This week has the major indexes battling what could be strong resistance but so far they show no intention of pulling back. This is a potential turn week for the market and that has resistance levels important to watch.
Today's Market Stats
Following Tuesday morning's high we've had only a small pullback that was followed by another bounce attempt today. The major indexes closed in the green but other than the RUT's stronger performance (+0.6%) the rally attempt was weak. The Dow was the weaker index as Boeing (BA) and Disney (DIS) pulled the index down and kept it in the red.
There were no significant economic reports to distract the market this morning and it suffered a further pullback before bouncing back up. The report on crude inventories, which showed a larger decline, sparked a rally in crude prices and that's usually helpful for the stock market, especially the small caps (which benefits from the smaller companies in the oil sector). But as I'll review with its chart, even oil has made it back up to what could turn into strong resistance.
The major indexes are pushing up against what will potentially be strong resistance levels. With a rally that appears to be running out of steam there's a good chance resistance is going to hold, although I see the potential for at least minor new highs. In addition to resistance levels, which I'll review on the charts, this week is a potentially important turn week.
Today we have a full moon and we've had more than a few important highs (and lows) on the full and new moons. There is also an important cycle turn date tomorrow and at the moment it's looking like we have price, pattern and time coming together this week for what could be an important high for the market. But there's no evidence yet that a high is in place and for the moment the bulls still rule.
I've been reading reports lately about the support that the global stock markets have been receiving from the world's central banks. Between this kind of support and the continuing effort by companies to buy back their own stock it's been tough for bears to do anything with this market. That could continue for much longer than seems possible but eventually even this rally is going to experience a more significant decline.
The central banks have been quite public about their support for the stock market. The central banks are of course fighting to boost their economies and to a large extent that requires consumers to consume. One way to accomplish that is to get consumers to feel good about the economy and a higher stock market theoretically helps that.
There is also an effort by the central banks to improve the returns on their own money and since the stock market always goes up (cough) they figure it's a safe investment. The problem is most of their investing has been in the tail end of the bull market and therefore they're buying the highs (with the belief the market will simply head higher).
As an example, the Swiss National Bank (SNB) has also been a heavy buyer of the stock market and especially in the last quarter. Many well-heeled investors put their money into the Swiss banks and currency since it's theoretically a safer place to park your money. But with their banking system heavily invested in the stock market it certainly prompts the question about how safe their banks will be in the event their investments start to lose money.
The chart below shows the stocks that the SNB is mostly invested in and compares Q1 2017 holdings to Q4 2016. The numbers are times a million so $2700 in AAPL stock is actually $2.7B invested. They added about $1B in just AAPL stock in the first 3 months of this year and certainly helped the stock's performance this year. As you can see in the chart, SNB poured more money into the stock market in the 1st quarter than they did in Q4 2016. What could possibly go wrong with this picture?
Swiss National Bank stock holdings, Q4 2016 - Q1 2017, chart courtesy stansberryresearch.com
Warren Buffett recently announced the fact that he's holding a larger position in AAPL and the combination of "heavy hitters" has certainly helped the stock outperform to the upside. AAPL is up nearly +50% since November, which is considerably better than the +15% for SPX over the same time period. The techs have of course been helped and NDX has enjoyed a +22% rally since November.
AAPL has clearly been on a tear but what happens if these central banks become spooked with any kind of decline. Will they not just withdraw their support but also become big sellers? Can you imagine being a money manager for a central bank and having them breathing down your neck when their investments start losing value?
Before getting into a review of the major indexes I wanted to take a little time to review AAPL since it's been one of the strong drivers behind the rally we've seen and what happens in the near future could help determine market direction. A big-picture view of AAPL is shown with its monthly chart below.
Apple Inc., Monthly chart
AAPL's stock really took off from the lows hammered out in 2000-2003, when you could have bought it for a split-adjusted price near $1 (you can take out the butt-kicking machine now). Even though the stock continued to rip higher after pulling back into the January 2009 low (another butt-kicking for not buying the stock at the split-adjusted price of $11) you can see how the rally is "rounding" over and is showing monthly bearish divergence since early 2012. Whether or not the stock is peaking here is arguable but the rolling top pattern suggests it will peak here.
Apple Inc., Weekly chart
It's arguable that the completion of AAPL's rally was actually the April 2015 high (the completion of a 5-wave move up from 2003) and the rally from May 2016 is only a corrective move within what will become a larger pullback pattern. The weekly chart of AAPL, shown below, shows a 3-wave move up from May 2016 and as such it could be the b-wave of what will become a larger 3-wave pullback from April 2015. The projection at 151.35, shown on the chart, is where the 2nd leg of the move up from May 2016 is 162% of the 1st leg.
At this point the 3-wave move up from May 2016 is either a bearish a-b-c or a bullish 1-2-3 and we won't know which it is until we see the next pullback/decline. A multi-week/month choppy pullback would suggest a 4th wave to then be followed by another rally later this year. A sharp impulsive move down would suggest we're going to see a much strong decline for the rest of this year (down to at least the May 2016 low near 89). And then maybe after that we'll see another rally back up to the rounding topping pattern shown on the monthly chart.
Jumping into the major indexes, I'll start with the NDX since it's been the leader to the upside. It's also been benefitting from AAPL's rally. After it tops out it will likely provide an important clue for the rest of the market.
Nasdaq-100, NDX, Daily chart
As I've reviewed in the past for NDX, there were a few price projections that pointed to a 5654-5690 target zone and the high end of the zone was achieved with Tuesday's high at 5691.
As a quick review of its larger pattern, NDX has a 5-wave move up from November 2008, with the 5th wave being the rally from February 2016. It equals the 1st wave (November 2008 - April 2012) inside the target zone, at 5664. Once this 5th wave (the rally from February 2016) completes we will be set up for a much larger decline, even if it's going to be "just" a bear market correction to the bull market run from 2008.
The 5th wave (the rally from February 2016) is also a 5-wave move (the fractal nature of the market) and its 5th wave is the leg up from November 2016. This smaller 5th wave extended (it's larger than normal) and a common projection is where it equals the 1st through 3rd waves, which is where the 5654 projection comes from.
Now looking at the rally from November 2016, it too is a 5-wave move and once again the 5th wave has extended. Because the 3rd wave also extended I look for a price projection based on 162% of the 1st wave. This all sounds complex but I basically take each 5-wave move and figure out price projections based on the count. The 162% projection for the 5th wave of the rally from November 2016 points to 5690.46, which is the projection shown on the daily chart below. This is the high end of the 5654-5690 target zone that I've been looking for. Note also that the 5690 projection crosses the trend line along the highs from November 2014 - July 2015 this week.
Key Levels for NDX:
- bullish above 5690
- bearish below 5608
Nasdaq-100, NDX, 60-min chart
Now we zoom in closer to the 5th wave of the rally from November 2016 with the 60-min chart below, which is the leg up from April 13th. Once again this smaller-degree 5th wave is a 5-wave move, shown on the chart. Once again the 5th wave of the rally from April 13th extended and again I then look for a projection where the 5th wave equals 162% of the 1st wave.
The 162% projection points to 5689.31 and the fact that it fell on top of the larger-degree extended 5th wave (at 5690.46) has it looking like it's an important level to watch carefully. Notice the bearish divergence since MACD peaked on April 25th, which shows the slowing momentum of the rally. We have the pieces in place to call a high at any time and now we wait for the market to tell us whether or not it will top out near here.
S&P 500, SPX, Daily chart
On Tuesday SPX poked above its March 1st high, near 2401, but was not able to hold it. It remains to be seen whether or not we're seeing a double top in the making, with bearish divergence against the March 1st high, but that's the bearish setup here. Is SPX is able to push a little higher we could see it make it up to about 2415 where it would run into the trend line along the highs of the rally off the March 27th low.
Key Levels for SPX:
- bullish above 2415
- bearish below 2379
Dow Industrials, INDU, Daily chart
The Dow has been struggling to get out of its choppy sideways price action that it's been in since April 26th. If it's been in a bullish continuation pattern since that date we'll see a breakout to the upside and while I have trouble seeing the Dow heading up to 21539 (for two equal legs up from April 19th) that remains upside potential. That would get the Dow up to its trend line along the highs from May 2011 - December 2014, currently near 21450. The bears want to see the Dow below its crossing 20- and 50-dma's, near 20820 and 20795, resp., and then break its uptrend line from November-April, currently near 20750.
Key Levels for DOW:
- bullish above 21,170
- bearish below 20,775
Russell-2000, RUT, Daily chart
At its April 26th high, near 1426, the RUT had again tested its trend line along the highs from 2007-2015. This is arguably the top of a larger megaphone topping pattern (the bottom of the pattern is a trend line along the lows from February 2014). The top of the megaphone, using the log price scale, is approaching 1429 and remains the upside target if another rally can kick into gear.
When switching the chart to arithmetic price scale it shows the 2007-2015 trend line near 1400 and is once again acting as resistance after breaking last week. The RUT has been finding support at its 20-dma, riding up it since its May 4th low. The choppy bounce pattern looks like a correction to the decline from April 26th and two equal legs up for the bounce points to 1403.67, which is near the 50% retracement of its decline.
A rally above 1404 would therefore suggest another rally to 1429 is possible. But at the moment the RUT is facing resistance with a choppy bounce pattern that looks more like a bear flag than something more bullish. The bulls want to see the RUT above 1404 while the bears want to see it below 1378.
Key Levels for RUT:
- bullish above 1430
- bearish below 1378
Volatility index, VIX, Daily chart
While the indexes battle potentially significant resistance the VIX hit support at the bottom of a large descending wedge from 2015, at 9.77. It poked below the bottom of this wedge on Monday and Tuesday but closed at or back above the line. Tuesday's low was 9.56 but it closed at 9.96 following Monday's close on the line. It's possible this is the little throw-under completion to the pattern and now we'll see the VIX start to climb back up.
It's important to recognize that a climbing VIX, if that's what we see happen from here, is not necessarily a rally killer for the stock market. A rising VIX will show more fear entering the market but as we've seen at prior VIX bottoms, it's been common for the stock market to make a final high weeks, if not months, later. That could happen again but of course there are no guarantees that the market will ignore a rising VIX and keep rallying anyway.
KBW Bank index, BKX, Daily chart
The banks have been neither strong nor weak since BKX hit a high at 93.67 on April 26th. The sideways consolidation can easily be interpreted as a bullish continuation pattern, which points to another leg up to at least the March 1st high at 99.77. BKX is struggling to punch through its broken 50-dma, currently near 92.75 and today's close was 92.60.
A sustained break above 93.75 would bullish for at least another few weeks whereas a break below its 20-dma, near 91.38 on Thursday, would likely lead to a sharper decline. Another leg down would help create the right shoulder of a H&S topping pattern but that's yet to be proven. The neckline is currently near 86.85. In any case, follow the money whichever direction it breaks.
U.S. Dollar contract, DX, Daily chart
The US$ has shown us a series of lower highs and lower lows since its January 3rd high, which is the definition of a downtrend. But the pattern for its decline could be considered a bullish descending wedge, which is showing hints of bullish divergence. A break out the top of the wedge, currently near 100.36, would also be rally back above its broken 50-dma, which is dropping and currently near 100.06.
However, following the April 24th break of its uptrend line from May-August 2016 it's only been able to back-test the broken trend line since then. That includes the back-test on Tuesday and today, at 99.57, with its high at 99.61. We wait now to see whether the bearish or bullish pattern will be confirmed. If the dollar drops below Monday's low at 98.35 and stays below the bottom of the descending wedge it would leave behind a failed bullish pattern and would likely lead to a stronger decline.
Gold continuous contract, GC, Daily chart
Gold is approaching price-level support near 1205 and its pattern looks like it should find a tradable bottom soon. The decline from April 17th looks impulsive, which suggests another leg down following a bounce correction. Assuming it will soon find support to complete the leg down from April 17th, it will become a question about how high the bounce will go. It's anyone's guess but for now I'm depicting a bounce back up to the 1250 area where it would run back into its 20-, 50- and 200-dma's, which will likely be crossing around that level in a couple of weeks. For those interested in buying gold for a long-term hold position I think we'll see lower prices this year.
Oil continuous contract, CL, Daily chart
Today oil rallied up to its broken uptrend line from August 2016 and then pulled back. The bounce off its overnight low at 43.76 on May 4th would achieve two equal legs up at 48.75, which would also be a test of its broken 20- and 200-dma's. But if today's back-test is followed by selling it will leave a bearish kiss goodbye at support-turned-resistance. How oil trades from here could be a good indicator for the direction of the RUT and possibly the broader market.
Thursday's economic reports will include PPI data, which is expected to show a higher inflation rate in April than was reported for March. Any further slowdown in inflation would spark further conversation about whether or not the Fed will raise rates further in June.
On Friday, in addition to further inflation data with the CPI numbers, we'll also get retail sales data, which are expected to have improved in April over March. A negative surprise would tell us the consumer is not spending money and that would spark slowdown concerns
With several indexes bumping up against resistance while showing slowing momentum it's going to be important to see what the bulls can put together for the rest of the week. I see at least a little more upside, such as to SPX 2415, before turning back down into at least a larger pullback correction. But as laid out for NDX, there is the potential that we've seen the highs or will in the next day or two.
With price projections met, resistance lines being hit, price patterns that can be viewed as completed wave counts and a time window this week (full moon and an important cycle turn date) we have the pieces in place for an important market high. What we don't have is any evidence of a reversal and that keeps the bulls in charge until a top is more evident.
If the market rolls over it will then be important what kind of pullback/decline develops. If we get another multi-week choppy pullback (corrective wave count) we'll then know to expect higher prices into next month. But if the decline turns into a sharp impulsive move then we'll have evidence of a trend change. Until we see what happens after a top is in place we can't know what the larger pattern is and that means trading should be kept short term.
I think it's risky chasing the market higher and stops on long positions should be trailed and kept tight. Let the bulls prove they have more from here. Otherwise I sense there are some hungry bear ready to pounce.
Good luck and I'll be back with you next Wednesday.
Keene H. Little, CMT