A holiday-shortened week tends to be bullish and while this week hasn't exactly been bullish it's at least held onto recent gains, which can be considered bullish. We'll have to get through this week before we'll have a better sense about what this week's consolidation means in the larger pattern.
Today's Market Stats
Happy Thanksgiving! While this is a U.S. holiday that celebrates the fall harvest by the brave (but some would say not too bright) Pilgrims after they landed on our shores in current-day Massachusetts, the Canadians also celebrate their thanksgiving on this day. Even if you do not have a national holiday of thanksgiving, it's a perfect day to sit and reflect on those things you're thankful for. Reflecting on what you're grateful for makes you a happier person for it.
This holiday-shortened week has been very quiet, which was not unexpected, and thanks to the market save Tuesday morning (following the negative reaction to the news about the shot-down Russian jet) the market hasn't been negative this week. It's been a neutral week, except for a more bullish RUT, and the only question now is whether this week's consolidation is a bullish continuation pattern or instead a bearing topping pattern. As I'll show later, even the more bullish RUT actually presented us with a bearish setup by the end of today. But I could easily argue either direction from here and considering Friday's half-day session will likely also be a quiet session, we'll probably need to wait until next week before we get some more clues as to what's next.
There were several economic reports this morning as Thursday's and Friday's reports were brought forward. There was nothing market-moving presented this morning and while there was a brief negative reaction in the pre-market futures, they were lifted back up at the market's open (another sign from the market handlers that there will be no selling allowed this week). Durable goods orders bumped higher than expected (+3.0% vs. +1.5%) but removing the volatile transportation sector left it as expected (+0.5%). Michigan Sentiment came in a bit lower than expected, 91.3 vs. 93.1. A relatively small bump in oil inventories helped crude rally today.
Before getting into my regular charts I wanted to help set the tone of the market vs. what we should be watching for. It's easy to get caught up in the bullishness of the market and if you're feeling bullish you're not alone. The market's rally off the August/September lows has driven bullish sentiment to extreme highs, as can be seen on the Sentix Sentiment chart below (from Sentix.de). Whenever the sentiment level gets above 0.3, especially if it reaches 0.4, it provides a warning that the stock market's rally is overheated and that it's done a good job sucking in bulls near what is likely to be a top in the market (when the rally runs out of buyers it creates a top). It is currently at 0.442, which is the highest reading since the end of 2010. These high sentiment readings don't tell us the market is ready to reverse now but instead simply provide a warning.
Sentix Sentiment, November 20, 2015
Another sign of excessive bullishness can be seen on the Rydex chart below (provided by Tom McClellan). This compares the SPX against the Rydex Nova assets, which is a fund that seeks to achieve 150% of the S&P 500 index. When investors are feeling bullish about the stock market's potential they use this fund to leverage the play. As you can see on the chart, the last two peaks prior to the current one were at the end of 2014, which has been followed by essentially a flat year, and then the peak in May 2015, which was the high of the year. The assets in this fund are now higher than they were at the November 3rd peak in SPX. Since the September low it's been a very fast climb for assets held in the Nova fund, which indicates a strong bullish sentiment and one has to wonder if this is telling us the rally is about to peak.
Rydex Nova Assets, November 20, 2015, chart courtesy mcoscillator.com
Keep in mind that the stock market's holding up near its all-time highs, along with the extreme bullish sentiment, is in the face of a global economic slowdown, which the U.S. will not be immune to. In fact there are many signs our economy has been slowing for at least two quarters and in hindsight we could see the recognition that the recession has already started. Using employment growth is not a good indicator since it generally peaks with the stock market, which typically peaks about six months ahead of a recession and if we use the May highs as the market peak then we are at the 6-month mark.
The Baltic Dry Index is a very good indicator for how much products are in demand since so much is transported by ship. After hitting a high in early 2008 this index dropped sharply to a low in late 2008 and has been unable to recover much of that loss. It is now down about 96% from its 2008 high and it has dropped below its late-2008 low, as can be seen on the chart below. It had bumped up to another lower high in August but since then it lost about 60% of its value. We have a stock market back up near its highs and the BDI dropping 60% and now below the lows seen at the last stock market lows in 2008-2009. Think there might be some kind of disconnect between the stock market and reality? At some point, especially with the discussion above, there will be a market correction and I think it's going to be a lot stronger and violent than most believe.
Baltic Dry index, BDI, Weekly chart courtesy Casey Research
There are a couple of factors affecting the BDI price -- supply and demand (as always). With the high rates back in 2007-2008 many ships were built (the boom times were expected to last). The combination of too many ships and a slowdown in demand has killed the index, which has dropped lower for the past four quarters. Last Friday Forbes reported the global shipping industry still has 30% excess capacity. Not a good time to be a ship owner (unless you own oil tankers). The shipping company Maersk ships about 15% of all manufactured goods worldwide and their CEO recently announced plans to lay off about 17% of its global workforce. He said the global economy is slowing faster than most people think. In the meantime most central banks and the IMF continue to report slowing but still positive growth. I think I'd prefer to place my bets with someone who lives in the real world and not academia.
We see additional evidence of global slowing in things like the price of copper and other commodities prices. Copper is down to lows not seen since May 2009. But copper could still drop lower if it follows the commodity index (DJUBS), which has dropped below not only its 2009 low but also its 2001 low. Big international equipment builders, such as Caterpillar (CAT) have been telling us equipment sales have been slowing drastically (CAT's sales are down 16% from a year ago and have been slowing for the past three years). Europe is rapidly slowing and of course that has the ECB promising to do more of "whatever it takes" and rather than worry about a slowing economy and weaker earnings we have a stock market much more interested in more intravenous drugs from the cabal, I mean central banks. The longer the distortions from central bank activity continue the stronger will be the counter-reaction when it occurs. Ask any drug addict and they'll tell you that coming off drugs is a bitch and now we've got the Fed promising to start squeezing off the drug supply.
The market's love of printed money and the big push into riskier assets in search of higher yields has created a monster known affectionately to us as the stock market, which is close to probing all-time highs instead of lows with commodities. But while the indexes are holding near their all-time highs, a look under the hood tells us a different story. Price is always the final arbiter since that's how we make and lose our money. But while the outside of the car looks all shiny on the used-car lot with a 'For Sale' sign on it, the engine is leaking oil and showing us many other signs of aging. The chart below shows SPX vs. 52-week highs in the middle and then at the bottom is chart of the advancing-declining stocks.
S&P 500 index vs. 52-week highs and Advancing-Declining stocks, Daily chart
Over the past year the number of new 52-week highs has been steadily deteriorating, a sign of lack of participation by stocks in the rally -- more and more stocks are succumbing to selling pressure while SPX is held high (some would say through manipulation through buying of futures and the index itself, including the SPY). Even now as the market pushes back up toward the November 3rd high you can see the lower number of stocks hitting 52-week highs. Likewise, the bottom chart shows the number of advancing-declining stocks has deteriorated since early October. Like sentiment, this is not a timing tool but it does tell you when it's better to be defensive rather than aggressive about the long side. Combined with high bullish sentiment I think we have a very vulnerable market right now but how long that could continue is anyone's guess.
OK, onto the regular charts, starting with the SPX weekly chart. It shows this week's dragonfly doji at resistance, which is its broken uptrend line form October 2011 - October 2014 (dark bold green) and the top of its parallel up-channel for its rally from 2009 (lighter bold green). Those two lines cross this week near 2095 (last week's high, on Friday, was 2097 and this week's high, on Tuesday, was just above 2095. It's too difficult to tell from this week's price action what will follow but a red candle next week would leave a candlestick reversal pattern so that's what the bulls need to avoid. If the bulls can close above 2100 it would open the door for a rally up to the 2170 area in December (the projection for the 2nd leg of the 3-wave move up from 2009, where it would equal 162% of the 1st leg). But a drop below the November 16th low near 2019 would indicate we've seen the top.
S&P 500, SPX, Weekly chart
The daily chart below shows the little candles following the spike up on November 18th and the multiple probes of the broken uptrend line from 2011-2014. That's bearish until proven otherwise with a rally above 2100, but then it would need to get above its downtrend line from July-November, near 2011 and its November 3rd high near 2117. There's plenty of overhead above but little in the way of support, which is one reason why I'm reluctant to bet on the upside but watching carefully before getting aggressive on the short side. Another thing the bulls need to see is RSI breaking back above its broken uptrend line from August since a rollover from here would leave a bearish back-test.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 2117
- bearish below 2019
Zooming in closer, the 60-min chart below shows the price action around the broken uptrend line from 2011-2014. As I mentioned earlier, I could easily argue for a move up to test the November 3rd high near 2117 since that's also where a 5th wave for the move up from November 16th would equal the 1st wave. But there's plenty of resistance between here and there and it's not hard to argue we've seen a small rolling topping pattern this week, one which will be followed by a stronger breakdown in the days to come.
S&P 500, SPX, 60-min chart
The DOW presents the same picture as SPX -- it's been bumping up against its broken uptrend line from October 2011 - October 2014, near today's high at 17855, and then only slightly higher is its downtrend line from May-November, near 17920. Following that is its November 3rd high at 17978 so I think the DOW needs to break above 18K to prove the bulls remain in control. But from here it could go either way.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 17,978
- bearish below 17,210
The Nasdaq has again been working on its March 2000 high near 5132 following the last attempt into the November 3rd high. It's showing a lot of weakness on its oscillators as it tries again and while we can never say never about more rally, this is looking a little dangerous for bulls.
Nasdaq Composite index, COMPQ, Daily chart
Key Levels for NDX:
- bullish above 5163
- bearish below 4960
The RUT is the index that has been relatively stronger this week and it's another sign of bullishness as traders run into the seasonally strong small caps. This week's rally has brought it closer to its broken uptrend line from October 2011 - October 2014, currently near 1204 so there's at least a little more upside potential if that's what it wants to tag before at least pulling back. The high so far is 1198.53 and above 1204 it would then meet resistance at 1213-1215, which includes price-level S/R near 1213 (its March and July 2014 highs, which acted as support in July-August before breaking down from there) and its 200-dma, currently near 1214.50. Above that is the trend line along the highs since October 9th, which will be near 1225 at the beginning of December.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1215
- bearish below 1150
I've been watching the RUT carefully this week because it has a clearer wave count at the moment. There's a way for to look at it as a corrective move (red labels) but it's cleaner to look at it as an impulsive move (green labels) and the leg up from Tuesday morning fits well as the 5th wave of the move up from November 16th. Today it achieved equality with the 1st wave at 1198.46 (with the high at 1198.53) and while I see additional upside potential to the 1205 area on Friday, to reach the top of its parallel up-channel from November 16th, today's close left a setup for a reversal back down on Friday instead. As I mentioned earlier, we might not get a good answer until next week but paradoxically, the RUT's relative strength this week now has it looking the most vulnerable to a downside reversal.
Russel-2000, RUT, 30-min chart
It's a little challenging trying to figure out the short-term squiggles in the bond market and while it looks like rates will be heading lower from here, I can't argue against another pop higher. I see upside potential to about 2.44% for the 10-year (TNX) but I'd be surprised to see higher than that. It could be stuck in a sideways trading range that will take us into early 2016 before dropping lower. I'm showing the possibility for a down-up sequence to finish a sideways triangle before dropping lower in 2016 (potentially down to sub-1% before finally bottoming. This pattern suggests the bond market will remain unsure what the Fed wants to do before finally recognizing that another round of QE is coming.
10-year Yield, TNX, Weekly chart
Since last Friday I've liked the setup on the TRAN for a reversal to the downside. Friday morning's rally produced a small throw-over above the top of an ascending triangle that it's been in since the August low and that made a good finish to the a-b-c-d-e wave count inside the triangle. This triangle fits well as a bearish continuation pattern and suggests a decline will follow. So far the decline this week fits the expectations and the only way to negate the sell signal is with a rally above Friday's high at 8358.
Transportation Index, TRAN, Daily chart
The U.S. dollar has continued to work its way higher in anticipation of a rate hike by the Fed and more QE from the ECB. The euro is a heavy weighting in the dollar index and weakening the euro (with more QE) would strengthen the dollar, which has now made it back up near its March/April 2015 highs (100.78 and 100.27, resp., with today's high at 100.23). I have two price projections based on the wave pattern at 100.16 and 100.88 so today's high has it inside my target zone. The weekly chart below shows a modified idea for a sideways consolidation into 2016 before it will be ready for its next rally. It could simply continue higher from here but the daily chart is showing a choppy move higher, which is generally a good indication the move (up) is finishing inside my target zone so that has me looking for a reversal back down. If the dollar does pull back as shown, it would indicate something has changed with the expectation of a rate increase by the Fed. It might coincide with a pullback in Treasury yields.
U.S. Dollar contract, DX, Weekly chart
Gold continues to languish near its July low at 1072, threatening to break support and head lower. But I think it's due for a bounce before heading lower, which is what I'm depicting on its weekly chart below. I haven't seen strong enough evidence yet to tell me I want to start accumulating the shiny metal but I'm hoping that will be in a few months and down around 1000 (maybe 900-ish).
Gold continuous contract, GC, Weekly chart
After achieving two equal legs down from its October 9th high, for an a-b-c pullback correction, it looks like the next leg up could be underway. It's still early and I want to see oil above price-level S/R at 44-45 before feeling a little more bullish. My expectation is for a rally up to about 52 for two equal legs up from August before turning back down in what I believe will be a larger consolidation pattern. Once the consolidation is finished, perhaps by spring 2016, we should then see oil drop further, probably at least down to its January 2009 low near 33. Once this picture changes I'll update my expectations based on those changes. Right now it's a preliminary idea that needs additional price action over the coming months to help solidify.
Oil continuous contract, CL, Daily chart
During a holiday-shortened week, especially with low volume, it's easier for the market to get pushed around (or held still like this week). It makes it hard to use the price action to help discern what the next move will likely be. The major indexes have traded sideways and in a bull market that's usually a bullish consolidation, which suggests another rally leg next week. But we've seen plenty of these sideways consolidations suddenly break down instead (catching too many bulls leaning the wrong way). The RUT has a very interesting setup right here, one which calls for a reversal back down. It might be good for only a pullback correction to its rally from November 16th, but it does suggest caution about the upside.
We have plenty to think about with the market challenging all-time highs while bullish sentiment is at an extreme and market internals are weak. We all know this market can rally a lot further under these conditions and with an end-of-year desire to close the market at/near its highs, there could be just enough manipulation to keep the bears away, even if it doesn't make much headway to the upside. We might see the market go on hold until we get through the nonfarm payrolls report next Friday, which would provide more clues about what the Fed might do later in December. And of course the market could stay on hold until the next FOMC announcement.
The risk is to the downside without a lot of upside potential but we're entering the jolly season and the bulls could still pull a ho-ho-ho on the bears. Trade carefully over the next couple of weeks and in the meantime, enjoy your Thanksgiving day away from the market.
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