Everyone is making a big deal about the longest losing streak for the stock market in five years, down 7 days in a row after today's loss. Many argue it means nothing but concern over the uncertainty about the upcoming elections but there's some historical precedent for the losing streak and its importance in predicting what will happen next.
Today's Market Stats
A string of losses for 7 or more days in a row has only happened 3 times in the last 20 years and now we have the 4th time with today's loss. Each of the prior 3 times coincided with a major financial crisis for the market to deal with. The worst losing streak was an 8-day with the Lehman Brothers failure in October 2008. The next two times were 7-day losses when the U.S. debt was downgraded in July/August 2011 and then when the EU experienced its financial crisis in November 2011 (when the cost of insurance for EU debt climbed to a record level). The market sniffs out trouble in advance and the losing streak has been indicative of trouble ahead.
The interesting supposition here is that the current 7-day losing streak might be portending a Trump win, which most believe would cause a larger selloff in the stock market. Wall Street has made it abundantly clear it wants Clinton to win since it would keep the current power structure and influence in place.
Trump is a huge unknown and the market hates uncertainty, which is one reason why the market has been declining -- Trump is climbing in the polls and now the race is in many respects too close to call. Keep in mind that Brexit was not supposed to happen according to the elitists and mainstream media. The market will rally if Clinton wins but she's damaged goods following the latest email scandal and her presidency would hardly go smoothly. Many Republicans are out for blood. It's all reason enough to feel very uncertain about what's next.
The market is not paying much attention to anything else at the moment but this morning's ADP Employment report didn't help the market's mood. The report showed employment climbed 147K, which was below expectations for 165K and much less than 202K in September (revised up from 154K). The market has been expecting Friday's nonfarm Payrolls report to show an increase from 156K to 175K so there's the possibility for disappointment from that report.
This afternoon's FOMC announcement was a non-event since no one expected the Fed to change anything. They continue to jawbone the market into thinking it will be able to raise rates in December (their last chance to raise rates in 2016, something they've been attempting to do since last December) but their wording is basically "we think we can, we think we can, we think..." What they actually said was "The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of further progress toward its objectives."
Before the FOMC announcement the odds for a rate hike stood near 70% and then after the announcement the odds increased to 80%. But the bond market is not showing any real concern about a rate increase since it has been rallying since November 1st, including today, and pulled back only a little after the announcement. A bond rally of course drops the yield and that's in defiance of the Fed wanting to raise rates.
The stock market has clearly been bearish, with a 7-day losing streak, but it's not been as bearish as previous losing streaks. Between the "losing less" and the choppy pattern we've been in since August, it's not hard to argue the bullish case here, especially if we continue to see a choppy consolidation into the election and Clinton wins. Look out above if that happens. Conversely, the choppy decline could be the beginning of a waterfall decline and if Trump wins we're going to see the waterfall decline accelerate to the downside. Both possibilities need to be respected and at the moment I could argue a case for either one. We'll have to let price action, with the help from charts, tell us which direction to trade.
S&P 500, SPX, Weekly chart
The descending triangle pattern for SPX that I had been tracking for the past several weeks, which is typically a bullish continuation pattern when it follows a rally, was broken this week with the decline below 2120. Failed patterns tend to fail hard and that leaves SPX vulnerable to a strong selloff from here. There is one other potentially bullish way to look at the pullback, which I discuss with the daily chart below, so I wouldn't say the bears have a slam-dunk setup here but if you're long you need to understand the risk here. The first thing the bulls need to do is recover SPX back above 2135, which would be a heads up that a new rally could be starting.
S&P 500, SPX, Daily chart
On the SPX daily chart I added a parallel down-channel for the move down from August, the bottom of which is currently near 2100 and SPX closed marginally below it today. This down-channel can be interpreted as a bull flag pattern, especially with the choppy price action we've seen since August. I would expect this down-channel to hold if it's to remain bullish so today's throw-under needs to turn right back up on Thursday if the bullish potential is to play out. But if the selling continues I would watch to see what happens near the price projection at 2089.54, which is where the move down from September 22nd would have two equal legs down and where it could complete a corrective wave pattern that will then lead to a new rally. But if SPX drops below its 200-dma, currently near 2081, I think it would be a strong statement that the market is in trouble and the 7-day loss we've seen would be predicting another strong market decline.
Key Levels for SPX:
- bullish above 2135
- bearish below 2081
Dow Industrials, INDU, Daily chart
The Dow has been holding up relatively well compared to the other indexes but it too is threatening to break down. It has had the "cleanest" descending triangle for the consolidation following the August high, and the expectation out of this pattern has been another rally leg. Breaking down below 18000 would leave it a failed pattern and that would signal strong selling ahead. But at the moment the breakdown is marginal and could still recover. It would have been better for the bulls if it recovered today instead of closing lower, but today is the first close below 18K and therefore it has another chance to recover. Similar to SPX, there is one other pattern that could be playing out, which is also a bullish one and I show it on the 120-min chart next.
Key Levels for DOW:
- bullish above 18,260
- bearish below 18,000
Dow Industrials, INDU, 120-min chart
Instead of a descending triangle for the Dow and instead of a parallel down-channel like for SPX, it's possible the Dow has been hammering out a bullish descending wedge for the pullback from August. The bottom of the wedge is the line along the lows from September 12 - October 13, which is currently near 17930, and it was tested with this afternoon's low. Much below 17925, on a closing basis, would tell us the descending wedge idea is not correct but for the moment it's a warning for bears not to get complacent here since the wedge tells us the entire pullback from August (18668) will be retraced and relatively quickly. The bullish interpretation portends a win for Clinton.
Nasdaq-100, NDX, Daily chart
On Monday NDX broke down from a bearish rising wedge but Tuesday's decline put an exclamation point on the breakdown. This pattern points to a fast decline to the beginning of the wedge, which is the September 12th low at 4656, before we'll see an appreciable bounce correction. But the market is short-term oversold (7 days down in a row) and could get at least a bounce at any time. There is of course the possibility that the big sideways consolidation since August is a bullish continuation pattern and will lead to another rally leg. A rally above 4840 would have me thinking a little more bullishly but for now it's looking more bearish.
Key Levels for NDX:
- bullish above 4840
- bearish below 4740
Russell-2000, RUT, Daily chart
The RUT has been the leader to the downside and while the blue chips were fighting gallantly to hold support the RUT was breaking down. The techs followed and finally the blue chips, which tells us risk-off has been the trade lately and that could continue at least into the elections. Risk-on will be the play if Clinton wins but right now there's too much worry about what could happen if Trump wins and investors have been bailing out of the riskier small caps. On Tuesday the RUT broke double support at the bottom of an up-channel from April and the bottom of a down-channel from September. Today's selling put an exclamation point on the breakdown and now we wait to see if price-level support near 1160 will hold. It's more bearish below that level, to at least its 200-dma near 1149, and potentially down to its uptrend line from March 2009 - October 2011, currently near 1114. If 1160 holds I see the potential for a big bounce in November before heading back down and if it gets back above 1215 I'd start thinking more bullish, such as a run to new highs.
Key Levels for RUT:
- bullish above 1215
- bearish below 1176
10-year Yield, TNX, Daily chart
Monday saw the 10-year gap up to 1.879, a little higher than I thought it would reach with this rally, but it was only a minor jump above the top of a parallel up-channel for the rally from July. Tuesday it gapped up again and tested the high before selling off sharply (with a bond rally). Today it broke below a short-term uptrend line from September 29th, currently near 1.819, and suggests yields could be starting back down (with a rally in bond prices).
High Yield Corporate Bond fund, HYG, Weekly chart
I've been suggesting recently to keep an eye on HYG since it's a good reflection of how much investors are willing to hold onto the riskier end of bonds. HYG has been underperforming the stock market for a long time and that's been a longer-term warning for stock market bulls. On October 26th it broke down from a rising wedge for the rally from February and the past two weeks have seen strong selling, which can be seen on its weekly chart below. As you can see on the chart, previous breaks of rising wedges have led to sharp selloffs and I expect to see more selling for HYG. Currently it's testing its broken downtrend line from June 2014 - April 2015, near 84.80 (today's low was 84.81) and it could get a bounce before heading lower (similar to the possibility for a stock market bounce).
Corporate High Yield Bonds A-D line vs. SPX, chart courtesy mcoscillator.com
Supporting a reason to feel more bearish than bullish HYG is shown on a chart done by Tom McClellan. The red line shows the advance-decline line for Corporate High Yield bonds and previously when it had made a lower high vs. a higher high for SPX it then led to a strong correction in the stock market. That's the current situation. Also, when the red line broke its uptrend line (gray dotted lines) it wasn't long before the stock market followed. The uptrend line from February has been broken and SPX broke its uptrend line from February last week.
Transportation Index, TRAN, Weekly chart
We have a potentially bullish signal from the Transports, which have not succumbed to the selling seen in the broader market. That's bullish divergence and it needs to be respected by the bears. The choppy consolidation since October 4th looks like a bull flag continuation pattern and a break above 8150 would signal a new rally leg. There is the potential for a decline to kick into gear and a drop below 7850 would be a bearish heads up. It might be good for only a drop down to the uptrend line from January-June, which will cross its uptrend line from March 2009 - October 2011 near 7625 at the end of the month. From there another bounce back up to the top of a possible ascending triangle, near 8150, would be a setup for stronger selling.
U.S. Dollar contract, DX, Daily chart
The US$ has pulled back from last week but still well within an up-channel from May. The uptrend line from May-August is currently near 95.65, a little below its 200-dma at 95.90, and I would not begin to turn bearish the dollar until it drops below 95.50. It could pull back a little further but I continue to look for higher prices for the dollar, probably near 100 before starting another pullback in its larger consolidation pattern.
Gold continuous contract, GC, Daily chart
Gold has returned to the scene of the crime, which was the breakdown on October 4th from what was a bullish descending triangle that ran from July through August. The bounce off the October 7th low has now made it back up to the breakdown level at 1308 (today's high was 1309.30 and it closed at 1297.80). This is a classic back-test of support-turned-resistance and the play here is to short gold. A tight stop just above today's high makes for a low-risk play.
Oil continuous contract, CL, Daily chart
Oil peaked out near the 51.97 projection, for two equal legs up from August 3rd, with the high at 51.93 on October 19th. From there it has dropped back down and today it closed below its uptrend line from August as well as back below its broken downtrend line from June, both of which crossed today near 46. The setup is for oil to continue lower, although a bounce correction first is a possibility, and it takes a rally above 52 to show us the bulls remain in control.
Tomorrow's two reports tomorrow at 10:00, Factory Orders and ISM Services, have the potential to be market moving, but the big report will be Friday's NFP report since it will affect how much the Fed thinks it can raise rates in December.
There are short-term bullish divergences showing up on the intraday charts when looking at today's lows vs. yesterday's. The market is short-term oversold and the bullish divergence could be pointing to at least a higher bounce in the coming days. There's been heavier-than-normal put buying in the past 3 days and that's usually a good indication the market is reaching an oversold condition. Whether or not a bounce, if we get it, develops into something impulsive to the upside or only a choppy consolidation instead will tell us more about what to expect after the bounce.
The big unknown of course is how the election will go and what kind of reaction we'll see from the market. The assumption at this point is that it will rally with a Clinton win, which means the pullback we've seen will be just a correction and will lead to a new rally leg into the end of the year. But if Trump wins then I think the choppy pullback we've seen so far will be followed by a waterfall decline. Looking at the shape of the decline from August you can see it steepening and that could be foretelling the waterfall. In either case, I think flat or a straddle/strangle position on election day (the 8th) would be the best way to deal with the market. A directional play could be a big win or big loss and that makes it a high-risk play.
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
SAVE $50 on your EOY Subscription - ONE WEEK ONLY!
Long time readers of Option Investor know we launch our End of Year subscription special on Thanksgiving weekend. It will be 19 years this Thanksgiving. If you already know you want to renew your subscription at the cheapest price of the year then click the link below. I am offering an Early Bird Special with an additional $50 off for anyone that subscribes this week only. Once the special actually begins on Black Friday the price will revert to normal.
CLICK HERE FOR ADDITIONAL $50 OFF EOY SPECIAL