The stock market has been whipping up and down since the August 8th highs and traders are probably getting tired. Tuesday's big rally on low volume (short covering) was followed by today's gap down and sideways trading that created a doji day. Traders are wondering which way to lean.
Today's Market Stats
The price results seen in the table above look decidedly bearish and that resulted from this morning's gap down. There was no follow through to the downside and the bounce off the initial low actually produced slightly bullish market internals. But it was just another low-volume day with no conviction by either side as each waits for the other to blink after the whipsaw gyrations this month.
Other than the noise from the White House and the even more distracting noise from the mainstream press, there was little to help guide investors today. Many are waiting to see what comes out of the Jackson Hole meeting of global bankers that starts tomorrow and today's trading volume was the lightest of the year when you exclude half-day sessions. There's probably not a lot that can be gleaned from today's price action.
This morning's gap down was the result of steady selling in the futures overnight, which was blamed on Trump's statement that he'll let the government shut down if Congress doesn't fund The Wall on the Mexican border. First of all, he's a negotiator and he'll start off asking for the moon and then figure out what has to be compromised. Why anyone reacts to his bluffing statements is beyond me. Second, if the government shuts down it would probably help the deficit so go ahead, make my day. Only kidding of course (?) but it does seem to me the press can make a mountain out of a molehill.
There's actually very little to report on since the geopolitical news was quiet and bankers are on their way to Jackson Hole so they weren't out there today trying to confuse the market. The market was left on its own and it didn't know what to do. I'll simply dive into the charts for some clues.
S&P 500, SPX, Weekly chart
The SPX weekly chart shows the bearish divergence at the August high vs. the March high and is now threatening to break down. It's struggling to hold onto the uptrend line from February-November 2016, currently near 2426, which was tested with last Friday's and this past Monday's lows. It's an important trend line for the bulls to continue defending.
The next important support line below the February-November 2016 uptrend line is 2400-2405. A drop below price-level support near 2400 would be stronger confirmation that an important high is already in place. But there's still bullish potential to the intersection of some important trend lines -- a trend line along the highs from November 2015 - March 2017, the midline of the up-channel from 2010-2011 and a trend line along the highs since April 2016 (excluding the March 1st high), all of which intersect near 2525 at the end of this month.
S&P 500, SPX, Daily chart
Tuesday's rally for SPX had it closing just above its broken 50-dma near 2450 but it then gapped back down below 2450, leaving a head-fake break. The bounce off this morning's gap down had it almost back up to the 50-dma but stopped about a point below it. The bulls want the 50-dma recaptured and then see a break of the downtrend line from August 8th, currently near 2460. The bears want to see a continuation lower (bearish kiss goodbye following the back-test) and a drop below Monday's low at 2417 in order to confirm a stronger selloff will likely follow.
Key Levels for SPX:
- bullish above 2475
- bearish below 2420
S&P 500, SPX, 30-min chart
Today's small sideways consolidation looks like a bearish continuation pattern following this morning's gap down. It might be good for just another leg down to about 2434, for two equal legs down from Tuesday's high, and then start another rally leg. The more bearish pattern is a series of 1st and 2nd waves to the downside, which would mean a much stronger decline to follow, one that would likely drop SPX to its 200-dma, maybe near 2360, before getting much of a bounce.
Dow Industrials, INDU, Daily chart
On August 17th the Dow broke its uptrend line from November-May and yesterday's rally was back up to the line and its broken 20-dma. It looks like a back-test followed by a bearish kiss goodbye (albeit with only a small decline so far). Back below its trend line along the highs from May 2011 - March 2015, where it closed today at 21812, would be more bearish while a rally above its 20-dma at 21921 would be more bullish.
Key Levels for DOW:
- bullish above 22,086
- bearish below 21,535
Nasdaq Composite index, COMPQ, Daily chart
Similar to the SPX and Dow patterns, the Nasdaq bounced up to resistance with Tuesday's rally, which is its uptrend line from November-July. It had closed slightly above the trend line but this morning's gap down left a head-fake break and possible bull trap. The bounce off this morning's low almost made it back up to the line, now near Tuesday's high at 6302, but is currently looking like a back-test that's ready for its bearish kiss goodbye.
Key Levels for COMPQ:
- bullish above 6424
- bearish below 6177
Russell-2000, RUT, Daily chart
The RUT was relatively strong today since it made it back into green following this morning's gap down. The bounce off its August 18th low also looks impulsive, which suggests just a little deeper pullback and then another leg up for a larger bounce correction to its July-August decline. For now I'm depicting a larger bounce up to the 38% retracement of its decline, near 1389. But it's possible we'll only see a bounce up to its broken uptrend line from March-May, currently near 1382, which would coincide with a back-test of its broken 200-dma.
Key Levels for RUT:
- bullish above 1413
- bearish below 1347
10-year Yield, TNX, Daily chart
Since the July 6th high for TNX I've been waiting to see what is going to develop. I've been thinking yields will head lower but the fact that it's building another descending wedge (similar to the May-June pullback) it has me wondering if we're going to first get another leg up like the June-July rally.
The difference with the current descending wedge is that it is not showing bullish divergence like that seen for the May-June wedge. I think we'll see a breakdown from the wedge, in which case the decline would likely accelerate following the breakdown from a bullish pattern (failed patterns tend to fail hard).
Below 2.14 would be a bearish heads up and below 2.10 would confirm a breakdown in progress. If we do see a breakdown, there will be time to evaluate the decline and figure out a downside objective. There will be potential support near 2.00, which is a downside objective following the double top between December 2016 and March 2017. That projection crosses the bottom of a larger descending wedge (almost a parallel down-channel) for the decline from December 2016 on September 1st.
High Yield Corporate Bond fund, HYG, Daily chart
A week ago I had shown the HYG chart, updated below, to point out how it had broken down from its shallow rising wedge pattern and bounced back up to the bottom of it. It then dropped back down on August 24th to its 200-dma, bounced and is now back up near the bottom of the rising wedge again, currently near 88.12. Two equal legs up for the bounce off the August 10th low also points to 88.12. The broken 50-dma is also now approaching 88.12 and it's likely HYG won't be able to do better than that. I expect to see HYG continue lower, which would show a reluctance to hold riskier bonds. That in turn would be a bearish warning to stock holders.
Baa Corporate bond yields vs. 10-year yield, chart courtesy St. Louis Federal Reserve
Following up the chart above, the chart below shows the spread between TNX and Baa Corporate bond yields, which has dropped below where it was in early 2014 (a high for HYG but not the stock market, which made it higher into a large rolling top pattern into mid-2015). The spread was even lower (near 1.6) in 2006-2007 before skyrocketing in 2008 when the financial world was falling apart.
So this is a good measure of sentiment in that chasing slightly higher yields in junk bonds is a sign of confidence in the economy and markets. When fear enters the arena those same junk bonds sell off hard and drives yields higher. At the same time Treasuries are bought (safe haven) and drives their yields lower. While this spread can always go lower and can stay low for a long time, it can provide a good warning sign when it starts back up.
Transportation Index, TRAN, Daily chart
The TRAN has been a leading indicator as far as showing us potential weakness in the broader stock market, peaking about a month before the Dow. Today it dropped below last Friday's low, something the Dow has not done yet (it will need to drop below 21641 in order to accomplish the same or about 170 points below today's close).
The TRAN looks bearish following the multiple back-tests and failures since first bouncing off its 200-dma on August 2nd. It back-tested price-level S/R near 9310 on August 8th (the Dow's high) and then a higher bounce into the August 16th high was a back-test of its broken 50-dma. It then dropped back down and broke its uptrend line from June 2016 - May 2017 as well as its 200-dma on August 17th. Yesterday's rally was good for a back-test of its broken 200-dma and its declining 20-dma and today's selloff leaves another bearish kiss goodbye.
This is all bearish price action and there's very little reason to want to buy the pullback. The next potential support level is the May 18th low at 8818 and the uptrend line from January-June 2016, near 8725 by the end of the month.
DJ US Home Construction index, DJUSHB, Daily chart
In addition to the transports, the home builders are good to watch to see if they support the idea of a growing or shrinking economy. Both are looking weak and that portends weak things for the economy and the stock market. The home builders had been working their way higher in a rising wedge since the March 16th high and showing bearish divergence along the way. The final part of the rally, following the July 10th high, was a choppy move with further bearish divergence.
The choppy ending pattern warned us of a top and now price has dropped below the bottom of the rising wedge as well as its 50-dma. This morning's report of weak new-home sales helped trigger more selling in the home builders. The risk now is that the rising wedge is likely to get retraced quickly if indeed the index has topped, which would mean a fast trip back down to the April low near 630. That would also be good for a test of its 200-dma.
U.S. Dollar contract, DX, Daily chart
Following the August 2nd low for the US$ I thought we'd see a multi-week consolidation over to the top of its steeper down-channel for price action since May. A wider down-channel from January was broken in mid-July and I thought we'd likely see the bottom of it act as resistance if back-tested, which it was last week. The dollar is now pinched between price-level support near 93 and the bottom of the wider down-channel and top of the steeper down-channel, which are currently near 93.65. It's possible we'll see a larger consolidation before heading lower but the risk is for another leg down sooner rather than later. The next downside target is near 90.
Gold continuous contract, GC, Daily chart
Gold is struggling at price-level resistance near 1298 (two previous highs in April and June) but consolidating near this level has it looking like we'll see a bullish breakout. It has already broken its downtrend line from September 2011 - July 2016 and it climbed back above its uptrend line from December 2016 - May 2017, both of which are bullish.
Assuming gold can break price-level resistance at 1308 (its January 2015 and November 2016 highs) we should see a nice rally. The upside target will be 1377 where the rally from December 2016 would achieve two equal legs up. That would also be good for a test of its July 2016 high at 1377.
Silver continuous contract, SI, Daily chart
Gold bulls would like to see support from silver and right now they don't have it. Silver has been struggling to get back above its broken uptrend line from December 2015 - December 2016, currently near 17.20. Silver is also currently struggling to get back above its broken 200-dma, which has been acting as resistance since first tested on August 10th. If silver bulls can break through 17.20 they'll then have to deal with the downtrend line from July 2016 - April 2017, near 17.55.
Oil continuous contract, CL, Daily chart
Since the low in June oil has been attempting a bounce and essentially ping-ponging between support and resistance at its moving averages and broken uptrend line (April-August-November 2016 was resistance to the high on August 1st. The pullback from the August 1st high found support at the 50-dma but the bounce stopped at the 20-dma. I think oil is heading lower but I can easily see another bounce higher to test its downtrend line from May 2015 - January 2017. Even the oscillators are currently neutral so there's no good trade setup here.
Thursday morning is another light one for economic reports, which will include the usual unemployment data, existing home sales (no change expected) and natural gas inventories. Nothing market moving there.
Today's doji day was on the lowest volume day of the year (excluding half-day sessions) and this followed a low-volume day for Tuesday's big rally. Short covering on Tuesday led to a gap down and not much else today. Investors are waiting for something and playing it cautious after this month's whipsaws. Maybe something out the Jackson Hole meeting will trigger a bigger move one way or the other.
The 3-wave pullback from August 8th could easily be viewed as just an a-b-c pullback correction that will now lead to another rally to new all-time highs (except the RUT). That means today's little pullback should see a reversal, either from here or after a little lower to create a small a-b-c pullback from Tuesday. In any case, the bulls will be weakened further if they don't get another rally going by Thursday afternoon and certainly on Friday.
The bears will be in good shape if Tuesday's rally is reversed since the more bearish wave count would then be in play, which calls for a much stronger decline in the coming week(s). We should know which direction will be the right one by Friday at the latest. Trade carefully since we're probably looking for a big move in the coming days.
Good luck and I'll be back with you next Wednesday.
Keene H. Little, CMT