The stock indexes made it back down to their January lows (some with higher, some with lower lows) for what looks like might be a successful retest. The week finished negative (again) but the setup looks good for some bullish follow through in the coming week, which would be typical for opex.
Week's Market Stats
Friday's Market Stats
As you can see in the tables above, Friday finished strong but for the most part it wasn't enough to erase the losses for the week. For the week the banks were weak and the semiconductors were also weaker, both of which are not helpful for the bulls. There's certainly the possibility Friday's bounce will get turned around and the indexes could break lower. But at the moment it's looking like we should get a reprieve from the selling.
For the first six weeks of this year we've seen four of them down. The bounce off the January 20th low gave us two positive weeks but the bounce failed and prices dropped back down to the January lows. If the bulls can follow through on Friday's buying with some more buying in the coming week we'll see some nice bullish divergences against the January 20th lows. The market is clearly oversold and the setup looks good for at least a little larger bounce correction before the bears return.
Part of this past week's volatility was due to Janet Yellen's testimony before Congress and she was grilled a little more sharply than we've seen in the past. Typically softballs are tossed the Fed Chairperson's way so that they're easier to return. But apparently lawmakers, like people in general, are starting to lose faith in the Fed and what they can do. Many are now blaming the Fed's December rate increase for the stock market decline and it's likely it was a catalyst but of course we know the market is all ready for a move before the catalyst arrives. We just never know what the catalyst will be.
In her testimony Yellen started preparing the market for negative interest rates (NIRP), which many European countries already have and Japan has now started. In the race for the bottom in fiat currency devaluations the U.S. will be forced to follow in order to remain competitive with our exports and so as not to import deflation (import prices were down another -0.2% in January, following December's -0.3%). The Fed is talking about the possibility of NIRP, even if they say it's not likely, is a way for them to prepare the market (and the banks since it would hurt their earnings) for the likelihood. It's a move that would drive Treasury yields even lower and that will obviously have a huge negative impact on savers and retirees looking to earn income from their savings. Get ready for it to happen and possibly before the end of this year.
One of the hopes from going nuclear with NIRP is that it will force banks to lend, savers to spend and entice borrowers to borrow more. Companies would borrow more and buy back more stock in hopes of improving their earnings per share and drive stock prices higher. But when Japan announced their implementation of NIRP it generated only a brief rally before dropping nearly -8%. The Nikkei index just closed one of its worst weeks in years. So much for NIRP helping the market's psychology. The media, and Congress, are rightfully beginning to question NIRP and all the other failed policies of the central banks. They are out of ammo but you can bet they're not done trying more of the same failed policies on us.
The only thing that has worked to boost the stock market is liquidity and that comes from QE. I think therefore we can expect QE4 from the Fed before they go NIRP on us. The problem for the Fed, and by extension us taxpayers, is that the Fed is already deep in the hole and essentially insolvent now (especially if they use mark-to-market valuations instead of their make-believe valuations). Adding trillions more to their debt will only significantly weaken the entire financial system. The only one to bail out the Fed is the government but I have to wonder if another bailout would be the final straw for people who are already frustrated and angry with the government and bankers.
But that's something in the future to worry about. As traders we just want to know what's going to happen next week and try to get a piece of the move. I want to kick off the chart review with a look at the RUT's weekly chart but before I do that I want to show a chart I've shown relatively recently to highlight the downside risk over the next few years and then compare that to the RUT's pattern, which suggests we might actually be looking for something more bullish this year before the big bad bear snaps his jaws shut.
The big expanding triangle for the Dow shows the throw-over above the top of the triangle in 2015 and the subsequent decline from there. First thing to note is how small the pullback is so far. All the wringing of hands and gnashing of teeth for such a relatively small decline. If the decline really gets going I can only imagine the angst, especially since the 2007-2009 decline is relatively fresh in everyone's mind. But take note of the expanding triangle because I'm going to show a similar one for the RUT. Following the 2000 high we have an a-b-c-d-e wave count, which is why the 2015 high fits as THE high.
Dow Industrials, INDU, Monthly chart
Now look at the RUT's expanding triangle pattern on its weekly chart. The move down from the June 2015 high is a 3-wave move, as it should be inside a triangle pattern. The bullish interpretation of this pattern suggests we're going to get another rally to a new high this year and back up to the top of the expanding triangle before it then drops back down to the bottom of the triangle, perhaps in 2018. While I don't believe this will play out I think it's important to always try to see how the market could do what I don't expect. The same pattern for the DOW, in a larger-degree pattern, called for another rally leg up to the top of the triangle following the 2009 low. We couldn't know then, just as we can't know now, if a large rally for the RUT will happen but it's a possibility (even if that possibility is not a high probability, imho).
Russell-2000, RUT, Weekly chart
Instead of expecting another rally to a new high for the RUT this year, I think the higher-probability pattern is the bearish one (bold red depiction), which suggests a bounce correction and then a continuation lower. Assuming we'll get the bounce (wave-iv on the chart), maybe into April, we should then get another new low to complete a 5-wave move down from last June. The H&S top points to about 860 for a downside objective, which would be a test of price-level S/R at 868. Since I'm expecting a 4th wave correction, it can't overlap the wave-i low (the September 2015 low near 1079), so if did then I'd turn more bullish.
The daily chart shows what I think are the two higher-probability moves in the next few weeks, both bullish so at a minimum I think we should be looking to play the long side into March. If the RUT breaks below 940 I would turn short-term bearish but until that happens I believe we have some oversold conditions that need some relief. The 5-wave move down from December 2nd, with the 5th wave nearly achieving equality with the 1st wave (at 941 with Thursday's low at 943), gives us a very good setup to play a reversal to correct the 5-wave move down. How the correction will play out is the big question. We could see a quick high bounce up to price-level S/R near 1080 (light-red dashed line), which would also be a 50% retracement of the decline from December, or we could see a slower choppy sideways/up kind of consolidation into April that maybe back-tests the broken uptrend line from March 2009 - October 2011 and retraces 38% of the decline from December (a typical retracement for a 4th wave correction), which is near price-level S/R at 1040. It could get whippy so trade carefully (4th wave corrections are difficult to trade).
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 990
- bearish below 940
SPX also has what looks like a completed 5-wave move down from December 2nd and while the larger pattern since last year's highs is subject to different interpretations between the indexes, it's the 5-wave move down into Thursday's low that has me looking for a bounce correction. It's too early to tell if it will be a sharp bounce above 1950 are a flatter correction but the expectation is for the market to continue lower once the bounce correction has finished. I think bullish through the rest of this month (or at least not bearish) is the way to work your trades but again, 4th wave corrections have a tendency to whip traders around. It's the reason I call these corrections "feed your broker" corrections. Traders tend to trade too actively and get stopped out a lot. The first thing the bulls need to accomplish, to confirm the leg down from December 29th has completed, is break the downtrend line from that high, currently near its 20-dma at 1885.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1885
- bearish below 1800
From a shorter-term perspective the bulls have confirmed the leg down from February 1st has completed by breaking out of the down-channel from that high, which it did on Friday. After a little back-test midday it then pushed higher and finished just under price-level S/R at 1867 (its August 2015 low). We now wait to see if that resistance level will result in a pullback Tuesday morning or if instead we'll see it gap up over resistance, in which case look for 1885 next.
S&P 500, SPX, 60-min chart
Thursday's low for the Dow was a little higher than its January 20th low, leaving a slight truncation for its 5th wave in the decline from December 2nd. This assumes the leg down has completed, which still requires of a break of its downtrend line from December 29th, near 16200, to help confirm the completion. I show the possibility for a choppy sideways triangle consolidation into March before heading lower but obviously that's just a guess (it's a common pattern for 4th wave corrections). The other possibility is for a sharper a-b-c bounce into the end of the month before heading back down. As with the prior 4th wave correction (January 20 - February 1), it's nearly impossible to know what form the correction will take, which is all the more reason to trade carefully (or watch) until we see how it's setting up for the next leg down.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 16,200
- bearish below 15,500
The tech indexes are a little different than the other indexes in that their December 2nd highs were slightly higher than their November highs and that makes it possible we're looking at the completion of a 1st wave down from December (with the 5-wave move down into Thursday's truncated low). This calls for a sharper bounce correction in the coming weeks, not a sideways choppy one. This is one of the primary reasons why I think playing the long side could work nicely. Rather than get chopped to pieces in a sideways consolidation we could have a couple of very nice opportunities to trade long. It's still only a trade because the correction should be followed by a sharp decline (as a 3rd wave down) but at least for now I'd look to buy the dips rather than sell the rips. We could see NDX retrace at least 50% of its decline, which would have it back up to 4321, and potentially back up to its 200-dma and 62% retracement at 4420. It won't be a straight-up trade but that's a 400-point potential into March. The first thing the bulls need to do is break out of the down-channel, the top of which is currently near 4100. It might not stay above 4100 but it would be the first confirmation that the leg down from December 2nd has completed.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 4100
- bearish below 3787
Treasury bonds rallied strong this past week but then sold off hard after gapping up Thursday morning. Yields of course did the opposite and as you can see on the TNX weekly chart below, the intraweek reversal left a bullish hammer at support (its May 2013 and January 2015 lows near 1.65%) and it almost it almost recovered its broken uptrend line from July 2012 - January 2015, near Friday's high at 1.76%. The descending triangle idea is still valid although weakened with this week's break below the January 2015 low. Instead of a bounce back up to the top of the triangle, which is the downtrend line from June 2007 - December 2013, currently near 2.28%, we might see only a sideways choppy consolidation before dropping back below 1.65% and then lower. But at least at the moment the bullish weekly candlestick suggests this week's low should hold for a while and rising yields would mean selling in bonds and that money should rotate into stocks.
10-year Yield, TNX, Weekly chart
The banking index is showing how well it trades technically. Thursday's low at 55.99 achieved the 162% projection for the 2nd leg of the 3-wave move down from July 2015 at exactly 55.99 and the sharp reversal back up off its uptrend line from March 2009 - October 2011 looks bullish. Friday's big white candle also has back above the 38% retracement of its 2007-2009 decline, at 57.25, and its April 2010 high at 58.83. There was a lot of support at 55.99-58.83 and all three support levels were broken/tested on Thursday but recovered with Friday's rally. It's the weekly close that matters. It looks like we should see only a correction to the decline before another leg down for perhaps just a minor new low but we'll have to see what develops in the next week. In the meantime it looks more bullish than bearish.
KBW Bank index, BKX, Daily chart
Since the low on January 20th for the TRAN it has been in a very choppy bounce back up and it's been struggling with its broken uptrend line from March 2009 - October 2011 for the past two weeks. It's likely to make it higher if the broader market can put a higher bounce together but the pattern for its bounce looks like a correction to the decline that could fail at any time. Maybe it will make it up to its 50-dma, which will be near 7180 on Tuesday. It would look at least short-term bullish above 7200, probably with a rally with the broader market.
Transportation Index, TRAN, Daily chart
On Tuesday the US$ dropped below its uptrend line from August-October 2015 and the bottom of a parallel down-channel from December. Friday's bounce took it back up to the bottom of the down-channel and it then pulled back, leaving it looking more bearish than bullish at the moment. There's a downside price projection at 94.46 where the 2nd leg of its decline from December would be 162% of the 1st leg down and that could set up another bounce within its large sideways consolidation pattern that I've been showing on its weekly chart. Because it's a corrective pattern it's hard to know what the next move will be but for now I see it continuing to trade inside a 94-100 price range before breaking out to the upside later this year.
U.S. Dollar contract, DX, Daily chart
What else can you say about gold this week other than "Wow!" Can you say parabolic? The rounding bottom off the December low led to a huge spike up in the past two weeks (up nearly $150) and it's either in an honest-to-goodness breakout to the upside or it's a parabolic spike that will end in tears for gold bulls. What happens following the spike will provide some clues -- a stair-step move higher over the next couple of weeks would have it looking more bullish whereas a spike back down will have it looking like just another overzealous spike in gold prices with no follow through. Thursday's high tagged the top of a parallel down-channel for price action since its 2013 low and from a longer-term pattern perspective it's not hard for me to argue the need for another leg down to the bottom of the channel and price-level support near 1000 by this summer. But if it can rally above Thursday's high near 1264 and hold above the top of the down-channel on a back-test it should then be able to test 1285, which is the 38% retracement of its 2001-2011 rally and its January 2015 high near 1308.
Gold continuous contract, GC, Weekly chart
Interestingly, Mark Cuban was on CNBC on Thursday and said he has bought "a lot" of call options in gold. Apparently that caused a rush into GLD call options on Thursday, which outnumbered put options 4-to-1. One trader bought 20,000 GLD 140 call options for $0.30 each, betting $600,000 that GLD will be above $140.30 by March expiration. Thursday's high might have been partly a result of all these traders running into bullish plays and now the buying might have been exhausted. GLD's weekly chart looks just like the gold contract chart above and it stopped right at the top of its parallel down-channel. I hope the trader who bought the 140 calls was a way to create a bear call spread instead of making a bullish directional play. That long call position is down -$140,000 as of Friday. But hey, I guess a rally to 1400 for gold in the next 5 weeks is a possibility.
Silver spiked up with gold and it too slammed into resistance and stopped. We now wait to see if it can stair-step higher or quickly retrace its parabolic spike. Thursday's high was at its downtrend line from May 2011 - December 2012 and a back-test of its broken uptrend line from August-October 2015. A break above these two lines, with a rally above 16.15, would be more bullish but at the moment I have to wonder if silver's rally is the real deal or just an overreaction with gold. Silver is associated more with industrial uses and we know industry is slowing. But price is king and we now wait to see what the next move will be.
Silver continuous contract, SI, Daily chart
On Friday oil got a nice bounce and it continues to track closely with the stock market. The tight relationship between the two will disconnect at some point but for now they seem to be connected at the hip. I see the potential for oil to continue lower to the bottom of a descending wedge, near 24, but with the stock market looking like it's ready for a larger bounce there's a good chance oil will also. Thursday's low was a good test of the January 20th low with lots of bullish divergence at the moment. An a-b-c bounce off the January low could see the c-wave head up to price-level S/R near 38 and its downtrend line from June-October 2015, currently near 40. So at the moment I see downside potential to about 24 and upside potential to 38-40.
Oil continuous contract, CL, Daily chart
Last week was relatively quiet as far as economic reports and the coming week will be a little busier. Monday is closed so the first reports will be Tuesday and the Empire Manufacturing index is expected to be "less bad" with a jump up to -9.9 from January's -19.4. Wednesday will be a busy day with PPI numbers, housing starts/permits (no big changes expected) and industrial production, which is also expected to improve slightly from December. The FOMC minutes will be out Wednesday afternoon. The Philly Fed on Thursday and CPI numbers on Friday will finish the week. With the Fed in data-dependent mode and market expectations that the Fed has been put on hold by the market, these numbers will be evaluated carefully to try to figure out how the Fed might react.
The week finished down again (4th down week in the 6 weeks of the new year) but the big recovery off Thursday's lows, which were a test of the January 20th lows, left a weekly bullish hammer candlestick at support and bullish divergence on the daily charts. It looks like a good setup for a rally in the coming week, which of course is opex and we might get the typically bullish opex. Thursday's decline fits as the head-fake move in front of opex (pull the market down, get the shorts in and longs out and then flip it around to spark short covering and longs wanting back in). This has been a well-engineered move in the past and has made the big trading houses a lot of money by selling puts and buying calls on the pull-down.
Assuming we'll get a bounce in the coming week it's not clear how it will develop. The larger pattern suggests we should be looking for just a bounce correction, which could last several weeks and through March, and then head lower again. But whether the bounce will be a sideways multi-week choppy consolidation or instead a sharp short-lived a-b-c bounce can't be known yet. Like the previous bounce off the January 20th low, we have to let it develop in order to see how it might play out and then look for a setup to play the next leg down. But for now, look to buy dips since I think that will be the direction of least resistance. Just keep your trades short term so you avoid the whipsaws.
I hope you have a good 3-day weekend away and recharge your batteries. Good luck in the coming week 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