We're into what is typically a bullish time of the month, opex, but so far the bulls have been largely absent. Last Thursday's strong recovery was followed by Friday's weak rally attempt and today continued the weakness. Waiting to see if the opex bulls show up.
Today's Market Stats
Tom and I have switched Market Wraps this week and he'll be with you on Wednesday.
Today was a relatively quiet day with only a small loss to start the day. A quick morning low was followed by a sideways consolidation into midday but then the sellers continued to be a little stronger than the buyers. It looked to be more a lack of buyers than any kind of concerted effort to sell. This is a little surprising since opex is typically bullish. When it's not bullish it can get very bearish so the bulls will need to do something on Tuesday. Last week's lows must be defended by the bulls.
This morning's economic reports were mixed but a little disappointing. The Industrial Production, at +0.1%, was better than August's -0.5% but not as good as had been expected (+0.2%). The Empire Manufacturing index for October was also disappointing, coming in at -6.8, which was much worse than the expected 2.0 and a further decline from -2.0 for September. Capacity Utilization was roughly in line with expectations and no change from August.
The market barely made a ripple following the reports and as I'll show later, the market has been ignoring all kinds of economic and stock earnings reports. That might not change until we at least get through the elections and then December when it's expected the Fed might maybe possibly raise rates. Yellen's last statement was a little bit of back-peddling on that possibility and as long as the market believes the Fed will not have the room to raise rates, which means a weaker economy, it could stay elevated. It should be paying attention to earnings and the economic slowdown but we know the market is ignoring those signals and pinning its hopes on more accommodation and more government spending.
The stock market has been stuck in a rut, again, since the September lows and while we could at least see those lows tested again, there's no strong evidence yet that the month-long trading range is going to break. We could be stuck in this until at least the elections but at least we have some key levels to watch to help us know when it will be time to trade the move.
S&P 500, SPX, Weekly chart
SPX has struggled this week to hold its uptrend line from February-June, currently near 2140 (arithmetic price scale), as well as price-level support near 2135 (its May 2015 high). Losing support at both of these levels is not a good sign for the bulls, especially if it closes below those levels for the week (for what is typically a bullish week). If support is lost we will likely see the next support level tested quickly, which is the 50-week MA at 2167, about 60 points lower. Below that level there isn't much support before price-level S/R at 1992. But as long as last Thursday's low near 2114 holds there is still upside potential to the 2275-2300 area in the rising wedge pattern off the February low.
S&P 500, SPX, Daily chart
I had been watching a sideways triangle pattern for SPX (and the Dow) and the breakdown last Tuesday made it more bearish looking. The breakdown was followed by two attempts to get back above the bottom of the triangle, last Wednesday and again Friday. Each attempt was a back-test of support-turned-resistance and then a bearish kiss goodbye. Friday's kiss goodbye was followed by more selling today and frankly it's hard to see much that's bullish here. MACD rolled back over from the zero line and RSI is back below 50, both of which are bearish as well. It's looking like we could get at least another test of price-level support near 1220 and as long as that holds we could stay stuck inside a sideways trading range into the elections. It's possible we have a larger consolidation pattern with a descending triangle (declining highs, flat bottom), which would be a bullish continuation pattern and suggests a strong rally right after the election (predicting a Clinton win?) if this continues to consolidate into the elections. It would mean a continuation of the choppy whippy price action with a run back up to about 2160, back down to 2120 and then a rally. All the bulls need to do is not let SPX drop below 2114, which would attract bears as though it was honey from heaven.
Key Levels for SPX:
- bullish above 2170
- bearish below 2114
S&P 500, SPX, 60-min chart
The short-term pattern for the leg down from last Friday suggests one more small drop to complete the leg and then a bounce back up. This is what has me wondering if we'll see another test of 2120. But we have had so much choppy corrective price action and that has made it near impossible to come up with higher odds for one particular direction vs. another. For now SPX is stuck between price-level S/R levels at 2135 and 2120 and a break from one before the other could set the tone for the next week at least.
Dow Industrials, INDU, Daily chart
The technical indicators look just as bearish for the Dow as for SPX and the inability to hold above the bottom of its sideways triangle, which it broke below last Thursday and recovered on Friday, also looks bearish. But as with SPX, as long as it holds above the bottom of a possible descending triangle, at 17992, there remains bullish potential out of this pattern (following another up-down sequence). It would turn more immediately bullish above its September 22nd high at 18450 and more immediately bearish below 17992.
Key Levels for DOW:
- bullish above 18,450
- bearish below 17,992
Nasdaq-100, NDX, Daily chart
Following last Thursday's breakdown for NDX it bounced back above its broken 50-dma, near 4814 on Friday, but was stopped by its 20-dma near 4848. Today's decline took it back below its 50-dma, as well as back below price-level S/R near 4816 (its March 2000 high). The double failure looks bearish, as does the bearish divergence with the oscillators. I continue to see upside potential into the end of the month (or maybe more sideways chop to match the blue chips) but at the moment it's looking more bearish than bullish. Bulls would be in trouble if NDX drops below price-level support near 4740 (the December 2015 high). NFLX reported after the bell and zoom climbed up to about 121 from its close near 100, for a 21% pop in after-hours and well above its April high at 111.85. It pulled back only slightly and if it opens anywhere near 120 Tuesday morning it's going to give the tech sector a nice lift back up.
Key Levels for NDX:
- bullish above 4905
- bearish below 4740
S&P 500 Earnings vs. SPX, 2010 - September 2016, chart courtesy Casey Research
Speaking of earnings reports, which I don't follow much since reactions to them are too unpredictable, no matter what they are, I came across an interesting chart showing the decline in earnings since the end of 2014. While NFLX is apparently reporting great numbers, that hasn't been true for aggregate earnings for the S&P. The decline from the end of 2014 is shown with the blue line on the chart below. The stock market usually responds to future expectations of earnings but in this case it has essentially ignored it in favor of the Fed's help for the stock market. It shows just how distorted this market has become and that distortion is very likely to get corrected. Bulls believe earnings will turn back up in time before the stock market corrects whereas bears believe the wide gap will be closed with a stock market decline. In any case, this is a chart that says something is wrong.
Russell-2000, RUT, Daily chart
The RUT has been trying the past three days to hold support at price-level S/R near 1215 but it's looking like we could see another test of price-level support at 1205 on Tuesday if we see a little more selling. Below that level there's not much support before 1160. Short term it's looking like 1205 should provide support for at least a bounce but there is no bullish divergence against the September 13th low and that should be worrisome for bulls. I don't think you want to be long below 1205. But like the blue chips, there is the possibility for a flat sideways consolidation to continue for at least the rest of this month so bears might want to hold their fire until the RUT drops below 1205 (and then be careful about a head-fake break that hits the stops and pulls in shorts that's then followed by some buy programs to reverse the whole thing).
Key Levels for RUT:
- bullish above 1254
- bearish below 1205
Volatility index, VIX, Daily chart
The VIX had popped up to 17.95 last Thursday and hit a downtrend line from June-September. It has pulled back from the trend line but is holding support at its 200-dma, currently at 16.30. A drop below 16 would be bullish for stocks whereas a rally above last Thursday's high would be bearish for stocks and a stock market selloff could push the VIX up to its downtrend line from January-June, currently near 22.80. As long as the VIX stays below 18 it would mean stocks remain potentially bullish. We're into opex week and that means there could be a little extra volatility in the VIX.
10-year Yield, TNX, Daily chart
Last Wednesday TNX almost reached the projection at 1.811% (with a high at 1.801) but immediately pulled back from its morning high. A little higher now is the top of a parallel up-channel for the bounce off the July 6th low and its broken uptrend line from July 2012 - January 2015, both near 1.84. So there's at least a little more upside potential for TNX, with a little more selling in bonds, but I think there's a good chance TNX could start back down at any time. The bounce pattern off the July low looks corrective and suggests it will be retraced.
High Yield Corporate Bond ETF, HYG, Daily chart
HYG is the go-to bond fund when you want to be in corporate bonds looking for a little extra boost in yield. I should emphasize "little" boost because there's very little difference between the yields in higher-risk securities and the safer Treasuries and that's actually one thing that makes them so dangerous now. Investors are taking on a whole lot more risk vs. the smaller-than-usual yield improvement. But regardless, HYG is a good reflection of investors' willingness to take on that added risk and when fear enters the market we'll see HYG decline as investors rotate into the relative safety of Treasuries and other bonds rated better than BBB. It's a good canary ETF for the stock market and at the moment all is fine. There's bearish divergence since March but at the moment that's just a warning. We'll know something is potentially wrong if HYG drops below the bottom of a small rising wedge pattern (uptrend line from August-September), currently near 85.96, and then confirmed bearish below the September 13th low at 85.27. The next support level below that would be its broken downtrend line from June 2014 - April 2015, near 84.50.
KBW Bank index, BKX, Daily chart
Since the June low for BKX I've been wondering if the bounce off the February low is going to achieve the price projection at 75.41 for two equal legs up. But the October 10th high at 73.58, which was slightly higher than the September 1st high, left a bearish divergence on the chart and now I'm thinking we're going to see a stronger decline instead of any additional upside. BKX is trying to hold its uptrend line from June-September, currently near 71.25, which it closed below today, as well as its 50-dma, currently at 71.05. This morning's high was held down by its broken 20-dma at 71.38 and as long as it stays below Friday's high at 72.17 I think BKX will remain weak.
Transportation Index, TRAN, Daily chart
I've seen reports by several analysts recently that point out the bullish signal coming from the transportation sector. In early September and again in early October the TRAN broke above its downtrend line from August-November 2015, currently near 7880. Last Thursday's low also tested its uptrend line from June-September. Things are looking bullish for the TRAN, especially with the higher price highs since bouncing off the June low. This supports the idea that we'll see the broader market follow, or so goes the argument with Dow Theory.
There are two problems that I see with this bullish thought: the first counterargument is that the TRAN has been significantly underperforming the broader market since it peaked in November 2014; and the second counterargument is that the "breakout" above its downtrend line is on weakening momentum. As shown on the chart, MACD and RSI have been making lower highs since March, which is an indication that the tests of the highs in March and April will lead to a failure. That's not a guarantee but it's a reason to doubt the breakout attempt.
U.S. Dollar contract, DX, Daily chart
The US$ looks ready for a small consolidation before stair-stepping higher into November in order to make it up to the top of its shallow down-channel that it's been in since the March 2015 high, currently near 100.35. Two equal legs up from April points to 99.79 so that gives us an upside target zone for the completion of the leg up from August. The first sign of trouble for the dollar would be a drop back below the broken downtrend line from last December, currently near 96.40, but for now I'm looking for the dollar to continue higher.
Gold continuous contract, GC, Daily chart
Gold's consolidation following the low on October 7th suggests lower prices and in fact its pattern since August is basically a mirror image of the dollar's. I'm looking for gold to stair-step lower into November and potentially down to price-level support at 1180-1200 before it will be ready for a bigger bounce on its way down to lower prices. If gold bulls are to prevail the first thing they need to do in order to negate the bearish wave pattern is rally the shiny metal back above its September 22nd high near 1348.
Oil continuous contract, CL, Daily chart
It's a little hard to see on my squished daily chart for oil but it has formed a possible small sideways triangle off the October 10th high and that suggests one more leg up to complete the leg up from September 20th, which in turn could complete a corrective bounce structure off the August 3rd low and lead to a stronger decline. The upside target zone, if we get a pop higher, is to about 52-55 and there's a short-term price projection right in the middle of that range. A drop below the October 9th low at 49.15 would negate the short-term bullish pattern and suggest a breakdown sooner rather than later.
Tuesday morning's economic reports include CPI data, which is expected to remain essentially unchanged and unless it's very different than expectations it should not move the futures market.
The stock market is acting a little weak and I keep waiting for the buy programs to hit so that they can spark some short covering and get the opex rally started. Last Friday's highs are important -- the bulls need to drive the indexes above those highs (SPX 2149) in order to open the door to higher prices, such as to SPX 2160. If that's achieved we could get another pullback to SPX 2120 before setting up a bigger rally. A rally above the October 10th highs (SPX 2170) would suggest the next rally leg to new all-time highs was underway. But if bears push indexes below last Thursday's lows (SPX 2114) we could see some strong selling kick in.
The market is currently stuck and we're seeing just a bunch of 3-wave corrective moves that get reversed before anything really gets started in one direction or the other. Elections are either holding up the market or "someone" is holding up the market into the elections. In either case it could be a tough time to be a trader with all the whipsaws and lack of follow through. Stay cautious and stay safe since there will be better times to trade.
Good luck and I'll be back with you a week from 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