart). There are some cycles pointing to early to mid-January for an important market turn, which has me thinking a final high at that time, so another rally leg from here would fit that cycle pattern. But betting on the long side is risky when I think about the downside potential. I'll need to see how the next day or two progresses before feeling more confident about either direction from here.
Keep in mind that tomorrow is the Thursday prior to opex week. It's been name head-fake Thursday because of the common pattern of getting a low early Thursday, usually following a decline prior to Thursday, that's then followed by some big buy programs to get the shorts covering. The short-covering rally then leads to a larger rally into opex and all those who sold puts get to keep their money with a higher close in opex. That's the potential setup that I see in front of us. Treat any hard reversal back up Thursday as bullish and look to play the long side. But a decline on Thursday that is followed only by a choppy consolidation will very likely lead to lower prices. Only a strong impulsive bounce is one I'd look to buy.
The SPX daily chart below shows today's decline broke its uptrend line from October 9th through last week's low and tested last week's low. It hit a low of 1780, just above a 1775-1779 support zone, which could get hit with a brief spike down Thursday morning. Any quick low that finds support above 1775 that's then followed by a strong bounce would be a move that could lead to the Santa Claus rally. But a close below 1775 would then likely see a drop down to at least the 50-dma, currently near 1758, and then a bounce/consolidation before heading lower through opex week. A 5-wave move down into a low by the end of opex could then lead to a higher bounce into early January (a late Santa Claus rally) before dropping even harder, kicking off the next phase of the secular bear market.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1812
- bearish below 1775
The SPX 60-min chart below shows a closer view of what to watch over the next couple of days. This morning's decline broke its uptrend line from October 9th through the December 4th low and it's now approaching a price projection at 1777, which is where the decline from November 29th would have two equal legs down. This could complete an a-b-c pullback before starting the next rally leg. The November 20th low is also at 1777 and last week's low was at 1779. The highs in late October/early November are near 1775 and this is why I'm saying we've got a support zone at 1775-1779 that needs to be defended by the bulls. For the bearish pattern I'm depicting a drop to the 1740 area before the end of next week before setting up the bigger bounce. We'll have time to review this pattern as it develops. We're at an inflection point and one side or the other is about to make a statement.
S&P 500, SPX, 60-min chart
Following the November 29th high for the DOW, and the shooting star doji at resistance (the trend line along the highs from 2000-2007), it was a good setup for a reversal, which was confirmed by the red candle the next day. Then the bounce into Monday's high left another bearish candlestick (gravestone doji, a more bearish version of the shooting star) and Tuesday's red candle left another confirmed reversal. Another bearish signal is this week's failed attempt to regain its broken 20-dma, which it had not even tested since climbing above it in October. So the bulls appear to be on the ropes at the moment but I've learned to not underestimate their ability to punch the bears in the nose.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 16,060
- bearish below 15,721
I like to throw in a much longer-term chart every now and then to keep things in perspective and the monthly chart of NDX below shows an interesting setup. The uptrend line from 1990 through the 2002 low was broken in September 2008, one of the strongest down months of that year. Since the 2009 low it has been attempting to get back above that uptrend line but has only managed to bump up along it. I've mentioned this kind of pattern often for the DOW, which loves to bump and grind its way up underneath broken uptrend lines. It's never a bullish sign but you don't know when it will end. However, typically when it does end it quickly retraces the effort. Currently NDX is slightly above the line, which could be bullish, especially if the bulls get back in the game here. But RSI is starting to curl over at a high that is slightly less than its 2007 high (bearish divergence against the new price high). Betting on further upside from here would be the riskier bet.
Nasdaq-100, NDX, Monthly chart
On the monthly chart above you can see how the latest part of the rally, from the November 2012 low, has accelerated up in a parabolic arc. Without the bearish divergence I'd be more inclined to believe it's on an upward path that will take it back to its 2000 high. But in this case I think it's a blow-off top for its rally from 2009. It's hard to know where blow-off tops will finish but when they do it's usually not a good time to be a bull. The final portion of the rally from November 2012 is shown below on the daily chart.
The rally has can be counted as a string of corrective wave structures, making it more difficult to determine in real time where it is (and more importantly, when it could finish). This is when the trend lines can be very useful and the latest one is the uptrend line from October 9th, currently near 3469. This line was tested today (briefly broken with a low of 3464) but it held. The bulls must step back in now and if they do we could see another rally to the trend line across the highs from July, which will be near 3566 by the end of next week. It's getting pinched further by the two trend lines and stays bullish above 3469 (on a closing basis since we know S/R levels are repeatedly broken intraday). A drop below last week's low at 3453 would be a strong statement in favor of the bears since the wave count can be satisfactorily be considered complete at Monday's high (following the 5-wave move up from November 7th).
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 3520
- bearish below 3453
Two charts worth watching here are AAPL and GOOG. They could be good sentiment indicators and their price patterns are at or near levels where the bears might decide it's their turn. Starting with AAPL, its bounce off the April low has two equal legs up for an A-B-C correction to its decline at 576.14. Its December 5th high at 575.14 was exactly 1 point shy of the projection. The sideways consolidation since last Thursday could lead to another attempt to ring the bell at 576, or maybe even make it up to the 62% retracement of its decline at 582.84. But with three different price projections and the trend line along the highs from May-August all lining up at 571-582 I'm looking for a top in this area and it might already be in place.
Apple Inc., AAPL, Daily chart
The weekly chart of GOOG below shows upside projections at 1175 and 1195, clearly quite a bit more potential than Tuesday's high at 1092. But it has already achieved one target at 1060, which is where the 5th wave in the move up from June 2012 is equal to the 1st wave. It would be 162% of the 1st wave at 1195 and the move up from November 2008 would have two equal legs up at 1175. A rally into mid-January could easily accomplish either but the risk from here is that the rally pattern can be considered complete at any time and start back down from here. A drop below 1000 would tell me the rally high is in place.
Google Inc., GOOG, Weekly chart
Last week I showed a weekly chart of ZB, the 30-year Bond, and how it had dropped down to its very long-term uptrend line from 1981-2007, near 128'24, and I had mentioned bond bulls need to step back in now if they want to hold prices up. Hear that Fed? So far we've got a little bounce off Friday morning's spike low and I could argue it's an impulsive leg up, which means the pullback from Monday's high should be followed by more rally. So far the pullback is a little shy of a 50% retracement, which is at 129'06, so we'll soon find out if the bulls mean business or not. A drop below 128 would indicate a lot of trouble for bonds (and the Fed and all borrowers).
While ZB made a minor new low below its early-September low it could be important (for bond bulls) that ZN (the 10-year Note) did not. Its higher low is creating a potentially bullish inverse H&S pattern since the left shoulder in July, as shown on its daily chart below. I can see the possibility for one more drop lower to a price projection at 123'12 where the 2nd leg of the decline from October 30th would be 162% of the 1st leg down. It's not something I would bet on but it is something I'll be watching carefully if it happens.
10-year futures contract, ZN, Daily chart
The banks have been weaker than the broader indexes this week and BKX is has nearly retraced the rally from last Friday's gap up following the Payrolls report. Part of the reason for the under-performance this week by BKX might be due to the "Volcker Rule," which has passed the House and it's looking like it will make into law. It's been adopted by the Fed, CME, SEC and some other alphabet soup regulatory agencies. When the Dodd-Frank bill was written, which was done by the banking industry protecting its own turf, there was still no limitation on the banks' abilities to trade their own money. This is the risky behavior that got banks into so much trouble in 2008-2009 and the Dodd-Frank bill failed to curtail the banks from continuing this behavior, which was basically a system of private gains/public risk.
One reason the Volcker Rule might not be a factor today is because it wouldn't go into effect until July 2015. The other reason, as stated by Bloomberg's columnist Jonathan Weil, "The Volcker Rule promises to end proprietary trading by federally insured banks, except in those instances when it doesn't." Needless to say, there's a lot of skepticism about curtailing some of the banks' risky behaviors. After all, it's generally recognized now that the Fed's actions have been nothing short of a massive transfer of wealth to the banksters and many question any serious intent to slow that transfer down.
But the banksters are on notice here -- their trading behavior is not being tolerated by the masses and the regulatory agencies and even Congress is finally starting to respond. The Volcker Rule will prevent banks from using their own money for their proprietary trading desks, much of which has been coming from the Fed's printing press, and that could significantly reduce the money-making operation the banks have had. They can still trade clients' portfolios but that's not going to be subject to public risk (theoretically).
The Fed's incentive behind this is to get the banks to lend the money out for constructive purposes rather than allowing them to simply use it to trade the market, especially the derivatives market where the banks have once again run up the risks to an even greater extent than where they were back in 2007. Maybe even the Fed is beginning to recognize they've created another unsustainable bubble (although Greenspan insists we're not in a bubble so I feel much better now). Now if only they made the Volcker Rule effective January 1, 2014 I'd feel a little better. It's very likely 2014 is not going to be kind to the stock market and the banks are going to get hurt again. Guess who they'll be looking to for another bailout.
As for the BKX, it's been weaker this month, like the RUT, but it stopped at support today. If we do get a stock market rally into the end of the month we're going to need to see the BKX joining in and it should start right away on Thursday. Today's decline dropped marginally below its uptrend line from October-November but then got a little bounce into the close and finished on the line. It's also a test of last week's low at 66.40 with today's low at 66.48. It's a good place for the bulls to jump back in and we'll find out quickly if they'll do it or not.
KBW Bank index, BKX, Daily chart
I've been expecting the U.S. dollar to work its way down toward its H&S neckline from February 2012, currently near 79.72, and it's now close to achieving that. Today's low was 79.75 and it's showing some short-term bullish divergence. At the same time, as can be seen on its daily chart below, MACD has now dropped back down to its uptrend line from June. It doesn't mean the dollar has to bounce from here but that's the setup. The larger price pattern calls for another rally leg at least equal to the October-November rally, which currently points to 82.27. The dollar bulls need to drive the dollar back above 81 to confirm the bullish pattern is the higher probability.
U.S. Dollar contract, DX, Daily chart
Along with the dollar getting its pullback I had been expecting gold to get a bigger bounce, which finally got started this week. I show a projection up to its downtrend line from February-August where it crosses it broken uptrend line from June-October, near 1293 next week. I'm still looking for lower prices for gold but it would be a lot more bullish if gold can get above 1300.
Gold continuous contract, GC, Daily chart
Silver looks like gold and could bounce up to about 21.46 by next week to hit its downtrend line from August-October. But first it needs to get through price-level resistance near 20.50. I'm looking for a drop back down to the $18 area (if not $15.50) but it would turn bullish instead if it can get above 22.
Silver continuous contract, SI, Daily chart
Last week oil broke its downtrend line from August but has since been struggling to get through its 50- and 200-dma's, at 97.13 and 98.59, resp. There's the possibility it will pull back to its broken downtrend line for a back test, perhaps down to about 95 next week, before heading higher again. I'm looking for oil to make it up to its downtrend line from May 2011 - March 2012, currently near 101.30, before heading lower. A 50% retracement of its August-November decline is at 102.
Oil continuous contract, CL, Daily chart
Thursday's economic reports include the unemployment claims numbers and retail sales results for November. Any disappointment in retail sales could make it tough on the bulls but expectations are for an uptick over the October sales.
Economic reports and Summary
The indexes are at or very close to what should be strong support if there's going to be another rally to a new high into the end of the month. The sharp decline from Monday's highs can either be the start of a more serious decline, one that will turn into an impulsive move down through next week (opex) or it's the c-wave of an a-b-c pullback from November 29th. The bullish expectation calls for the bulls to step back in and drive the bears back into the woods. It could start with a head-fake drop Thursday morning to pull in more shorts and then fling them out with a couple of big buy programs to get the short covering started, to be followed up by more fund buying as manager are forced to chase performance into the end of the year.
The head-fake drop on Thursday morning prior to opex is a common tactic used by big funds, something we've seen many times and it's why I call it Head-fake Thursday. Be careful about that possibility -- if we get an early drop that's followed by a sharp reversal back to the upside I'd look to be a buyer for what could turn into the Santa Claus rally into the end of the year. But if a drop is followed by a choppy consolidation then I'll be looking for lower prices, in which case Santa could disappoint this year. We should know which it will be, possibly as early as noon on Thursday.
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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