The market has been consolidating since last Friday as it waits to get through some potentially market-moving news this week. The consolidation looks like a bullish continuation pattern but a new rally might not get started until the market shakes out a few bulls.
Today's Market Stats
The market's consolidation has presumably been because it's waiting to get through Thursday when we'll hear ex-FBI Director Comey's testimony to Congress and learn what the ECB's next move will be. Thursday night we'll get the results of the UK election so Thursday/Friday could see the market break out/down from this week's consolidation.
Very little has happened in the market this week and economic reports have been quiet as well. There's been very little geopolitically as well and the consequence has been a market that doesn't know what to do next. The anticipation of Comey's testimony has become the latest reality-TV show and all 3 major news networks are going to be providing live coverage. I'm sure they'll all be offering unbiased coverage (cough).
Some Washington D.C. bars will open early to host "viewing parties," which shows us the whole event has captured the attention of people and obviously the market as well. The whole thing has become a staged show by the Democrats (and the left leaning major media) in an effort to further discredit Trump. Whether he did something illegal or not is now not the point. And would have Hillary and Bill in office been any better when it comes to lies, shenanigans and more lies? The whole system is about as corrupt as it can get without blatant violations of public trust (although I think we're there).
At any rate, let the show begin so that we can get our market back. How it will react is anyone's guess so all we can do is see if the charts should have us leaning one way vs. the other.
S&P 500, SPX, Weekly chart
From a weekly perspective I see upside potential for SPX around 2500, which I know a lot of analysts are looking for as well. For a 5-wave move up from 2009 the 5th wave would equal the 1st wave near 2490. This 5th wave, which is the leg up from January 2016, has formed a rising wedge pattern (common for a market that has gone too far and starts to peter out in the 5th wave) and the 5th of this 5th wave would be 62% of the 1st wave near 2507. There's another short-term projection for the 5th of the 5th wave that points to 2485. So we have confluence between 2485-2507 for a projection for a final high. Note also how the top of the rising wedge pattern is near 2500 next week. Now all we need to see is another rally leg to complete this.
S&P 500, SPX, Daily chart
The move up from March 27th is a choppy move, which fits for the move up inside the rising wedge pattern from January 2016. An A-B-C move up from March 27th could complete with just a minor new high (to give us a small 5-wave move up from May 18th). But a larger pullback before heading higher is very possible and that would mean more whippy price action into July. I see the potential for a quick high (positive reaction to Comey's testimony?) and then a hard reversal back down or a strong drop down, possibly to the 2340-2350 area, before reversing back up. Be careful with your positions over the next few days and maybe weeks.
Key Levels for SPX:
- bullish above 2435
- bearish below 2400
S&P 500, SPX, 60-min chart
The 60-min chart shows a depiction (in green) to a minor new high to complete a 5-wave move up from May 18th. The May 25-31 and June 2-7 consolidations are exactly the same amount of time and therefore it could be ready for another thrust higher, presumably from a positive reaction to Comey. But the 3rd wave of the leg up from May 18th was a little shy of 62% of the 1st wave and if the 5th wave achieves only 62% of the 3rd wave we'll see a rally to only 2447, or lower, before reversing back down. This short-term pattern suggests the weekly projection to the 2500 area might not happen. Or it might not happen until we get a large pullback (2340-2350) first.
Dow Industrials, INDU, Daily chart
The Dow has the same pattern as SPX and the same short-term and longer-term possibilities. If we do get a strong rally in the next week or so I see the potential for the Dow to reach 21600 by mid-June, which is where it would run into its trend line along the highs from May 2011 - December 2014.
But short term, if we get just a quick pop higher, we could see the rally finish around 21300 and then reverse back down. If we get a negative reaction to news and the Dow drops below its May 31st low at 20942 we could see a sharp drop down to its April 19th low near 20380 before setting up the next rally leg (a sharp decline would look like the completion of a larger pullback pattern and NOT the start of a more serious decline).
Key Levels for DOW:
- bullish above 21,212
- bearish below 20,942
Nasdaq-100, NDX, Daily chart
NDX has been consolidating just below its trend line along the highs from November 2014 - July 2015, currently near 5910. This is just above a price projection at 5906 where the move up from April 13th would achieve two equal legs up (for a possible a-b-c move). It's also up against the top of a parallel up-channel for its rally from March, the top of which crosses the 2014-2015 trend line near 5915 in the next few days. There's strong resistance just above but it also means a rally much above 5925 would be a bullish breakout.
Key Levels for NDX:
- bullish above 5925
- bearish below 5762
Russell-2000, RUT, Daily chart
The RUT has been a choppy mess since December and has been running much weaker than the big cap indexes. With all the 3-wave moves and reversals it's near impossible to figure out whether it's going to head higher or lower from here. It's simply not a helpful index to follow at the moment. If it does head higher we could see another test of the trend line along the highs from June 2007 - June 2015, now near 1435. This is the top of a possible large megaphone topping pattern so I wouldn't trust a move up to 1435 for a longer-term hold position.
Obviously a sustained move north of 1435 would be a bullish breakout. If we get a downside reaction to news we could see the RUT drop down to price-level support near 1347 and maybe down to the trend line along the lows since January (the bottom of a smaller megaphone pattern since December, which is at the end of the larger megaphone pattern).
Key Levels for RUT:
- bullish above 1400
- bearish below 1300
We have had a large difference this year between the small and large cap stocks, with SPX up +8.5% this year while the RUT is up only +2.8%. Some of the outperformance in the large caps has to do with the strength in foreign markets, which is when the large-cap multinationals tend to do better. The small caps reflect more of our local economy and smaller companies have been struggling more. So which index is our Goldilocks index that's not too strong and not too weak? Enter the midcap stocks, which I've now added to the Market Stats in the table at the top of the wrap.
S&P Midcap 400 index, MID, Daily chart
If the midcap index is a better reflector of the stock market I'd say the bulls are in good shape for months to come but not before we see a pullback, as depicted in green on its chart below. The sideways triangle fits well as the 4th wave correction in the rally from January 2016. A 4th wave leads to the 5th wave (up in this case) to complete the move, which is why sideways triangles (typical for 4th waves) tend to point to the final move. The bottom of the triangle and the uptrend line from January-November 2016, near 1680, gives us a downside target for now.
The wave count inside a triangle is typically a 5-wave move, labeled a-b-c-d-e and we're now waiting for a pullback for wave-e. Back down to the bottom of the triangle would be a very good setup to get long for the next rally. The 3rd wave of the leg up from January 2016 was a little more than 62% of the 1st wave (typical inside a rising wedge pattern) and if the 5th wave achieves a little more than 62% of the 3rd wave we get an upside projection around 1850-1875.
A projection from 1680, the presumed low for the completion of the 4th wave, to 1875 would be about a +12% rally. This is of course speculation at this time but it will be a pattern that I'll continue to watch since it could provide us with a good idea about what the market will do next.
Key Levels for MID:
- bullish above 1761
- bearish below 1673
I've been watching the bond market closely since December as yields pulled back their highs back then. Most people feel the bond market has bottomed and that we're now in a new bull market for bonds. I still hold onto my opinion that the bond's bull market has not ended yet and that we'll probably see the 10-year below 1% before the bull market is finished. This is part technical and part fundamental, with the fundamental part having to do with a deflationary cycle that I believe we're still in.
We currently have a large credit bubble and when (not if) it pops it will create havoc in the financial system (again). Credit contraction is deflationary and I see no way to avoid what's coming. Stocks will tank during this time and the new TINA (there is no alternative) investment will be bonds, not stocks. But obviously I could be wrong (it happened once back in 1982) and that's why I'm watching the bond pattern carefully.
U.S. Treasury 30-year Bond, ZB emini contract, Monthly chart
The big picture is offered with the monthly chart of ZB, which is the emini futures contract for the 30-year Bond. There is more history with the 30-year than the 10-year so that's why I use it. ZB is unarguably in an uptrend that started from the low in 1981. It's been inside a parallel up-channel following the 1985 peak and suggesting bonds have peaked is really nothing more than top picking (I've been known to try that a time or two).
ZB dropped below the midline of its up-channel back in November when yields spiked up following Trump's election. It poked below its 50-month MA twice, in December and March, but is currently holding above this MA. If it gets back above its midline, currently near 157 (about 2-1/2 handles above its current price), it will remain bullish. If it drops below its 50-month MA we could then see a drop at least to the bottom of its up-channel, currently near 136. That would obviously spike yields higher. RSI has curled back up from above the 40 level, which it has consistently done while in its up-channel. From a monthly basis I don't see a reason (yet) to turn bearish bonds.
10-year Yield, TNX, Daily chart
The 10-year yield, TNX, has been chopping its way lower since December and that could be an indication that it's just a corrective pullback that will be followed by another climb higher. But so far TNX has been acting more bearishly than bullishly (coinciding with the opposite I'm seeing on the ZB chart since December).
As I've mentioned in previous market wraps, the double top between December and March, with the valley in between, gave us a trading range as a downside projection once TNX broke support near 2.321. The downside projection is near 2.00, which would easily have it closing its November 14th gap, at 2.117, but it would still have more work to do to reach its November 9th gap at 1.862. There's one wave count idea (double zigzag for the pullback from December) that points to 1.98 for two equal legs down. Therefore I think a break below 1.98 would be more bearish than what we've seen so far.
The bearish price action I've seen so far is breaks of support and then only back-tests before proceeding lower. The latest was a break of its 200-dma last Friday and then a quick bounce back up to it on Monday before dropping away to a new low. It was also a break of price-level support (the top of its November 14th gap and the April-May lows) near 2.19, which was also back-tested on Monday. Today's bounce up to 2.183 is another back-test of its broken 200-dma at 2.184.
Note also that the double top was above the downtrend line from June 2007 - December 2013 but then it dropped back below the trend line when it broke its uptrend line from July-September 2016. Again, bearish price action. We'll have to see if today's back-test can get some upside follow through, otherwise a continuation lower would continue to target the 2.00 projection.
KBW Bank index, BKX, Daily chart
BKX continues to leave us guessing about its next move. It remains above the neckline of a possible H&S top, which is the trend line along the lows since January and currently near 86.80. But it also remains below its crossing 20- and 50-dma's, near 90.50 and 90.95, and its downtrend line from March, currently near 90.75. A sustained breakout above 91 would be at least short-term bullish whereas a breakdown below 86.70 would likely see a decline to price-level support at its July 2015 high at 80.87 and potentially down to its H&S price objective at 75.25.
U.S. Dollar contract, DX, Daily chart
The US$ continues to work its way lower but it's starting to show minor bullish divergence against its May 23rd low. The bottom of its down-channel from January is currently near 95.75 and a downtrend line along the lows from March-May is near 96 so watch for possible support between those two levels. Lower than 95.50 would likely see a drop down to 94.79 where the 3rd wave of the decline from January would be 162% of the 1st wave down. Once any of these levels are achieved and we then get a bigger bounce/consolidation we'll get some more clues about whether or not we should expect lower.
Gold continuous contract, GC, Daily chart
On Tuesday gold made it up to its downtrend line from September 2011 - July 2016 (log price scale, whereas the trend line is lower when using the arithmetic price scale, which is usually not as accurate when looking at large price swings over a longer period of time). At the same time it achieved two equal legs up for the rally from May 9th at 1296.80 (yesterday's high was 1298.80 and it closed at 1296.60). Today it pulled back and we're left to wonder if we will now see a reversal back down.
Gold bulls need to see gold rally above 1300, although watch carefully if it reaches a price projection at 1317.20, which is where it will achieve two equal legs up from March 10th. The overall pattern of the bounce off the December low has it looking like it will all get retraced but I could argue for a little higher before it does that. A move up to the top of an up-channel for its rally from December would mean we'll see close to 1350 before potentially moving back down.
Oil continuous contract, CL, Daily chart
Oil has been in a whippy pattern for a long time and it's anyone's guess which way this will resolve. I think oil is in the process of rolling over and will start to accelerate lower but that opinion and $3.00 will get a decent cup of coffee. For now the key levels to watch are the May 5th low at 43.76 and the May 25th high at 52. Mind the chop in between.
There are no market-moving economic reports the rest of the week and other than maybe being moved by the ECB rate decision and/or the UK election results (late Thursday night), the biggest market-moving event will be Comey's Congressional testimony on Thursday. That could cause some volatile price action on Thursday.
The market has been on hold since last Friday and the presumed reason is that it's waiting to get through the Comey Congressional testimony on Thursday. If he drops a bombshell on the Trump Tower, indicating Trump tried to thwart an FBI investigation into Flynn and other accusations about ties to Russia, we can expect the market to tank. It would put a nail in the coffin of expectations for what the market perceives as positive changes (tax rules, business rules, infrastructure spending, etc.). The rally since November has been based on expectations that Trump would achieve his campaign promises and any trouble for Trump could torpedo those expectations.
If Comey indicates Trump was not trying to thwart any FBI investigation we'll probably see the market rally in relief. But a news-related spike could finish the leg up from May 18th, which in turn could complete a larger upside pattern. Therefore I'd be very careful chasing the market higher from here. It's possible we'll see a stronger rally develop and have SPX reach 2500 but first I'd want to see it can successfully get through 2450 before I would trust the move.
The bottom line is that I see the potential for a lot more price volatility in the next couple of days/weeks and it will likely remain a trader's market, not a buy/sell-and-hold. Trade carefully.
Good luck and I'll be back with you next Wednesday.
Keene H. Little, CMT