Depending on which index you're looking at you'll have a different opinion of the market. That's usually a good sign of a directionless market that will chop up traders. It's also another sign of a trend change in progress.
Wednesday's Market Stats
The RUT and NDX finished well off their morning lows but NDX still finished in the red and the RUT made it back to the flat line. The DOW and SPX also finished well off their lows but finished nicely in the green. The DOW was up +117 (+0.7%) while NDX finished the day -10 (-0.3%). The banks were in the green while the SOX spent most of the day in the red. When you see days like this you know we're in a directionless market which is generally not a good time for traders (unless you're a quick day trader). There is still a good possibility for at one more stab higher into opex week but then the market could be in trouble.
Usually you can get a good sense for market direction if both the banks and semiconductors are pulling in the same direction. Trade in their direction and you'll normally be OK, but when they're not in synch you should take that as a warning sign that there's no one driving the boat and you could easily get flipped out of it and into the water. It's best to don your life vest and just hang onto your seat until someone in charge takes control of the wheel. At the moment we're waiting for someone to take charge.
Economic reports were quiet today but generally speaking not a good sign for companies. Productivity dropped -1.7% in Q1 while labor costs increased +4.2%. That will negatively impact the corporate bottom line and earnings are going to take a hit. Just more evidence that the stock market's valuations are out of kilter with what's coming and it's going to be much more difficult for fund managers to justify paying higher prices for a deteriorating corporate picture.
Janet Yellen's speech for her Congressional testimony to the Joint Economic Committee, which started at 10:00 this morning, was greeted with a negative market reaction and all indexes dropped sharply, hitting lows by 10:15. From there they started back up (probably with a little support by the Fed's friends -- the banks) and depending on the index we saw full or partial recoveries, similar to what we saw on Monday morning. The market is threatening to break down but someone keeps swooping in to save it.
Yellen's speech said nothing new about their policies being data dependent, targets not met yet, risks to the economy, continuing record-low rates, blah, blah, blah. The market was hoping for something more accommodative and without those words in her speech the sell buttons were mashed. She discussed in a little more detail the slumping housing market, which is different from her previous speeches, and also feels the geopolitical risks surrounding Ukraine could be a drag on the economy. She mentioned the market, I mean economy was still in need of help, especially given the "considerable slack" in the labor market.
There was an effort to drum up support for techs with the announcement that Alibaba filed for their IPO but IPOs are not getting the bullish attention like they did earlier this year. After yesterday's drubbing, TWTR lost another -3.7% to finish at 30.66 (down -1.19) but at least finished off its afternoon low at 29.51 and could be "sold out" at this point. Those insiders who wanted to sell after the lockup period expired yesterday have likely now done so and those who wanted to sit tight will likely wait longer. Facebook (FB) bottomed soon after its lockup period in 2012 so there's some bullish potential for TWTR based on that.
IPOs in general are not doing well this year and that's another sign of an exhausted bull market. There's a lot of hope for the upcoming Alibaba IPO but the recent record is not encouraging. The last 16 IPOs in a row, including 3 last week, priced an average of 21% below the midpoint of the original price range. They also had an average 0% return on their first day of trading. This is the longest streak of a poor showing like this since 1999, which of course led to the dot bomb in 2000. Clearly IPOs are not attracting attention (money) like they used to and it's another warning sign for the bulls to pay attention to.
There's a fight going on right now between the indexes and it's not clear yet if the blue chips will pull the techs and small caps higher or vice versa. Based on the longer-term pattern and without a clear ending pattern to the upside I've been holding onto the thought that we could see a final high for the blue chips by next week (opex) but the bulls need to get it started now. The techs and small caps have probably already made their highs but they should get a decent bounce if the blue chips can make at least a minor new high.
I'll continue to look for this short-term bullish potential until the market tells me differently and that moment is not far away if the indexes don't start back up from here. Instead of turnaround Tuesday maybe we had turnaround Wednesday this week. And instead of head-fake Thursday in front of opex, usually with a dip in the morning to suck in the shorts and then use them for short-covering fuel into opex, perhaps it was done today. There was higher volume today and that might have been some opex activity. At any rate, we'll see what the charts are telling us and tonight I'll start with the NYSE. As a larger and broader index I'm hoping it will filter out some of the noise from the narrower indexes.
The weekly chart of NYA below shows the price consolidation around the 2007 high at 10387 since first achieving that level on December 29th. It's been laboring to push higher but the waning momentum since December is not encouraging for the bulls. The wave count suggests it's now into the final wave of the move up from October 2012, which in turn should be the completion of the 3-wave move up from 2009. The trend line along the highs since May 2013, currently near 10760, is where I think it will finish its rally (assuming we'll see another leg up).
NYSE Composite index, NYA, Weekly chart
The daily chart below shows we have nested bearish rising wedges, another sign of exhaustion for the bull market as each new high is by fewer points and we see bearish divergence in the oscillators. The upside target by a Fib projection and the top of the larger wedge (the trend line along the highs since May 2013) point to a possible high near 10776 by next Wednesday/Thursday (again, assuming we'll get the rally leg).
NYSE Composite index, NYA, Daily chart
Getting in a lot closer, the 60-min chart shows how I think the rally will complete if the small rising wedge pattern off the April 11th low is the correct pattern that will play out. One more 3-wave move up into mid-week next week should complete it and interestingly, there's a full moon on Wednesday. Get your favorite picks for shorting ready if it plays out as depicted.
NYSE Composite index, NYA, 60-min chart
SPX is in a similar pattern as shown for the NYSE, calling for just one more leg up to complete a small rising wedge pattern. Until this week's pullback I had been calling for a rally up to the 1920 area but now I'd be a little surprised if it can much higher than 1900. It's holding above its 20- and 50-dma's, near 1866 and 1865, resp., and as long as they hold I'll stay bullish this index but nothing more than a little higher into opex week and then I'll be looking for topping signals to get short.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1900
- bearish below 1850
The DOW has been the stronger index but its pullback from last Friday has "distorted" the rising wedge pattern that I've been using for the other indexes. It could indicate a strong rally is coming after a larger a-b-c correction pattern off the April 22nd high but that doesn't fit well with the others. That's part of the problem at the moment -- the different indexes are giving us different patterns, which is one reason I wanted to show the NYSE tonight. At any rate, Fibs and trend lines coincide in the 16700-16735 area for a potential high next week so watch for that possibility.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 16,300
- bearish below 16,015
It's difficult to say whether or not NDX will get another leg up for its bounce. Today it broke its uptrend line from April 15th, near 3549 this morning, and was not able to recapture it today. A back-test of it, near 3560 Thursday morning, could be all the bounce we'll see. But if the blue chips drag the techs higher into next week (or maybe the higher-beta stocks will lead the way higher) I see the potential for the NDX to test its downtrend line from March 7th, currently near 3650. If it drops much below 3500 it could be in trouble but until it breaks below 3425 it's unclear how this choppy pattern will resolve.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 3676
- bearish below 3425
The RUT continued to show more weakness than the other indexes and today it broke below both its April 15th and 28th lows, showing far greater weakness than the others, the techs included. But the strong rebound off this morning's low brought it right back up to the short-term trend line along those two previous lows and the daily candle looks like a bullish hammer (actually a more bullish dragonfly doji). But on an intraday chart the rebound back up to the short-term uptrend line looks like a back test and more selling on Thursday would leave a bearish kiss goodbye. The bulls need to prove today's recovery will have legs by getting back above its 200-dma, near 1115, which was broken for the first time yesterday since the RUT climbed above it in November 2012. Then a climb above its downtrend line from April 3rd, near 1123, and its 20-dma, near 1128, would go a long way to putting the bulls back in the driver's seat. How long they'll be allowed to drive would then be the next question. The bulls would be in more serious trouble if the RUT drops below price-level support at 1080.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1160
- bearish below 1080
The banks should help lead the way in the coming week and at the moment it's looking like we should expect a bounce for the banks. That would support the idea that the blue chips and broader market indexes, such as the NYSE, could make a new high. BKX is showing us a picture that I think is worth paying attention to and I'll show a top-down approach to where it is and what could be next.
The weekly chart shows the decline from the March 21st high broke down from an up-channel for the rally from June 2012, which is a good indication that that rally leg has finished. How that leg fits into the larger rally pattern for the move up from 2009 is questionable but the bearish wave count says the March 21st high at 73.90, which was a small throw-over above the trend line along the highs from July 2013, was THE high for the banking index. Note the projection at 73.64 for two equal legs up from 2009, which is essentially a large A-B-C correction to the 2007-2009 decline. The correction to the decline should be completely retraced, dropping it below the 2009 low (potentially in 2016).
KBW Bank index, BKX, Weekly chart
The decline from March 21st is shown in more detail with the daily chart below and the low on April 28th fits well as the completion of a 5-wave move down. That adds to the bearish picture by confirming the new trend is now down. The minor new low this week looks to be part of a larger bounce correction off the April 28th low and calls for a spike back up to its broken uptrend line from June 2012, near 69.55 next week, or perhaps up to its broken 50-dma near 70. Today's low was a minor throw-under below the trend line across the lows since April 11th, as well as a test of its 200-dma at 67.08, which was this morning's low. The bulls now need to keep today's bounce going and break its downtrend line from April 4-24 and close Tuesday's gap down at 68.15
KBW Bank index, BKX, Daily chart
With the little thrust higher into the close today BKX broke its downtrend line from April 4th, near 67.80, and now it needs to hold above it on any back test. If BKX rallies up to the 70 area it would then be a very good setup to look at to short the banks.
Another way to look at the banking sector is to view its relative strength (RS) against SPX, which is what the weekly chart below is showing. You can see the RS of the banks broke down in September 2013 after peaking in July 2013. The BKX weakness has been evident for well over 6 months. Since breaking the uptrend line the RS line back-tested it in January and again in March and has now broken below the October 2013 low, confirming the failure of the back test. If this was a stock it would have "SHORT ME!" written all over it. Following the RS high in 2010 it had a much lower high for the 2nd leg of the bounce off the 2009 low. SPX went on to make a much higher high than BKX following the 2011 low and that's been a major warning about the strength of the rally based on bank "strength." I suspect BKX will be one of the leading sectors to the downside in the next bear market.
RS BKX vs. SPX, Weekly chart
I'll continue to keep an eye on the banking index because I believe BKX is a canary index at this point. Our economy (and stock market) has been built on a massive buildup of credit over the past 40+ years. Banks don't loan money out of deposits; they simply create the money out of thin air when someone wants a loan. They don't keep 10% of the loan in reserves; the reserve against each loan is now less than 1% (blessed by the Fed). Our entire system of credit has very little holding it up except for faith in the system (including in the Fed) and when that faith is lost we will see the house of cards collapse.
A collapse in the financial system almost happened in 2008 but the Fed stepped in since they still had credibility with the market. But when that credibility gets shattered, as it likely will be the next time the overleveraged banks get into trouble, faith in the credit system will be in serious trouble and the banks are likely to get spanked badly. The decline in BKX could be a reflection of some early warning signs that not all is well with our financial system (and it's not).
While on the subject of relative strength, another interesting comparison is between consumer discretionary vs. consumer staples. The former does well when consumers are feeling good about their financial situation and a good representative ETF for consumer discretionary stocks is XLY. The 5 largest stocks in XLY are Comcast, Disney, Amazon, Home Depot and McDonald's. XLP is the ETF representing consumer staples stocks, which do better when consumers are feeling unsure of their financial situation and keep their wallets closed except for necessary expenses (if you can eat it, drink it or smoke it, buy it). The top 5 holdings in XLP are Proctor & Gamble, Coca-Cola, Philip Morris, Wal-Mart and CVS Caremark.
Looking at a ratio of these two will tell you how the consumer is feeling and in turn how the economy can be expected to do. The chart below shows the RS of XLY vs. XLP and interestingly, the RS line broke its uptrend line 2 months prior to the 2007 stock market peak. This year the RS line broke its uptrend line from 2008 in March. Add 2 months and we could be looking for a stock market high in May. Coincidence? I think not.
RS of XLY vs. XLP, Weekly chart
The U.S. dollar tested the bottom of its sideways trading range that it's been since October 2013, near 79. I drew faint gray lines indicating a possible bullish descending wedge since the December 2013 low and January 2014 high, which it might have finished with yesterday's low at 79.09. It's a bullish setup but the bulls need to prove they can take advantage of it. A drop much below 79 would put the bears in the driver's seat.
U.S. Dollar contract, DX, Weekly chart
Gold got a nice bounce off last Friday morning's low but gave most of it back today. The bounce off the April 24th low fits as a 3-wave correction to its decline, which means it should be followed by a continuation lower. But the bullish interpretation of its pattern, especially if it holds above its broken downtrend line from March, currently near 1282, calls for a rally up to at least its longer-term downtrend line from 2012, currently near 1350. Because of the choppy bounce pattern so far it's going to take a strong rally above 1350 to turn gold bullish whereas a drop below the April 24th low at 1268.40 would confirm the bears remain in control of the shiny metal.
Gold continuous contract, GC, Daily chart
Like the dollar, I'll stick with the weekly chart until it breaks its trading range and there's something to follow. It will turn more bearish below 97 and the bulls aren't in control until oil breaks above 111
Oil continuous contract, CL, Weekly chart
The rest of the week will be very quiet as far as economic reports go. The market will be on its own to react to overseas reports and geopolitical events.
Economic reports and Summary
The market has pulled back about as far as it can go without turning a lot more bearish. The short-term pattern continues to support the idea that we had a turnaround Wednesday this week instead of a turnaround Tuesday (to keep traders from expecting any kind of pattern to continue). This morning's decline might have been the head-fake move we typically get Thursday before opex, which would set us up for an earlier rally into opex and one that could finish earlier than the end of next week.
The short-term bullish expectation is for a rally into next Wednesday to hit some price projections and trend lines. Next Wednesday is also the next full moon so maybe we'll get a final fling to the upside around that emotional point. The bottom line is the price pattern is choppy and could go either way. Consequently I'll continue to urge caution in trading this market. Traders are getting chopped to pieces and unless you're a good day trader, this is a time to sit back and watch and wait for the setup to come to you. That setup, as I see it currently, is for the market to give us a very good shorting opportunity next week.
The long side, except for day trades, continues to be the riskier side and personally I'm more comfortable having some short positions with a couple of long hedge positions. Upside potential is dwarfed by downside risk (imho) and that's why I'm waiting for a good setup to then suggest short plays. In the meantime it's time to continue with your double-cheek trade (for those who aren't aware of this very important trading technique, stand up, firmly grab both cheeks (yours, not the person next to you) and then sit down -- this prevents you from hurting yourself by making trades when you shouldn't).
Good luck and I'll be back with you next Wednesday when hopefully, on the full moon, we'll have some good trade setups to talk about.
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