The market consolidated since last Friday and essentially went on hold until the FOMC announcement today. Following the usual volatility around the announcement the market then continued higher. The rally doesn't look finished yet but it's looking tired.
Today's Market Stats
The market's consolidation following last Friday's high was a bullish continuation pattern and it appeared the market was simply waiting to get through the FOMC announcement before continuing higher. A negative reaction following the announcement turned into a bear trap and a strong spike up into the close created new highs for the indexes. The rally is likely running on fumes but higher highs look to be in the cards.
There weren't any significant economic reports today, except a bullish crude oil inventory report (which sent oil prices higher), and the market started the day with a dip but that was met with some big buy programs to keep the sellers away. The same thing happened following the negative reaction to the FOMC announcement, which has it looking like someone is waiting for dips to hit the market with big buy programs. The bears are totally frustrated with the market's inability to pull back and the bulls are at risk of getting complacent about their expectation for new all-time highs from here.
We could be seeing an effort to get the indexes as high as possible for October month-end. This could continue into Friday and if it does then I'd be concerned about what next week will bring. We'll look at some upside projections to see if they get hit before the end of the week but it's important to understand that the price pattern can be considered complete to the upside at any time, which makes trading the long side riskier than usual. At this point entering new long trades can be considered chasing the market higher and this late in rally means you run the risk of a sudden reversal (after setting a bull trap).
The FOMC announcement held no surprises and in fact I'm not sure why the market even cares at this point. A surprising move was the U.S. dollar's rally this afternoon, which tanked the metals. What was the surprise? The Fed said they still want to raise rates in December, to which I say yea, good luck with that. The Fed doesn't have an economy that can handle a rate increase and it would only further strengthen the dollar, which would crush the emerging economies and make our international corporations even less profitable. The Fed is in a corner and as much as they want to get a rate increase started they simply don't have the room to do it. The last thing they'll want to do is embarrass themselves with a rate increase that needs to get reversed in the next 3-6 months.
With a weak economy the Fed is forced to leave rates alone and in fact might be forced to follow the ECB in establish a negative rate (depositors would have to pay banks to park their money for them). The Fed is crossing its collective fingers in hopes the asset bubble they've created doesn't pop before the economy recovers. I don't believe they'll be successful but they are apparently either delusional or eternally optimistic. More than likely, instead of raising rates they'll soon be forced to modify their language to say something like they're "data dependent" and will "exercise patience" before deciding to raise rates. When that happens that would be our clue that another QE is not far behind.
In fact the Fed changed their language slightly, hinting of the coming change. The Fed said it would determine "whether it will appropriate to raise the target range at its next meeting." Hint, hint, we don't see the ability to raise rates but we'll wait for December before we'll start hinting in the other direction. What a silly game they play with the market (and the market eats it up, which is even sillier).
Since this time last week, following Wednesday's decline, I had thought we had a good setup where the 5th wave of the leg up from September 29th had finished near resistance (price-level S/R near 2040 for SPX). But last Thursday's strong spike up, starting with a big gap up following an overnight rally in equity futures (a favorite way to trap the bears from the day before), has seen follow through and the 5th wave extended into a larger 5-wave move (the leg up from last Wednesday). Today's rally has done a nice job giving us the 5th of the 5th wave and while there is additional upside potential, this is a very risky time to trade the long side.
What is bullish at the moment for SPX is the fact that it has pushed through what I thought would strong resistance at 2075-2085 (it closed at 2090 today). Price-level S/R near 2075, its broken uptrend line from October 2011 - October 2014 and the top of a parallel up-channel for the rally from 2009 all coincided in this resistance band. Unless this afternoon's rally was just a final short-covering burst higher (very possible), in which case a close back below 2075 would be a sell signal (after setting a bull trap this afternoon), there is now additional upside potential to at least 2100-2110.
S&P 500, SPX, Weekly chart
Once the leg up from September 29th completes, which should be soon if it didn't finish this afternoon, we'll need to see what kind of pullback/decline follows next. A choppy sideways/down correction would look like a 4th wave in the rally from August, which would mean another rally into the end of the year (bold green depiction on the chart above) and potentially up to 2170. But if the 3-wave bounce off the August low is an a-b-c correction to the July-August decline then the next leg down will be strong and likely make it down to at least the October 2014 low at 1820.
The daily chart below shows a rising wedge shape for the rally from September 29th, the top of which is currently near 2100. By the end of the day Friday it will be near 2109. A drop below 2075 would be a bearish heads up since it would leave a failed breakout attempt. A drop below Tuesday's low near 2059 would tell us the top is in place for now.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 2077
- bearish below 2058
The 60-min chart below shows the rising wedge and the potential path to higher highs. If it pulls back from a test of the top of the wedge, near 2100, watch to see if it holds support above 2075. If support holds we could then see another leg up to new all-time highs in November. You can see how price-level S/R lines acted as support after they were broken to the upside. The bulls want to see 2075 act the same way.
S&P 500, SPX, 60-min chart
The S&P 100 index (OEX) shows an interesting setup on its weekly chart as it approaches its July high at 947.85. That high was within 3 points of the price projection at 950.45, which is where the 2nd leg of the 3-wave rally off the 2009 low is 162% of the 1st leg up (a common reversal Fib projection). Maybe we'll see another attempt at achieving that projection but at the moment it's about to back test its broken uptrend line from October 2011, currently near 937. The break of the uptrend line in August tells us the leg up from October 2011 finished and a back-test of it is a setup for a short play.
S&P 100 index, OEX, Weekly chart
The DOW has the same setup as shown for SPX. The top of a rising wedge for the rally from September 29th is currently near 17860 so that's the upside potential if the rally continues on Thursday. If it consolidates a little on Thursday and then pushes higher for a closing high for month-end on Friday we could see it make it up to just shy of 18K. Wouldn't that be something for the weekend papers? But the DOW closed only slightly above resistance today -- its broken uptrend line from October 2011 - October 2014 (17740) and at its downtrend line from May-July (17760). The bulls need to avoid leaving a failed breakout attempt, which it would be if the drops back below today's low at 17556.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 17,780
- bearish below 17,489
Last Friday's gap up for the tech indexes had NDX jumping over multiple lines of resistance and has held above its broken/recovered uptrend line from 2012-2013-2014, currently near last Friday's low near 4599. A drop below that level would leave a failed attempt to recover its broken uptrend line and it would be a drop into last Friday's gap. It remains bullish above 4600 but watch the price projection at 4716.55, if reached, since that's where the bounce off the August low would have achieved two equal legs up for an a-b-c bounce correction. A rollover from the July high at 4694 would also leave a bearish double top.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 4720
- bearish below 4600
I've been watching the RUT's consolidation since its October 13th high and thinking it's bullish. The RUT has been relatively weak for months and yet it was the one suggesting we'd see a bullish move. Today's big rally (+2.9%) is a bullish breakout and it looks like it caught a few traders short. Upside potential is to 1192-1196 where it would back-test its broken uptrend line from October 2011 - October 2014 (1192) and where the 2nd leg of the bounce off the September low would be 62% of the 1st leg up. Above that it could make it up to its 200-dma, near 1215, and 1231, where the 2nd leg of the rally from September 29th would equal the 1st leg up. But if the RUT drops below Tuesday's low near 1140 it would leave a failed breakout attempt (bull trap).
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1170
- bearish below 1140
One reason to be careful about chasing this market higher, and a reason to keep stops on long positions tight now, is that it's overbought by several measures. One is the percentage of stocks above their 50-dma (some by a large margin) and as you can see on the chart below, the percentage is approaching 70%, a level that is associated with prior reversals. It can go higher but it's a warning sign not to get complacent. Notice how it's been chopping higher following the spike up in early October. New price highs are getting fewer stocks participating, always a sign of topping, even if for only a larger pullback.
NYSE Stocks above 50-dma
The banks got a big shot in the arm (short covering?) and I guess it was on the Fed's continued jaw-boning about raising rates, which makes banks more profitable. It's not going to happen and today's rally runs the risk of an immediate reversal. But there is some more upside potential -- a 62% retracement of the July-August decline is at 75.87 and only pennies below that, at 75.74, is the 162% projection for the 2nd leg of the 3-wave bounce off the August low.
KBW Bank index, BKX, Daily chart
The Transports got hit hard yesterday and the decline left a failed breakout attempt over its downtrend line from March, currently near 8125. It bounced off its 50-dma today but is below its 20-dma, also near 8125, and therefore as long as it remains below 8125 it will remain bearish. But a climb back above 8125 would leave a whippy consolidation off its October 9th high and point to a rally up to its 200-dma, currently at 8467, if not price-level S/R at 8515.
Transportation Index, TRAN, Daily chart
The U.S. dollar also got a strong boost this afternoon following the FOMC announcement. Again, hints of raising rates looks like it caught a few traders short the dollar. The rally broke above its downtrend line from March-August, near 97.10, and it could be a bullish breakout. But I'll want to see how it closes for the week since this afternoon's rally might have been nothing more than short covering, which could quickly flame out and reverse back down. I'm expecting a strong dollar rally but I've been thinking not until another leg down into the end of the year. We'll soon find out whether or not that will happen.
U.S. Dollar contract, DX, Weekly chart
Following gold's high on October 15th it's looking like it could be rolling back over. The high was just shy of the projection near 1195 for two equal legs up from July and the larger pattern suggests gold will see lower lows (at least down to 1000 if not a little lower). But a rally above this morning's high at 1183.10 would suggest we could see at least 1200 to the upside, if not higher, before turning back down later this year or early next year. Bulls want to see support near 1142 hold if it pulls back further.
Gold continuous contract, GC, Daily chart
Watching silver for confirmation of gold's move, it's not clear here which way silver is going to go. It's consolidating at its downtrend line from July 2014, which is also where its 50-week MA is currently located, at 16.03. A weekly close above that level would be bullish but it's possible this morning's high concluded its bounce off the August low.
Silver continuous contract, SI, Weekly chart
This morning's crude inventory report (less than expected) prompted some short covering and it could be the kickoff to the next rally leg. I've been expecting another leg up to give us a 3-wave bounce off the August low and if it heads higher from here the projection for another equal leg up is at 55.75. If the large sideways triangle pattern, as depicted on its weekly chart, is correct, we'll continue to see oil trade between 38 and 58 (probably narrower) before dropping lower next year. I'll continue to watch for evidence that changes this expectation.
Oil continuous contract, CL, Daily chart
Tomorrow's economic reports include the advance GDP number and expectations are all over the map. But most believe it will show slowing from Q2's 3.9%, which is one of the metrics keeping the Fed from raising rates. We'll also see how pending home sales are looking.
Economic reports and Summary
The rally continues and there's still some upside potential. That's enough to suggest to bears to hold their fire and sit in cash while waiting for the bulls to tire. The market is overbought, overloved and starting to fade in its strength (short-term bearish divergence at this afternoon's new high). It's not a rally I'd chase higher from here but would instead pulls stops up tight and let the market tell you when the rally is over (a drop below Tuesday's low would be good confirmation). We should be days, if not hours, away from putting in a high for the leg up from September 29th and following the high should be at least a larger pullback than we've seen since then.
The larger price pattern is not clear as far as what we should expect into the end of the year. It won't be until we get a pullback/decline that we'll get some clues for the next move. A sharp (impulsive) decline will tell us to short the subsequent bounce but a choppy (corrective) pullback (over a few weeks) will tell us to look to buy the dip for a year-end rally. In the meantime trading should be short-term until the bigger picture clears up.
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