The market is waiting to get through the elections and in the process the major indexes are forming tighter trading ranges. Depending on one's interpretation of the consolidation patterns it can be argued they're bullish or bearish, leaving traders waiting for a break. We might be waiting for at least another week before that break.
Today's Market Stats
The market is on hold and it continues to chop up and down in a tightening trading range. That sentence describes the market for the past two months and it might not change until we get through the elections. It's driving traders crazy but at least we are likely much closer to the end of it than the beginning. The challenge will be figuring out which direction the break should occur.
There's very little affecting the market right now and with lower trading volume we're getting fast reversals of reversals, leaving traders trapped daily looking in the wrong direction. Trend traders are getting chopped to pieces and are giving up, which drives trading volume lower. While this might not change for at least another week, it's important to understand how the market typically frustrates the most traders to the point of giving up before establishing a new trend. The new trend is typically not believed until it's well underway. Our job is to figure out where and when that trend will start so that we can get a jump on it earlier than most traders.
I'll jump right into the charts, starting with the SPX weekly chart, to point out the patterns that could help us identify a trend change (from a consolidation or ending pattern to a new trending move). If you're very frustrated right now, join the club, but stay patient for a little longer so that you'll be ready to start trading again when the time is right (no later than post-election I believe).
S&P 500, SPX, Weekly chart
From a weekly perspective SPX continues to hold onto the bottom of a rising wedge pattern, which is the uptrend line from February-June and currently near 2150. Bears look at the break of the uptrend line on October 13th and not being able to recover back above the line as bearish. A break followed by back-tests should lead to lower prices, or so the theory goes in a normal market. In any case, the bulls really would be in a better position above 2150. But a descending triangle off the August high (better seen on the daily chart further below) is a bullish continuation pattern and it's looking like price could continue to consolidate for another week or two before breaking out to the upside. Of course if it breaks down instead, with a decline below the October low near 2114, it would leave behind a failed bullish pattern and that would likely be followed by strong selling.
S&P 500, SPX, Daily chart
On a daily basis I'm seeing short-term patterns getting blown up with the endless choppy consolidation that we've been in (over two months now). I can't help but feel there are some monied interests holding the market up to ensure a Clinton victory. I see signs of distribution but then indexes spike back up in order to keep the bears away. And if Clinton wins I can see the potential for a hurrah rally to follow, which from a longer-term pattern perspective would be the completion of the rising wedge shown on the weekly chart and that would in turn complete the cyclical bull off the 2009 low.
The descending triangle off the August highs is shown on the daily chart and this ideally will get one more up-down sequence to finish (around election day?). That would be a setup for a big rally to complete the cyclical bull (maybe to SPX 2250-2300). Short term there is the possibility that the descending triangle can be considered complete at any time and therefore a rally above the October 10th high near 2170 would be bullish. Between 2114 and 2170 we have to stay aware of the potential for more of the same choppy whippy price action, potentially into the elections.
Key Levels for SPX:
- bullish above 2170
- bearish below 2114
S&P 500, SPX, 60-min chart
A closer view of the price action inside the triangle is shown on the 60-min chart below. We have price-level S/R near 2145 and 2135 that price has been cycling around for the past two weeks, along with the bottom of the triangle near 2120 and the top of the triangle currently near 2158. As with all triangles, they're full of choppy price action and this one certainly has been no exception. I show an up-down sequence into election day to complete the triangle but obviously that's just speculation. For now it provides a road map to follow to help determine whether or not we're going to get a bullish setup out of this or if instead it breaks down or breaks out early.
Dow Industrials, INDU, Daily chart
The Dow got a bigger helping hand today, thanks to Boeing (BA), which finished up at 145.54 (+4.7%). It's a real heavy weight for the Dow and it single-handedly lifted the index, which made the Dow the only one in the green today. But its chart is no different from SPX as it hammers out what appears to be a descending triangle with all the choppy price action inside to support the interpretation. The bottom is near 18K and the top, depending on how the downtrend line is drawn, is near 18300 or 18345. The May 2015 high is at 18351 so there's double resistance near there for the bulls to break through. Above its October 10th high near 18400 would be bullish since it would be a breakout from the triangle and a rally back above its 50-dma, near 2158. But a break below 18K would indicate a breakdown from a bullish pattern and I would not want to be in long positions if that happens. Beware of more chop until we get the break one way or the other.
Key Levels for DOW:
- bullish above 18,400
- bearish below 17,992
Nasdaq-100, NDX, Daily chart
On Monday it looked like NDX finally broke free of its trend line along the highs from July-November 2015, currently near 4881. Tuesday it dropped back down to the trend line for a bullish setup with a back-test. All it needed was a rally today to keep things bullish. AAPL spoiled those plans with a disappointing earnings report (first sales decline in 15 years) in yesterday's after-hours session. That gapped NDX down this morning and left another bull trap with Monday's rally. The gap down put NDX back below the trend line which it broke above on Monday. This has been one frustrating index for bullish traders since we've seen repeated breaks of resistance that then turn into failed breaks and bull traps.
The choppy move higher from September 12th looks like a shallow rising wedge pattern with the top of the wedge being the trend line along the highs since September 22nd (where Monday's rally stopped) and the bottom of the wedge being the uptrend line from September 12th, currently near its March 2000 high at 4816. The rising wedge for NDX is a bearish ending pattern, which calls for a completion prior to the elections. This is very different from the bullish interpretation of the descending triangles for the blue chips and is a strong reason to doubt the bullish pattern. The flip side says if NDX breaks out of the rising wedge, with a rally above 4930 (the projection for where the 5th wave of the rally from June equals the 1st wave), bears will need to abandon the short side and head for the hills.
Key Levels for NDX:
- bullish above 4931
- bearish below 4760
Russell-2000, RUT, Daily chart
The RUT is the bearish index and as a sentiment index it's not a good sign for the bulls. It could be in just a larger pullback while the other indexes trade sideways/up but at the moment it's looking more bearish than bullish. On October 14th it broke its uptrend line from February-June, as well as price-level support near 1215. It repeatedly bounced back up but was held down by the broken uptrend line. Following Monday's back-test it sold off sharply yesterday, leaving a bearish kiss goodbye. But the bulls had another chance to power it higher since price-level support near 1215 held. But today's decline dropped the RUT below 1215 and then through support at 1205 (its December 2015 high and last tested on September 13th). It closed only marginally below support so there's still a chance for the bulls to come to the rescue but I don't see any reason to be long this index. Maybe if it gets back above Monday's high near 1232 (which was also a back-test of its broken 20-dma).
Key Levels for RUT:
- bullish above 1254
- bearish below 1205
High Yield Corporate Bond fund, HYG, Daily chart
In addition to the higher-risk small caps, the higher-risk bonds could be in trouble as well. I've mentioned HYG many times in the past as a good index to watch since it's a good reflection of risk-on vs. risk-off by investors. It's hard to see the break on the squished daily chart of HYG below but today's decline broke its uptrend line from February-June, currently near its 20-dma at 87.05. If that's the bottom of a rising wedge we could see faster selling develop. But a larger rising wedge, using an uptrend line from August 2 - September 13, currently near 86.35, could be the more important line to break since a drop to there could be followed by another leg up to finish the rising wedge later in November (which would keep it in synch with the bullish idea shown for the blue chips). An early breakdown is predicted by the RUT if it keeps selling off while we'll likely see more of a choppy rise higher if the blue chips keep their bullish patterns intact. In any case, this index could be a good canary for the broader stock market.
10-year Yield, TNX, Daily chart
The 10-year yield has been holding near the high set on October 12th and will either form a small double top here or press at least a little higher to trendline resistance just below 1.84%. Above 1.84 would be bullish for yields (bearish for bond prices) but at the moment, with a stall under the projection at 1.811 (two equal legs for a double zigzag wave count), I wouldn't be surprised to see yields start falling back down at any time, especially if tomorrow's Durable Goods report and Friday's GDP report are weak and further support the idea that the Fed will not have enough wiggle room to raise rates.
KBW Bank index, BKX, Daily chart
The banks have been relatively strong, presumably under the assumption they'll be in a stronger financial position with a rate increase from the Fed. The pattern for its rally from February is corrective (choppy with overlapping highs and lows within the move) and that means the entire thing has a high probability of getting completely retraced. The only question is how high it could go before rolling over. For a while, since it climbed above price-level S/R near 66.50 in July and then its downtrend line from July-December 2015, near 69.60 in mid-August, I've thought it could reach a price projection at 75.41 to achieve two equal legs up from February. With today's high at 74.87 it's within spitting distance of achieving that level. There's no guarantee it will reach that level or stop there but it's a level of interest to see if it's achieved and then rolls over after that.
U.S. Dollar contract, DX, Daily chart
The US$ remains on track to reach the top of its shallow down-channel off the March 2015 high, currently near 100.35. I show a projection to that level by the end of November to reach the top of its parallel up-channel from April at the same time. Obviously this is speculation but it would be a good setup for a reversal back down for one more test of the bottom of its down-channel in early 2017 before finally setting it up for a big rally.
Gold continuous contract, GC, Daily chart
Following gold's breakdown on October 4th into the low on October 7th it has tried to bounce back up and hold onto its 200-dma, currently at 1269.70, slightly above today's close at 1267.60. The bounce looks corrective and suggests at least another leg down and we could see it stair-step lower to price-level support at 1182, or perhaps to its May 31st low at 1199, before getting a bigger bounce. Note the breakdown from a descending triangle pattern that followed its July high, which had suggested we'd see another rally leg for gold. Instead, the breakdown led to strong selling, which once again shows how a failed pattern tends to fail hard. Longer-term there is the potential for much more selling in the future and a complete retracement of the 3-wave bounce off the December 2015 low (1046.80).
Silver continuous contract, SI, Weekly chart
Silver often leads gold since it has more of a production component whereas gold is often thought of as a currency hedge. Silver has been in a long-term down-channel since 2011 and the bounce off the December 2015 low into July 2016 high was just a 3-wave move up to the top of its down-channel. It would have been more bullish with a break of the down-channel and a rally above its July high near 21.23 would have me turning bullish both metals. The decline into the October 6th low was a break of its uptrend line for the bounce off last December's low. The bounce attempt since October 6th is a choppy sideways/up correction, which should be followed by another leg down. It should find at least temporary support near 16 and maybe on a back-test of the mid-line of its down-channel, which will be near 14.75 by the end of November. The overlap of its May high at 18.06 suggests a high probability that the December-July rally will be completely retraced and a drop down to the bottom of its down-channel could be next, perhaps down to it 2008 low at 8.40 by the end of 2017.
Oil continuous contract, CL, Daily chart
I've been watching an upside target zone for oil at 50.92 (its October 2015 bounce high) to 51.97 (two equal legs up from August 3rd. The October 19th high was 51.93 so 4 cents from the 51.97 target and I'd say close enough, especially now with the drop below the October 10th low at 49.15. (today's low was 48.87). It could still press higher and it would be bullish above 52 for at least a run up to price-level S/R near 58.50. But the bearish setup, which would be confirmed with a break of the uptrend line from August 3rd, currently near 46, is for oil to now head lower and drop below 26.
Thursday's economic reports include unemployment claims data and more importantly the Durable Goods Orders and Pending Home Sales. The bigger market impact could come from Friday's GDP data since that could influence the Fed, which is what the market reacts to.
We have been in an endless consolidation (over two months at this point) and it's driving traders crazy. These are the times when trend traders get chopped to pieces and finally give up at about the time the market is ready to trend again. Traders get used to the quick reversals with all the choppy price action and when a trend gets started they miss it because they expect the market to reverse again. This is the way the market frustrates the most traders and we're experiencing it again. Get ready for a trend to start since most traders have now been conditioned to not expect one.
But a new trend might not start until after the elections. Traders seem to be on hold (low trading volume) while waiting to get through this period of uncertainty. It's a little surprising the market hasn't declined during this period but I strongly suspect there are big-monied interests keeping the market from sinking in order to maintain the status quo -- those in power want to keep the power and those who have influence over the government (big money, whether that's banks, pharmaceuticals, big Ag or other corporate interests) want to keep that influence. This has created a strong support effort to get Clinton elected in order to extend the current power structure. That's not a political comment since it wouldn't matter which party was in power. In fact we've seen very little difference between the parties as far as how this country is run (into ruin).
The big question is which way the market is going to break. The pattern for the blue chips (descending triangles) suggests an upside break following the election. But keep in mind what happened to the bullish descending triangle for gold. NDX is in a rising wedge ending pattern and might have finished or could see a choppy sideways/up continuation to finish its rally shortly after the election. The RUT is threatening to break down now and that would not be a good sign for the broader market. Keep an eye on it and HYG for advance bearish warning (or not).
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