By several measures the market became quickly oversold on Monday and more so on Tuesday. Some measures were at levels where previous strong rallies have started, which makes today's bounce potentially bullish. But a bounce of the dead-cat variety is what bulls need to worry about.
Wednesday's Market Stats
It's been a bit of a wild ride this week, thanks to what's going on with Greece and the EU. The stock market rallied from June 15th into the June 22/23 highs based on an expectation that a solution to Greece's next bailout would be found and traders were front-running an expected rally. Sunday night, when Alexis Tsipras effectively thumbed his nose at the EU finance heads, indicating a willingness to take a gamble that Greece would default on its loans and get kicked out of the EU, all those who bought into an expected rally suddenly found themselves underwater Monday morning.
The selling continued into Tuesday but today we got an oversold bounce and now we're left wondering if it's just a dead-cat bounce or something more bullish. There's still hope that the Greek tragedy will be resolved in a market-friendly way. We'll find out a lot more after the Greek vote this Sunday. Tsipras has been encouraging voters to vote "no" to the EU demands and accept the risk of leaving the EU and higher inflation due to going back to the drachma currency and printing their way out of their problems (that won't work in the long run either). A "yes" vote to stay in the EU and accept higher taxes and more austerity (reducing pensions, raising retirement ages, etc.) would be market friendly
If Greece ends up leaving the EU, either voluntarily or not, it will open the door to other nations leaving. It could be the first domino to fall and that's what worries the markets. I've read analysis by some very smart people and they couldn't be more diametrically opposed in their opinions, leaving me thinking no one has a clue what might happen, and the market hates uncertainty, which makes for a more volatile market.
Greece owes about $260B (240B euros) and they defaulted on the $1.7B payment that was due yesterday. It is now believed Tsipras overplayed his hand, which was weaker than the EU's, and is now scrambling to make a deal. He might not have thought through the consequences of shutting down the banks (bank "holiday") and essentially shutting down businesses and people's ability to transact business. Even credit card purchases are not being allowed since that's considered withdrawals from banks, which are limited to 60 euros/day. But not much, if anything will be accomplished until the Greek vote and then the two sides will figure out the next move.
Greek citizens have been fearful of a bank closure and that's why so many have been withdrawing money from their accounts. Since November 2014 they've cleared out about $34B euros, about one fifth of total deposits. The ECB had been lending money to the Greek banking system to keep it afloat but they've now cut that off, hence the bank "holiday," which of course is not like your typical bank holiday. In this case the government simply prevents access to bank accounts and is essentially free to do what they want with the money. More bail-ins? Quite possible. How this plays out should be quite instructive for people in other countries facing similar financial problems. Think Portugal, Spain, Italy and Ireland.
If Greece ends up leaving the EU and survives, with lots of pain of course, we could see the other financially weaker countries (owing lots of money to the EU) follow in Greece's footsteps. This would of course unravel the EU as we know it and that's what scare EU leaders. What happens to the people's money in Greek banks will also be instructive. If the people end up losing their accounts, either through forfeiture (government theft) or high inflation, people from other countries will have learned what they need to do to protect themselves. That would of course mean withdrawing their money from bank accounts.
Below is a chart showing the European countries in order of government debt as a percentage of their GDP:
EU country Debt-GDP percentage, chart courtesy CaseyResearch
The U.S. is not immune to such a problem either. The chart below shows our debt climbing steadily since 1980 with only a brief break from about 1997 to 2000. The current rate, updated today, is 101.5%, which places us between Spain and Belgium on the above chart. For reference, the U.K. is currently 89.4 and Japan is a whopping 224 (a bug in search of a windshield).
U.S. government Debt-to-GDP percentage, chart courtesy TradingEconomics.com
Bank "holidays" are always a surprise -- if the government warned of a bank holiday it would alert people to get their money out. Once the "holiday" is announced, usually over the weekend, people find they no longer have access to their money. The government institutes capital controls as it essentially takes over the banking system. For this reason it's important for all of us to be thinking about alternative investments to shield our money. Don't have all your eggs in one basket in case that basket gets stolen.
The U.S. might be in a lot better shape than other countries but we still should be prepared for a sudden and surprise announcement that we can no longer have full access to our money and the possibility of a bail-in to help the government pay its bills. Confiscation of retirement accounts, replaced with Treasury certificates, is a real possibility in the not-too-distant future. If you think this can't happen here then you could be considered as naive as many Greeks who didn't think this could happen to them either.
The common pattern to be aware of over the next few years is: 1) the financial system is in trouble -- too much leverage and not enough capital to protect against losses; 2) the country's leaders deny there's any problem, which is your clue that they're lying; 3) wealth confiscation begins, through tax increases, bail-ins, etc.; 4) additional capital controls to take over the banking system, at which point you are completely at the mercy of the government. As Doug Casey, at Casey Research says, "The diminution of personal and financial freedom looks like a hyperbolic curve, at first with an almost unnoticeable slope, then one that gets steeper and steeper, at an accelerating rate." The trick is to recognize the early part of this pattern.
Ways to protect your investments include precious metals, land (real estate), especially farm land (food will always be needed), and foreign bank accounts (be careful in which country you place your money). We of course hope that these protections will never be needed but there's a reason it's called contingency planning. It's like buying insurance on your house -- you hope you'll never need to use but you're sure glad to have it when some yahoo torches his garage and the flames leap over onto your house and burn it to the ground.
But enough about planning for the future, what the heck does this week's price action mean for next week and this month? Unfortunately, the longer-term picture hasn't cleared up yet. It looks a whole lot more bearish than it did last week but as I'll show on the charts, it's possible we've seen (or are seeing) the completion of an a-b-c pullback off May's highs, which will be followed by another rally to new highs. While that possibility looks less likely than the start of a more serious selloff, it must be considered when making your trading plans (where to place stops).
Starting with the DOW's weekly chart below, you can see how yesterday's low at 17590 came very close to its 50-week MA at 17575. It's also close to its uptrend line from October 2011 - October 2014, currently near 17510. Things would turn more bearish below 17500 but in the meantime it's not hard to see the potential for another rally back up to the trend line running along the highs from last December, near 18500 by the end of July. Obviously that would be a nice trade on the long side if that's what we're looking for. I remain unconvinced we'll see that kind of move but bears need to recognize the potential and why stops need to be managed carefully.
Dow Industrials, INDU, Weekly chart
The bearish picture for the DOW is shown on its daily chart below, which is a H&S topping pattern. The neckline, which is the shallow uptrend line from March 26 - June 15, was broken Monday but recovered today. It was back-tested with yesterday's high at 17714, as well as its 200-dma at 17684, and today it closed back above both. That leaves a possible head-fake break that will be followed by a new rally leg. Another point in the bull's favor is the fact that the 3-wave pullback from May nearly achieved two equal legs down at 17553 with yesterday's low at 17590. That strengthens the idea that it completed an a-b-c pullback from May as a correction to the longer-term uptrend and now the uptrend will resume. Even if we get a new low tomorrow it doesn't negate the bullish potential and if the DOW finds support at roughly 17500-17550 I'll be looking for at least a bigger bounce early next week. Then next week I'd be looking for evidence of something more bullish or instead just a bounce before turning back down. A new low tomorrow that sets up a higher bounce suggests a positive market reaction next Monday following the Greek vote. But it would turn more bearish below 17500.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 18,000
- bearish below 17,500
SPX has the same pattern as the DOW (a little uglier H&S top). It too broke the neckline on Monday, popped above it today but then closed at the line, leaving the potential for just a back-test and bearish kiss goodbye tomorrow. But a new low on Thursday would still be a setup for a larger bounce/consolidation before continuing lower this month. If we do get a new low on Thursday I'll be looking for support in the 2048-2054 area, which includes its 200-dma near 2054.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 2109
- bearish below 2048
The 60-min chart below shows the afternoon bounce back up to the H&S neckline near 2078, leaving both sides guessing whether or not the line will hold as resistance. A drop lower would complete the 5th wave of the leg down from June 22nd and it would equal the 1st wave near 2048. Below that level would look more bearish but if it finds support in the 2048-2054 area I'll be looking for a higher bounce and/or larger consolidation pattern through next week before continuing lower. It takes a rally above 2105 to turn things more bullish but a strong impulsive rally (not evident yet) would provide a bullish heads up.
S&P 500, SPX, 60-min chart
The Nasdaq failed to hold its breakout attempt above 5132 (the March 2000 high) last week and it quickly dropped below the little parallel up-channel that it was in since its May 6th low. It bounced back up to the bottom of the channel this morning, near 5035 (with a high at 5038), but then dropped away, leaving a bearish back-test and kiss goodbye. Based on this pattern it should continue lower on Thursday and keep it aligned with what I see for the blue chips. A new low, especially with bullish divergence against Monday's low at 4956, would be a good setup for a higher bounce next week. The bounce, if it plays out, should make it at least back up to its 20- and 50-dma's, which will be near 5050 next week. A higher bounce could make it back up to the trend line along the highs from January 2004 - October 2007, near 5110 next week. Back above 5132 would have me looking for higher highs, potentially up to the 5200 area.
Nasdaq Composite index, COMPQ, Daily chart
Key Levels for NDX:
- bullish above 5132
- bearish below 4888
The RUT was the weaker index today, which is not what the bulls want to see. It only managed to bounce back up to its broken uptrend line from October 2014 - May 2015, which is the line that supported all pullbacks since May 6th. As you can on its daily chart below, traders think this is an important trend line and today's failure to get back above the line leaves a bearish kiss goodbye instead. If it drops lower on Thursday there's good support in the 1240-1243 area to watch for at least a short-term bottom to set up a bounce into next week, perhaps back up for another back-test, near 1270, or up to price-level S/R near 1279. Above 1280 would have me thinking more bullishly about the RUT but not before -- shorting rallies appears to be the better bet until proven otherwise.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1280
- bearish below 1233
Another index that is more bearish than bullish at the moment is the NYSE. As can be seen on its daily chart below, it has been using its 200-dma as S/R since March. It bounced sharply off it on June 9th but broke below it on Monday. Notice too where it opened on Monday -- just below its uptrend line from last December, which was last tested on June 9th and 15th. The break of that trend line was important, as was the break of the 200-dma. This morning it managed to bounce back up to the 200-dma, at 10885 (with a high at 10890), and then sold off, leaving a bearish kiss goodbye (so far). As with the others, a minor new low on Thursday would be a good setup for a higher bounce next week, one where NYA could make it back up to its broken uptrend line, near 11K next week and maybe even high enough to close Monday's gap at 11040.
NYSE Composite index, NYA, Daily chart
Treasuries have been volatile for the past few weeks as bond traders try to figure out the longer-term impact from Fed policies and global events. The projection at 2.453% (two equal legs up from January) and the uptrend line from July 2012 - May 2013 have been exceeded twice since June 10th but both times have failed to hold. Monday's sharp decline has been followed by another bounce back up toward both, which cross next week. A sustained rally above 2.5% would be bullish but only if it's able to negate the bearish divergence that's been building since May's high. Otherwise I continue to believe Treasury yields will be heading much lower this year (rally in bond prices), especially if the stock market is getting ready for a swan dive.
10-year Yield, TNX, Daily chart
While many of the other indexes are in synch with the big ones reviewed above, it's the TRAN that has been out in front of this decline and I continue to watch it for clues. The pattern remains bearish as it consolidates Monday's loss and it takes a rally above its last shelf of support near 8260 to give us a bullish heads up. Not until it can get above 8515 would it turn bullish and for now there's downside potential to the bottom of a parallel down-channel from March, currently near 7965. It could make it down to a price projection at 7841 after failing to hold at the projection at 8266 (two equal legs down from February 25th). Today's price action produced a long-legged doji at the trend line along the lows from April 6 - May 29 and as long as that line holds as resistance, after breaking on Monday, the bears maintain control.
Transportation Index, TRAN, Daily chart
No change for the U.S. dollar -- I continue to watch to see if it forms a big sideways consolidation this year. As long as it stays between 93 and 100 I don't see any reason to think otherwise.
U.S. Dollar contract, DX, Weekly chart
It's been two weeks since I've updated gold's chart (since I missed last Wednesday) and my last update (June 17) called for a bounce up to about 1202-1205 before heading lower. Near that level was a projection for two equal legs up from June 5th (for an a-b-c bounce correction), near 1202, and the 38% retracement of the February-March decline is at 1205. Not shown on the chart, a 62% retracement of the May-June decline is also near 1205 and that made a tough zone of resistance for gold bugs. Gold topped out at 1205.70 on June 18th and is now back down near its June 5th low at 1162. I expect that to break and see gold sell off toward 1090, if not lower.
Gold continuous contract, GC, Daily chart
Silver's weekly chart below shows it's back down to its shelf of support near 15.25 (Monday's low was 15.42). As noted on the chart, a breakdown, assuming it will, should lead to a drop down to the $12 area, which is where it would meet downside price objectives out of its previous descending triangle (June 2013 - August 2014) and its rectangular consolidation pattern (November 2014 - present). The bottom of a parallel down-channel for its decline from April 2011 will be near 11.50 by the end of August and that remains a potential downside target as well. I show the start of a bullish rally following that kind of move down but that will have to be evaluated when the time comes.
Silver continuous contract, SI, Weekly chart
I continue to believe oil will head back down but it's not clear if it will drop to a new low or just consolidate sideways this year before dropping lower. At the moment it looks like it's ready to roll over and as long as it stays below the June 24th high at 61.57 I'd stay bearish oil for now.
Oil continuous contract, CL, Weekly chart
The market is not paying much attention to economic reports right now but the NFP report tomorrow before the bell could certainly be a market mover. This morning we had the ADP report, which came in at +237K, higher than the expected 220K and better than the 203K in May. Tomorrow's NFP report is expected to show an increase of 250K jobs, which is less than the 280K in May but might come in a little stronger if today's ADP report is a good indication. Of course we still have the problem of trying to figure out if a strong number is bullish or bearish for the market. A strong employment number could embolden the Fed to lean more strongly to a rate hike, which the market doesn't like.
We also received the ISM Index report this morning and that also came in a little stronger than expected, 53.5 vs. 53.2, and better than May's 52.8. Construction spending dropped to +0.8%, from 2.1%, but it was better than the expected +0.3%. Auto sales were expected after the bell but I never saw any numbers.
Other than the employment numbers tomorrow, we'll get the Factory Orders report after the open. It's expected to show a little more deterioration, dropping to -0.5% for May, from -0.4% in April. It's old news so very likely it will have no effect on the market.
Economic reports and Summary
Following the market's reaction to the NFP report before the open tomorrow we could see a relatively quiet market since it's the day before a holiday weekend and traders will likely not want to place any big bets in front of the Greek vote on Sunday. Monday could be another wild day, one way or the other, and there are strong arguments for either way. It's the reason I will be basically flat in front of the weekend (with a small strangle position just in case the market tanks on Monday, in which case it could crash, or in case it takes off on another hopium-induced rally.
The EW pattern calls for one more leg down on Thursday before setting up a long play into next week. Fear of the Greek vote could cause some selling on Thursday and unless the market is going to crash next week I think we'll see a positive reaction on Monday (assuming we first get a new low on Thursday). A new low with bullish divergence tomorrow would provide a decent signal for a long play into next week. A strangle position with OTM puts and calls is a little risky because premiums could deflate quickly without a big move and I could lose on both positions. Hence a small position with known and acceptable risk.
If we do get a new low on Thursday followed by a big bounce next week I'll be looking at it as a shorting opportunity later next week. Hopefully by this time next week we'll have a good opportunity to evaluate a bounce to see if it should be shorted or instead look to buy pullbacks. And if we don't get a bounce on Monday, short will be the place to be and just hang onto your hat for a wild ride down the slope.
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