The day was spent chopping up and down, as it has been doing for days/weeks/months, and it's either consolidating in front of another rally leg or it's getting ready for a solid decline. For now though, any attempt to sell the market is met with a couple more buy programs to shut the sellers down.
Wednesday's Market Stats
Following yesterday afternoon's selloff equity futures chopped sideways/up during the overnight session and we were looking to open marginally positive. "Someone" wanted that marginally-up opening to turn into something more positive and big buy programs hit the market at the open, jamming the indexes back up and retracing yesterday's afternoon decline. But there were no takers following the buy programs and the sellers smacked the market back down. From there the rest of the day was spent chopping up and down, including after this afternoon's FOMC minutes. The message from the market today is that sellers are not welcome to our party but more buyers are needed to follow up on the buy programs.
There were no strong economic reports to move the market and it was essentially quiet in the global markets, which left our market floundering for most of the day. A few quick buy and sell programs without any follow through in either direction left each side hanging and it was apparent the market was waiting to get through the FOMC minutes before making any bets. Unfortunately for traders, there was only a little whipsaw price action following the minutes and then more sideways chop
The minutes provided very little new information and that's what this afternoon's session reflected. Fed officials acknowledged the weak economics for the year so far and the risks from overseas weakness. But they agreed there were enough signs of strength (really?) to start laying the groundwork for raising rates later this year. The minutes left the door open to a rate hike in June and of course that's what the market doesn't want to hear. Several officials wanted to be on record about their expectations for better economic data in the months ahead and that it will warrant a rate increase sooner rather than later.
The first thing to remember is that these well-educated economists can't forecast worth stinky pooh. They consistently get forecasts wrong so I'm not sure why the market pays so much attention to them. They are always wrong, 100% of the time. They're far worse than the weather forecasters. Nevertheless, most of them agreed the economy had improved enough to allow the Fed to shift gears and start forward into a rate-hiking mode. All I can say is they must be looking at different economic indicators than I'm looking at.
What most market participants are starting to realize is how impotent the Fed is but they're still willing to give them the benefit of the doubt. The problem for the Fed is that they're trapped and other than jawboning the market into believing rates could increase this year, there's very little likelihood that they will. The consequences of a rate increase, as small as it would be at the start, would be too difficult for debt-burdened governments, especially the Federal government. Just a 1% increase in rates on Treasuries would cost the government close to $200B annually. If rates were near the historical average of 5% we (the taxpayers) would have to come up with nearly a trillion dollars every year just to pay the interest. How are we going to be able to do that?
Of course the Federal Reserve can, and will, simply create more money to pay the higher debt interest. But one has to wonder how long that can continue. We all know what happens when you borrow money (and creating new money is essentially borrowing it from the future) to pay your interest on existing loans. You better get more income coming in or start talking to a bankruptcy lawyer. We're already starting to hear plans from other countries (many European and Canada too) how they'll take money from savers as an emergency measure to protect the financial system and pay the government's debt.
The U.S. will likely be right behind them in deciding to do the same thing. The government could instantly take all 401k retirement accounts and convert the money into Treasury IOUs. It used to be only tinfoil-hat wearers that talked of such conspiracy idea but they're becoming more popular ideas and we've already seen how well it worked in Greece (for the government, not the peoples' savings). There's a reason why so many have been looking to invest in more stable countries (New Zealand, Singapore, even Panama and others) and convert cash to other assets (farm land, precious metals, etc.).
So the Fed is trapped in this debt spiral and raising rates would only exacerbate the problem. They can jawbone all they want but the reality is the market is in control and the only way rates will be raised is when the bond market says "enough!" When risk becomes too high for the measly return it will demand higher rates and that's when the Fed will be forced to follow. It's the way it's always been -- the Fed is a follower in rates, not a leader. Interesting times we are currently going through.
As for the stock market, I'll start off with a look at SPX since it continues to be one of the better proxies for the broader market (it and the Wilshire 5000 index typically look very similar.
SPX has been holding its uptrend line from March 2009 - October 2011 after only briefly breaking it last October (but closed on the line for the weekly closing price). The line is currently near 2052 (log price scale) so as long as it holds, especially on a weekly closing basis, the bulls remain in charge. Traders have clearly respected this trend line and therefore it's very important for the bulls to defend. I show the potential for another rally leg into May (there's an important time cycle that completes May 13th and currently fits well with the idea for one more rally to finish a rising wedge pattern off last October's low). But the bears could have a trick up their sleeve and surprise the market with a strong move down, especially if it drops below 2045. You can see subtle evidence of a rounding top since last November-December and the bearish divergence warns bulls not to get too comfortable here.
S&P 500, SPX, Weekly chart
There are two ways to interpret the price action since the February 25th high, one of course being bullish and the other bearish. The bullish pattern is a sideways triangle as a bullish continuation pattern, which is shown on the daily chart below. This is shown more clearly on the 60-min chart further below and what I'm expecting for the bullish scenario (green path) is one more leg down inside the triangle to finish it. A drop back down to the 2052 area would be a good setup to try the long side since the stop on the play can be kept relatively close at 2045. The bullish interpretation of the rising wedge pattern off last October's low calls for one more leg up and the upside target would be 2160-2170 by mid-May.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 2115
- bearish below 2045
The bearish interpretation of the pattern since February 25th (red path) is that it's not a sideways triangle that's playing out but is instead a 1-2, 1-2 wave count to the downside. The next leg down would be a 3rd of the 3rd wave and that calls for a very strong decline to follow the current bounce. This is why stops on a long play can't be much below 2045 -- there won't be a second chance to get out if that level breaks.
From a short-term perspective, shown on the 60-min chart below, it's not clear whether or not we're going to get one more minor new high before starting a pullback/decline or simply start back down on Thursday and into Friday. A push higher to about 2097, where the 5th wave of the move up from April 1st would equal the 1st wave, is possible Thursday morning but it's equally possible we'll see a drop back down from here. Assuming we'll see a drop back down to the bottom of the sideways triangle, the bullish interpretation suggests getting long there for the start of the next major rally leg. This interpretation is supported by the fact that opex weeks tend to be bullish. On the flip side, when opex is not bullish it tends to be very bearish and a 3rd of a 3rd wave decline would certainly be viewed as very bearish, in which case I would expect to see the December-January lows, near 1988, tested before the end next week. Because price action has been so choppy it's hard to get a bead on this thing and therefore the key levels are wider than I like -- bullish above 2100, bearish below 2045.
S&P 500, SPX, 60-min chart
The DOW has the same pattern as SPX except its triangle off its March 2nd high can be viewed as more of a descending triangle (flat bottom, lower highs) and like SPX it too would look more complete with another leg down to the bottom of the triangle, near 17600, before setting up the next rally leg into May. The upside target for its rally would be near 18500. But the bearish pattern is still a good possibility and it calls for the start of a strong decline from here (or slightly higher) and instead of a new high into mid-May we could see a test of price-level support near 16500 by then. The potential following the month-long consolidation is for a big move (about 1000 DOW points) and the only question, still, is what direction it will be. I'm still waiting for the snow to settle down before I can tell what my crystal ball is telling me (6 more weeks of winter?).
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 18,206
- bearish below 17,579
NDX has been fighting to hold onto its uptrend line from October-February, as well as trying to get back above its 20-dma, both near 4364, and today it close above both. So that keeps the bulls in control for now and it's possible we'll see a new rally leg continue from here. But it's possible the bounce off the sharp drop down into the March 26th low is going to be just an a-b-c correction to the decline and then continue lower. Two equal legs up from March 26th points to 4387.29 so a rally above that level would be more bullish but in the meantime stay aware of the possibility this could be followed by the start of a more serious decline. If the triangle patterns for the DOW and SPX are correct, NDX has a similar triangle but more of a bullish descending wedge, which again would look best with one more drop back down to complete it. Only if it gets below the wedge, near 4270, and stays below it would we have better proof the bearish pattern is the correct one. Above 4436 (78.6% retracement of its March 20-26 decline) would confirm the new rally is underway.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 4436
- bearish below 4260
The RUT has been acting a little weaker than the other indexes in the past few days although today it was relatively stronger again. As for its price pattern, it's been in a different one than the others and it's not clear yet whether it will continue to lead to the upside (if there's to be more upside) or instead lead to the downside. There's a possible rising wedge pattern for its rally from October, like the others, and we could see a rally to 1280 next week, if not 1300. But with the bounce off the March 26th low not yet having taken out its March 24th high there is the potential for a stronger decline to kick in at any time. I'd be a worried bull if the RUT drops below its April 1st low at 1239.60 and I'd turn bearish below the March 26th low near 1225. Cautiously bullish until then.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1268
- bearish below 1225
One of the reasons I suggest caution for bulls right here is because of the short-term rising wedge pattern for the bounce off the March 26th low. It fits as either a bounce correction to the March 23-26 decline or as the final 5th wave of its longer-term rally. In either case, if the rising wedge is the correct interpretation (and the bearish divergence suggests it is) then we'll see a fast retracement of it. That would mean back down to the March 26th low at 1225 in only a couple of days. That would not necessarily be a bull killer until it gets below 1220 because a sharp drop back down could be a c-wave of an a-b-c pullback from March 23rd and two equal legs down would be above 1220. But I wanted to show the 60-min chart to point out the potentially bearish setup for Thursday-Friday.
Russell-2000, RUT, 60-min chart
With the potential for the RUT to either top out sooner than the other indexes or lead to the downside, it fits with what I'm seeing when I look at a chart of the RUT's relative strength (RS) to SPX. The weekly chart below shows the RS "price" pushed above the top of the Bollinger Band and has been pushing it higher over the past month. That's usually a good sign of an exhaustion move and a return to at least the midline (20-week MA in this case) can be expected. For the RUT that would mean either a reluctance to move much higher with the other indexes or a stronger decline in a broader market decline. As our canary stock it's going to be important to watch the RUT carefully over the next week.
Relative Strength of RUT vs. SPX, Weekly chart
The TRAN is skating on thin ice here and it needs to rally now or else it's going to attract the bears. Last Thursday it broke below its 200-dma and then on Monday it broke its uptrend line from November 2012 - October 2014 and the bottom of its consolidation pattern that it's been in since December. Today's bounce brought it back up to its 200-dma for what is so far just a back-test. Further selling and a break below Monday's low at 8527 would leave a bearish kiss goodbye and confirmed breaks of multiple layers of support. That would attract bears like bees to honey. At the moment, from a bullish perspective, Monday's low was a throw-under to complete the consolidation pattern (the typical head-fake break at the end of the pattern) and now we should see a new rally leg kick into gear.
Transportation Index, TRAN, Daily chart
When the U.S. dollar turned down from its March 16th high I thought it was a good setup for the start of a larger multi-month pullback/consolidation. But the sideways triangle that it has formed since the high has me now wondering if we've still got another new high before it will be ready for the multi-month correction. It's holding inside its up-channel for the rally from last year so it stays bullish until it breaks down from there, which would also be a break of its 50-dma near 96.50. That would be the first bearish heads up for the dollar and then below its March 18th low at 94.76 would tell us it's in the larger pullback correction. Interestingly, the dollar has the same setup as the stock market and if the dollar rallies into a mid-May high we could see it up around 105 by then. That would certainly put some pressure on commodities and U.S. international companies (since exports would become more expensive). Notice how MACD on the dollar's daily chart has dropped back down to the zero line, which essentially "resets" it and a turn back up would be a buy signal.
U.S. Dollar contract, DX, Daily chart
Once gold completed a 5-wave move down from January 22 - March 17 I've been looking for a bounce correction to that decline. As shown on the daily chart below, the bounce has so far retraced 50% of the decline, at 1224.70(Monday's high was 1224.50) and it's a 3-wave move. That leaves us with a setup for the start of the next leg down. It's possible we'll see gold bounce a little higher, maybe up to its 200-dma near 1235, but there's a good possibility the bounce correction has now completed. It's not hard to see the H&S continuation pattern that has developed since last November's low and the downside price objective for the pattern points to 975. In past updates where I've been using the weekly chart I've been showing an expected move down to the 1000 area where it would test price-level S/R from 2008-2009 so the H&S pattern, if it completes, supports that kind of move.
Gold continuous contract, GC, Daily chart
Oil dropped more than -6% today before recovering some this afternoon. The drop was blamed on the larger-than-expected buildup in inventories, nearly +11M barrels vs. expectations of +3.3M and a significant jump over the prior week's +4.8M barrels. The inventory buildup is the largest since 2001 and the inventory level is the highest it's been in 80 years. This is increasing the level of concern about what will happen to the price if and when full storage capacity is reached by Memorial Day, which is only two months away. The storage figure does not include oil that is being stored in tankers off the coast or in transit from Alaska. Currently oil is being pumped at its fastest rate in the past 30 years in the U.S. and the hope is that additional refinery capacity will soon be able to draw down some of the crude inventories.
Exacerbating the oil glut problem was the announcement by Saudi Arabia that they increased production in March and they're not expecting to reduce production. It's a well-known secret that Saudi Arabia is trying to shut down the shale producers, especially since they feel the U.S. has reneged on its promise to support the House of Saud. Saudi Arabia feels the current administration is more interested in other countries, such as Iran (Saudi Arabia's arch enemy) than living up to its promise to help protect Saudi Arabia. Interesting geopolitical games being played and oil production is just one piece of the puzzle.
As for oil's price pattern, I continue to track the idea for a rising wedge pattern for the bounce off the March 18th low. If we see a sideways consolidation for a few days it would point to another leg up to test price-level S/R near 58.50 before dropping back down in a larger consolidation pattern. We could get more of a standard a-b-c bounce (red dashed line) following a back-test of its broken downtrend line from last September, currently near 47.60, but the bottom line is traders need to be careful about a choppy price pattern for months to come (selling options above and below 60 and 40, resp., might be the better way to play oil for a while.
Oil continuous contract, CL, Daily chart
Today was a quiet day for economic reports as will be the rest of the week. The market is on its own to react to whatever news comes from overseas.
Economic reports and Summary
The long choppy consolidation that we've been in since late February (actually since November) may soon come to an end. The problem is that there's still no high-odds play right here -- it could literally go either way. The likelihood is that we're looking at a big move coming within the next week, which could trend into a mid-May turn window. For the DOW we could be looking for a 1000-point decline from here or a 1000-point rally from the bottom of its recent consolidation (assuming it first drops down to the bottom of it near 17600).
If we get a new high on Thursday, such as SPX 2097/DOW 18050, it should be followed by a pullback that will either correct the rally from April 1st or drop back down to the bottom of the consolidation patterns. So a new high would be a good setup for a short play since we'll get either a pullback or the start of much more significant decline. If instead the market drops from here and the indexes make it down to the bottom of the recent consolidation patterns then we'd have an opportunity to test the long side for a strong rally into May. For either trade I'd keep stops relatively tight since there might not be much of an opportunity for a 2nd exit.
Tomorrow is the Thursday prior to opex week, which typically sees a head-fake move followed by a trending move into opex. With all the choppy whipsaw moves we're seeing in the market, that will be just one more reason to trade carefully and use good risk management.
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