The market got hit this morning following yesterday's after-hours earnings report from AAPL but then recovered nicely. Just as it was about to stand up, the market got hit again by the FOMC announcement, which kept rates the same but left the market with a mixed message.
Today's Market Stats
The market tried gallantly to rally today after an initial down opening following the disappointing reaction to AAPL's earning's last night. It actually rallied strongly (about 30 points for SPX) into a midday high but then slowly pulled back into this afternoon's FOMC announcement. Following the usual cha-cha-cha after the announcement the market then sold off sharply. The net result is a sideways market following last Friday's high and a lack of direction at the moment.
Part of the market's concern is whether or not our economy is heading into a recession (it's been my contention that we're already in one but it won't be recognized by economists until we get another quarter or two of data). The stock market typically tops out about six months before it's announced we're officially in a recession so perhaps that will mean we'll see an announcement this summer. But our stock market has been so disconnected from reality and pumped up on extra liquidity from the Fed that the normal economic metrics have had little to do with stock performance.
I also hear many say we won't be in a recession as long as the yield curve has not inverted and they base their decision to stay long the market based on that. But I don't think it's hard to agree on the fact that yields have been grossly distorted by the Fed and that makes this argument more difficult. The bottom line is that there are many arguments about whether or not the economy is weak enough, and getting weaker, that we should be concerned about the end of the bull market. I think January's decline has answered that question for us (actually August did but many believe it was just another flash-crash correction in the ongoing bull market).
Adding to the difficulties in figuring out the economic data is that it's been voodoo economic numbers from organizations that have a desire to "massage" the data. Jim has been regularly posting the chart of GDP growth expectations from the Atlanta branch of the Federal Reserve. It's at least a lot more accurate (not as optimistic as the Fed always is) but it too has been ratcheted down repeatedly over the past year. It's currently showing an expected Q4 growth of just +0.7% but that's still using the government's massaged economic data. At the beginning of the quarter we were told to expect +2.7% growth. Oops. And it's that oops that's causing some concerns by investors. Smart money has been exiting this market stealthily for a while.
The January ISM (Institute of Supply Management) report was the sixth consecutive month of decline for the manufacturing index and the past two months have been below 50 (contraction territory). The response by many has been "so what, the services component is still strong." I think that's turning a blind eye to the problem of a slowing economy that can be tracked by many other measures, such as transportation. Every measure of transportation, whether by truck, rail or ship, is in a strong decline.
As much as the Fed has been trying to fight deflation, they're losing the battle. The PPI (Producer Price Index) has been declining since last summer. The Empire State Manufacturing index, an important gauge for the country, dropped significantly into negative territory. And yet the Fed's economic models told it the economy was strong enough to warrant a rate increase in December. I think history will say the Fed caused the next market crash but in fact it had already started. But I don't mind them getting the blame since they've completely screwed up in so many ways. Maybe it will help to get them abolished before the bear market is dead.
The Fed relies heavily on employment data, one of Janet Yellen's favorite measures of economic strength. The building could be burning down but she sees firemen at work and feels safe. The problem with the employment numbers is that it's only a surface number. Beneath the surface you can see so many problems such as the kinds of jobs (low paying, part time, one person holding two or three of those part time jobs, etc.). A big problem with using employment data is that it's a significant lagging indicator and often peaks the same time as the stock market in front of a recession. The real numbers, such as business sales down -4%, CapEx orders down -6% year-over-year, trading goods volume down -7% y-o-y, exports down -12%...you get the picture and it's not a pretty one.
So with all that, how does the Fed see things? If you read the minutes you'll see they believe the labor market continues to improve even as economic growth slowed. They changed the language of how household spending and business fixed investments are doing, saying spending is increasing at "moderate rates", which is a change from "solid rates." They did acknowledge there's a global drag on the U.S. economy and that they're not as confident that inflation will climb (they're worried about "disinflation). They kept the language that they expect inflation to rise to 2% over the medium term (not defined) as the "transitory effects" of the decline in energy prices dissipate and the labor market strengthens. They dropped the sentence that said they saw an improvement in the labor market and that they're confident that inflation will rise. Their concerns resulted in a decision to pause rate hikes while they remain "data dependent." I continue to believe the Fed will lower again (heading for negative rates, like Europe) before they raise rates further.
The market apparently did not like the fact that the Fed hasn't turned more overtly accommodative, even though their statement says they remain accommodative. The other concern is the Fed's recognition, in their language changes, that the economy is not doing as well as they thought in December. Well, I at least have to credit them for noticing the obvious.
Interestingly, this afternoon's strong selloff, which might not be quite done, could be setting us up for another rally to give us a larger bounce pattern off last Wednesday's low. But once this bounce off last Wednesday's low has completed, which it might have already done, we should see the market continue lower.
I'll start off with the INDU's charts tonight and the chart below is a weekly line chart, which shows the important weekly closing prices. I've drawn an up-channel to show the 2009-2015 rally and how the Dow dropped down to the bottom of the channel last August. The bounce into the November high was at the midline of this up-channel, a common rebound/failure point, and then this month's decline has seen a break below the bottom of the up-channel. This is a significant break and it's a very strong sell signal following the completion of the 2009-2015 bull market. Notice too that the January decline has also dropped price below the trend line along the highs from 2000-2007, which I'm interpreting as the top of a large expanding triangle continuation pattern off the 2000 high (the bottom of the expanding triangle is at the bottom of the chart). The bearish interpretation of the price pattern calls for the Dow to continue lower into the fall, potentially getting down to the 13K area before setting up a rally into the end of early 2017 to a lower high and then hard down next year.
Dow Industrials, INDU, Weekly line chart, 2008-present
The weekly chart of the DOW below zooms in closer to part of another parallel up-channel which is based on a trend line along the highs since May 2011 and a parallel line attached to the October 2011 low. The difference with this chart is that it's drawn on a log scale chart. You can see the August low almost made it down to the bottom of the channel and the January decline did make it down to the bottom. Once the bounce off last week's low is finished (I'm only expecting a bounce, not a new rally but that's yet to be proven) we should see the Dow drop below the bottom of the channel and act as resistance on a subsequent bounce correction. As depicted on the chart, I'm looking for the market to stair-step lower in a pattern similar to what I'm showing. If the Dow gets above 16600 I'd turn at least neutral.
Dow Industrials, INDU, Weekly chart, 2014-present
The daily chart below shows the daily red and white candles, which clearly indicates a confused market. I've been expecting a higher bounce pattern and I'm sticking with that for now but it means the market should rally on Thursday, perhaps after this afternoon's selloff continues a little lower Thursday morning. Watch carefully if the Dow makes it back up to its 20-dma, currently at 16500 but coming down fast, since it could be the limit of its bounce correction.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 16,600
- bearish below 15,300
The SPX daily chart below shows the same expectation as for the Dow -- another leg up for its bounce off last Wednesday's low is what I'm looking for, but the risk for those long the market (and wannabe shorts) is that the bounce completed today and now we'll start the next leg down sooner rather than later. I like a February 1 turn date (Fibonacci cycle) and so far the price pattern is supporting that idea. As with the Dow, we could see the 20-dma, currently at 1940 and dropping, act as resistance, otherwise a bounce up to the bottom of a previous down-channel, near 1950, makes a good upside target. That would also be a test of the bounce high on January 13th (the previous 4th wave in the leg down from December 29th) and a 50% retracement of the December-January decline, at 1947.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1950
- bearish below 1820
Without getting too detailed about the short-term pattern following last Friday's high, it would look good as a completed correction at a price projection at 1864 but might find support at price-level support at 1867 (August 2015 low). That makes 1864-1867 a good downside target, if reached, for an opportunity to trade the long side into Friday (I would not hold long over the weekend). From 1864 we'd have a projection to 1960 to achieve two equal legs up from last Wednesday's low. But a 62% projection for the 2nd leg up would be near 1924 and that's the first upside target I'd look for. The potential for a move up to 1950 would be in the middle of the two projections. But if SPX drops much below 1860 I'd start to think a little more immediately bearish (certainly not bullish).
S&P 500, SPX, 60-min chart
I've been watching the two uptrend lines, from June 2010 - November 2012 and March 2009 - August 2015, since the NDX first tested the upper one (from June 2010) on January 14th. Those lines are currently near 4168 and 4126. The short-term pattern looks like we should see lower prices tomorrow morning but I wouldn't be surprised to see an immediate turn back up in the morning (for a typical reversal of the post-FOMC move). Whether it's right away or after another poke lower in the morning, the short-term bullish pattern calls for another leg up to give us a larger a-b-c bounce off last Wednesday's low and then another leg down, possibly for just a test of the low or perhaps a little lower before setting up another bounce.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 4478
- bearish below 4050
The daily chart of the RUT shows the alternating red and white candles since last Friday and in a narrowing trading range. Last week's rally has been followed by a sideways consolidation in what looks like a bullish continuation pattern. This points to another leg up and the first upside target, and potentially strong resistance, is 1040, although two equal legs up from January 20th points to 1060. But I'm looking at price-level S/R at 1040 (October 2014 low) and slightly below that is its broken uptrend line from March 2009 - October 2011, near, 1036, the top of a parallel down-channel for its decline from November 30th, near 1032, and the bottom of a previous down-channel for the initial decline from June, near 1029. In other words, there's a landmine of resistance levels between 1029 and 1040, any one of which could blow up in the bull's face. But it also means the RUT would be more bullish above 1040, in which case I'd look for a run up to 1060, if not price-level S/R near 1080.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1040
- bearish below 967
Money has rotated into Treasuries as the stock market sold off and that has lowered yields, which should continue if the stock market is to work its way lower. Assuming yields head lower I see the potential for TNX to drop down to a projection at 1.729% for two equal legs down from June 2015, perhaps a little higher at the uptrend line from June 2012 - January 2015, near 1.77% by the end of February. There will time to evaluate the pattern if and when it gets down there but for now I'm expecting that decline to be followed by another bounce up to the top of its sideways triangle before dropping much lower into the end of the year and 2017. This differs slightly from the longer-term projection I'm showing for the stock market, which don't always trade in synch but often enough to pay attention. But that's later and for now they're both in agreement with an expectation for lower into February.
10-year Yield, TNX, Weekly chart
The banks have been relatively weak this month and that's saying a lot. It's actually been very weak since its December 4th high and there's a good chance we'll see it stair-step lower with the broader market. There's a price projection for the leg down from November, at 55.99, where the decline would be 162% of the July-August decline. But above that level are other potential support levels, at 57.25 and 58.83. The higher level is the April 2010 high and the 38% retracement of its 2007-2009 decline is at 57.25. BKX nearly tagged its 62% retracement last July, at 81.65 (with a high at 80.87), tried to hold support in August-October at the 50% retracement, at 69.45, and now appears to be heading back down to the 38% retracement at 57.25. At the same level is its uptrend line from March 2009 - October 2011 and I would expect this level to be a good downside target and strong support. Notice today's rally failed with a back-test of the bottom of its broken down-channel from July.
KBW Bank index, BKX, Daily chart
The U.S. dollar has been slowly chopping its way up from its December 15th low, which has it looking like a corrective bounce and should turn back down at any time. An uptrend line from December 15th was tested today so a drop below today's low at 98.74 would be the first sign that it could head down to at least 96.56 for two equal legs down from its December 3rd high and likely down to the bottom of its trading range since March 2015, near 95.
U.S. Dollar contract, DX, Weekly chart
Gold is working its way closer to an upside target zone I've been watching for, at 1133-1142. The top of its parallel up-channel for the bounce off its December 3rd low intersects its downtrend line from October 2012 - January 2015 near 1133, which is where its 200-dma is currently located. There's price-level S/R near 1142, which would be a test of its 50-week MA. Once this bounce completes I'm expecting another leg down, perhaps only to its trend line along the lows from December 2013 - July 2015, near 1030 by March, but potentially down to 1000 or below.
Gold continuous contract, GC, Weekly chart
Silver got a little higher bounce this week than I expected to see (it was looking like it would stay inside a sideways triangle) but the pattern off the December 14th low continues to look like a correction to the previous decline. The rally has it testing the top of a parallel up-channel for the bounce (bear flag) and looks ready for a turn back down, otherwise the next resistance level is not until its downtrend line from July 2014 - May 2015, which coincides with its 200-dma, currently at 15.16.
Silver continuous contract, SI, Daily chart
Last week oil dropped down to 26.19, 21 cents below the 26.40 price target I have had on my chart for a long time (for two equal legs down from 2008 in percentage terms). It was also good for a test of price-level S/R that's been traded around since 1984 and was last used support in 2003. So is that it, time to get long? Hmm, maybe not but it could also be late in the game to get short. Ideally I'd like to see a 5-wave move down from last June, although I can make the argument that the 3-wave move down was the last of larger 5-wave move down in an ending diagonal. The bottom line is that I'm watching carefully for bullish signs with an impulsive rally off the low (too early to tell). The first thing oil needs to do is get back above the trend line along last year's lows, currently near its January 2009 low at 33.20. If price consolidates for a bit we could see another leg down toward 20. But the bullish divergence since January 2015 is warning oil bears to be careful.
Oil continuous contract, CL, Weekly chart
Tomorrow's pre-market report on Durable Goods Orders is expected to show more signs of a slowing economy but any upside surprise could spark a rally.
The stock market has been mimicking oil and that could continue since the strong decline in commodity prices and energy-related stocks has finally caught the attention of the stock market. If oil can get above resistance at 33.20 I would expect the stock market to also rally. They're not tied at the hip but at the moment they're trading in synch.
A pattern for the stock market, off last Wednesday's low, looks like a good setup for another rally leg, perhaps after a new low Thursday morning (but a new low is not required). Many times we'll see the Thursday after the FOMC announcement reverse the direction of the post-FOMC reaction. That and the pullback pattern from last Friday suggests another rally leg is coming. But SPX below about 1858 would have me thinking more immediately bearish. Assuming we'll get another rally leg into Friday/Monday, to complete a 3-wave bounce off last Wednesday's low, it will be a good setup to look for a short entry since we should get another leg down to new lows into the first or second week of February. I do not see enough evidence yet that suggests we should be looking for a stronger rally. Instead I'm looking for just a correction to the December-January decline and then lower.
AMZN reports after the bell on Thursday and there are rumors that the company is going to disappoint big time. Of course there have always been and probably always will be rumors about the demise of AMZN's stock price but just keep in mind that it's an important sentiment indicator and sentiment is turning sour. A bad reaction to AMZN could have significant ramifications for the broader stock 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