Equity futures shot higher during the overnight session after the BOJ announced some policy tweaks that supported the stock and bond markets. The FOMC announcement this afternoon was essentially the same -- hold steady -- and the market rallied some more. As long as the central banks remain accommodative and continue to hand out free money the market is happy.
Today's Market Stats
The market went into a holding pattern following the September 12th low and the indexes began coiling in a tighter consolidation pattern while waiting to get through today's FOMC announcement. It was setting up for a big move but of course the big question has been what direction the coil will break. There are a couple of different short-term patterns for the consolidation but coming into today's FOMC report there was still no clear direction setting up and the FOMC announcement keeps the waters just as muddy as they were.
While there was much speculation about the Fed wanting (needing) to raise rates by +0.25%, they had practically no wiggle room to do so. The economy, other central bank actions and the strength of the US$ make it extremely difficult for the Fed to start tightening since they'll surely upset the apple cart and cause a stock market selloff. One of their new self-imposed mandates is to not let the stock market sell off and they've painted themselves into a smaller and smaller corner. There's no way out without causing the market to have a hissy fit.
The Fed is leaving rates alone, again, but Yellen mentioned she believes one increase this year would be "appropriate." That leaves December as their likely next opportunity (so as not to upset the markets days before the election) and as long as nothing has changed much they might be able to get away with it, but I doubt it. I think they're trapped and they know it and we'll see lower (negative) rates before we see higher. JMHO.
Yellen said senior Fed officials "are generally pleased with how the economy is doing" but that they still want to see a better labor market and an increase in inflation. The decision to leave rates unchanged was not a unanimous decision as there were three dissenters, the same number as in the December 2014 decision to raise rates. Those who dissented this time argue for a need to cool down the financial markets (do ya think?). There's been more and more concern expressed about the Fed's blowing more bubbles into the market and the fear of course is what happens when those bubbles pop.
The market cares about only one thing -- is the Fed going to keep the party going or are they going to start reducing the amount of Vodka in the punch? As long as the Fed continues to offer plenty of free booze the market will continue to party. The hangover won't be pleasant, which is what the Fed is now afraid of, but as far as the market is concerned it's looking like it could party at least into December. But the chart patterns don't fully support that view so let's get into their review, starting with the SPX weekly chart.
S&P 500, SPX, Weekly chart
This week SPX recovered back above its May 2015 high near 2135 and remains potentially bullish for another rally to a new high inside a rising wedge off the February low. We could see a rally to the 2250 area by November, especially if there will be an effort to not rock the political boat and keep the Democrats in the White House, followed by a brief celebration into a final market high. That's not a political comment since I'd say the same thing if a Republican was President, but is instead simply a recognition that the government and Fed readily admit to buying the stock market to prevent a selloff. If they're successful for another 6 weeks I can easily see this bullish scenario completing and the Democrats maintaining the White House. Whether or not it will be a sickly Hillary or someone else is hard to say (OK, that was a political comment, wink). But if the buyers lose the battle here and SPX drops below the September 12th low near 2119 I think it would be the fat lady singing the blues as the market would likely sell off hard, at least into a cycle turn window in mid-October.
S&P 500, SPX, Daily chart
The spike down from September has been followed by a choppy consolidation and that's one of the things that keeps me bearish at the moment. The setup for a strong reversal, like we saw off the June 27th low (note the similar RSI setup), has not followed through and that change of character is a warning sign for bulls to heed. A rally above the 50-dma, near 2168.60, would change my tune and turn me bullish for an expected new high but right now I lean with the bears and the next big move could be down to at least the 200-dma near 2060. The cycles point down hard into mid-October and therefore I would not be surprised to see a mini-crash leg lower and a test of the June 27th low at 1992 in the next few weeks. That's not a prediction but instead more of a warning about the potential. The bearish setup at the moment is a back-test of the broken uptrend line from August 2 - September 1, near 2163 (where it closed today), its broken 20-dma, near 2161, and its broken 50-dma. That's tough resistance between 2161 and 2169. The bulls need to hold onto today's rally otherwise it's going to look like a bull trap.
Key Levels for SPX:
- bullish above 2181
- bearish below 2119
S&P 500, SPX, 60-min chart
The choppy pattern for the consolidation following the September 12th low can be viewed a few different ways but the bottom line is that it looks corrective. While we could see a choppy rally to new highs, since it followed the strong spike down from September 7th it looks like a correction to the decline rather than the start of another bullish rally. Not shown on the 60-min chart below is the 62% retracement of the September 7-12 decline, which is near 2162 so throw that into the 2161-2169 resistance zone mentioned above that the bulls need to break through. If they can do it I'll be impressed but let's first see if they can do it. For the bounce off the September 12th low it achieved two equal legs up today at 2164, also in that 2161-2169 resistance zone. From a short-term perspective, I have the key level to the upside at 2171 for two equal legs up from September 14th, above which would leave little doubt the bulls mean business.
Dow Industrials, INDU, Daily chart
The Dow's pattern is very similar to SPX and today's rally brought it up close to its broken trend line along the lows from August 2 - September 1, near 18330 (today's high was 18307). A 38% retracement of its August 15 - September 12 decline is at 18331. Two equal legs up from September 12th points to 18356, just above its May 2015 high at 18351. Its broken 20-dma is near 18326 so like SPX, there's some tough resistance at roughly 18330-18360 and it's important that the bulls crack this zone. Otherwise a back-test followed by a bearish kiss goodbye here would look ominous (except for salivating bears).
Key Levels for DOW:
- bullish above 18,351
- bearish below 17,994
Nasdaq-100, NDX, Daily chart
After weeks of trying (since August 15th) NDX looks like it might have finally broken free of resistance at its March 2016 high near 4816. It's only a 1-day break, as it was on August 15th, August 23rd, September 6-7, September 15-16 and now today, so the bulls will need to hold today's gains to prevent another failure. But even if they hold today's gains there's another line of resistance just overhead -- the trend line along the highs from July-November 2015, currently near 4865. Not shown on the daily chart below is a price projection at 4865 for two equal legs up from February so there's tight correlation at 4865 for it to be potentially tough resistance to break. If the bulls can power through 4865 I see upside potential to 4930 but at the moment the bearish divergence since August is not confidence inspiring if you're looking for a bullish trade.
Key Levels for NDX:
- bullish above 4931
- bearish below 4656
Russell-2000, RUT, Daily chart
The rally from September 12th for the RUT also looks corrective and I see potential trouble for it near 1250 (actually from here, at 1245, up to 1250), which would include a back-test of its uptrend line from August 3 - September 1. The RUT is more bullish than the others as far as its moving averages since it's now above both its 20- and 50-dmas and if it's able to rally above 1250 it would open the door to a new high. Otherwise the bearish pattern calls for a steep decline to follow the bounce off the September 12th low, one which should at least test 1205 area but could drop quickly to support near 1160.
Key Levels for RUT:
- bullish above 1250
- bearish below 1205
20+ Year Treasury ETF, TLT, Daily chart
Bonds also rallied this afternoon following the FOMC announcement, which of course dropped bond yields. I've been expecting a bond market rally since last week but I'll want to see TLT above 136.15 to break into its gap down on September 9th as well as climb back above its broken uptrend line from December 2015 - May 2016, currently near 136.15. At the moment we could be looking at a bearish setup with a back-test of the broken uptrend line so it's going to be important what it does over the next couple of days.
High-Yield Corporate Bond index, HYG, Weekly chart
Another bond ETF to watch is HYG. As mentioned in prior updates, it tracks well with the stock market because the bullishness (or lack thereof) in stocks is typically matched with bullishness in the higher-yield (junk) bonds. Since the top in 2013 for HYG we've seen the stock market continue to new highs while HYG has only been able to make lower highs so that's been a longer-term warning sign for stock market bulls. Eventually that will correct and I doubt it will be HYG making new highs. But what happens following today's rally will tell us whether or not we should expect new highs in the coming week(s).
As can be seen on its weekly chart, the rallies in HYG tend to form rising wedge patterns and predictably the breakdowns from them happen quickly. With the strong selloff in the stock market on September 9th, HYG also broke down and dropped out of its latest rising wedge (the one off the February low). It found support on September 13th at its broken downtrend line from June 2014 - April 2015 so it's possible it's a back-test of resistance-turned-support but I think it will be good for only a bounce. However, today's rally brought it back up near the bottom of its wedge, currently at 86.80, so we'll get to see if it's stronger resistance on a back-test than support at its broken downtrend line. If HYG breaks down further it would suggest a big selloff is coming. Not shown on this chart, there's a big rounding top pattern for the price action since 2009 (it can be more easily seen on the monthly chart), which suggests the 2009 low will be taken out. The combination of patterns right here is a setup to get short HYG against its August 30th high at 87.14, which provides a nice tight stop on the play.
Transportation Index, TRAN, Daily chart
The TRAN has been struggling with its downtrend line from August-November 2015 all year. It managed to pop above the line for 3 days, making it look like a real breakout but then the September 9th selloff dropped it quickly back below the line. Today's rally (thanks largely to FedEx (FDX), which rallied more than $11 for a +7% gain) has it back up to the line for another test, currently near 7916 (it closed slightly above it with today's close at 7931). It's another opportunity for the bulls to shine but if today's rally is followed by selling and the TRAN drops below the September 15th low at 7712 I think we'll see a lot more selling follow. Do or die time for the bulls.
U.S. Dollar contract, DX, Daily chart
The US$ lost some ground today following the FOMC announcement since no rate increase weakens the dollar, which is part of the reason why the Fed doesn't want to raise rates. Strengthening the dollar would hurt international businesses, which would in turn further hurt the economy an stock prices. What's a Fed to do? So many things to think about. The dollar is coiling between the downtrend line from December 2015 - July 2016 and the uptrend line from May-August, each currently near 96.75 and 94.80, respectively. I'm looking for a continuation of a choppy rally into October/November but it would obviously turn at least short-term bearish below the uptrend line.
Gold continuous contract, GC, Daily chart
With the help from the dollar's decline gold got a little boost but it remains stuck inside a tightening consolidation pattern since the July 6th high. This sideways consolidation fits well as a 4th wave triangle (descending) in the move up from December 2015. If this is the correct interpretation the correction should be over and we should get another rally leg for the shiny metal. I show an upside projection to the top of rising wedge, near 1475 by the latter part of October. It has me wondering if a selloff in the stock market, if it comes, will spark interest in the safety of gold. A stock market selloff would also likely have traders seeking the perceived safety of Treasuries. But if gold loses support near 1308 it could instead prompt some panic selling (a failed bullish pattern would likely fail hard).
Oil continuous contract, CL, Daily chart
Oil is fighting hold on and so far with just a 3-wave pullback from August 19th it might be able to start another rally leg. Above its downtrend line from June 2014 - June 2016, near 46.10, would be a good start for oil bulls and then above its September 8th high at 47.75 would leave a confirmed 3-wave pullback correction. The next upside target would be back to its October 2015 high at 50.92 and then its June 9th high at 51.67. Above that would open the door to its next price-level S/R near 58.50. But if oil breaks down instead and drops below 41 I think it would start of lot more selling.
There are very few economic reports Thursday morning and none on Friday so the market will left to react to whatever is happening overseas. Each morning this week has started with a gap up following an overnight rally and then the rally completes by 10:00 so we'll see if that pattern continues.
Today's rally added some strength behind the bounce attempt off the September 12th lows and there's certainly a good chance for more to come, in which case we should see a rally to new highs into the end of the month. But the choppy bounce pattern suggests it's just a correction to the decline off the September highs and that it will be followed by stronger selling. The post-FOMC bullish reaction (it always seems to be a bullish reaction) might have put the finishing touches on the bounce correction rather than something more bullish but that means there should be very little, if any, buying on Friday.
There's nearby resistance for each of the indexes, which I pointed out on the charts, so we should find out quickly whether this afternoon's rally was anything more than a short squeeze. The day after the FOMC announcement often sees a reversal of the post-FOMC afternoon move and that's one more reason to be careful about expectations for higher prices on Friday.
I've mentioned in recent wraps that there is a grouping of market cycles that point hard down into mid-October and between that and the choppy bounce pattern since September 12th I've been leaning bearish. But that also means we cannot see much more of a bounce correction otherwise I'll start wondering if the mid-October turn window will be a high instead of a low. Sometimes the cycles invert like that.
For those who follow any of Jeff Cooper's work (he used to write for Minyanville), he has some very interesting numerology patterns, as well as Gann date relationships that suggest a market top could be found by the end of September. That means we could see a rally to a new high next week but based on relationships to past market crashes the new high could turn into a monster bull trap that leads to strong selling into mid-October.
All of this is to say I'd be very careful about a new market high from here -- the wave count and Jeff Cooper's analysis tell me it would be a high to be shorted, not bought. In the meantime, if Friday turns down we might see a negative week instead of a positive one next week. Trade very carefully the next few days.
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