In the continuing currency war, with the ECB now taking a turn at the QE wheel, and an all-out effort by many nations now in a race for the bottom by devaluing their currencies, the U.S. Dollar's strong rally and the Euro's collapse has many wondering what's next. The uncertainty is causing some angst in the U.S. stock market.
Wednesday's Market Stats
The ECB kicked off their promised QE plan and it has created a rally in European stock markets as well as their bond markets. This has the euro crashing (nearing parity with the U.S. dollar) and European bond yields dropping further (into inflation-adjusted negative territory). Money is also flowing into U.S. Treasuries for their higher yields, especially after the recent climb in rates following last Friday's NFP report and worry that the Fed will start raising rates sooner rather than later. To say the central banks have made a mess of the markets would be a gross understatement.
The fact that the Fed would raise rates 1/8 of a point in June vs. September would hardly make a dent in any business plans. It seems such a silly worry by the market. But the real worry is the message behind a rate increase -- it would mean the Fed is done accommodating the markets and that they're on their own. Being used to so much liquidity and a "I've got your back" Fed makes the market very nervous about standing on its own two feet.
The stock market is overvalued by several different metrics (some more overvalued than others but valuing on forward-looking guidance is wrong when forward guidance keeps getting ratcheted down) and it's certainly overloved. High bullish sentiment and record-high use of margin debt in a market that could be losing the support of its major benefactor (the Fed) has many thinking the party is over.
As I've said many times before, it's not so much what the Fed does with money or policies but instead it's how they influence sentiment. As long as they were able to convince investors that the fed is protecting the market it kept investors willing to gamble more and pay top dollar, in hopes there will be another sucker, I mean investor who's willing to pay even more. Now investors are starting to wonder if the Fed is pulling their support and that makes them nervous about paying top dollar. Hence the profit taking.
But all is not lost for the bulls yet. The pullback in March can easily be considered just another bout of profit taking that will create another higher low and be followed by another rally to a new high. As always, I'll cover both possibilities with the charts.
There's not a lot of news going on in the markets right now and I've got a few different charts than usual tonight (I take a closer look at the dollar and euro) so I'm just going to jump right into them. I'll start with the NYSE Composite index to follow up last week's view of the Wilshire 5000 to take a look at the broader market's message.
The NYA weekly chart below shows the struggle it's had since hitting a high just over 11100 in July 2014. It has tested that high 4 times, although a little short of it in November, and left a strong bearish divergence with the March 2nd high. It doesn't look good for the bulls but helping them is the idea that all of the choppy price action since the October 2014 low could be a shallow rising wedge, which would fit as a 5th wave ending diagonal. As labeled in green, this interpretation calls for one more minor new high into April to complete the pattern. This short-term bullish pattern would be negated with a drop below the February 2nd low at 10495.
NYSE Composite index, NYA, Weekly chart
The daily NYA chart below shows a similar bearish pattern that I've been showing for the past few weeks. The sideways triangle off its November 25th high fits as a 4th wave correction and the March 2nd high completed the final 5th wave. The decline so far in March looks impulsive and that suggests it's the 1st wave in what will become a much larger decline. The bearish interpretation calls for a bounce, perhaps following one more minor new low, into next week and that will be a good setup to get short for a stronger decline. The bullish pattern, which is the shallow rising wedge pattern calls for another new high, in which case we could see NYA up around 11200 by the end of the month. It's going to be a little difficult determining which is playing out (assuming we'll get at least a bounce into next week) since the bounce for either scenario will be corrective but a rally back above the downtrend line from November, near 10880 next Monday, would also be a rally back above the 50- and 200-dma's and that would suggest the more bullish pattern is playing out, which would be better confirmed with a rally back above 11000. Below the uptrend line from December, near 10600, would be a bearish heads up and then better bearish confirmation would be a drop below the February 2nd low at 10495.
NYSE Composite index, NYA, Daily chart
The same rising wedge idea for NYA can be seen for SPX and today's decline has SPX testing the bottom of its wedge, which is the uptrend line from October-February (a slight break of it near 2044. Bears should be alert to the possibility for another rally leg to kick into gear at any time and an upside target would be 2140-2150. The bearish pattern would look best with a minor new low, possibly after a relatively small bounce Thursday morning, and then a rally into next week (opex). That would fulfill the head-fake move in front of opex followed by a rally. From a bearish perspective, a rally next week would be a 2nd wave correction in a new decline and it would therefore be an excellent setup to get short. The bounce pattern, assuming we'll get it, will have to be evaluated to see when would be a good time to try shorting it but I would look for a bounce up to the 2080-2090 area. A rally much above 2090 would turn it more bullish.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 2093
- bearish below 2020
The 60-min chart shows SPX broke below the bottom of a parallel down-channel for its decline yesterday morning and has not been able to climb back above it since. That's bearish and it's possible it will simply continue lower from here. But the pattern would look better with a small bump back up tomorrow morning and then one more new low to give us a 5-wave move down from March 2nd. That in turn would provide bears with more of a reason to look to short the subsequent bounce, which I show as a wave-(ii) correction into opex week. From there, if the bearish wave count is correct, we'd have a strong decline that exceeds the March decline so far.
S&P 500, SPX, 60-min chart
It's the same picture for the DOW. If it drops a little lower it should find support at its uptrend line from October-February, currently near 17510 and then launch a higher bounce into next week. If we're to get "one more new high" I would expect we'll see the DOW up to the 18400-18500 area by the end of the month. How it plays out over the coming week will help answer the question as to who will be the likely winner.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 18,160
- bearish below 17,480
Unlike the blue chips, NDX made a higher low in February vs. its January low and that creates an alternate bullish possibility. Starting from its January 16th low we could have a 1-2-3 wave count to the March 2nd high, which calls the pullback since then the 4th wave. That calls for another rally for the 5th wave to put in a final high. This is shown in green on its daily chart below and as long as the pullback stays above the January 23rd high at 4292.88 (it can't overlap the green wave-i on the chart) there will remain the potential for a new high. But if the bears stay in control and we see NDX stair-step lower we could see it find support at its 50-dma, near 4286, or its uptrend line from October-February, near 4255 by Friday (where it would also back-test its broken downtrend line from November). This afternoon's low was at the bottom of a parallel up-channel for the rally off the January 16th low. Depending on how this decline finishes, a bounce into next week could set up the next shorting opportunity. What happens by the end of this week should tell us whether the bearish or the bullish path is the more likely one.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 4425
- bearish below 4250
A stronger dollar is getting the credit for a relatively stronger RUT. Small caps tend to do better in this environment since they become more competitive (business tends to be domestic and therefore they have less currency risk than big international companies). As for its price pattern, the RUT, like NDX, made a higher low on February 2nd vs. its January 16th low and it has not overlapped its January 28th high at 1201.24. This keeps alive the idea that the pullback from March 2nd is a 4th wave correction that will lead to another new high in a 5th wave, like that shown for NDX. There's also the possibility for a 5th wave in a larger pattern for the rally from last October (labeled in light green on its daily chart below), which would complete a rising wedge pattern. This is similar to the patterns shown for the other indexes. Upside targets for a bullish move would be about 1250 and then about 1280 by the end of the month. Today's relative strength has me wondering if we're getting advance warning of this bullish move. The bears would be in a stronger position if they can the RUT below the uptrend line from October-February, currently near 1196. The short-term pattern suggests a new low tomorrow that finds support at or above the uptrend line, perhaps at the 50-dma near 1203, and then start a higher bounce into next week. The RUT made it back up into its price-level S/R zone at 1213-1217 so a continuation back above 1217 would be more bullish.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1236
- bearish below 1196
The TRAN continues to have me wondering if the market still has "one more new high" in it. The TRAN has not been confirming the DOW's new highs since its November high and that has obviously looked bearish for the market. But the sideways consolidation since November looks like a bullish continuation pattern and I can see the potential for another leg up to at least the 10,000 area to complete an alternate wave count. This supports the idea shown on the other charts, which point out the possibility for another rally leg to complete a 5th wave to one more new high. This bullish possibility is an alternate wave count at the moment but it's something I'll be watching carefully for evidence in any bounce patterns that begin to look stronger than just a correction to this month's decline.
Transportation Index, TRAN, Weekly chart
The U.S. dollar now looks to me like it's in a blow-off top. Out of its sideways triangle in February I expected one more leg up to complete the 5th wave in its rally from May 2014. As is often the case with commodities and currencies, it can sometimes look like a blow-off move that sucks in traders thinking the strong move will continue. Last week I was looking for an upside target at 97.27-97.35 and if it made it through that level, which it quickly did last Friday, the next upside projection is 99.20. This higher projection is where the 5th wave of the rally from May 2014 equals the 1st wave and today that level was achieved (with a high at 99.97). The last time the dollar was this high was nearly 12 years ago in April 2003. The rally could continue higher but I think when the dollar reverses it's going to reverse hard and century-level resistance at 100 could be the place to start it. The first reversal signal would be a drop back below 99 and then stronger confirmation of a top would be a drop below 97.30.
U.S. Dollar contract, DX, Daily chart
One reason why I say the dollar's rally appears to be in a blow-off move is because the rally from February 26th has gone parabolic, as demonstrated with increasing steepness of the uptrend lines on the dollar's 60-min chart below. Parabolic moves always end badly for whoever chases the move higher in its latter stages, which is where I think it is now. This looks like short covering and when it finishes there will be no more buyers left and the move back down is likely to be swift.
U.S. Dollar contract, DX, 60-min chart
The euro has been getting crushed with fears the ECB will completely destroy the value of the currency with their QE program. It's their way of making European products more competitive in the world trade markets and it's all part of the currency wars that are going on right now (started by our Fed). It's a race to the bottom to see who can out-devalue the other. In addition to the destruction of the euro we're seeing European bond yields take a nose dive as free money is used to jack up bond prices. Interestingly, the ECB is now saying they might have to rethink their QE program since it's had such a negative effect on the euro and bond yields. Do you think? What a bunch of numbskulls.
Like the dollar, but inversely, I see the euro's selloff as panic selling at this point. But it's now down to two overlapping price projections that could see the conclusion to its decline. The 5th wave of the decline from May 2014 has extended and the price projection for it (where it will be 162% of the 1st through 3rd waves) is at 1.04976. The 5th wave, which is the leg down from October 2014 (the same as the dollar but inversely) would be 162% of the 1st wave at 1.05158, which gives us nice correlation in the 1.05 area to watch for a possible completion of the decline (no guarantee of that; it's just a level of interest to watch carefully for support).
Euro contract, EC, Daily chart
Now lay the euro's daily chart above over the dollar's daily chart and you can see how they're mirror images of each other. And each is looking ready to complete their own panic moves. The current moves could continue for much longer, in a true blow-off move, but each has gone parabolic and it's a dangerous time to chase the trend.
U.S. Dollar vs. Euro, Daily chart
You can see on the euro's monthly chart below that it is more oversold than it's ever been. It can get more oversold but it just goes to show how strong the selling has been. Today's decline has the euro breaking below the bottom of a parallel down-channel for its decline from 2008, near 1.069. How it finishes for the week will be important since a close below 1.05 would be more bearish. Back above 1.084 would be a good indication the selling is over (but a retest of the low is likely in the future).
Euro contract, EC, Monthly chart
Gold has been hammered in the past two weeks and the strong dollar has been one reason. Fundamentally there aren't a lot of drivers in place yet for a gold rally and while gold bulls were very hopeful the bounce off last November's low would continue, especially with the strong spike up in January, disappointment is setting back in and those who rushed to buy are now dumping. When gold is no longer viewed as the place to be, which should happen at lower prices, then we'll know it's a good time to buy. There are still too many looking to buy each dip and breakout attempt but as I've been saying for a long time, the larger pattern has been calling for lower prices and until I see a better ending pattern to the downside I'll continue to view bounces as head fakes to the upside. For now I'm looking for a drop down to the 1090-1108 area where it could find support at the bottom of a shallow down-channel from 2013 (1108) or at the 50% retracement of its 2001-2011 rally (1090). But chasing gold lower from here looks a bit risky since a 5-wave move down from January could find a tradeable bottom at any time.
Gold continuous contract, GC, Weekly chart
Following the low for oil in January I was expecting to see a multi-month choppy sideways consolidation before heading lower after the summer. I thought then and still think that trading oil would be a fruitless exercise in frustration. In the large pattern for the decline from August 2013 the bearish wave count calls for a 4th wave correction and I call these corrections "feed your broker" times. Most traders get chopped to pieces and the only ones who make money are the brokers (and day traders who are quick to take small profits). Trying to figure out 4th wave patterns is worse than herding wild cats and so far the two months since the January 13th low has been no exception. I think we'll see another leg up from here, one that could test price-level S/R near 58.50, but it's by no means certain. The bulls would be in better shape if they can get oil back above 59 but until then mind the chop.
Oil continuous contract, CL, Weekly chart
In addition to the usual unemployment claims numbers tomorrow morning, we'll get the retail sales numbers (some improvement over January is expected) and export and import prices. None of these should move the market.
Economic reports and Summary
At this point we still don't know if the pullback from March 2nd is a correction to the longer-term rally (4th wave correction) that will lead to another new high (in a 5th wave) or if instead the March decline is the kickoff to a much larger decline to come this year. March has been a reversal month more years than not since 2000 so from a seasonal pattern perspective it should make bulls nervous. But as shown for all the indexes, I could easily argue for another new high this month and maybe March will continue to be a reversal month but not until after a new high before the end of the month. Bears need to respect this potential until there's better evidence the March 2nd highs will stand for a long time.
The kind of evidence the bears need is a high bounce into next week and then a drop below wherever the low for this pullback finishes. That would be solid evidence that THE high is in place. For now, look for a higher bounce to get started, either from here or preferably following a new low Thursday/Friday (head-fake move in front of opex?), and then next week, assuming we'll get the bounce, we can evaluate it for a setup to get short while keeping in mind the upside potential.
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