The stock market got a little extra bounce this morning following yesterday afternoon's late-day bounce, and then went flat into the FOMC announcement. The reaction was barely noticeable to the announcement until the final 30 minutes of the day when the market sold off. Now the question is whether the next day will be a reversal of that move, which is typical.
Today's Market Stats
The day was mostly positive until the last few minutes of the day after the market sold off in the final 30 minutes. But the pop up in the morning followed by a rally added to the bounce off Tuesday's low and then the market flattened out while waiting for the FOMC announcement and Janet Yellen's conference. There was virtually no reaction to either but then some traders got nervous into the close and decided to sell.
The selling into today's close might have been a head-fake move, not that we've ever seen that happen before. This is opex and we haven't had a good opex rally yet so pulling the market back into today's close might have been a setup to spark some short covering tomorrow. The days following the FOMC announcements often see reversals of the post-FOMC moves so that's another reason to be suspicious of today's late-day selling. But obviously we'll have to let price lead the way and then determine what it means for the bigger price pattern.
Other than the usual Brexit/Bristay polling there's not much for the market to pay attention to and today's FOMC announcement leaves the market guessing what the Fed will do, what Britain will do and what the ECB will do in response to what Britain does. Add in a little opex and we're getting the expected volatility this week. That may or may not calm down before the Brexit vote next week so it's important to be careful with your trading through next week.
The Fed acknowledged the slowing job growth and worries over the Brexit vote. While they would like two more rate hikes this year they hinted that they might only be able to do one. My guess remains none and that they'll drop rates again before they raise them. Six of the ten members now believes there will only be one more hike this year, which is a significant change from just one member in April. They also ratcheted down their expectations for 2017 so they're recognizing that the slowing economy is likely to last into next year.
The Fed made note of an improving housing market but as I'll show later, the home builders are not supporting that view. Interestingly, banks are starting to ramp up their subprime mortgage loans and lowering down payment requirements to just 3%. Borrowers have to be below certain income thresholds in order to qualify. So if you make too much, making you a better risk, you can't get the special financing deals. But if you're credit score is not so good and you don't make enough money to qualify for a regular mortgage you'll be able to get one of these special mortgages. The banks then sell these loans to Fannie Mae and guess who owns Fannie Mae? We the taxpayer through our government. Does this remind you of another time silly things like this were done and the banks and Fannie Mae were bailed out? It's all part of the Fed forcing banks to get rid of their cash and lend it out. What could possibly go wrong with this scenario?
The stock market is getting a little nervous and the selloff following last Wednesday's high is reflecting it. Some would say it's mostly fear of the Brexit vote (the market hates uncertainty) but there's also more evidence of the economy slowing, which the Fed acknowledged today. As I'll show on the charts, the price pattern still supports the idea that the current pullback, even if it becomes a little larger, could lead to a brand new rally. I think that's becoming less and less likely but we'll have to let price lead the way. For now we have to keep things short-term oriented while waiting for the larger pattern to better identify itself. I'll start tonight's review with the Dow Industrials.
Dow Industrials, INDU, Weekly chart
It's been a choppy price pattern for the Dow since its April high and that makes it look like it could be consolidating before pressing higher. It could press higher from here or it could drop lower to give us a larger a-b-c pullback from April. But neither of those options are an assured thing and that's what's making it difficult to figure out what the larger price pattern is likely to be. There's a large consolidation pattern off the May 2015 high that suggests we'll see one more drop down to the bottom of the shallow up-channel off the August 2015 low, currently near 15550 (the February low was near 15500). If you're a longer-term bear, confirmation of bear market won't come until the Dow drops below its August 2015 low near price-level support at 15340. For bulls, proof we're still in the longer-term rally would be a climb above 18400, which would negate a potential bearish correction pattern and it would exceed the May 2015 high at 18351. We've been in a chop zone and that could continue, which is a reason for short-term trading.
Dow Industrials, INDU, Daily chart
The Dow broke important support near 17750 yesterday when it dropped below its 50-dma, near 17785, its 20-dma, near 17755, and its uptrend line from February-May, near 17760. It looks like an impulsive decline from last week and that would make the bounce off yesterday's low just a correction to the decline. The broken uptrend line from February crosses its 50-dma near 17790, while the uptrend line will be near 17830 on Thursday. A 50%-62% retracement of the decline is at 17806-17855 so we have a target zone for the bounce correction, if that's all it's going to be, at roughly 17790-17855 so watch that area, if reached, for a setup to get short. Above 17860 could be bullish and in any case I'd be careful about more whipsaws until we can get through this week and the Brexit vote.
Key Levels for DOW:
- bullish above 18,120
- bearish below 17,400
S&P 500, SPX, Daily chart
SPX broke support yesterday near 2085 and then 2075, which was followed by a bounce back up to 2075 for the close. This morning it bounced a little higher and back-tested 2085 S/R, which is price-level S/R and its broken uptrend line from February-May. Its broken 20-dma is only slightly higher, near 2087. There's certainly higher bounce potential, including to a new high, but at the moment the pattern supports lower prices before thinking about the potential for another rally leg. If we've started an impulsive (5-wave) move down from last week and the decline so far is only the 1st wave then we could see a 5-wave move down to the 1982-1992 area by the end of the month. The big question of course is whether or not the Fed/government will do something to prevent any kind of selloff.
Key Levels for SPX:
- bullish above 2121
- bearish below 2064
S&P 500, SPX, 60-min chart
Today's rally attempt was stopped twice by the broken uptrend line from February-May, this morning and then this afternoon. The spike down at the end of the day has it looking like a bearish kiss goodbye following the back-test and a drop below Tuesday's low near 2064 would be more bearish. But be careful about a head-fake pullback here, including the possibility for a minor new low, that's followed by another rally leg into Friday to save some of opex week. Last week closed near 2096 and it's possible we'll see this week close near the same level. If we do get another leg up to create a larger a-b-c bounce off Tuesday's low, two equal legs up points to 2091 and a 50% retracement of the decline into Tuesday's low is near 2092, both of which would have SPX doing another back-test of its broken uptrend line from February. That would make a good setup to review carefully for a shorting opportunity.
Nasdaq Composite index, COMPQ, Daily chart
The Nasdaq found support yesterday at its 200-dma after finding resistance at its 50-dma. Today, before the FOMC announcement, it bounced a little higher than its 50-dma, near 4856 (with a high at 4865), and then went sideways. Its broken 20-dma, near 4890, is now slightly above its downtrend line from December 2015 - April 2016, now near 4882. I show an expected bounce up to price-level S/R at 4920 but it might not make it that high or it could make it higher to close last Friday's gap down, at 4958.62, before reversing back down. This of course assumes we'll get another leg down but we'll have to see how the rest of this week plays out. The stronger the Brexit vote becomes the more worried our market will be. One note on MACD though -- it's starting curl (histogram lines getting less negative) and doing so at the zero line. A cross back up by MACD would be bullish so keep an eye on it (my (8,12,5) settings are faster than default settings on most charting programs).
Key Levels for COMPQ:
- bullish above 4980
- bearish below 4811
Russell-2000, RUT, Daily chart
The RUT remains relatively stronger than the other indexes as it holds above its 20-dma, now near 1150. It was broken intraday yesterday but closed on it and today it closed above it. But it has price-level resistance just overhead near 1160 and if it can get above that level it would then have a little room to run up to its broken uptrend line from February through the May 6th low, currently near 1176. Its pattern is the same as the others -- bullish above its June 8th high at 1190 but bearish below it. We could see a higher bounce before heading lower but at a minimum I think we'll see at least two legs down for a larger a-b-c pullback from last week. If a more significant high is in place then a drop below price-level support near 1193 is likely.
Key Levels for RUT:
- bullish above 1190
- bearish below 1125
10-year Yield, TNX, Daily chart
Last week TNX broke down from its sideways triangle that followed the February low and March high. This week it has dropped below price-level support at 1.65%. This price level comes from lows in May 2013 and January-February 2015. Other than a 1-day decline below this level in February 2016 is has managed to hold above support but now this week's break is significant. I see the potential for a bounce back up to the underside of the sideways triangle, near 1.73% by the end of the month, but that would likely set it up for a stronger decline to follow (bond rally in July). TNX stays bearish below 1.64 and then neutral up to 1.73.
KBW Bank index, BKX, Weekly chart
This week's decline for BKX had it dropping out of its up-channel off its February low. This follows the rally up to its downtrend line from July 2015, where it topped out at the end of May. The rejection at the downtrend line and now dropping out of its parallel up-channel clearly looks more bearish than bullish, especially if the weekly close is below price-level S/R near 66.50 (today's close was 66.03). The bearish pattern suggests we should look at bounces as shorting opportunities.
DJ U.S. Home Construction index, DJUSHB, Weekly chart
It's been a while since I've shown the home builders index so I wanted to point out its topping pattern. The bounce off the February low has now created a double top between April and last week's high, with bearish divergence in June. It looks like it will again be rejected by its broken uptrend line from October 2011 - October 2014 and another weekly close below price-level S/R at 553 (today's close is 556) would likely point to a larger decline from here. This index is at the same level that it was at the May 2013 high near 553 -- 3 years and it's gone nowhere. As with the broader averages, I think there's a good chance the home builders will drop below the November 2008 low at 130.
U.S. Dollar contract, DX, Weekly chart
There's not much of a change in the US$'s weekly chart even though it's been a little volatile in the past two weeks. Its June 1st high was at the top of its down-channel from December 2015 and that was followed by a steep drop back down into last week's low. The rally from June 8th has now brought the dollar back up near the top of the down-channel, near 95.32 (today's high was 95.15) and we'll soon find out if the dollar can break out, which would be confirmed with a high above its June 1st high at 95.90.
Gold continuous contract, GC, Weekly chart
Gold has made it back up near its May 2nd high at 1306 (with today's high at 1300) and I see the potential for it to reach its 200-wma near 1313. But rather than a bullish breakout I'm expecting the rally off the May 31st low to be just a test of its previous high (or slightly higher) but with bearish divergence. I think we'll see at least another leg down (probably a sharp decline) to create a larger correction off the May 31st high before potentially setting up the next large rally. That's the bullish pattern but there's also still a good chance gold will return to its December low (1045).
Oil continuous contract, CL, Daily chart
As expected, oil dropped out of its rising wedge last Friday and if the wedge is the correct interpretation of the pattern we should see a relatively quick retracement of it (so back to the April 5th low at 35.24, perhaps in a month's time). It now looks like a completed A-B-C bounce off the January low and while the larger pattern is a little unclear, there is the potential for oil to drop below the January low near 26. Assuming it will continue to drop from here we'll be able to see if the decline becomes impulsive (bearish) or gets choppy (potentially bullish).
Tomorrow morning we'll get the CPI numbers, which are not expected to change much, and the Philly Fed for June, which is expected to show improvement to +1.0 following May's -1.8. We'll also get the unemployment numbers. More than likely our market will be reacting more to what's happening overseas.
The market was a little nervous heading into today's FOMC announcement but in reality the market pretty much has the Fed figured out and knows it's trapped between a rock and a hard place. Still, you never know what the Ph.D. numbskulls will dream up next. The real worry is the Brexit vote next week and that means another week of pins and needles while watching the polls, which at the moment has the Brexit vote outnumbering the Bristay vote. It's the uncertainty that's keeping traders awake at night. BTW, if you're one of those who can't sleep because you're worried about your positions then may I suggest trimming your positions. Your health is far more important than trading, especially since you could make a million and then die before you get to play with it. Play now and live longer.
One thing to think about into next week, especially if the market heads a little lower but looks like just a 3-wave pullback, is that we could see a sell-the-rumor, buy-the-news following the Brexit vote, no matter which way the vote goes. And if the market remains depressed but the Brexit vote results in a Bristay I can only imagine the rally that would follow that vote. We'll have next Wednesday to see if a decent trading opportunity is setting up on the long side but for now I'd stay cautious since I think we're looking for at least a larger pullback, if not something a lot more bearish, before thinking of buying the dip. If we get a bounce back up tomorrow, look it over carefully for a shorting opportunity and remember to keep your trades short-term (days at the most) since volatility could quickly make a big move against (or with) you. Stay safe.
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