The Senate was unable to pass a budget over the weekend, which has resulted in a government shutdown. The stock market reacted with a gap up this morning and buyers then added to the rally, finishing the day on a high note. Perhaps the market is telling us we're all better off with the government shut down.
Today's Market Stats
Tom and I (Keene) have swapped Market Wraps this week so he'll be back with you on Wednesday.
The government shutdown is temporary and everyone knows it. The only ones trying to create theatrics around this are the senators themselves and their incessant sound bites. Between that and the filibusters it's amazing any of the senators have any time to work. The market ignored all of the fanfare and worries and simply kept doing what it's been doing -- rallying to the moon. The parabolic rally continues today with the Dow up another 143 points and it was the weaker index today. Hold on tight for this ride up and for what assuredly be just as quick back down.
Other than the noise surrounding the government shutdown it was a very quiet news day. There were no major economic reports and therefore there was little for the market to chew on or to knock it off track. The northbound train remains on track and the only question on the minds of many traders is what could derail this rally. At the moment there's not much out there that's scaring investors and the only thing we appear to vulnerable to is the unknown, the Black Swan, the Minsky Moment, the final snow flake that creates the avalanche. Since those events are unpredictable we have to remain aware of the potential for a surprise bear attack but the path of least resistance is clearly to the upside and that's the way traders should be looking. Just keep the exit door propped open with your foot so that you can be one of the first ones out when someone yells "SELL!"
Since there's very little news to discuss I'm going to jump right into the review of the charts, starting with the Nasdaq since it's close to what could be strong resistance.
Nasdaq Composite index, COMPQ, Weekly chart
There was a little short-covering spurt into the close today and that had the indexes closing at the day's highs. It looked like some bears still can't believe the market's not going to at least pull back some and they are forced to cover into the close. That little spurt higher for the Nasdaq got it close to trendline resistance near 7420 (the day's high and close was 7408). On its weekly chart you can see how it has pressed up near its trend line along the highs since April 2010, which fits well as the top of a parallel up-channel since then. Through 2014-2015 the top of the channel was resistance and now it's back up to try again to bust through.
At the same level is the trend line along the highs from September 2016 - June 2017 so the trendline cross near 7420 has been a good upside target and we'll soon find out if it's also going to be tough resistance. But if the buyers keep coming, like the Ice Walkers from the North, the next level of resistance is the top of a parallel up-channel for the rally from February 2016, which could mean the Naz is heading for 8000.
The weekly oscillators are now more overbought than they've been since 2000 but we know they can get more overbought and so far there's no bearish divergence. There was a bearish divergence on RSI (not MACD) at the March 2000 high. Trendline resistance here could cause price to pause but I don't see anything yet that says the bears are cleared in hot (cleared to shoot).
Nasdaq Composite index, COMPQ, Daily chart
The daily chart shows a little closer view of the trendline resistance mentioned above. Ideally, from a pattern perspective, we'll see a little larger pullback correction and then another push higher and then each new high will have to be evaluated for its potential importance. Right now I don't expect to see anything more than a pullback correction.
Key Levels for COMPQ:
- bullish above 7290
- bearish below 7003
Nasdaq Composite index, COMPQ, 60-min chart
The 60-min chart does not show the trend line along the highs from April 2010 - July 2015 but it does show the one from December. On the 60-min chart the line looks closer to 7430 so we have a 7420-7430 target zone for Tuesday to watch. A break of the uptrend line from December 29th, currently near 7345, would tell us a larger pullback/consolidation is in progress. In the meantime we can watch to see if it will continue to chop its way higher inside the rising wedge (some bearish divergence is starting to show up).
S&P 500, SPX, Daily chart
SPX is in a similar position as the Naz as it approaches the top of its narrow up-channel from December 29th and its broken uptrend line from November 2016 - April 2017 (gray line). The two lines cross on Tuesday near 2840-2850. As with the Nasdaq, the price pattern would look best with a pullback correction (potentially into the end of the month) and then another leg higher. That would relieve some of the daily overbought condition and set up a new high with bearish divergence (if the subsequent high is going to be an important one).
Key Levels for SPX:
- bullish above 2775
- bearish below 2736
Dow Industrials, INDU, Daily chart
The Dow's squished chart shows clearly the increasing steepness of the uptrend lines since last August, with the steepest one being from December 29th and currently near 26000. Stay bullish above that line since the rally could continue to steepen as it seeks to escape the earth's gravity pull. Once the uptrend line from December 29th is broken it will be our clue to look for at least a choppy consolidation although we could see a sharp retracement before starting the next rally leg.
Key Levels for DOW:
- to the moon Alice!
- bearish below 24,700
Russell-2000, RUT, Daily chart
The RUT is also nearing potentially strong resistance at 1610 (today's closing high was 1605). A trend line across the highs from October 2017 - January 2018 crosses a price projection at 1610, which is where the move up from November 15th has two equal legs up. That in turn could be the completion of an a-b-c move for the 3rd wave of a large rising wedge pattern from August. This pattern calls for a large choppy pullback into the end of the month/early February and then another rally into the end of February.
Key Levels for RUT:
- bullish above 1610
- bearish below 1535
20+ Year Treasury ETF, TLT, Weekly chart
The Treasury market has reached an inflection point when viewed with TLT, the 20+ year Treasury bond ETF. TLT has worked its way down/over to its uptrend line from February 2011 - December 2013, which held the pullback into the December 2016 and March 2017 lows. A break of the uptrend line (for more than a week) would obviously be bearish and that would likely spike yields even higher. A spike in yields would make it a lot more difficult to service the huge amount of debt that individuals, corporations and governments have accumulated.
U.S. Dollar contract, DX, Daily chart
The US$ has been consolidating for the past week near the bottom of its large expanding triangle pattern that it's been in since 2015, which is the trend line along the lows since February 2015 and currently near 89.80. A sustained drop below that level would be a bearish move for the dollar but at the moment I think we'll see the dollar bottom and then start to head back up.
Gold continuous contract, GC, Weekly chart
Gold's next direction can be determined by a flip of the coin, although you'll then have a 50% chance of being wrong. That's about the best I can do with its chart right now. I'm not seeing enough evidence in its bounce to suggest a continuation of its rally and it's going to be somewhat dependent on what the dollar does. Gold looks bullish with its bounce off the 200-week MA and broken downtrend line from 2011-2016 in December but I remain unconvinced it will be able to make it much further.
Oil continuous contract, CL, Weekly chart
Oil's daily chart looks short-term bullish with the choppy consolidation over the past week, especially since it's consolidating on top of the broken trend line along the highs from June 2016 - January 2017, currently near 62.60. As long as oil holds above this price it will remain bullish but a drop below the uptrend line from August, currently near 60.65, would be confirmation a top is likely in place.
There were no important economic reports today and there won't be any tomorrow. The rest of the week remains relatively light with existing home sales on Wednesday, new home sales on Thursday and then GDP and durable goods orders on Friday.
The party for the bulls doesn't show any sign of aging yet as more money pours into the market, much of which is going into ETFs and that drives up all stocks, which in turn keeps the advance-decline line looking strong. The uptrend has turned into a parabolic rise and that's always dangerous but it can go much higher and much longer than anyone thinks possible. It's clearly not a time for bears to be even thinking about trying the short side -- death by a 1000 paper cuts or death by getting stabbed in the heart, take your pick.
A lot of money is chasing this market higher and my fear is that it's a lot of retail money, the ones who get the most hurt when the market turns. But if you're long you're doing very well and I'm sure it's tempting to leverage up and get more out of the rally. That would be like borrowing money to invest in crypto currencies and not recommended. If you're on the sidelines wondering how to get in and enjoy the ride, take it slow, leg in with small positions/known risk (such as an option play), and watch it carefully. I still worry about waking up to find we put in a v-top reversal with a big gap down and sharp selloff.
But unlike bottoms, v-top reversals are not common in the stock market. There were sharp reversals off the March 2000 and July 2007 highs but both were tested months later (September 2000 and October 2007), something you don't often see with v-bottom reversals. That's not to say it will happen again that way but it will be a reason not to get immediately bearish on the next big spike down. After a big bounce correction it would be time to get more aggressive on the short side. So if you're a bear itching to get short, you'll likely have plenty of time to think about that after we see an important high get put in place. For now the bulls rule and the bears drool and I don't see that changing anytime soon.
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