You can tell the market is nervous since every little news item causes a knee-jerk reaction that then gets reversed a day or two later. Both sides have been frustrated by not getting a trade to stick and stops are getting hit before many have an opportunity to take profits. Welcome to September.
Today's Market Stats
It was a relatively quiet day for the stock market today, especially considering the number of whipsaw moves we've seen since the August highs for the indexes. Today finished with a doji and as an inside day (mostly inside Tuesday's wider range). All of this points to an indecision day as traders try to figure out which way is up or down.
It was also quiet for economic reports this morning. The trading day started with a gap up, thanks to an overnight rally in the futures, but immediately sold off following the gap up. The selling didn't stick and the market rallied to new intraday highs before pulling back in the afternoon session. Equity futures have dropped back this evening and completed a round trip off this morning's lows.
Sticking a wet finger up into the wind I think the market will head lower before possibly setting up another rally into the end of the year but with all the choppy price action it's a challenge trying to get a bead on this market. All the jinking and jiving is making it difficult for traders and it could get more volatile this month. Even the VIX is jumping all over the place. It's certainly time for a little more caution than usual.
This afternoon's Fed Beige report was followed by a little more rally in the market but that was given up in the final 30 minutes. The report was basically neutral for the market since it didn't shed any new information. The language was the same -- "moderate growth" and wage pressures are "moderate." Inflation is less than their 2% target and they're not sure why wage pressures, and therefore inflation, isn't higher.
The Fed is stuck in their old thinking (e.g., Philips Curve) and they're essentially baffled by this economy. If they raise rates at their September meeting it will be because they're simply desperate to get rates higher in order to provide a cushion (to lower rates again) for the next recession. And if they raise rates and we soon get confirmation of a recession they'll get the blame. Couldn't happen to a finer group of people (wink).
Instead of worrying about wage pressures (and inflation) perhaps the Fed should pay attention to a rather simple indicator that shows tax receipts from wages. The chart below shows year-over-year growth in payroll tax receipts and the message is not supporting the Fed's concerns about wage pressure.
If employment is growing we should see an increase in payroll tax receipts but since May there has been a reduction in the growth in receipts. The employment numbers have been questionable over the years and while they've been showing growth in employment we have actual tax receipt data that suggests otherwise. If employment has reversed it means trouble ahead for our economy and therefore the stock market.
Payroll Tax Receipts, July 2016 - August 2017, chart courtesy Michael Carr, Peak Velocity Trader
Moving to the charts, the techs have been the strong indexes recently and are the only ones to have made new all-time highs this month. So I'll start tonight's chart review to see where NDX might be headed next.
Nasdaq-100, NDX, Weekly chart
After a brief dip below its uptrend line from June-November 2016 NDX popped back above it last week. Currently near 5862 I think it's an important trend line for the bulls to defend. Another break probably won't recover. The other important trend line is the one along the highs since November 2014, which stopped the rallies into the June and July highs. It's currently near 6077 and is upside potential if the rally keeps going.
If that upper trend line is tagged again we'd then have a 3-drives-to-a-high setup for a top. Whether or not NDX rallies that high is currently a big question mark since there are lower possible targets, as explained below, but if NDX does push higher from here I think we could see a top anywhere between a test of last Friday's high near 6010 and the upper trend line, which will be closer to 6100 by the end of next week.
Nasdaq-100, NDX, Daily chart
Unlike the blue chip indexes, the pullback from last Friday into Tuesday's low for NDX did not result in an overlap of its August 22nd high and therefore it could still be in what will become a 5-wave move up from August 21st. We could therefore see another push higher to at least 6019 where the 5th wave would equal the 1st wave. There's higher potential to the trend line along the highs since November 2014, currently near 6077 but it's important to keep in mind that we could get just a minor new high and then a reversal back down.
There is also still the potential for the bounce off Tuesday's low to be just a correction to the decline and will be followed by a resumption of selling on Thursday. It could go either way but I see upside as limited while downside risk is significant.
Key Levels for NDX:
- bullish above 6010
- bearish below 5890
Nasdaq-100, NDX, 60-min chart
The bounce off Tuesday's low is a 3-wave move with the 2nd leg being the recovery off this morning's low. Two equal legs up points to 5979 so watch for that possibility Thursday morning. But the minimum expectations for an a-b-c bounce correction off Tuesday's low has now been met and therefore there is the potential for more selling to kick into gear right away Thursday morning. The bulls would be in better position, even if only for a rally to a minor new high (6019) if NDX makes it above 5980.
S&P 500, SPX, Daily chart
At the moment SPX has a 3-wave move down from August 8-21 and a 3-wave move back up from August 21st. That leaves us hanging as far as what direction the next big move will be. I think the higher-probability move will be down but we'll need additional price action to verify which way this is going to go next. If the bulls keep control we could see SPX rally up to the trend line along the highs from March 1 - July 27, which will be near 2514 by the end of next week (currently near 2509).
If there's going to be at least another leg down to create a larger 3-wave pullback we should see SPX drop down to at 2407 where it would achieve two equal legs down and test price-level support, also near 2407. More bearish potential is down to a price projection at 2361, possibly slightly above that where it would test its 200-dma, something it hasn't done since the November 2016 low.
Key Levels for SPX:
- bullish above 2481
- bearish below 2428
S&P 500, SPX, 60-min chart
While NDX did not drop below its August 22nd high, thereby keeping alive a possible 5-wave move up from August 21st, SPX (and the Dow) did drop below its August 22nd high at 2454.77 and by doing so it negated the bullish 5-wave count. It leaves a 3-wave bounce in its wake and that turns things more bearish. We could have some kind of complex wave structure that will take us higher but at the moment I think the higher-odds play is to short the current bounce with a stop just above last Friday's high at 2480. The bounce could make it a little higher before turning back down but it's not required.
Dow Industrials, INDU, Daily chart
The Dow has the same pattern as SPX and if anything it looks a little more bearish. Friday's high was a back-test of its broken uptrend line from November 4 - May 18 and Tuesday's selloff was the bearish kiss goodbye. It is therefore bearish against last Friday's high at 22039. Tuesday's low found support at its 50-dma, currently near 21740, which is also the location of the bottom of a parallel up-channel for price action since the April low.
The Dow could find support slightly lower at price-level S/R near 21680 but a break of that would be bearish and below 21600 would be confirmation that another leg down is in progress. At that point I'd watch to see if the Dow finds support near 21449 where it would achieve two equal legs down from August 8th. Below that is minor support near 21300 and then a price projection for a larger decline at 21091, possibly down to price-level support near 21000.
Key Levels for DOW:
- bullish above 22,039
- bearish below 21,600
Russell-2000, RUT, Daily chart
The RUT has had the more bearish price pattern since its July 25th high (it peaked before the others, which was a bearish warning sign). The move down into its August 18th low counts well as a 5-wave move, which sets the trend (unless it was the completion of a larger sideways consolidation). The sharp bounce into Tuesday morning's high is a 3-wave bounce correction and it should lead to another leg down.
Tuesday's reversal from the 62% retracement of its decline, near 1413, should be the start of the next leg down and short against Tuesday's high near 1415 looks like a good play from here. Another leg down equal to the July-August decline gives us a downside target at 1311 and there's price-level support only slightly lower at 1296 (its June 2015 high).
Key Levels for RUT:
- bullish above 1415
- bearish below 1385
10-year Yield, TNX, Daily chart
The banks got hit hard with Tuesday's selling because there's concern that the Fed does not have as much economic support as they want in order to justify another rate increase. They'll probably do it anyway in this month's meeting but they really don't have the numbers backing that decision. It doesn't really matter anyway since the bond market is a lot smarter than the Fed and if large institutional fund managers see a lower probability for inflation and evidence of a slowing economy they're going to be investing more in the safer bonds instead of riskier stocks.
Banks do better in a higher interest rate environment (it helps their spreads between money lent vs. paid on deposits) and yesterday's steep decline in yields (TNX dropped 4%) sent shivers down the spines of the big banks. TNX has dropped out of its bullish descending wedge that it was in since its July 6th high and that's bearish. Since a failed pattern tends to fail hard we could see bond yields tumble lower from here and head quickly for a downside target zone (for now) at roughly 1.95%-2.00%. The bearish potential would be at least in question if TNX gets back above last Friday's high at 2.167%.
If TNX does drop down to support near 2.0% it will be interesting to see what the Fed decides.
KBW Bank index, BKX, Daily chart
The banks are slightly behind the decline in yields since BKX made a slightly higher high in August whereas TNX made a lower high at that time. Like TNX we can see a bullish descending wedge for the decline from the high on August 8th but so far there isn't the confirming bullish divergence I like to see before depending on this pattern. It's looking more likely we'll see a drop below the wedge and that would leave another failed pattern.
Tuesday's strong decline dropped BKX to the bottom of its descending wedge, which was again tested with today's midday low. So support is still holding but at the moment it's looking like it will drop below the wedge and then watch for a back-test to confirm a larger decline is in progress (or not if there's a recovery back inside the wedge, since a throw-under followed by a climb back inside the wedge is actually a good buy signal).
Transportation Index, TRAN, Daily chart
The battle of the trend lines and moving averages -- that's how I'd label the TRAN daily chart. The August 24th low was a test of support at its uptrend line from January-June 2016. Last Friday's high was a test of resistance at its broken uptrend line from June 2016 - May 2017 after it broke through its short-term downtrend line from its July 14th high.
Tuesday, and again this morning, the TRAN then back-tested that short-term downtrend line and it held as support. It also back-tested its 200-dma following the rejection at its 50-dma last Friday. Today's bounce brought the TRAN back up to price-level S/R at 9310, which held as resistance. For now it's just ping-ponging between support and resistance and it's a tough call as to which way this will resolve. At the moment I think it's going to head lower but I could easily argue for a higher bounce back up to resistance near 9490 before turning back down. As an economic indicator this is an important index to watch.
U.S. Dollar contract, DX, Daily chart
After falling out of its down-channel from January, in mid-July, the US$ has back-tested the bottom of the channel as well as the top of a steeper down-channel from May. It is now below price-level support near 93 and looks like its vulnerable to the trend line along the lows since February 2015, near 90.20, and then the bottom of its steeper down-channel, which will be near 89.80 by the end of next week.
Since the dollar rolled over from its January high I've been looking for a drop down to the trend line along the lows and it's the reason I've been projecting a decline to the $90 area. We're starting to see bullish divergence and that's supporting the idea that the dollar will find support between here and 90. A rally above 94 would tell us a low is in place.
Gold continuous contract, GC, Daily chart
The N. Korean scare tactics are working for gold bulls as they seek a safe haven investment. The dollar's decline is also helping drive gold higher and it's looking like we could see gold reach a price projection at 1377 for two equal legs up from December 2016. This would also be a test of the July 2016 high at 1377.50.
I'm still looking at the 3-wave bounce as a correction to the 2011-2016 decline and not something more bullish but it would start to look more bullish if it gets above its March 2014 high at 1393. A 38% retracement of the 2011-2016 decline is near 1381, making the 1377-1393 area a good upside target as well as strong resistance. But a drop below 1300 would likely bring out the sellers sooner rather than later.
Oil continuous contract, CL, Daily chart
Oil has rallied up to its downtrend line from February and its broken 200-dma, both near 49.50. It would obviously be more bullish above this resistance, in which case we could be looking for a rally to about 54 where it would achieve two equal legs up from June and back-test its broken uptrend line from April-August-November 2016 later this month. In order to accomplish that though it would first have to break its downtrend line form May 2015 - January 2017, near 52.30. I think the higher-odds pattern calls for the decline to continue from here.
Thursday's economic reports include the unemployment data and a few others but nothing market moving. The market will be left to react to overseas news.
The stock market is looking vulnerable to more selling following the bounce off Tuesday's low. That picture would change if the indexes rally above last Friday's highs, in which case we could be looking for the rally to extend into at least mid-September (opex Friday is the 15th). That would likely get SPX above 2500 but as long as the current bounce stays below last Friday's high (2480) I think we'll see 2400 before we see 2500. Below 2400 would likely trigger stronger selling.
The longer-term pattern from here is up for grabs. I could just as easily argue we've seen THE high for the stock market as I could for another rally to new highs following a larger pullback into September. Short-term I lean bearish from here but another week of strong selling would then turn me more cautious until I can see whether or not some strong support levels start breaking. Play it short term until we get some longer-term clarity.
Good luck and I'll be back with you next Wednesday.
Keene H. Little, CMT