A seasonal pattern for December is weakness in the first half of the month and then the Santa Claus rally in the second half. This has been a year of not following seasonal patterns (sell in May, weakness into September?) but so far December has started off on the weak side. The pullback so far can be considered just a correction to the rally but it's still a question as to whether or not the seasonal pattern will hold true this month.
Today's Market Stats
Today was another mixed day with different indexes doing different things. Today the techs were stronger while the Dow and RUT (which have been strange bedfellows lately) were the weaker indexes. SPX finished flat. It's been like this since the end of November and the mixed messages from the indexes is one part of the equation that says we probably are getting just a correction to the rally, one which will be followed by another leg up, possibly as early as next week (opex).
Countering the argument for a correction this week and then another rally leg is the bear's argument that this is exactly what we should expect to see at a major top. The market gets goofy as money rotates in and out of different sectors and tops are made at different times by the different indexes. Tops in the stock market are generally messy affairs (vs. v-bottom reversals), which generally creates rounded topping patterns. We'll only know in hindsight and until the price patterns prove otherwise I think it's safer to look for higher prices.
We might not see the market make it much higher and it could do so in a very choppy (ending) pattern. We have enough warning signs from technical indicators to suggest caution to the point where new long positions are probably not worth the risk. Bottom line, I'd say both sides need to be cautious here since the upside potential does not offer a good risk:reward ratio (look for profit potential at least 3 times the risk before risking your capital).
It was a relatively quiet day with weak but bearish market internals. The day started with a small bounce attempt but ended up going more sideways than anything else. Short term it's looking like we could get another leg down but again, if we're into a correction to the rally we should not see last Friday's lows broken. So for the short term, mind the chop.
There's been a lot of discussion about how long this bull market has lasted and how strong it's been. The chart below is through November 30th and shows the S&P 500 has gone 391 days without a 3% pullback, which means today makes it 395 days and still counting. This is the longest stretch since the post-WWII period and possibly longer than that. Kudos to the bulls -- that's quite a performance.
We know there are a few reasons behind such a long stretch of time without a decent pullback in the market, the largest being simply the extra liquidity from central banks. Liquidity, in the form of newly created fiat dollars (or euros, yen, etc.), goes looking for a home and yield chasing has benefitted the stock market and other higher-yielding assets such as real estate. Cryptocurrencies are certainly the beneficiaries as well (Bitcoin shot higher today and is now above $14K), although the crypto market hasn't been penetrated much by institutional money, yet. Additional liquidity has also come from cheaply borrowed dollars, much of which has made it into the stock market (corporate buybacks).
What's troubling, and has been for a long time and therefore not a good market timing issue, is the fact that the economy has not been doing well. Most everyone talks about how strong the economy is and the fact that it's been growing steadily, but it has not been strong and it has not supported the extremely high valuations for the stock market.
The economic recovery from 2009 has lasted a long time but it's been weaker than all previous recoveries in the past 6 decades, as can be seen in the chart below. The current recovery is the yellow line at the bottom of the chart -- it is now as long as the 1982-1990 recovery but still short of the 1961-1969 and 1991-2000 recoveries. But importantly it's been much weaker than all previous recoveries.
U.S Economic Expansions since 1961
The two charts above tell me the current stock market is seriously out of synch with reality, which is most often the case at stock market tops. Where the top will be to the current bull market is anyone's guess but I think it's very important to recognize the "adjustment" that's going to be made when it happens.
The previous economic recoveries were based on real production increases and real improvements in GDP (along with the "it's different this time" dot.com boom). We have neither this time and the strong bull market has been primarily driven by money created out of thin air and corporate buybacks. People have been borrowing heavily to spend and the amount of credit (debt) is at all-time highs. The debt implosion, as always happens, will significantly hurt the stock market.
Today, with the Fed on a tightening cycle and corporations slowing their buybacks, the props holding up the market are being dismantled. Without these props it's only a matter of time before the market runs into trouble and I believe the trouble could be quite painful for those who simply hold on through the "pullback," believing it will always come back.
The recovery from the next bear market could take decades, like that following the 1929 crash -- the losses were not recovered until nearly 30 years later, about 1956 in inflation-adjusted dollars. And that's just the recovery. Think about how much better you'll do if you protect your profits and buy back in at a much lower price. And if you play the short side in the next bear market you'll have an opportunity to make bitcoin-like profits (wink).
BTW, speaking of Bitcoin and getting off on a small tangent, since so many more people are talking about Bitcoin, I thought I'd share my quick take on it before diving into the stock charts. Bitcoin's rally has gone parabolic, which is why so many are calling it a bubble that's ready to pop at any time. Of course they've been saying that each time it has spiked higher since 2015 (when it traded between about $200 and $500, how quaint).
Bitcoin, Daily chart, 2015-present
The Bitcoin chart below is a squished daily chart to show the climb from the beginning of 2015 (I told myself back then I'd be a buyer if it dropped down to a Fib pullback level at $150 in January 2015, which it did and of course I didn't -- doh!). The uptrend lines since 2015 have been increasing in pitch, which is the definition of a parabolic move (my chart is using the log price scale, making the parabolic move all the more amazing).
I have two parabolic lines, one off the lows and the other off the highs, and both are coming together near $15K this month. Bitcoin could certainly break higher into a truly massive parabolic move, which it's starting to do (the top parabolic line is near $12K), or it's doing a little throw-over and will come crashing back down. I'm watching to see if it will get further pinched into the crossing lines later this month.
A drop below the lower parabolic line, currently near $8K, would be a bearish development. It's hard to see in my squished chart (tradingview.com is the charting software, which is excellent for charting the cryptos, as well as stocks) but each previous peak before a strong pullback has acted as price-level support. The last peak was near 7600 in the beginning of November. A drop below that level would be a confirmed break of the lower parabolic line, which would confirm a more important high is place for now.
I'm one of the believers in cryptos and fully support a way around central-bank-controlled fiat currencies. I believe BTC and others will head much higher over the coming decade but buying right here is asking for trouble. Don't let FOMO catch you here. And especially don't get caught up in the huge number of ICOs (Initial Coin Offerings), most of which are pump-and-dump schemes.
And now on to our regularly scheduled program, starting with the Dow's weekly chart
Dow Industrials, INDU, Weekly chart
Last week the Dow made it up to the trend lines along the highs from April 2016 - March 2017 and from 2011-2014, which are currently near 24310 and 24120, respectively. Monday spiked above both lines and the pullback from Monday is down near the longer-term trend line along the highs from 2011-2014. This lower line near 24140 should act as support if we're going to see another run higher, whereas it would start to look a little more bearish if the Dow drops below 24100. A rally above Monday's high at 24534 would obviously be bullish but the pattern suggests we might get just a minor new high to put in a more significant top.
Dow Industrials, INDU, Daily chart
The Dow's daily chart doesn't have the 2011-2014 trend line shown on the weekly chart above but it shows the one along the highs from April 2016 - March 2017 and a shorter-term one along the highs from April-October 2017. The Dow spiked above both trend lines and has now pulled back to the shorter-term one, currently near 24120. So between the longer-term trend line from 2011-2014 and the shorter-term one from April-October we have trendline support at roughly 24120-24140 and today's low was 24134. Last Friday's low was at 23921 and that's a must-hold price for the bulls.
Key Levels for DOW:
- stay bullish above 23,921
- bearish below 23,250
S&P 500, SPX, Daily chart
Last Thursday and again on Monday morning SPX spiked up to a trend line along the highs of the rally from August, each time getting rejected from there. The daily oscillator is overbought and the hourly oscillators show bearish divergence on Monday vs. last Thursday's high, both of which suggest we might have topped on Monday. But we'll see if support holds at the trend line along the highs from June-November 2017, which is where SPX closed today (2629). I'm showing the bullish potential to rally up to about 2680-2690 by next week and I'll stick with that expectation until price proves the bears have gained control, which would start with a break down below last Friday's low at 2605. That's also where the 20-dma is now located, making it doubly important for the bulls to defend.
Key Levels for SPX:
- bullish above 2665
- bearish below 2605
S&P 500, SPX, 60-min chart
Following last Thursday's high I thought we'd see at least a larger pullback correction before heading higher. Then we got Monday's higher high and it was looking like it might continue its rally. Instead I think the minor new high is part of a correction to the rally, which I'm showing as a sideways triangle that will resolve to the upside, possibly as early Friday after another small up-down sequence. It could of course just start heading back up from here but I consider that a lower probability.
Because the pullback from Monday can be viewed as an impulsive decline, meaning Monday could have been an important high, a bounce Thursday morning is a shorting opportunity but only if managed tightly. Shorting the market here is still an attempt to catch rising knives. But if an important high is in place then the next leg down should be strong and I would expect to see SPX drop down to at least its uptrend line form August-October, near 2595. If however we see a small drop lower Thursday morning and then a stronger bounce I'd be more inclined to believe the bullish sideways triangle will play out, which calls for another rally into next week.
Nasdaq Composite index, COMPQ, Daily chart
The techs have been weaker than the broader market, and the RUT, since they peaked on November 28th. But the pullback has been very choppy and that has it looking like just a correction to its rally. It would look more bearish below its uptrend line from September-October and its 50-dma, both near 6691, but until then it's looking like a good short-term setup to get long (with a stop below 6680). Upside potential is to 7006, where the 5th wave of the rally from August would equal the 1st wave, and potentially up to about 7080 if it makes it up to the trend line along the highs of its rally since October and the top of a parallel up-channel for the rally from August.
Key Levels for COMPQ:
- more bullish above 6915
- bearish below 6680
Monthly Performance for Small Caps
The RUT has been one of the weaker indexes since Monday and it's now testing support so we'll see if the typically strong December starts to exert its influence. The chart below shows the typical performance for small caps and as you can see on the chart, December is the strongest month with a 78% chance of finishing the month higher. The next two best months, at 74% are March and November. March finished marginally lower but November was a very strong month for the RUT. We now wait to see if the bulls will climb back in and lift the RUT 1544, which is where November closed and it's also the all-time closing high.
Russell-2000, RUT, Daily chart
Today the RUT closed down and on support at the top of its previous October-November expanding triangle. I've had that level (1509) as a key level for the bears to break but now with the 20- and 50-dma's coming up, currently near 1504-1506, I think the key level to break is 1503. Keep in mind that the Thursday prior to opex is considered "head-fake" day, usually with a morning decline to suck in the shorts and then spit them out with a short-covering rally and stronger buying into opex.
If the bears press their attack here and drive the RUT below last Friday's low near 1498 I think we'll be hearing the fat lady singing. There's a weekly price projection at 1562, which is where the 5th wave of the rally from February 2016 equals the 1st wave. Monday's high was near 1560 so was that close enough for government work? That's a distinct possibility and the reason an impulsive decline below 1503 would be bearish. Shorting a subsequent bounce to a lower high would then be the recommended trade.
Key Levels for RUT:
- bullish above 1560
- bearish below 1503
KBW Bank index, BKX, Weekly chart
The banks had a strong rally off the November 27th lows and last week BKX made it up to the trend line along the highs from April 2010- March 2017, currently near 106. On Monday, with the spike up to a new high, it poked above the trend line and then pulled back to it on Tuesday. Today it formed a little doji slightly below the line and for the week so far we have a shooting star at the trend line.
With daily oscillators in overbought and weekly oscillators showing bearish divergence I don't think it's a safe bet on the upside. If this week finishes as a doji/shooting star at resistance I'll make a bet that next week will be a red candle and that would complete a 3-candle reversal pattern to confirm completion of a small rising wedge pattern for the final 5th wave of its rally from February 2016. Follow the money if BKX starts back down ahead of the pack.
U.S. Dollar contract, DX, Daily chart
Until today I've been leaning long the US$ following the successful back-test of the top of its broken down-channel from January (last week). But I think it's a coin toss from here and we'll need to wait for either a break above 94 or a drop below 92.50 to have a better idea which direction it will head from here.
Today it achieved a price projection at 93.58 (with a high at 93.62) for two equal legs up from November 27th. At the same level it has run into its broken 20- and 50-dmas, now near 93.50 and 93.65, respectively. The confluence of these resistance levels could mean tough going for the bulls and a turn back down after an a-b-c bounce off the November 27th low could lead to another leg down, one which would target the $90 area. But a rally above 94 would have it looking stronger and potentially much stronger if it's into a 3rd wave in the rally from September. We'll need to let price lead the way from here.
Gold continuous contract, GC, Daily chart
Bitcoin is being talked about as a replacement for gold since it's easier to spend bitcoin than gold (unless of course an EMP takes down the electric grid). Bitcoin mania has probably depressed interest in gold for now and that could continue until there's a panic out of Bitcoin (which is likely coming soon). But I don't think that's the primary driver behind gold's funk that it's been in since the September high. I think the longer-term pattern is still in a bearish downswing and lower prices ahead. That might change if and when the stock market gets taken out behind the woodshed but even at that point it might be a time where all asset classes are sold.
Gold is currently sitting on price-level support near 1265, which goes back to 2010 but more recently from the February 2017 high. The bottom of a descending triangle (descending highs, flat bottom) since the October 6th low at 1262.80 should hold if we're to get one more bounce up in the triangle pattern. Following one more bounce would then be a good setup for the next leg down for gold. Only a break above 1300 would I turn bullish gold. Silver has already broken below its October 6th low and gold could follow sooner rather than later.
Oil continuous contract, CL, Daily chart
Once oil hit 59 on November 24th I thought it was a good setup for a reversal back down. The EW pattern could be considered complete there and it had achieved a 38% retracement of its 2013-2016 decline. There is additional upside potential to the top of its up-channel from June and a trend line along the highs from June 2016 - January 2017, currently near 62, especially if we get a strong bounce off the uptrend line from August, which is about to be tested at 55.50. I think the bigger pattern points back down but until oil drops below 54.80 I'm watching for evidence for another rally.
Thursday's economic reports include the unemployment claims data and the Challenger Job Cuts in the morning (no big changes expected) and then Consumer Credit in the afternoon. There should be nothing market moving from the reports. Friday we'll get the NFP reports, which are expected to show slowing in new jobs but if it comes in around 200K it would likely keep the Fed on its rate-increase track.
The market looks in danger of tipping over, especially since the decline from Monday is looking impulsive enough to suggest we should short the next bounce correction to a lower high. But I'm staying cautious about this market, especially since there's the potential for a whippy consolidation this week and into next that sets up what I believe would be the final leg of the rally. That would also fit the December seasonal pattern.
For the bullish pattern to hold I think it's important for last Friday's lows to hold (except for the tech indexes, which have a different pattern). A drop below those lows would more strongly suggest important highs are already in place, in which case it would be time to look at bounce corrections as shorting opportunities.
I can only go by what the charts are telling me but looking ahead this month, if the market starts to get worried that the tax reform plan will get hung up in committee, on top of the debt ceiling worries, we could see a lot more selling kick in. If the tax plan is looking like it's in trouble, profit taking could happen this month rather than waiting for January's expected lower tax rates.
Countering all these worries is of course the expected Santa Claus rally. But will that rally start from much lower? All of these things can only be guessed and right now I'll stick with the charts, as messy as they are. As long as next Friday's lows hold I think it's safer on the long side even though I hate using the word "safe." This is a tricky spot and flat is a very good position.
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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