The bulls are on a stampede and the bears have screamed "run away, run away" as the indexes rip to the upside following a steady rally that was looking tired. The rally into FOMC next week looks to be underway but with bearish divergences in a stretched market it's now getting a little dangerous to chase this higher.
Today's Market Stats
The rally off the November 4th lows has stretched most indicators into extreme overbought values but that sure didn't stop the bulls from stampeding the bears flat today. I think many bears tried to short what was looking like a top as the indexes struggled higher over the past week. They were shoved out of the market today and the short covering, along with some who are forced to chase the market higher this month (fund managers), and the result was a strong rally across the board and with strong advance-decline numbers.
Closing near the highs today has it looking like the market has further to go. A rally into next Wednesday's FOMC could be what we'll see but that would be particularly dangerous since it would be a buy the rumor, sell the news kind of setup. While there's clearly more upside potential after a day like today we do have to be concerned about the possibility of a blow-off top where the shorts are squeezed out and the last wannabe bulls were forced to chase the market higher. The vulnerability here is that the market could simply run out of buying power and then a pullback starts the covering of long positions and the selling triggers more stops and all of a sudden the talking heads on CNBC are looking for answers as to why the market is suddenly selling off hard. That's not a prediction from here but it is a risk for those chasing it higher and then not honoring your stops in a decline.
So why did the market rally so strong today after appearing to be tiring in the past week? Actually the more important question is does it matter why? Answering the why is like asking the market to be logical. But the rally clearly did catch more than a few leaning the wrong way and it could prompt more to chase it higher into next week. Many resistance levels and price targets were blown through today and we saw barely a dip today. That's actually one indication much of the rally was likely due to short covering.
Another warning sign came from the VIX, which had gapped down this morning but then started rallying even as the stock market continued its rally. The VIX finished the day above yesterday's close with a +3.6% rally. That's usually seen just before a market turn and while it's not a guarantee a top is just around the corner it does tell us there are likely some big players starting to buy some cheap insurance against the downside. It's wise not to be part of the retail crowd (which includes most fund managers) in a blow-off top (if that's what this is).
There was very little news today and regardless, the market is pretty much ignoring it all anyway. So I'm just going to jump into a review of the charts. Following the weekly and daily charts of SPX I'll explain a little about the Gann Square of 9 chart to show how the relationship between it and what's on the charts could provide some important clues here.
S&P 500, SPX, Weekly chart
Today's rally took SPX up through an important price level at 2223, which is the 127% of its previous decline (2015-2016). This is often a resistance/reversal level so the bulls would like to see a weekly close above this price. It's still within "throw-over" territory and with today's rally right up to its broken uptrend line from February there is the potential for the back-test to be followed by a bearish kiss goodbye. This follows an "almost" back-test on November 25th, which resulted in last week's pullback, and now we're getting another better back-test. The bulls and the bears each know what they need to see happen from here. A continued rally has upside potential to the middle of its up-channel from October 2011, which was last tested in April and again July-August. The line is currently near 2285, which is no longer that far away.
S&P 500, SPX, Daily chart
The SPX daily chart below shows the back-test of the broken uptrend line from February-June, currently near today's high at 2241. The bulls now need an overnight rally in the futures to get SPX to gap up over this resistance line. As mentioned above, a weekly close below 2223 would be potentially bearish but as long as SPX can stay above 2225 it will stay bullish.
Key Levels for SPX:
- Stay bullish above 2225
- bearish below 2194
Gann Square of 9 chart, middle top portion
A tool that I use and have shown periodically is the Gann Square of 9 chart, which I reproduced in Excel but is unfortunately too large to show here except in parts. In case it's useful, I show the middle top half and middle bottom half of the chart below. If this is getting too much into the weeds for you, just skip this section and pick it up with the Dow's chart that follows.
What I'm attempting to show is the relationship between time and price with the dates of the year around the outside of the chart (360 degrees almost equals the number of days in a year). The dates run counter-clockwise starting from March 21st at the 9:00 position (spring equinox, which was Gann's way of starting the new year). The prices in the boxes start at zero in the middle and then spiral out clockwise. The first circle around zero finishes with '9', hence the Square of 9 chart.
When prices line up with dates, or are 90 degrees or 180 degrees from each other, Gann believed they "vibrated" off one another and are important relationships to observe. The blue and green vectors are the ones potentially important at the moment since the blue one goes through the 666 low in March 2009 and the green one is 90 degrees from the date of March 6 (2009 low), which is off to the right side of the chart but not visible. Note the prices in the top row -- 2271 at the blue vector and 2273 at the green vector -- those are prices that "vibrate" off the March 2009 low and could be the upside target zone for SPX.
Another vector that I'm watching is the red one, which goes through 2261-2262 at the top. This goes through previous important levels, such as October 2007 price high, the April 2012 price high and the October 2002 price low. It's also square (90 degrees) to the April 2, 2012 high, which is off to the right side, as well as square to the October dates of the 2002 low, the 2007 high, the 2011 low and the 2012 high, which points off to the left side.
Gann Square of 9 chart, middle bottom portion
The blue vector that is 90 degrees to the right is also shown below (I couldn't get the whole chart in because I'd have to squish it too much and make it non-readable). It points to the October 2012 price high while to the left it points to the date of September 14, which was an important high in 2012. The blue vector to the left points to 2224. The blue vector pointing to the bottom is 180 degrees from the 666 low (in 2009) and it points to December 12th, which is this coming Monday. The green vector to the right (off the chart) points to March 6 (2009 low), which is 90 degrees from 667 (the actual low in March 2009 was 666.79, and off to the left it points to 2226. This is a reason I thought 2224-2226 would be an important level to watch if reached. It was not only reached but the rally blew through those levels so it remains to be seen if they were important. A drop back below them on Thursday would leave a one-day throw-over.
The green vector pointing at the bottom, which is 90 degrees from March 6 and 180 degrees from 667, points to December 8. That gives us a possible turn window between tomorrow and next Monday. If SPX rallies to 2271-2273 within this turn window it would be important to watch for a possible top within a potentially important price/time window. But SPX has already hit a potentially important price zone (2224-2226) and therefore a top inside the December 8-12 time window is possible.
For those who stuck with me through the above explanation of the potentially important time and price relationships, thanks for trying to understand it. It's not easy without a chart in front of you. If you'd like a copy of my Excel spreadsheet with the above chart, just email me to let me know. The bottom line from the above explanation, for those who skipped it, is that 2224-2226 is an important price/time window but an even more important price/time window is December 8-12 at SPX 2271-2273.
Dow Industrials, INDU, Daily chart
The Dow outshined them all today with its 300-point rally (+1.5%) but I can't help wondering if that was a defensive move by many -- better to be in the bluest of the blue chips in case a market decline is right around the corner. Many are going to start worrying about a sell-the-rumor reaction to the FOMC next week. There's no also a helluva profit for the year to protect. As a fund manager do you hold out for another 5% or do you protect against a 10% decline? The rise in the VIX today says some are thinking about the latter and could have been moving money into the relative safety of the Dow. Bonds also rallied and that's another potential safe-haven play.
The Dow's weekly chart shows RSI more overbought than it's been since May 2013. Going back before 2000 I can't find a time the daily RSI has been this overbought. This is a dangerous time for the market, especially with the bullish complacency that has come roaring back. The VIX dropped to 11.33 this morning, which is lower than it's been since August. Below 12 is a dangerous time to be long the market. But if this rally is going to continue at least into next week there are two levels to keep an eye on. The first is at 19670, which is where the rally from January would equal 162% of the August-November 2015 rally (as part of a larger 3-wave bounce off the August 2015 low). The second level to watch, if reached, is 19904, which is a projection for the leg up from November 18th. This leg followed the sideways triangle consolidation pattern off the November 14th high and might have marked the half-way point for the rally from November 4th). The Dow stays bullish above 19370 but be very careful if you're long and put in some stop protection.
Key Levels for DOW:
- bullish above 19,370
- bearish below 18,185
Nasdaq-100, NDX, Daily chart
The techs have struggled this week to keep up with the rally in the other indexes but they did some catching up today and beat out the RUT's weaker performance today. NDX now has a 3-wave bounce off last Friday's low and achieved two equal legs up with today's rally. That sets it up for a reversal back down but in reality its price pattern is a mess. It's been a choppy mess since August and it could continue to stay in a choppy sideways move for the rest of the year. It needs to get above 4900 to prove it's ready to break out otherwise we should be prepared for another reversal at any time.
Key Levels for NDX:
- bullish above 4900
- bearish below 4721
Russell-2000, RUT, Daily chart
The RUT appears to be heading for the top of a parallel up-channel for the rally from February, near 1372 on Thursday. Considering the bearish divergence at the current high vs. the November 25th high I think it would be risky to push your luck on the long side. There's no clear sign of an impending reversal yet but when it does start a pullback, considering the level of complacency in the market right now, we could see a fast drop back down. Adding to the bearish potential is a rising wedge pattern for the leg up from last Thursday, which suggests when it breaks it will likely quickly retrace this week's rally. Today's rally took it right up to the top of the rising wedge in what can be considered a completed 5-wave move. It could easily extend higher but again, its looks risky from here. But if the buyers keep this going, there's a large megaphone pattern that I've shown previously on the weekly chart and the top of the pattern is the trend line along the highs from 2014-2015, which is currently near 1397. That's the upside potential if the market is in a blow-off top heading into the FOMC announcement.
Key Levels for RUT:
- stay bullish above 1347
- bearish below 1308
KBW Bank index, BKX, Weekly chart
The banks have been on a tear to the upside and bullishly BKX made it above a trend line along the highs from April 2010 - July 2015, near 88. Further upside potential is to 97.07, which is where the 5th wave of the rally from March 2009 would equal the 1st wave. But at the moment BKX is now up near the top of a parallel up-channel from February, the top of which is the broken uptrend line from February-April-May. The weekly RSI and MACD are now more overbought than they've been since 1996. The rally is a wee bit stretched but of course that could continue at least into next week and potentially into the end of the month. It's just not a rally I'd chase higher from here.
Transportation Index, TRAN, Daily chart
Today's big deal is the TRAN getting above its November 2014 high at 9310, with today's high at 9383. The reason this is a big deal is because it finally matches the Dow's new all-time highs since 2014 and up until now we've had a bearish divergence between the two. With the TRAN's new all-time high we now have a DOW Theory bullish signal. In this environment of massively manipulated markets one could be excused for thinking the DOW Theory is no longer valid. The TRAN's rapid rise (in the face of slowing transportation numbers) might have been part of the manipulation so it's hard to judge whether or not this is meaningful anymore. But many still trust this theory buy signal and will be bullish based on it. That could add more bullish fervor to this market. The other bullish move today is the break above two parallel up-channels, one from January and the other from June, and if it pulls back to the top of the channels and holds as support it will keep the TRAN bullish. Now all the bulls need to do is prevent a one-day breakout whereas the bears want to see a drop from here back below the November 30th low at 8906.
U.S. Dollar contract, DX, Weekly chart
The US$ has pulled back from its November 25th high but it's trying to hold support at its March and November 2015 highs, near 100.60, and a shallow downtrend line from those highs, near 100.30. A failure to hold above 100 would tell us to expect at least a larger pullback correction, which could lead to a complete retracement of the rally from May and a drop to the bottom of a megaphone pattern, which will be near 91 in March.
Gold continuous contract, GC, Weekly chart
Gold has been struggling the past three weeks to hold price-level support near 1180 and I've been expecting a higher bounce, perhaps up to its broken 50-week and 200-week MAs, near 1260, before heading lower. But the longer it chops around 1180 the more bearish it will become and we could see another leg down sooner rather later.
Silver continuous contract, SI, Weekly chart
As many of you know, I like to keep an eye on silver to see if it's in agreement with gold. When they give me similar signals it adds confidence to my interpretation. On November 23rd and 25th silver bounced off price-level support near 16 and should be able to make it up to at least its broken 50-dma, near 17.54, and maybe its 200-dma near 17.69. Today's rally had silver popping above its broken 50-week MA at 17.17 and if the bounce has some life left (it's short-term overbought) we could see silver make it up to its downtrend line from July, currently near 18. It needs to break its longer-term downtrend line from 2013-2014, near 19.50, before it can be declared bullish so for now silver's pattern backs my belief that we're going to get just a bounce correction before dropping lower.
Oil continuous contract, CL, Daily chart
Oil's choppy move up from August has me leaning bearish, especially as it struggles with its previous highs in June and October. A parallel up-channel from August, the top of which is currently near 53.60, could be reached but the move up from November 14th achieved two equal legs up at 51.82 and it's looking like it could turn back down from here. It might stay trapped inside the bear flag pattern but would turn more immediately bearish below the November 14th low at 42.20.
There are essentially no economic reports for the rest of the week that will move the market, not that it's paying attention anyway.
The rally from November 4th is now going parabolic and it fits as the 5th wave of the rally from February. Both are reason enough to remain cautious about the long side. The rally in the VIX today offers another reason to be careful. A parabolic rally is often a sign of a blow-off top as the last of the shorts throw in the towel and the wannabe longs finally capitulate and buy into the last part of the rally. That's not to say this rally is toast here or in the next day or two but that's the risk for those chasing it higher and for those who remain complacent about it. Parabolic rallies never end well, never.
It's possible we'll see the rally continue into next week in front of the FOMC meeting. Whether the Fed will surprise us with something (such as nothing or a 1/2% increase instead of the expected +1/4%) or if it will simply be a sell-the-news reaction is hard to say. I see plenty of reasons to expect at least a little higher, especially if all we see are choppy consolidations near the highs. But if we see a sharp reversal back down it could be the start of a reversal of this week's rally and potentially the rally from November 4th and then much more. The longer-term pattern suggests we could be putting in a long-term top but that obviously is something we can only see in hindsight. There will be clues along the way but for now, while shorting this market is dangerous, buying this market now could be just as dangerous.
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
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