Since the sharp decline into the August 24th low we've seen multiple large opening gaps and big price swings but the market hasn't gone anywhere since the low. Trying to figure out market direction day-to-day has only led to frustration and today was no different.
Today's Market Stats
Over the holiday weekend we received additional information that China was continuing to slow down and dramatically in some ways. That should have tanked the futures on Monday but instead they rallied, which set up the big gap up Tuesday morning. The Fed stepped in front of the bad news by putting San Francisco Fed chief John Williams out in front, talking about the difficulty the Fed will have raising rates. This was done with an interview with the WSJ's Jon Hilsenrath, who is the Fed's authorized "leaker." Before the interview it has been Williams who has consistently supported a rate hike, feeling the economy was strong enough to support it. But in the interview Williams said "There are some pretty significant -- and I would say have now grown larger -- head winds that have developed." That was Fed speak for "we don't think we can raise rates at this time."
The interview with Williams was all it took to ignite short covering in the futures market, which created a large gap up Tuesday morning. A price consolidation was then followed by a push higher in the afternoon and that was then followed by more another overnight rally in the futures. It was looking like it was going to be off to the races again as more short covering launched this morning's big rally but this time the sellers smacked it back down and the DOW's 200-point rally became a 200-point loss before today's close. Basically it was just a continuation of what we've seen for the past 10 trading days -- big price swings with large gaps in both directions, which has created a large-range sideways consolidation. This fits best as a bearish continuation pattern and I'm watching for price evidence to the contrary (but not seeing any yet).
Tonight I'll just jump into the charts since there's very little to discuss about the world economies and other factors that affect the market sentiment. It's been a roller coaster with so many reversals, which has made trading difficult. The only thing I can do at this point is recommend safety over aggressive trading. There are times to watch and wait and this is one of them. What to wait for is what I'll attempt to show tonight.
The DOW's weekly chart is not terribly helpful at this point as price cycles around the broken uptrend line from May 2009 - October 2011, currently near 16400 (arithmetic price scale). There's a wide support-resistance window between roughly 15300 and 17100, or perhaps a tighter one between 15300 and today's high near 16665 (and the August 28th high near 16670). The bulls will argue the choppy consolidation since August 24th is part of a bullish base building while the bears will argue the consolidation is just a bearish continuation pattern. I'm currently arguing the latter (with the bears) but either potential needs to be respected by both sides.
Dow Industrials, INDU, Weekly chart
The consolidation pattern off the August 24th low currently looks like an ascending triangle (rising lows, flat top) and we could see one more bounce up to the top of the triangle (16670) before heading for new lows. The wave count is not clear because of what looks like an outsize 4th wave correction following the August 24th low but the triangle fits well for a 4th wave and the pattern off the May high continues to support the idea that we'll see the market stair-step lower into November. But a rally above 17100 would at least turn the market neutral, if not bullish.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 17,100
- bearish below 15,980
The 60-min chart below shows the ascending triangle pattern, assuming that's what's playing out. It's possible the bounce correction has already finished with this morning's high and a break below last Friday's low near 16026 would be more immediately bearish (although the potential for just a deeper pullback before bouncing back up can't be ignored).
Dow Industrials, INDU, 60-min chart
The SPX daily chart below shows a different kind of triangle consolidation pattern that could play out for many weeks before dropping lower. This would be a tough pattern to trade so let's hope this one doesn't happen. It could also be a tighter ascending triangle like the DOW's and as long as price stays above last Friday's low near 1911 and the August 28th high near 1994 you want to be careful of the chop. A break of either of those levels could lead to a larger tradable move.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1994
- bearish below 1867
On August 28th NDX tagged price-level S/R near 4345 (with a high near 4341), which is the level that was resistance in November 2014 and support in April and July. It had broken with a big gap down on August 21st and that gap would be closed with a rally to 4385. But 4345 acted as resistance again this morning with the gap up and quick rally to almost 4353. That was followed by an immediate reversal back down and the big red candle looks bearish against price-level resistance, especially since an outside down day or what could be considered a key reversal day. If the bulls can turn it around and push it up a little higher we could see its August 21st gap closed at 4385 and its broken 200-dma back-tested near 4384. And if the buyers can do better than they did today and really juice the market higher (where's a Fed head and "no rate hike" when you need one?), we could see NDX up to its broken 50-dma, currently near 4446 and its broken uptrend line from 2012-2013-2014, which crosses the price projection where the 2nd leg of the bounce off the August 24th low would be 62% of the 1st leg, near 4464.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 4385
- bearish below 4121
I'm using the RUT to track a pattern for lower prices with a stair-step move down into October (a common month for a major low). Notice that this morning's high for the RUT, near 1170, was a test of its broken uptrend line from October 2011 - October 2014 (arithmetic price scale). It's a good setup for lower lows if it drops below 1124 but continue to respect the potential for a higher rally.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1000
- bearish below 1000
While the stock market has been jumping around the past two weeks the bond market was at first chopping sideways but then bond prices sold off the past two days. That had rates rising and they acted like the stock market today, which had it looking like a rotation out of stocks and into bonds. TYX made it up to its broken uptrend line from January-April with this morning's gap up but it then sold off, leaving a bearish kiss goodbye. A reversal in bond yields to the downside (with a rally in bond prices) would support stock market bears.
30-year Yield, TYX, Weekly chart
The trannies were relatively strong today and I see the potential for another push higher to complete an a-b-c bounce off its August 24th low. The 2nd leg of the bounce, from September 1st, would be a cleaner 5-wave move with one more new high and the 3-wave bounce off the August 24th low would have two equal legs up at 8131. That would also be a test of its broken 50-dma, currently at 8136 and coming down. If you like to trade this index, such as with IYT, watch for this setup to get short if it plays out.
Transportation Index, TRAN, Daily chart
The U.S. dollar continues to stay choppy and that's one of the things that keeps me thinking it will stay stuck in a consolidation pattern for another 2 to 3 months. The downtrend line from March-August is currently near 97.85 and should hold as resistance if tested. The bottom of a descending wedge pattern is the trend line along the lows from May-August, is currently near 92.30 and that line should act as support if tested. Ideally we'll see the dollar push marginally higher before heading back down to the bottom of the wedge and finish close to the end of the year. That would do a nice job setting up a rally next year to new highs.
U.S. Dollar contract, DX, Daily chart
Gold broke down today from short-term price support at its August 26-27 lows, near 1117, and now looks like it will head lower sooner rather than later. If the bulls can turn this around and get gold above its August 24th high near 1170 that would be a bullish heads up. But the larger pattern is what suggests lower prices and down to around 1000 is the next target.
Gold continuous contract, GC, Daily chart
Oil's spike up from its August 24th low was impulsive and that suggests another leg up following the corrective pullback from August 31st. I'll continue to show the idea for a big sideways consolidation into next year (before heading lower) until the price pattern tells me otherwise.
Oil continuous contract, CL, Daily chart
Other than the PPI numbers and Michigan Sentiment on Friday, there's not much in the way of economic reports for the rest of the week that will move the market. It will continue to be more influenced by rumors and overseas events.
Economic reports and Summary
The stock market has been working hard to hold up off its August 24th lows. Following the comments from the Fed heads it's becoming more likely in the minds of many market participants that there will not be a rate hike this month. I've felt there was no chance of it happening and now with the admission of weakening economic numbers I don't believe the Fed will puts itself in a potentially embarrassing position of having to backtrack in a couple of months. It might be embarrassing to backtrack on their talk about raising rates but their easy out is to simply say the numbers have changed to the point where they can no longer support a rate hike at this time. That's far different from having to admit in a few months that they made a mistake when they raised rates. The Fed is all about saving face because once they lose the faith of the markets they've lost to battle to survive.
It's of course not so much the rate hike that bothers the market; it's more about the Fed changing their posture from supporting the market to one of letting the market flounder on its own. Most believe the market will not stay up without the Fed's help. Wait until they realize the Fed is really powerless and it's only the belief in the Fed (kind of like belief in the good faith of the U.S. government to back its fiat money) that kept the market heading higher.
With multiple large gaps in both directions and reversals of reversals following corrective price action (3-wave moves), it's been a rough time to trade. You had to be in position to enjoy the market gaps (good luck choosing that direction) and then you had to be quick to take profits following the gap, especially if in long options since premium quickly deflates once the gap move completes. From an EW perspective, it looks like a 4th wave correction following the August 24th low and 4th waves are notorious for being choppy and whippy. The only ones to consistently make money during these corrections are the brokers. I've been saying it's a good time to be flat because of the known difficulty trading these patterns. It's possible the bounce correction has finished but if the triangle pattern shown for the DOW (on its 60-min chart) is correct, we'll see one more bounce up before heading lower. I lean bearish, either from here or after another bounce attempt but the bulls can always pull another surprise attack. Trade carefully if you can't stand being on the sidelines.
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