The stock market is typically bullish during opex week and generally speaking that's been true for this week. But there's usually a little more volatility than we've seen and the quiet period is probably due traders waiting to get through the FOMC announcement (today) and the tax reform bill. The VIX has slowly climbed back up the past two days as worries continue to mount. But the bulls remain in control until proven otherwise.
Today's Market Stats
As we've seen most mornings, the stock market started with a small gap up and then essentially stopped. The bulk of the recent rally has again occurred during the overnight sessions in the futures market, which is more easily manipulated due to the lower volume and higher leverage. Get the futures higher by the market's open, create a gap up and a little bit of short covering and the HFTs mop up by getting in front of the orders. They then shut down their operations and wait for the market-on-close orders before setting up for the next day. In between the first and last 30 minutes of trading we typically find a quiet market and today was no different. Even this afternoon's post-FOMC price action was subdued.
Following this morning's pre-market economic reports there was a slight bump higher in the futures as the CPI data showed inflation in line with expectations (so no reason for the Fed to change course). Total CPI increased +0.4%, as expected, and core CPI increased +0.1%, which was less than expected. Removal of food and energy, especially energy in the last month (higher gas prices), shows inflation (as measured by the government) is still not up to the Fed's target rate of 2% annually.
Year-over-year total CPI is up +2.2%, at the Fed's target rate, which is a slight bump higher than the +2.0% ending in October. A 3.9% increase in energy costs was the primary driver behind the increase in November. The year-over-year core CPI slowed down slightly from +1.8% at the end of October to 1.7% at the end of November. These numbers suggest the Fed doesn't need to worry about inflation yet and justifies a reason to slow down their expected rate increases. But I think the Fed is more interested in a rate cushion for the next recession, which they will likely help cause with their rate increases and removal of liquidity from the economy.
The market has generally been on hold this week, making for a quiet opex week (we didn't even get the usual volatility on the Thursday/Friday in front of opex), while waiting to get through this afternoon's FOMC announcement. There weren't any expectations for a surprise from the Fed but it was still one of those uncertain events that cause traders to pause while waiting to get the event behind them. As expected, the Fed raised rates another 1/4 point and left expectations for next year unchanged. Now we wait to see what becomes of the tax reform bill making its way through Congress.
And speaking of Congress, last night's strong win by Democrat Doug Jones against Republican Roy Moore is viewed as a strong win for the Democratic machine while rebuking President Trump's influence. This creates more political tension for the market to deal with since the Senate now has only a 51-49 Republican advantage, which will make it even more difficult to get things done (I view that as a positive since a locked-up Congress is general good for us). The added uncertainty comes from what could happen to the Republican lead in the mid-term elections.
December is typically a bullish time for the stock market, especially the second half (the Santa Claus rally). The first half of the month often sees some kind of correction/consolidation that then leads to the Santa rally but this month we've had a rally in the first half and that begs the question about what the second half might be like. As I'll get into with the charts, there are reasons to believe Santa might be a no-show this year, or at least he might have come early.
The next thing the market wants to get past is the tax reform bill. It's looking like it's getting closer to some kind of compromise and it could be signed by next week (along with a new budget and an increase in the debt limit). The market has been rallying with anticipation of the tax reform bill and how it will help the bottom line for corporations.
There's also a high expectation for the repatriation of corporate profits made overseas and how that will be used by corporations to pay higher dividends and be used for stock buybacks, both of which are bullish for stocks. The big question is whether or not the successful passage of the tax bill will result in a continuation of the rally or if instead we'll get a sell-the-news reaction. One could easily argue either outcome so we'll use the charts to at least provide some trigger levels where one or the other outcome will be more likely.
As we near completion of the first half of December and opex week on Friday there's growing concern about what the second half of December will be like. We've had a nice rally but it's slowing down, showing some bearish divergences and money managers could soon turn into profit-protection mode rather than worrying about trying to get another percentage or two out of the market. And if the tax reform bill begins to look like it's going to struggle for passage that profit protection could turn into a full-fledged selloff. As always, we'll let the charts tell us when to turn bearish vs. sticking with the bulls.
S&P 500, SPX, Weekly chart
SPX appears to be heading toward a trend line drawn across the two highs in April 2016 - March 2017, which is currently near 2700. A nice round number like 2700 would be a fitting number to achieve for the year and if the market can hold up for another two weeks it should be easily achievable. Only a breakdown below the November 15th low near 2557 would the weekly pattern turn bearish, especially since a drop below that low would also be a break of the uptrend line from February-November 2016.
S&P 500, SPX, Daily chart
The SPX daily chart is a little messy since I'm trying to show a couple different ideas for how it could play out the rest of the month. I think the two highest-probability moves are shown in green -- either a little stronger pullback the rest of this week and then higher next week, shown in bold green, or a little higher first and then a pullback and final push higher into the end of the month (the Santa Claus rally), shown with the light-green dashed line). Both bullish scenarios call for a rally to just above 2700. From a daily perspective I think a drop below the December 1st low near 2605 would tell us a top is already in place.
Key Levels for SPX:
- bullish above 2672
- bearish below 2605
S&P 500, SPX, 60-min chart
The 60-min chart shows the bold green depiction for a little larger pullback to the uptrend line from November 15 - December 1, near 2650 on Friday, and then a final rally next week, finishing at the trend line along the highs from September-October, near 2700 (note that this line is slightly below the longer-term trend line along the highs from April 2016 - March 2017, as can be seen on the daily chart above).
It's possible SPX will simply continue higher on Thursday, maybe into Friday, and reach up toward the September-October trend line before pulling back a little and then higher again next week. I think we'll see the completion of the rally in a rising wedge pattern but it's not clear how large or small the pattern will be and it says we should see a choppy climb higher.
Note also that a sharp decline from here, confirmed with a break below the uptrend line November 15th, near 2646, could lead to a drop down to the uptrend line from August-October, near 2610, but I doubt it would be bearish. I think that kind of decline from here, since there's not a good ending pattern to the upside, would be a bear trap and would likely lead to a strong rally to follow.
Dow Industrials, INDU, Daily chart
With respect to the trend line along the highs form April 2016 - March 2017, the Dow is stronger than SPX since it's above the line, currently near 24400. As long as the Dow remains above 24400 it will remain more bullish than not but if it too follows a choppy rise higher into next week I'll be arguing for a top sooner rather than later. A choppy rally into next week would leave the week between Christmas and New Years vulnerable to a selloff. That possibility will be evaluated more carefully next week. The bears need to see the Dow below the December 1st low near 23922, which would be a strong indication an important high is in place.
Key Levels for DOW:
- bullish above 24,670
- bearish below 23,920
Nasdaq-100, NDX, Daily chart
An end-of-year rally is typically led by the techs and small caps (December being the typically strongest month for the RUT) but that's not what we have currently and that's one of the warning signs that bulls should pay heed to. They haven't done anything bearish yet but their lack of leadership is warning us that money managers are moving into protection mode (moving money into the relative safety of the blue chips and the bond market).
NDX has now met the minimum expected for the 5th wave of its rally from August (5th wave equals 62% of the 1st wave at 6394, where NDX closed on Monday and today). There's higher potential to about 6493-6500, which is where the 5th wave would equal the 1st wave and it would hit the top of its up-channel from July. I suspect the bearish divergence will continue to hold even if we get a new price high, which would be another warning sign for the bulls.
Key Levels for NDX:
- bullish above 6426
- bearish below 6234
Russell-2000, RUT, Daily chart
Like NDX, the RUT left a bearish divergence at its November 30th and December 4th highs in relation to the October 4th high and if it does push higher it will likely leave another bearish divergence. It's this weakness that's surprising to see this month and it makes it harder to argue the bullish case from here. But if the RUT does make it higher I see the potential for a choppy rally in some kind of ending pattern this month. If it's able to hold up in December and continues to show bearish divergence I think it would tell us to think seriously about shorting this index later this month and ride will likely be a strong decline in January. If the RUT drops below 1498 sooner rather than later I would seriously doubt we'll see any further rally this month.
Key Levels for RUT:
- bullish above 1560
- bearish below 1498
30-year Yield, TYX, Weekly chart
While I don't trade the bond market futures like I used, I still like to follow the market because it's the smarter one. That market trades more on fundamentals than the stock market and I like to follow the 10-year and 30-year, the latter being a better forecaster for where inflation could be headed. For a while now it looks like the bond market can't figure that out either.
Following the high in December 2016 and the retest of that high in March 2017, which was also a test of its downtrend line from February 2011 - December 2013, TYX has pulled back but in a choppy pattern. Since June it's been cycling around price-level S/R at 2.85%. I've long believed we have not seen THE lows for bond yields (for years I've been expecting we'll see the 10-year below 1% and the 30-year below 2%) and I can easily argue for a decline from here, or maybe after one more small bounce back up in its sideways pattern that it's been in since the low in late June.
I also see the potential for a higher bounce back up to the downtrend line from 2011-2013, near 3.02-3.05, before heading lower but it's looking vulnerable here. Buying in the bond market, perhaps coincident with a selloff in the stock market, would drive yields lower and that would be a statement from the bond market that they don't see inflation as a problem. If the Fed continues to raise rates in that environment they would likely create a recession, which of course would be bad for the stock market. I'll continue to watch this market carefully for further clues.
KBW Bank index, BKX, Weekly chart
The rally in the banking sector looks vulnerable to a reversal. The daily chat of BKX shows bearish divergence at this week's test of last week's high. Both highs are a poke above the trend line along the highs from April 2010 - March 2017, currently near 106. If BKX rolls over from here it would also leave a bearish divergence on its weekly chart, shown below. The pattern of its rally from February 2016 can be considered complete at any time with a completed 5-wave move up and the 5th wave as a rising wedge. This pattern calls for a strong decline once it breaks down -- the rising wedge for the move up from April should be retraced quickly, so back down to price-level support near 89.
U.S. Dollar contract, DX, Daily chart
Today's big red candle for the US$ looks bearish because of where the rally stopped yesterday. As I've noted on its chart, it was first bullish when an inverse H&S neckline at 94 was broken with the rally on October 26th. But that turned into a head-fake break with the drop back below the neckline with the selloff on November 14th. The dollar then dropped down to the top of the broken down-channel from January 2017 at the end of November and successfully back-tested it with the bounce back up. Bullish-turned-bearish has once again turned potentially bullish.
But the bounce off the November 27th low stopped at the neckline near 94 and today's red candle looks like the start of a bearish reversal. The potential bullish setup has reversed again into a bearish pattern and dollar traders are getting whipped around. The negative reaction following the FOMC announcement now has it looking like the dollar could head down to support near 90 before finally setting up a stronger rally into next year.
Gold continuous contract, GC, Daily chart
With today's decline in the dollar there was a countermove in gold and it rallied back above its downtrend line from September 2011 - July 2016, currently near 1250. Gold bulls need to see that level hold as support since another drop below it would likely keep going this time. The pattern for gold looks bearish to me but I see the potential for a at least a little higher bounce to price-level S/R near 1265 and possibly up to its broken uptrend line from December 2016 - July 2017, near 1275.
A higher bounce to 1275 would also result in a test of its broken 50-dma. Between 1265 and 1275 gold would run into its broken 20-, 50- and 200-dmas and that's a lot of resistance to plow through. For that reason gold would be bullish above 1275 and even more bullish above price-level S/R near 1300. In the meantime I think the path of least resistance is to the downside.
Oil continuous contract, CL, Weekly chart
Oil has been in a choppy consolidation pattern since the November 24th high and it looks like it's going to make another stab higher, especially if it can hold its uptrend line from August-October, currently near 56.30 (today's low was 56.55). The top of a possible rising wedge for its rally from February 2016 is near 62 and remains an upside target. But oil is currently struggling at its broken 200-week MA, at 57.76, and price-level resistance near 58.50. Coinciding with this level is the 38% retracement of its 2013-2016 decline, all of which makes it possible oil will roll over from here. It would be more bullish above 62 but confirmed bearish below 50.70.
Thursday's pre-market economic reports include retail sales, the unemployment data and import/export prices. Retail sales are expected to show improvement in November but interestingly, the retail sector (XRT retail ETF) is looking vulnerable to selling off following the 3-wave bounce off the August low.
The stock market is struggling but it's not time yet for bears to start making stabs at shorting it. We're seeing bearish divergences as the momentum of the rally slows but as long as we don't get disturbing news out of Washington D.C. about diminishing chances for the passage of a tax reform bill the market will remain hopeful. And as long as the market remains hopeful it should continue to chop its way higher. There might even be a spike higher on the news of successful passage of a bill. I suspect it would be a high on news but that would obviously have to be evaluated if and when it happens.
At the moment it's looking like the indexes, in particular the blue chips, are chopping their way higher in what looks like ending patterns (rising wedges) and the bearish divergences supports this view. These patterns suggest we'll see the market chop its way a little higher into next week (perhaps first a pullback tomorrow and into Friday) to then complete THE rally.
The completion of the rally next week would mean Santa Claus will be a no-show. Profit-taking into the end of the year could become the primary focus of money managers Again, this possibility will have to be evaluated if and when we get higher highs into next week. SPX 2700-2720 is the upside target zone. Just be careful of the chop and maybe a couple of whipsaws thrown in for good measure.
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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