Following last week's market disappointment about the Fed not being sure what to do, the bulls have had one less reason why they should move the market higher. The bears sensed weakness from the Fed and pounced and it appears they might not be done pouncing.
Today's Market Stats
Equity futures sold off hard in the after-hours session last night but were then rescued later in the session after the European markets started trading. The market finished down as it continues to worry about more signs of a global economic slowdown and a powerless Fed (and other central banks) to do anything. The once mighty leaders of the market, I mean banks, have lost their luster after successfully painting themselves into an inescapable corner. It's looking like the market could struggle some more as it looks for a reason to rally (finding little in the process).
As I've been traveling around Ireland the past two weeks it's been difficult concentrating on anything other than the road (I've driven on the left side before (in Japan) so it's not totally new but it certainly requires the mantra "stay to the left, look right before crossing") and consequently I've missed some big moves in the market in the past two weeks. But I arrived in Ireland on September 10th and the DOW hit a low at 16212 that day. Today's low for the DOW was 16212 so from that I should assume nothing has happened. Of course plenty has happened since then as the DOW rallied more than 700 points into last Thursday's high before giving it all back by today's low. Well, that was fun and now we wonder what's next.
We didn't have much in the way of economic reports this morning and the only thing traders might have been worried about was the overnight decline might pull the cash indexes down for a retest. The day started with a small gap up, a quick pullback and then a rally attempt that failed about 11:00 AM. Yesterday's lows were tested at today's midday lows and that was followed by another bounce attempt to lower high. The pattern since yesterday is looking like a bearish continuation pattern and it should resolve lower, but possibly not much lower before setting up a larger bounce (to a lower high below last Thursday's). The net result could be more volatile price action over the next week.
I was asked recently how we could still be in a bear market since the indexes have been making new highs in the past year (the last being the May high for the blue chips). I thought it might be a good time to again review the big picture and work my way down, using the DOW for this exercise. I think it will help explain why I'm looking for a much larger decline in the next two years and why I think long plays are now to be considered counter-trend (some will be significant multi-week bounces to be traded on the long side but I think it's good to have a sense of the overall trend and then trade with it or against it when the pattern suggests it).
The high in May, at 18351, which was above the 2007 high at 14198, fits as the d-wave in an expanding triangle pattern that should complete with an a-b-c-d-e wave count. This particular triangle fits well as a large-degree 4th wave correction that started off the 2000 high. It's not hard to argue the 2009 low completed the 4th wave correction with the A-B-C pullback, which would mean a new secular bull market started off the 2009 low, but the rally since 2009 looks corrective and that supports the interpretation that it's still one of the legs of a triangle (all triangle patterns have corrective rather than impulsive wave structures). The depiction for another leg down to a lower low than 2002 and 2009 is shown on the monthly chart below.
DOW Industrials, monthly chart
This expanding triangle pattern is similar to the smaller-degree 4th wave for the previous secular bear market (1966-1982). The expanding triangle portion of the bear ran from 1966 to 1974, which was then followed by more or less a contracting triangle until 1982. Back then the January 1973 high for the DOW was higher than the 1966 and 1968 highs and yet still led to a low below both the 1966 and 1970 lows. The 1970 low could also have been interpreted as the conclusion to a big A-B-C pullback from 1966 and the new high in 1973 was certainly looking bullish at the time. Some will argue it was the oil embargo that caused the next decline but it's important to remember it doesn't matter the reason. The only thing that matters is that something caused a sentiment shift, which I believe we're experiencing now. The 1970-1973 rally was a 3-wave move and it was followed by a new low into the end of 1974. So the pattern shown above is hardly a novel idea.
DOW Industrials, 1965-1983
The 1966-1982 pattern ended up looking like a diamond pattern, which turned into a bullish continuation pattern instead of a major top and it's possible we'll see something similar, which would mean a continuation of a sideways consolidation with large price swings could be with us well into the 2020s. But since secular cycles tend to run about 18 years, it's not unreasonable to think a strong decline into 2017-2018 will finish off the bear. Once the final wave (wave-e) of this triangle pattern completes (typically down at the bottom of the triangle but it doesn't have to get there) we'll start a large-degree 5th wave rally for the next secular bull.
I think the stock market could also be ready to follow commodities after diverging since 2011. Note the recent (August) break of the uptrend line on RSI from the 2009 low (this is for SPX). While there's always the possibility the market could make another stab at a new high, if it did so with a back-test of the broken uptrend line I'd be all over it like Pooh Bear and his honey. The last time there was this large of a divergence was 1999 and the stock market peaked in 2000 while the commodity index roared back. We might see a replay of that scenario in the next year or two.
SPX vs. DJUBS Commodity index, monthly chart
Last week the DOW bounced back up to its trend line along the highs from 1971-1972-1987 (log price scale), which was last tested at the October 2014 low and then was broken on August 21st and is now resistance. The price action following the August 24th low has continued to be choppy and therefore looks like a bearish continuation pattern. But at this point we don't know if we'll get anything more than a retest of August low before setting up a bigger bounce correction. Until I see something impulsive to the upside I look at bounces as shorting opportunities.
Dow Industrials, INDU, Weekly chart
The DOW broke its uptrend line from August 24 - September 4 last Friday and then yesterday it broke down from a parallel up-channel for the 2nd leg of its bounce off the August low, which only helps confirm it's probably heading lower from here (or maybe only a test of the low). Note MACD on the daily chart below curling over at the zero line, which is usually a good sell signal. The bulls want to see MACD climb back above the zero line.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 17,100
- bearish below 15,980
The DOW has an uptrend line for the 2nd leg of its bounce off the August low, which runs from the September 1st and 4th lows. It was tested yesterday and again today, which were also tests of the September 10th low at 16212. The lows since last Friday are showing short-term bullish divergence, which means it could bounce back up from here and give us a larger consolidation pattern. But the choppy sideways consolidation since Tuesday is looking like a bearish continuation pattern, which suggests lower prices sooner rather than later.
Dow Industrials, INDU, 60-min chart
SPX looks like the DOW -- it broke its uptrend line from August and while it could go more sideways from here I think the higher-odds scenario is lower prices before setting up a larger bounce correction.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 2000
- bearish below 1937
The weekly chart of the Nasdaq shows its broken uptrend line from October 2011 - October 2014, near 4940, and its 50-week MA, near 4870, have both been broken and back-tested. Stay bearish the techs as long as the COMPQ stays below last Thursday's high.
Nasdaq Composite index, COMPQ, Weekly chart
Key Levels for NDX:
- bullish above 4960
- bearish below 4625
The RUT failed to get any follow through to its rally last Thursday when it rallied above its downtrend line from July 16 - August 17 and back above its broken uptrend line from 2011-2014, both of which crossed on Thursday near 1175. That rally has been followed by a break of price-level support near 1152 and its 20-dma, now near 1153. It could whip around over the next week or so but the pattern continues to suggest lower prices.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1194
- bearish below 1124
I won't be able to get additional charts out tonight because of a weak data signal where I'm staying for the night and the wi-fi service is apparently not working either. I can't seem to get my charting program to stay connected. About all I can say about the other charts I post each Wednesday is that I don't see any changes to my expectations. The dollar should continue to consolidate for weeks/months before starting another rally. Gold and silver both look like they head lower soon and oil should head higher after its multi-week consolidation, probably up to the $56 area before turning back down in its larger sideways consolidation that started this year.
Tomorrow morning's economic reports include the Durable Goods Orders for August, which are expected to show significant weakness compared to the July numbers. If they come in as negative as expected it's going to be just one more report that the Fed is going to have to ignore if they want to keep talking about rate increases. The Fed is stuck and the market is starting to get that.
Economic reports and Summary
There's been a lot of choppy price action, with some large whipsaws following the August 24th low and sharp bounce. The price action continues to look more corrective than impulsive and that keeps it looking like a bearish continuation pattern. I'm expecting lower prices, or at least a retest of the August lows. There's a more bearish interpretation of the pattern that calls for another sharp decline to match the one into the August lows and that should keep bulls very cautious. Look for bounces to short until we see something more bullish to the upside.
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