We've all become accustomed to a stock market that only knows how to rally and therefore it was unusual to see the indexes gap down this morning. It was only a minor move and the bounce back up could easily lead to additional new highs, but it also might have been a shot across the bow of the USS Bullship as a warning not to proceed any further.
Today's Market Stats
I had to rub my eyes this morning when I first looked at the open and saw the gap down. Surely it must be a mistake -- this market only knows how to gap up. And the gap down was followed by a little more selling (stop run) and by the time the selling finished (all of 20 minutes) SPX had dropped 15 points from Tuesday's close. But the dipsters saw their opportunity, stepped back in and drove the indexes back up for most of the day.
So far the dipsters have only been able to achieve a lower high since the indexes finished in the red, but I'm sure they'll try again. It's been a winning strategy for a long time so why not? But the bears just might get a shot at this market since the bearish pattern and an important timing cycle have been suggesting a possible high of importance could be this week. It's possible Tuesday's high was the final one for this rally but we'll need the next day or two to help answer that question.
This morning's gap down resulted from a selloff in the futures last night, which began after the Asian markets started trading and continued after the European markets opened. There was a rally attempt from the early-morning low but that pre-market low was quickly retested after the regular trading session opened.
The morning retest of the pre-market low then led to a stronger bounce into the afternoon and the Dow and RUT (strange bedfellows since the Dow has been relatively strong while the RUT has been relatively weak) were able to close this morning's gaps before succumbing to a little more selling in the afternoon. A bounce into the close managed to get the RUT back near the flat line while the other indexes closed marginally in the red.
The techs were the weak indexes today but not as a result of any heavy selling in the FAANG stocks. The semiconductor stocks got hit a little harder (SOX finished -1.2%) and that hurt the tech indexes. But the bulls could easily recover today's weakness and a rally Thursday morning could lead to another push higher. Only time will tell how much higher this market can go before taking at least a larger breather.
Today's trading volume was a little heavier than we've seen recently and the market breadth was mixed, which sends a mixed message. There was a lot of churning with both selling and buying and no clear winner. If today's little pullback is followed by more buying Thursday morning we could see another push higher. But if the bounce off this morning's lows is followed by a drop lower then we'd have more convincing evidence that at least a larger pullback is in progress.
Prompting some of the today's weakness resulted from news out of China. The Treasury market sold off this morning (prices gapped down), spiking yields, after China announced that is considering halting its purchases of U.S. Treasuries. Many have been worried about this for some time as China has run up a huge debt (financing projects, paying for programs to keep people busy, etc.) and the fear is that China could halt their Treasury purchases and then start selling in order to free up capital and pay down some of their debt. The US$ also took a hit today for the same reason.
The gap down in Treasury prices was followed by a rally and the 10-year closed the gap by the end of the day. The recovery in Treasury prices probably helped the stock market recover as well so both the bond and stock markets traded in synch today. That could continue and it will be worth watching carefully in the coming weeks.
The worry over China's announcement comes from the worry about what a lack of demand for our Treasuries could mean. And if China starts selling it could cause prices to drop further, which would of course spike yields. Higher interest rates could stall our economy and even drive us into recession (there's worry that the Fed will make that mistake) since, like the Chinese, we are so highly indebted and even more so than at the October 2007 market high. The Fed would like to slowly raise rates but the market could have a different idea than the Fed (it usually does).
If rates do start to accelerate higher, which is not yet clear on the charts, it would make it very difficult for the economy since there's such a huge debt burden by so many businesses and individuals (and of course the state and federal governments). Even dividend-paying stocks would have to compete with higher yields from the safer Treasury bonds. Investors would once again have a choice for yield and could take some money out of the riskier stock market and put it into bonds. That's part of the worry that came from China's announcement so the market will be watching carefully for further developments in this area.
Countering the theory that higher bond yields would hurt the stock market is the idea that selling in the bond market could free up even more money that will rotate into the stock market. While that's certainly a possibility, one which supports the idea that the stock market's melt-up will continue for much longer, I believe higher yields will have more of a negative impact on the stock market. This morning's selling and then bounce by both bonds and stocks suggests we could see them trade in synch again. It will be an interesting development to watch over the next weeks/months.
Other than the China news it was a quiet day, including a lack of important economic reports. This morning we got some export/import price data, wholesale inventories and crude inventories but again, nothing market moving. Most market participants are simply focused on prices and enjoying the bullish run. Very few are looking ahead to see if there's any danger in the road but perhaps they should be.
Bullish sentiment has reached a dangerous level (from a contrarian perspective) and Mom and Pop have finally, literally, bought into the rally. We know the retail traders typically buy the top and sell the bottom so the very large and fast swing into the bullish camp by the public and investment newsletter writers should be a warning sign.
Trump's "the stock market is a bubble" has turned into "I'm great and the stock market is reflecting that." That's not a political statement but more of a statement about how everyone believes in the current uptrend and how it can only go higher. Right now we only have warning signs but of course price is king and the king has been happy with higher prices. Whether or not the trend is in trouble will be known from the charts so they're what we'll look to for our clues.
The bullish sprint continues and the streak of days without at least a 3% pullback continues, now at 432 days (the Trump rally that started November 4, 2016). Trump is now the market forecaster-in-chief and is calling for Dow 30,000 next. It's no wonder the moms and pops are getting themselves fully invested.
I'm going to start tonight's chart review with a top-down look at the RUT since I like it as our canary index. I've been watching and reporting on the RUT almost exclusively for the past week because it will be the index that tells us whether or not the uptrend will remain intact or instead provides an early warning when the trend breaks. The canary fell off its perch this morning but it then worked hard to climb back up on it. It's looking a little woozy from hypoxia but could take at least a few more big breaths before succumbing to the lack of oxygen from the high altitude.
Russell-2000, RUT, Weekly chart
A trend line along the highs from December 2016 - October 2017, currently near 1560, has been acting as resistance since the end of November and it's essentially where the RUT closed today. So far we have a little star doji for the week and it could be just an indecision candlestick or it will turn into the middle candle of a 3-candle reversal pattern (with a red candle next week). It's too early to tell but with the bearish divergence over the past year it would be a tough call to say it's bullish here. I think the higher-odds play here is to short it and keep your stop tight -- just above Tuesday's high at 1565.58.
Russell-2000, RUT, Daily chart
The trend line resistance mentioned above is shown in purple on the daily chart and you can see how the RUT has been unable to break through it. The daily candlesticks show a fight to keep from selling off but I think the churning near resistance, along with the bearish divergence, is a bearish signal that it's getting ready to break down. But because it's looking bearish, a sustained rally above 1565 would likely trigger a lot of stops and the short covering could help propel the RUT up to the trend line along the highs from October-December, which will be nearing 1600 by the end of opex week (January 19th).
Key Levels for RUT:
- bullish above 1565
- bearish below 1535
Russell-2000, RUT, 60-min chart
A short-term uptrend line for the RUT, from December 14-29, is currently near 1558 and it held on a closing basis today. A drop below 1558 would be a bearish heads up and it would look more bearish below this morning's low at 1551 since that would be a confirmed break of price-level support near 1552 and its uptrend line from November-December, currently near 1550. A drop below Monday's low at 1548 would confirm a top is in place. In the meantime I see the potential for at least one more pop up to a minor new high to complete a rising wedge pattern for the leg up from December 29th.
S&P 500, SPX, Daily chart
On January 5th SPX made a bullish break above its trend line along the highs from April 2016 - March 2017 and it also broke above a shorter-term trend line along the highs from September-October. This morning's low was a back-test of the line of the longer-term trend line and has so far produced a bullish kiss goodbye off that line. It then closed back above the short-term trend line after this morning's break. This looks bullish and if nothing else it should keep the bears away until it's at least proven to be a head-fake bounce back up today, starting with a drop below this morning's low at 2733.
Key Levels for SPX:
- bullish above 2733
- bearish below 2695
In last week's wrap I had shown a (squished) copy of my Gann Square of 9 chart and showed why 2721-2123 were important levels to watch. The next day (Thursday) SPX blew through those levels, which told me the market didn't think much about them. So that opened the door to the next important level on the SOf9 chart, which is 2760-2763. Tuesday's high was 2759 so was that close enough for government work?
I don't have a squished chart to show you tonight but I had mentioned a red vector that goes through 768 and 1576, which was the October 2002 low and October 2007 high, respectively. Opposite those numbers on the chart is 2763 and the high so far (yesterday's) is 2759. Tomorrow, January 11th, is where 2760 points to and when there's a price/time alignment Gann would often say it's far more important than just price. Maybe a test of Tuesday's high on Thursday?
The Gann Sof9 levels could also be coinciding with a time cycle that the market has responded to since the 2009 low. Again, Gann was more in favor of time than price and this week is the completion of the next 23-week period in a 23-week cycle that has typically resulted in a market turn (usually a pullback). There's also an Earth-Sun-Venus alignment this week but I won't go all astrological woohoo on you.
SPX weekly chart with 23-week cycle since 2009
And here's one more numbers thing to throw at you, this from Jeff Cooper, who often quotes Gann's work. This Friday is the 45th anniversary of the 1973 high. So what you say. That high led to the greatest downturn since the Great Depression and the 1973 high was 45 years from the 1929 high. Something to think about.
Quoting Gann, "Thus, I affirm, every class of phenomena, whether in nature or in the stock market, must be subject to the universal law of causation and harmony. Every effect must have an adequate cause. If we wish to avert failure in speculation we must deal with causes. Everything in existence is based on exact proportion and perfect relationship. There is no chance in nature, because mathematical principles of the highest order lie at the foundation of all things."
Will this week be a high of significance? We of course can't know that at this time but if nothing else, Gann's work should have you pausing to think about what it could mean here. I often say price is king but Gann would argue with me and say time is king. And now back to our regularly scheduled charts
Dow Industrials, INDU, Daily chart
The Dow has rallied up to the top of a possible rising wedge for it rally from November and if it's to complete a 5-wave move it can't go much higher. Since the 3rd wave in the rally from November, as I have it counted, is shorter than the 1st wave the 5th wave must be shorter than the 3rd wave, which means it can't rally above 25483. Ideally, from an EW perspective, Tuesday's high was it and now down we go. Otherwise the wave count will have to be redone and that could open it up to much higher prices (which would say the melt-up could accelerate higher). So Mr. Bear, are you feeling lucky here?
Key Levels for DOW:
- bullish above 25,440
- bearish below 24,876
Nasdaq-100, COMPQ, Daily chart
Like SPX, the Nasdaq made a bullish break last week above its trend line along the highs from April 2016 - March 2017 and above its shorter-term trend line along the highs from September-October. This morning's low was a back-test of its longer-term trend line and the bounce back up looks bullish. It only managed to close on the shorter-term trend line so it remains to be seen whether or not the bulls can recapture that line on Thursday, which will be only marginally above today's close. A better test for the bulls will be better than closing this morning's gap, near 7164.
Key Levels for COMPQ:
- bullish above 7182
- bearish below 7000
10-year Yield, TNX, Weekly chart
The 10-year yield has made it back up near its December 2016 and March 2017 highs near 2.62%, with a high so far (this morning's) at 2.595. TNX would turn more bullish (bearish for bond prices) with a rally above 2.62 but I'm not convinced yet that we'll see that, or that it will be bullish if it happens.
There's a corrective bounce pattern for the rally from September that drive TNX up to 2.75-2.78 and still be part of what will be a larger pattern to the downside. But a little more short-term oriented says a rally above 2.62 would be potentially bullish. However, at the moment we're seeing a possible double top with bearish divergence so we'll have to see whether or not TNX can maintain its upward momentum.
KBW Bank index, BKX, Daily chart
Banks outperformed today on the theory that higher yields would help the banks' bottom line. When yields fell back down from this morning's high it wasn't matched by a pullback in the banks but there was an afternoon pullback. We'll have to see if the banks can hold up if yields do reverse back down.
BKX ran up to the top of its parallel up-channel from September, did a little throw-over and then dropped back inside the channel. That can be interpreted as a sell signal but it would become a stronger signal if it continues to drop back down on Thursday. There's bearish divergence on both the daily and weekly charts, which at the very least suggests caution by the bulls. BKX would be more bullish with a sustained rally above 113.
U.S. Dollar contract, DX, Weekly chart
Taking a step back from my usual daily chart of the US$, it's good to see where it is in the larger pattern. The reason I keep thinking we might see a drop down to the $90 area is because of the large megaphone pattern that it might be in since 2015, the bottom of which is currently near 89.80. If the dollar continues to slide down the top of its broken down-channel we could see it reach the bottom of its megaphone by mid-February.
The bullish interpretation of its pattern calls for the resumption of the rally off its September low. The pullback from November is only a 3-wave move so far and could be an a-b-c pullback correction, which achieved two equal legs down at 91.57 last week, and now we'll see it rally from here. Whether from here or after it drops a little lower, I think we're looking for a rally in the dollar this year.
Gold continuous contract, GC, Weekly chart
Gold sits in the middle of its price range since last September and in fact, as can be seen on its weekly chart below, in the middle of its range since the July 2016 high. The big choppy sideways consolidation could go either way and there's not a lot to help us figure out the odds of one way vs. the other. It remains bullish with the strong rally off the December 12th low since that was a successful back-test of its broken downtrend line from 2011-2016. But that was the 2nd back-test and without bullish divergence so I'm not sure it's that trustworthy.
The daily oscillators are overbought and turning down while the weekly oscillators have room to "grow." That's a recipe for more chop and consolidation so at this point I'm not expecting much in the next few weeks. That could change quickly and I'll keep updating the charts.
Oil continuous contract, CL, Weekly chart
Oil is about to make a bullish breakout from a bearish rising wedge or lese this week's rally is completing a little throw-over above the top of the wedge and will soon collapse back inside. A drop back below the January 4th high at 62.21 would create a sell signal. But if oil's rally continues from here we could see a continuation of the rally to the $85 area. That would put the economy into a tight squeeze and bears a close watch here.
Thursday morning's economic reports, like this morning's, will likely not be market moving. We'll get some inflation data with the PPI numbers, followed by CPI numbers on Friday, but no big swings are expected.
The bears put a tiny little dent in the bull's armor today and we'll soon find out if he only angered the bull or if instead the dent is pushing against a major artery and causes the bull some more pain. The indexes have once again run up to potentially important price levels and as discussed above, there are some important timing reasons why this week could be an important turn week. We've rallied into the turn window and therefore the expectation is that the market will turn down.
But it's important to know that sometimes a turn window results in an acceleration of the current move and not a reversal. That would mean the current melt-up could actually pick up speed to the upside and go truly parabolic on us. Higher prices beget higher prices until the music stops and then look out below. I can't know what will happen from here but the setup is for a reversal back down and if the indexes drop below this morning's lows I think that would be a strong clue that an important high could already be in place.
Considering the melt-up potential it's not a good time to be thinking aggressively about the short side. The upside risk is too great. But I do like the potential for a profitable trade on the short side as long as Tuesday's highs are not exceeded (they therefore make a good stop level if you try a short play).
While there remains significant upside potential I think that's a risky bet. Just as it's risky to trade an expected market crash, it's just as risky betting on a continuation of a melt-up. Stay long for as long as the market confirms new highs but hedge your positions just in case we wake up to a surprise gap down and a no-bid market. Trying to sell/hedge at a time like that will cost you big time. Bottom line for both sides is to trade cautiously, if at all, while we wait for some sanity to return.
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