Heading into the final two trading days of the week/month/year had some traders taking money off the table before we enter the new year. The past two years were not kind to bulls in January and that could be causing some concerns about this coming January.
Today's Market Stats
Profit taking hit the market early today and it could be the start of a deeper pullback/selloff if it follows the pattern in December 2014. But the last day of December in front of another holiday weekend leaves both sides guessing what might happen in a low-volume environment.
As expected, today's trading was another low-volume day, about the same as yesterday, but the internals were a little more bearish than yesterday's bullish internals. This could be a clue about what to expect on Thursday, the last trading day of the week/month/year. In 2014 the stock market peaked on December 29th (Friday, December 26th for the DOW) and started a strong selloff in the final two days of the month
The strong selling at the start of 2015 continued for the first three trading days of January and SPX dropped about 101 points from the December 29th high before starting a whippy period for the rest of the month. In 2013 the market peaked on December 31st and then got whippy for the first half of January before selling off strong into the end of the month where SPX dropped about 110 points. Fear of something similar happening could be prompting some profit taking before the end of this year.
If we see more selling tomorrow I suspect early next week could see additional selling so take your clues from tomorrow's price action and hedge/protect your positions accordingly.
The only economic report of meaning today was the Pending Home sales for November, which declined -0.9%. That was a disappointment since the market expected +0.5% following +0.4% in October (which was revised higher from +0.2%). The month of November did not experience much in the way of bad weather so the decline in home sales is not a good sign when combined with the many other economic reports showing a slowing economy. Then when you combine the slowing corporate earnings and a Fed that is trying to tighten monetary policy you have an environment that is not supportive of a stock market rally.
Moving into January could be a period when fund managers decide they'd rather be in cash than in riskier asset classes. We've seen a strong decline in the junk bond market and that's expected to only get worse, especially from those companies that borrowed heavily but are now suffering from an earnings decline and do not have the ability to service their debt. This is happening to more and more companies but the energy field is the poster child for this problem.
And then we throw in all the debt for automobiles, much of which is has been taken on by "under" qualified individuals (does fogging a mirror ring any bells?) and student loan debt, we have trillions of borrowed money that is in jeopardy of never being paid back. Higher numbers of bankruptcies and debt forgiveness are expected and it's all part of what will become the next deflationary wave. Holding the market up into the end of the year (we'll see if SPX can hold above 2058.90 following today's low near 2062) could be followed by anxious fund managers quickly unloading inventory as the signs of economic weakness continue to grow and that's what makes this January again especially vulnerable to a strong selloff.
We can of course only speculate what the market will do. It has held up in the face of deteriorating fundamentals for a long time and it could continue to do so. You know the saying -- the market can remain irrational far longer than you can remain solvent fighting the market. So we'll stick with the charts and look for guidance from the price action.
There is the potential for the market to hold up at least into April if it chops its way higher as depicted on the SPX weekly chart below. I say choppy because of the way it has started and if it continues higher it will likely form a rising wedge (ending diagonal 5th wave) that would frustrate traders on both sides. The kinds of strong reversals we've been seeing would likely continue. This week's price action provides very few clues about what to expect. Price poked above the 50-week MA, near 2063, but closed on it today. Closing above 2058.90, to keep it in the green for the year, and above its 50-week MA would at least keep the bullish hopes alive as we head into January. But a decline below the December 14th low near 1993 would be a bearish warning sign that much strong selling could follow.
S&P 500, SPX, Weekly chart
Tuesday's rally brought SPX up to the top of a parallel down-channel for price action following the November high and today's selloff leaves it looking like a test of the top of the channel and a bearish kiss goodbye today. But it only pulled back to slightly below its 50-dma, near 2067, and slightly above its 200-dma near 2061. A rally above Tuesday's high at 2081.56 would point to at least a test of price-level S/R near 2090 and then perhaps its downtrend line from July-November, near 2106. But a drop below Monday's low at 2044 would be a bearish heads up and with the risk of a strong selloff in January I'd be looking to play the short side from there.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 2090
- bearish below 1993
One pattern I've been monitoring is an a-b-c bounce pattern off the December 14th low. Two equal legs up points to 2088.94 and with today's 3-wave pullback there is the potential for another rally leg to follow. That's why a rally above yesterday's high would have me looking for 2090. But there is the potential for a very bearish pattern to now be followed by a strong selloff in the weeks ahead. The bearish wave count calls the setup here the start of 3rd waves at multiple degrees (a 3rd of a 3rd wave to start a larger 3rd wave in the decline from July). It's this potential that could drop SPX in a hurry down to the trend line along the lows from November 16 - December 14. That would mean down to about 1970 in the first week of January, which would be a decline of about 110 points from Tuesday's high. That in turn would match what happened into the January lows in 2013 and 2014. The bulls need to rally the market on Thursday otherwise we could be looking at a nasty week for the bulls next week.
S&P 500, SPX, 60-min chart
The DOW's pattern is very similar to SPX except it's a little weaker. It has not been able to break through its downtrend line from December 2-16, which it had poked above yesterday but closed on it. Today's little selloff fits as a bearish kiss goodbye against resistance. But, similar to SPX, it has only pulled back in a 3-wave pattern and is holding above its broken 20- and 200-dmas, now near 17531 and 17536, resp. It closed slightly below its 50-dma near 17618. Below Monday's low at 17437 would be more bearish and a strong selloff could follow as a 3rd of a 3rd wave down in its decline from November. From a bullish perspective, I see the potential for at least one more push higher to 17823, although not likely tomorrow. Of course never say never since it's possible the DOW could be rallied 220 points in a low-volume environment. In addition to that level being the 2014 closing price, it's also the location of the May-November downtrend line.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 17,850
- bearish below 17,437
Since the November high and low NDX has been chopping sideways within the November price range of roughly 4500 to 4740. The sideways consolidation following the rally off the August low can certainly be considered a bullish continuation pattern but it's also been a common topping pattern at important highs. I see the potential for price to chop its way a little higher into January and reach the price projection at 4820, which is where the 5th wave of the move up from August would equal 62% of its 1st wave. But following a failed back-test (so far) of its broken uptrend line from August-September it's currently a setup to get short.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 4740
- bearish below 4513
The poor RUT will finish 2015 well into the red, currently down -4.6%. Compared to the NDX, currently up +9.8%, it's a little surprising the small caps haven't done better this year. The main culprits are the small energy-related stocks. Oil service stocks are down -12.6% while oil is down "only" -11.6%. December is supposed to be a strong month for the RUT, as can be seen on the chart below, which shows the typical price action during December. The RUT is the top (blue) line and it shows it's typically up about 3.25% for the month. This month it's down -4.0%. Not a good showing at all and in fact most indexes are finishing in the red for December. The utility index (a defensive sector) is in the green (+3.4%).
The RUT had an impulsive decline from December 2nd into the December 14th low. That has been followed by a choppy bounce pattern which has it looking more like a correction to the decline, which in turn suggests another leg down once the bounce completes. I see the potential for another small bounce higher, perhaps up to 1164-1170, before turning back down but it's also quite possible the next leg down started today.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1170
- bearish below 1120
The bond market continues to act confused as the sideways chop continues. The TNX (10-year yield) chart below shows the bounce off the December 11th low has it back up testing its downtrend line from June 2007 - December 2013, which is the 4th time since the November 9th back-test. The more times resistance is tested the weaker it becomes and therefore there's a decent chance it will break this time, in which case I'd look for a rally (with additional selling in bonds) at least up to its broken uptrend line from July 2012 - May 2013, currently near 2.4%. It would be more bullish above that level. But the choppy price pattern suggests we are likely to see a continuation of the sideways consolidation into January/February before breaking down. Below 2.08% would be more bearish and below 2.0% would indicate the next leg down is underway. I continue to believe TNX will be below 1% before the bond bull market has completed.
10-year Yield, TNX, Daily chart
A slightly different perspective is offered by TLT, the 20+ year Treasury bond ETF. The June-August rally has been followed by a sideways consolidation and it's possible to call the pattern complete (a-b-c-d-e wave count off the August high). If so it will then be followed by another rally leg to at least match the June-August rally, which points to 133.71 for two equal legs up from June, or the 62% projection at 128.34 for what could be a larger sideways consolidation pattern. This bullish pattern calls for a rally in Treasuries from here so a bounce off its uptrend line from December 2013 - June 2015 would give traders a good setup to get long and then use the low for your stop.
20+ Year Treasury Bond ETF, TLT, Daily chart
The banking index, BKX, has been unable to break through its nest of 20-, 50- and 200-dmas, currently located between 74.00-74.50, and today's decline dropped it back below those moving averages. There's nothing really firm to indicate one direction vs. the other since it's chopping up and down inside a contracting price range since the December 4th high. At this point I'd say BKX needs to break above 76.10 to look more bullish and below 71.82 (the December 21st low) to look more bearish. I think the setup here is bearish but there's a lot the bears still need to do in order to confirm the setup.
KBW Bank index, BKX, Daily chart
Since the December 14th and 18th lows for the TRAN I've been thinking we'll get a bigger bounce correction before heading lower again. That remains a possibility and it's what I show on its chart below. But the failure to get back above price-level S/R near 7650, as well as its 20-dma, currently near 7639, is bearish. A correction to the leg down from November 20th might go sideways instead of creating a higher bounce before heading lower again. As long as it remains below 7650 it certainly remains bearish.
Transportation Index, TRAN, Daily chart
I normally show a weekly chart of the U.S. dollar to keep the sideways chop since March in perspective. I've been showing an expectation for the sideways chop to continue into the first half of 2016 and that hasn't changed. Trying to figure out how the choppy pattern might play out is the difficult task but for the moment we have a good setup for at least another leg down for a 3-wave pullback from December 3rd. Two equal legs down points to 95.95 and that projection crosses its uptrend line from August-October mid-January. A drop below 95.95 would be more immediately bearish but likely only for a decline to the bottom of this year's trading range (93-94) before heading back up.
U.S. Dollar contract, DX, Daily chart
Similar to what I said about the TRAN above, I've been expecting a higher bounce correction for gold before it heads lower. But the more it consolidates near its December 3rd low the more it's going to look like a sideways correction instead of a higher bounce correction. I see the potential for a bounce up to about 1090 and then 1116-1118 if it climb above 1090 but that bounce needs to get started sooner rather than later. Regardless of the bounce/correction, the larger pattern continues to suggest lower prices before we'll see a good opportunity to start loading up on the shiny metal (silver too).
Gold continuous contract, GC, Daily chart
Crude inventories bumped back up this past week, +2.629M barrels, which follows a drop of -5.877M barrels the prior week. This morning's report might have had something to do with the pullback in oil today but at the moment it's hard to determine whether oil will head lower from here or give us at least a stronger bounce. As shown on its chart below, I'm looking for either a rally or a choppy bounce/consolidation before heading lower again. Above 43.50 would point to a higher bounce/rally but until that happens it remains possible we'll see a choppy consolidation/decline into a tradeable low around February.
Oil continuous contract, CL, Daily chart
Tomorrow's economic reports include the unemployment claims and Chicago PMI. With the steady drumbeat of slowing economic numbers we'll see if the Chicago PMI disappoints or comes in a little stronger than November, which is what the market is expecting.
Today's selling might not have been anything more than a little profit taking and for the last day of the week/month/year we could see some buying, maybe even strong buying, in a low-volume environment if there's going to be an effort to prop the market up as high as possible for and end-of-year finish. That can only be speculated here, especially since the weakness in the last two trading days is what we saw last year. That weakness turned into strong selling the first three trading days of January. This and the selling that occurred in January 2014 could have many fund managers looking to get out of the way earlier rather than later.
It's not hard for me to see some additional upside potential for the market, even if it's just for a small choppy move higher into next week. But the bearish interpretation of the price pattern is especially bearish, calling for multiple degrees of 3rd waves to the downside. This bearish pattern calls for a sharp and strong decline in the coming weeks and like January 2014 and January 2015 we could see SPX shed more than 100 points in a hurry into January 2016. You'll want to play the short side if that happens. Follow the key levels, up and down, on the charts and play the direction of the break. In the meantime be careful about the potential for more whipsaws and reversals of reversals.
I'd like to wish everyone a very Happy New Year and I hope 2016 will be better than 2015. As traders we like to see big moves and a trending market is a joy to trade. That's not what we had in 2015 as the market simply traded sideways in a choppy consolidation. It's a very difficult time to trade and I know many traders who were chopped to pieces. It's small comfort to know you're not alone if you were one of them but know this past year has been one of the more difficult to trade, especially if you're a trend follower. If we've entered the next (and last) bear market leg down it's also not going to be easy to trade but you will have an opportunity to make significant money on the short side if played correctly. And hopefully that's what we at OIN can help you do. If you're still sitting on the fence about re-upping, be sure to sign back up with us and let us help with some trading ideas and more learning. The subscription is a very small price to pay for the kind of learning that should help you tremendously. And again, thank you all for your subscription that enables us to do what we love to do (teach a man to fish...).
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Good luck and I'll be back with you next Wednesday. I'll also be taking over from Leigh Stevens for the weekend Index Wrap, starting this coming weekend. I hope to "see" some of you there.
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