The stock market has been stuck in neutral since July-August and the trading range is narrowing. Some indexes show a coiling in a sideways triangle pattern, which says we're going to get a strong move soon. The challenge for traders is figuring out which way it is likely to break and then get in front of the move.
Today's Market Stats
The market is chopping up and down while it goes nowhere and the consolidation range is tightening. Some indexes, such as the Dow, are forming clear sideways triangle patterns while other indexes are simply consolidating sideways and/or chopping their way marginally higher. Which way it will break is arguable and as traders we simply need to let the market tell us which way to trade. At the moment the market is giving us a blank stare.
There's very little to add to the discussion about the market since very little has changed. The market is ignoring economic reports (which it's been doing for a long time) as it focuses solely on one thing -- what's the Fed going to do. It's enough to drive me crazy since I believe the Fed is worthless and causes much more harm than good. But my opinion doesn't drive the market and therefore I and everyone else is forced to figure what the market THINKS the Fed might do and then what the market THINKS might happen based on what the Fed actually does. Good luck trying to figure all that out. So I'm just going to jump right into the charts, starting with the Dow's weekly chart. It's about the only thing most of us can at least watch for where price is telling us what the market is likely headed next.
Dow Industrials, INDU, Weekly chart
The Dow continues to provide one of the clearer pictures on the weekly chart as far as maintaining the bullish potential for another leg up to complete a rising wedge pattern off the February low. From here it would be the 5th and final wave to complete the 2009-2016(7?) bull market. The upside potential that I'm depicting on the chart is to about 19250 in November. That would also have the Dow achieving its 127% extension of its previous decline (May-August 2015), at 19162, which is a common target/reversal level.
This is obviously just a guess but so far the bulls haven't done anything wrong and the bears haven't done anything right, which keeps the bullish pattern alive. I hesitate to say "bullish" pattern since the rising wedge is actually a bearish pattern and quite bearish -- if it completes as depicted we will then see a complete retracement of the entire wedge faster than it took to build it. That would mean back down to the February low near 15500 in just a few months. For the short term the bulls simply need to prevent the bears from pulling the Dow below the September low at 17992 since that would open up more immediate bearish possibilities.
Dow Industrials, INDU, Daily chart
The Dow has been consolidating since its August high and September low and it has formed a sideways triangle. From a bullish perspective the consolidation follows the August high and a break above the top of the triangle, as well as its coinciding 50-dma, both near 18380, would be a bullish heads up. Above its September 22nd high at 18450 would be a confirmed breakout. But from a bearish perspective, considering the consolidation follows the September low, it's a setup for a strong move down once the triangle pattern completes (perhaps with one more tag of the top of the triangle and another back-test of its broken 50-dma). Another leg down equal to the August-September decline would be expected, which would target the 200-dma, currently near 17620. A breakdown below 17992 would indicate the consolidation pattern completed and the next leg down will have begun.
Key Levels for DOW:
- bullish above 18,450
- bearish below 17,992
Dow Industrials, INDU, 60-min chart
The Dow's 60-min chart shows the amount of choppy and whippy price action since the September low and this is a strong indication of a consolidation pattern, especially common in a triangle. The bearish interpretation says today's bounce, which could extend into Thursday, will lead to a breakdown. The bullish interpretation says the rally off Tuesday's low will lead to a strong rally that will take us to new highs. A pullback and then a breakout above 18351 would be a stronger indication that the bulls maintain control. But we could first see another pullback in the triangle to keep both sides guessing which way it's going to break. Playing this conservatively means waiting for the breakout/breakdown since there should be plenty to play in the move that follows.
S&P 500, SPX, Daily chart
Like the Dow, SPX remains trapped inside a narrowing trading range since its August high. The consolidation can be considered both bullish and bearish, depending on where you view the starting point of the consolidation, and that means waiting for a breakout above 2188 or breakdown below 2119 before knowing which way to trade this. If it breaks out we should see a rally for the rest of October with an upside target around 2250. If it breaks down we should see it head for its 200-dma, currently near 2066. Mind the chop between about 2140 (the uptrend line from February-June) and 2183 (the downtrend line from August-September). At the moment MACD has not been able to climb much above zero and that could be a sign of weakness as a rolling top continues to play out. Keep in mind that even a breakout or breakdown could be simply part of a larger corrective pattern, which could get reversed just as quickly as we've seen the constant small reversals in this consolidation pattern. These are tough patterns for traders since the whipsaw moves can cause death by a thousand cuts.
Key Levels for SPX:
- bullish above 2188
- bearish below 2119
Nasdaq-100, NDX, Daily chart
Since September 15th NDX has been battling between support at its March 2000 high at 4816 and resistance at its trend line along the highs from July-November 2015. It hasn't made much progress above 4816 since first hitting this level on August 15th but other than the snap to the downside on September 9th and then a quick recovery it hasn't shown any signs of a breakdown either. For the past 10 trading days it has been struggling to get above its trend line along the highs and today it climbed above it (again) but only managed to close on the line (again), near 4877. I show an upside target at 4930, which is a price projection for a 5th wave in the rally from June, where it would equal the 1st wave. This is not a clean pattern, nor is the leg up from September 12th, so it's not a high-confidence target/resistance level but one that will be important to watch if reached. Currently near 4920 is a shorter-term trend line along the highs from August-September and with the bearish divergences since August it's important for bulls not to be complacent here.
Key Levels for NDX:
- bullish above 4931
- bearish below 4811
Russell-2000, RUT, Daily chart
The RUT has held support at its 20-dma for the previous 7 trading days and yesterday it also held coinciding support at its uptrend line from June-September. The choppy consolidation following its September 22nd high looks like a bullish continuation pattern and that means as long as the uptrend line from June, currently near 1243, continues to hold it keeps the RUT bullish. The upside projection at 1294, for two equal legs up from September 13th, crosses the top of the rising wedge (trend line along the highs since April) mid-month during opex week. The bears need to see the RUT below 1215 to negate the bullish pattern.
Key Levels for RUT:
- bullish above 1264
- bearish below 1215
20+ Year Treasury ETF, TLT, Daily chart
Treasuries sold off sharply in the past week, driving yields higher with speculation of a Fed rate increase, and TLT is threatening to break down. Today it dropped through price-level support at its February 2016 high at 135.25 and it could be headed at least back down to the bottom of its parallel down-channel from its July 8th high. The bottom of the channel is currently near its September 15th low at 133.03 and it could coincide with the 200-dma that's rising up toward that level, perhaps by Friday. That means 133 should be strong support for at least a bounce but obviously bearish if it breaks. The strong pullback from September 28th now makes the larger pattern suspect but until proven otherwise (starting with a decline below 133) I continue to believe we'll see bond prices rally as it becomes clearer that the Fed will not be in any position to raise rates. They talk a good game but they back down each time they have a chance to raise rates and this has been going on for years.
Transportation Index, TRAN, Weekly chart
The transportation stocks have been doing well and TRAN is pulling ahead of the Dow to the upside. There are no new highs coming for the TRAN even if it continues its rally for a few more weeks. I doubt it has a chance to best its November 2014 high at 9310, and that continues to leave a bearish non-confirmation with the Dow but for now it's looking potentially bullish for a continuation of its bounce. I show a price projection at 8775 for two equal legs up from January but there is of course no guarantee it will get there (or stop there for that matter). The bearish divergence as it tests its April high at 8149 (today's intraday high was 8145) has the potential to leave a double top if the bulls can't keep it up.
U.S. Dollar contract, DX, Daily chart
The US$ has been chopping around just as much as the stock market and it's still not clear if we're going to see a drop lower or a continuation higher. The bounce off its August 18th low looks like a small rising wedge pattern and as such it's pointing to a breakdown, potentially back to the bottom of its shallow down-channel from March 2015, which is near the price projection at 92.82 for two equal legs down from July 25th (if it starts down from here). A break of its downtrend line from December 2015, currently near 96.60, would have it looking more bullish but it could continue its choppy and whippy ways as it works its way back up to the top of its consolidation pattern that it's been in since the March 2015 high.
Gold continuous contract, GC, Daily chart
Gold has broken down and it broke down from a bullish pattern (the descending triangle, which fit as a bullish continuation pattern). Since failed patterns tend to fail hard we could see gold hit support at 1182-1199, which includes price-level S/R that goes back several years and the May 31st low at 1199 before we'll see a sizeable bounce/rally. If the bearish wave pattern is correct, the 3-wave bounce off the December 2015 low into the July 2016 high will now be followed by the resumption of selling that will take gold below 1000. It's too early to tell which will happen but I know there are a lot of gold bugs out there and if you're buying for a rainy day then lower prices are simply good times to accumulate more. But if you're a gold trader, now's a good time to be much more cautious about the bullish side and instead think protection.
Silver continuous contract, SI, Weekly chart
Silver's weekly chart shows the same breakdown this week but it is now testing its uptrend line from December 2015 and could get a bounce/rally from here. If the metals are pulling back on fears of the Fed raising rates (and thereby increasing the value of the dollar), it could all suddenly reverse if the mood changes and traders start believing the Fed has no wiggle room to raise rates. Now's the time for silver to bounce if it's going to do so. Any lower than 16.91, where its pullback from July 5th would achieve two equal legs down, would be more bearish.
Oil continuous contract, CL, Daily chart
Oil has had a nice little rally off its September 20th low and with today's high at 49.97 it's now nearing price-level resistance at its October 2015 high at 50.92 and then its June 9th high at 51.67. Two equal legs up from its August low points to 51.97 to complete a possible a-b-c bounce correction. Based on this 1-point resistance band at 50.92-51.97 oil would be much more bullish above 52. But short term there could be trouble for oil since the leg up from September 27th has formed a rising wedge and today it did a little throw-over above the top of it, which was then followed by a drop back inside the wedge, thus creating a sell signal. A rally above 50 would negate the sell signal so it will be important to see what happens tomorrow.
Today's economic reports were basically ignored and tomorrow's lack of reports means the market will react to whatever is going on overseas. Friday morning's reports will move the market since they're Payroll related and there will be much handwringing and gnashing of teeth as traders try to figure out how the Fed will react to the numbers. It doesn't matter one wit what the numbers are, only the market's reaction.
For traders the long choppy consolidation patterns we've seen this year are enough to bring us to tears and that's after we pull the hair out of our heads. The latest consolidation pattern, especially visible on the Dow, shows we're getting ready for a big move but it's not clear yet which way the move will be. If we get a breakout to the upside it's important to recognize the sideways triangle as the pointer to a final leg, which could certainly run for a little while (mid-October at least and potentially into mid-November), but it will likely turn into a giant bull trap. Trade it but don't own it.
If the market breaks down out of the consolidation patterns it would likely lead to a fast decline but not a crash leg of any kind. Another leg down equal to the one from August would be my expectation and then get ready for another bounce. Whether that bounce would lead to higher highs or just a bounce correction before heading lower again will have to be figured out in real time. All of the choppy whippy moves are making real-time guesses of the pattern a real challenge and I know traders are getting knocked silly with stops constantly getting hit before positions can even become profitable in many of the trades. Play it conservatively and wait for the break since there should be plenty to play in the move.
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