Tuesday's strong decline took many traders by surprise and it looks like the aftereffects were felt today as traders stood around waiting to see what will follow. It turned into a doji day as the market absorbed Tuesday's loss while waiting to see if the selling will continue or if instead we'll get another sharp reversal back up.
Today's Market Stats
It's common to see a doji day follow a big day and it's basically an indecision day. Traders aren't sure if Tuesday's selling will continue or if instead it will get reversed as we continue the alternating up and down days. The bears will argue some support levels were broken and today's consolidation/bounce will be followed by more selling. The bulls will argue there's been no real harm done as the trading ranges continue to hold, which can be considered bullish continuation patterns. It will take more price action to settle the argument.
The market might also have been on hold as it waits to get through Yellen's speech on Thursday. The FOMC minutes that were released this afternoon caused a little bit of gyrating price action this afternoon and a bit of a pullback but nothing much. The minutes showed the Fed heads acknowledged there's sufficient reason for a rate hike and those who wanted to wait acknowledged that it was a close call. The language was changed enough to indicate the Fed believes it has the right conditions to start raising rates but wanted to wait for "further evidence" in the employment and inflation numbers. Therefore what Yellen others say in the coming days could have an impact on the market as it tries to compare their language with what was in the minutes.
Fed futures have only a 9% chance for a rate increase at the Fed's November 1-2 meeting but that jumps significantly to 64% at the December 13-14 meeting. It will certainly be an interesting meeting since the latest minutes reflected concern about any effort to tighten their policy accommodation could shorten the economic expansion and perhaps shove the economy into a recession earlier. The Fed has successfully painted itself into a corner and they're now at the point where they'll be damned if they do and damned if they don't.
Many Fed heads are worrying that the market is losing faith in the Fed, which is what I've been talking about for years -- part of the correction process in the secular bear market (which needs one more cyclical bear to complete it) will be a complete loss of faith in the Fed and central banks in general. What follows might not be better but the Fed will be blamed no matter what happens.
Other than the FOMC minutes this afternoon there were no significant economic reports and there were no other surprises to move the market much. Earnings announcements continue to mostly disappoint and equity futures dropped further after the closing bell today so there were likely more disappointing earnings announcements. Earnings have been in decline for 1-1/2 years now and revenue is in decline as well. This is going to make it much more difficult for corporations to continue their stock buyback spree, which is the one thing that's been holding the market up.
Without corporate buyback support, which I think is quickly waning, there's not going to be much to take its place as the Fed also has removed itself (for now) from propping up the market. There could be some continuing government interference for the sake of the elections but that's all conspiracy theorist stuff and we know the government would never directly interfere with the free market (cough). While I certainly see upside potential for the market, which I've been showing on my charts, I think we have once again reached the point where upside potential is dwarfed by downside risk.
For the rest of this week and into next we're looking to see what could move the market since we could be nearing the point where we'll see a much bigger move. The next day or so could set the tone for how the rest of the month goes. We have opex week coming up and that's generally more bullish than bearish but not a guarantee. We've entered a turn window (mid-October) and the market has been basically flat coming into the window, which makes a turn prediction much more difficult. We'll let the charts do the talking but so far they've been button-lipped about what we should expect next.
S&P 500, SPX, Weekly chart
The weekly chart of SPX shows this week's low was a test of its uptrend line from February-June, currently near 2138 (log price scale), and the pattern continues to support the idea for another leg up to complete the 5th wave of a rising wedge. But the bearish interpretation is that a 3-wave bounce off the February low topped out on August 15th and we've been a slowly developing rolling top. Along with the uptrend line from February there is price-level S/R at its May 2015 high near 2135 and therefore a weekly close below 2135 would be bearish, especially if it drops below the September 12th low at 2119.
S&P 500, SPX, Daily chart
The daily chart shows the sideways triangle that most technical analysts were following for the past several weeks. Most looked at as a bullish continuation pattern (consolidating off the August highs) and one of the concerns here is that if SPX breaks down it will leave a failed bullish pattern in its wake and that could result in a strong decline. Again, below 2135 is bearish and below 2119 would be confirmed bearish, but in the meantime the bulls still have a shot at a new high into November.
Key Levels for SPX:
- bullish above 2180
- bearish below 2119
S&P 500, SPX, 60-min chart
The choppy pattern since the August 15th high has led to several different interpretations, some bullish and some bearish. It's still not clear which it is and that's a big reason to watch the uptrend line from February-June. The strong decline from Monday looks bearish since it's an impulsive decline and could be the 1st wave of what will become a strong 5-wave move down. That means the bounce off yesterday's low is a 2nd wave correction and could be finished or it could make it a little higher but once complete it will be followed by a strong decline in a 3rd wave.
But considering the support near 2135 is holding and the possibility that the pullback from September 22nd is a completed a-b-c into yesterday's low as a correction to the rally we have to consider the potential for a new rally to kick off from here.
So far the bounce off yesterday's low is choppy and that favors a bearish resolution. The bulls need a strong impulsive move higher and then break the downtrend line from September 22nd (near 2166) and then Monday's high near 2170.
Dow Industrials, INDU, Daily chart
The Dow dropped out of its sideways triangle yesterday and today's bounce attempt was held down by the bottom of the triangle, now near 18160. That has it looking like a back-test that could be followed by a selloff to leave a bearish kiss goodbye, which of course would be bearish. Confirmation of a breakdown would be a drop below the September 14th low at 17992. But a recovery back inside the triangle, with a close above 18160, would leave a head-fake break and that would be bullish since it would leave a throw-under finish to the triangle. However, the Dow remains inside its trading range between 17992 and 18450 and as long as that remains true there is the potential for the choppy whippy price action to continue into the elections as the market is held steady.
Key Levels for DOW:
- bullish above 18,450
- bearish below 17,992
Nasdaq-100, NDX, Daily chart
Since August 15th NDX has been dancing around its March 2000 high near 4816. That's two months and NDX has gone nowhere with a close today at 4819. It spiked back below that level in early September, made it back above it on September 21st and stayed above it until yesterday and is now back to that level. For two weeks it tried to get through the trend line along the highs from July-November 2015, currently near 4875, and was able to close above it on Monday. But Tuesday's strong decline gave it all back and also broke support at its uptrend line from June-September, now near the same 4875, as well as its 20-dma, now near 4850. It's holding support at 4816 as well as its 50-dma at 4811 so it remains potentially bullish to a price projection at 4930. But with the bearish divergence since July and Tuesday's breakdown we could be looking at the start of a much more significant decline. It's at least a risky time to bet on the long side.
Key Levels for NDX:
- bullish above 4931
- bearish below 4800
Semiconductor index, SOX, Weekly chart
The biotech sector gets much of the blame for this week's decline in the tech indexes, and it should get the blame with its -5.8% decline this week. But the semiconductor stocks are not helping either, down -2.9% this week. A few weeks ago I showed the SOX weekly chart to point out it parallel up-channel from February and the fact that it was pushing against the top of the channel with a new price high but a bearish divergence on the oscillators. Last week it produced a small hanging man doji at the top of the channel and this week's big red candle leaves us with a 3-candle evening star pattern at resistance. This is a reliable reversal signal and says we should now be looking to play the short side.
Russell-2000, RUT, Daily chart
Last Friday the RUT broke down below its uptrend line from June-September and then on Monday it bounced back up to the broken trend line. That was a bearish setup with a back-test that was followed by the kiss goodbye with the big breakdown on Tuesday. It's very hard to look at the RUT with anything other than bearish-colored glasses. I can see a way to call the pullback from September 22nd as just a correction within its rally and the upside projection for another leg up is to 1280 (for two equal legs up from September 13th). That could result in another back-test of its broken uptrend line from June by the end of the month. So while I don't discount the bullish possibility, its chart pattern has "SELL" written all over it. But it goes without saying that bears need to stay on their toes and watch for yet another whippy reversal back up.
Key Levels for RUT:
- bullish above 1254
- bearish below 1215
10-year Yield, TNX, Daily chart
The bond market has sold off for the past two weeks as the bond market speculates on a rate increase from the Fed. This has driven yields higher and the 10-year (TNX) is now near the apex of a previous triangle pattern (shown on its daily chart below, which ran from March through May). The apex of a previous triangle, after price breaks out of it, is often resistance/support in the next correction. The apex is near 1.76, which TNX climbed above yesterday but for the past two days it gapped up and then pulled back, indicating possible topping action. There's a price projection at 1.811, a broken uptrend line from July 2012 - January 2015 near 1.825 and the top of an up-channel from July that crosses 1.825 early next week. So anywhere between today's high at 1.801 and 1.825 we could find TNX topping out and then a resumption of the decline. That would happen if the chances for a rate increase from the Fed start to fade.
DJ US Home Construction index, DJUSHB, Monthly chart
It's been a while since I've discussed the home builders and as a reflection of our economic health there are some things happening to the home construction index that are not bullish. As can be seen on the monthly chart below, the series of higher highs since January 2013 has been accompanied by lower highs on the oscillators. This is a perfect example of why you can't use bearish divergence as a timing tool but it's a very good indicator to show the rally's momentum is weakening and therefore subject to a reversal at any time. Following the August 2015 high the decline into the February 2016 low was a break of its uptrend line from October 2011 - October 2014. It has spent its time since February trying to climb back above the broken uptrend line but then fell firmly away last month. The September decline then broke a shorter-term uptrend line from February-June, which the broader market indexes are now starting to do. This week it also lost support, so far, at its August 2015 high at 553. Putting this all together gives us another chart with "SELL" written all over it and I think it's a good indicator for our economy and the broader market. We could get another bounce attempt and new highs in some of the indexes in the coming weeks but this is a chart that tells us to fade the rally if it happens.
U.S. Dollar contract, DX, Weekly chart
This week's rally popped the US$ above its downtrend line from December 2015 - July 2016, near 96.60, and it hasn't even looked back for a retest of the line. Two equal legs up from May points to 99.79 and the top of a parallel channel for its pullback/consolidation since March 2015 is now near 100.50 so that gives us an upside target for this move. Ideally we'll then see one more pullback for the dollar into the end of the year before setting up for a big rally next year. It would be more immediately bullish above 100.50, which could happen if the Fed raises rates in December. Or a drop back down could result from the Fed saying "not yet."
Gold continuous contract, GC, Weekly chart
Last week gold broke its uptrend line from December 2015 - May 2016, near 1319 at the time, and then broke price-level support at 1308 (January 2015 high and S/R since then). That led to stops getting hit and gold plunged nearly $105 (-7.8%) from the September 22nd high at 1347.80 to last Friday's low at 1243.20. It's been consolidating this week and it could get a little higher bounce but it's looking like it will head at least a little lower before getting a bigger bounce. It could be heading for support at its May 31st low at 1199 or possibly down to price-level support near 1180 before setting up a bigger bounce. The longer-term pattern for gold suggests the 3-wave bounce off the December 2015 low into the July 2016 high was only a correction to the decline and that it will be completely retraced as gold heads below 1000. We have plenty of time to evaluate the pullback to help determine whether or not gold is that vulnerable but it's something to think about if you're a gold trader (vs. hoarder) and also if you're looking to buy gold -- you might get some very good prices next year.
Oil continuous contract, CL, Weekly chart
Oil's weekly chart shows a potential double top in the making as Monday's high at 51.60 tested the June 9th high at 51.67 and showing bearish divergence with the test. There's also price-level resistance at 50.92, going back to the October 2015 high. Not shown on the chart, there's a price projection at 51.97 for two equal legs up from the August 3rd low and based on this 50.92-51.97 resistance zone it would be bullish above 52, especially since it would also be a break of downtrend lines from June 2014 and from May 2015, which have been broken in the past two weeks. A drop back below the pullback into the September 20th low at 42.55 would be confirmation a top is in place. The bulls are looking at this pattern as an inverse H&S pattern with the neckline at 50.92. A break above that level with volume and momentum would be a bullish move.
There are no market-moving economic reports on Thursday but Friday has some important reports, including PPI numbers, retail sales and Michigan Sentiment.
Tuesday's breakdown looks bearish and it could have been the firing gun to start the race downhill. Today would be a bearish consolidation in that case and the selling should resume, possibly after a higher bounce on Thursday. But we've seen plenty of sharp declines that get reversed quickly, which remains a possibility. If Tuesday's sharp decline was the completion of an a-b-c pullback pattern from September 22nd we should have seen a stronger bounce than we've seen so far.
Today's bounce looks like a correction to Tuesday's decline (choppy overlapping highs and lows in a bear flag kind of pattern), which is one reason why I'm looking for the selling to continue. Bears need to be ready for another strong reversal back up but at this point I think the bulls will need to take the ball away from the bears. That hasn't been difficult for the bulls to do and this is a market where bears need to be more cautious than bulls. However, if the bearish wave pattern is correct, the bears will have at least a little time at the feeding trough to fatten up a bit.
Neither side can take anything for granted here since indexes remain inside the trading ranges in place since the September highs and lows. Until that changes we have to be ready for anything. Trade carefully and stay disciplined.
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