With speculation that the market has made its high for the year (not clear yet) it's a good time to take a look at the bigger picture and see what could be in store for the market as we look ahead.
The market has become a little whippy this week. SPX has traded +/- 30 points in one direction and then the next since Friday, leaving long tails on its daily candle the past two days. A shooting star followed by a hammer. I think the past three days have traders feeling like they've been hammered and are seeing stars.
I'm going to take a longer-term look at the market tonight and then drill down into the shorter-term charts so that we can keep perspective for where we've been and where we could be headed. Interestingly, the monthly chart from 2000 looks whippy, similar to the intraday charts for the past three days. But before getting to the charts, a quick review of the day.
European news is what's jerking the market around and today there was disappointing news in the morning (about Greece of course) and hopeful news in the afternoon, which was the opposite of yesterday. In after-hours trading the futures are pulling back (ES was down -7 in the early evening but has erased most of that), which I suspect is on more news that Greece is going to abandon the euro, or maybe not, then again...
The news is clearly whipping this market around. As I'll review with the SPX intraday chart, it's possible we're seeing the market hammer out a consolidation before heading lower but there are some other things that have me thinking there's a good possibility we're going to see the market head higher into June and into a turn window the first week of July.
Following yesterday's existing home sales, which improved somewhat from March but came in a little less than expectations, today's new home sales number was marginally better than March and expectations. The Housing Price index also was up +1.8% for March compared to +0.3% in February. So the housing data was at least improving but nothing to write home about.
Last week's news about JPM losing $2B, um, make that $3B, oh wait, maybe $5B, there's been a lot of attention to the problem as people worry that where there's one cockroach there are many. Everyone knows the real danger to the global banking system is the interconnectedness and how derivatives link them all together. Everyone owes everyone else something or is exposed to someone else's risk.
As scared as Bernanke is of the 1930s, he and his central banking buddies around the world are even more worried about having another Lehman Brothers on their hands. Just as Bernanke is a student of the Great Depression (he learned the wrong lessons in my opinion) he is also a student of Lehman Brothers and doesn't want to see another large bank failure ripple through the entire financial system. The central bankers will do whatever they can to prevent another failure and that includes Greece. They will go down fighting to save their grand financial experiment.
The financial system is still so leveraged and interconnected (mostly through the derivatives market) that regular infusions of more credit and the monetization of government debt are required just to keep their heads above water. In some ways, the deflation that one would normally expect at the end of a credit bubble has been masked by the huge growth in central bank balance sheets. When the central banks' balance sheets become bloated to the point where no one trusts them anymore it will be the end game. It's anyone's guess when that will happen.
In the meantime the stock markets have become a giant charade, or perhaps a better analogy would be one giant Ponzi scheme. The indexes don't communicate useful or accurate information like they used to. Prices have become more influenced by the supply of credit in the system than the underlying fundamentals (I know, bad word, I'll go wash my mouth out with soap) of the businesses on the exchanges. The whole market has the appearance of a racket that's been designed to benefit the banks, the brokers, and the bureaucrats who regulate them (in name only). We traders are not even an afterthought at this point. If we're buy-and-hold investors then the Fed wants us to be happy, feel rich and spend our money unwisely (but patriotically) to support the economy.
It's certainly interesting game we've chosen to play. I'm not asking for much -- give me a direction to trade and I'm happy. I'm going to use SPX to show the bigger picture and drill down to the 30-min chart to show what I'll be watching in the coming days and into the end of May. From that we should have a good idea what June should look like and then through the rest of the year. The bigger picture is used to keep things in perspective.
The really big picture is shown on the chart below, which shows prices from 1870 through today and projected into 2016. The big bear market that should run from 2000 to 2016-1018 (if it's to be a typical secular bear) calls for another leg down. The up-channel was created with a trend line across the highs in 1929 and 2000, which are labeled waves 1 and 3 on the chart. A parallel line is attached to the 1932 low (wave 2) and is the target for the 4th wave correction that we're currently in. That line crosses near 475 in 2016. I'm just sayin'...
S&P 500, SPX, 1870-2020
The good news is that once this secular bear is finished we'll have a beauty of a long-term buying opportunity. The bad news is that It's going to be painful for most before we get there. As traders though, we have an opportunity to make some serious money on the downside so that we can put it to work on the long side in a few years.
What the next leg down for the bear market will be is the big unknown (but I have no doubt we've got another leg down coming). Whether it will be another large A-B-C move down or a faster decline can't be known ahead of time but on the monthly chart below I show two typical patterns based on what we've seen so far. A drop down to the bottom of the down-channel around 2016 would have SPX hitting 560. We'll have plenty of time as the years pass to figure out if it's going to be 560 or 475 for a final low.
S&P 500, SPX, Monthly chart
Moving in closer to view the leg up from 2009, the weekly chart below shows the corrective wave structure of the 2009-1012 rally and a corrective rally means it will be either completely retraced or is part of a large sideways consolidation pattern from 2000. Both call for a big move back down into 2013-2014 but the sideways triangle idea means the 2009 low will not be broken. I'm depicting a 5-wave move down to 1050 by September/October for the 1st wave down and then a bounce into the end of the year for the 2nd wave correction. That would be followed by a stronger decline into early 2013 for the 3rd wave down and then a consolidation through the rest of the year (choppy but big tradable moves). The question at the moment is whether or not the market has already topped out or if it has one more minor new high to finish the 2009-2012 rally before starting the next bear market leg down.
S&P 500, SPX, Weekly chart
The daily chart below zooms in on the last leg of the 2009-2012 rally, which is the rally from last October, and how the decline could unfold this year. This chart assumes the top is already in place at the May 1st high (to match up with the DOW's new high but a truncated high for the other indexes). The decline from May 1st is the 1st wave of a larger-degree 1st wave that may have finished or has one more new low to finish it. What's not clear yet is whether the move down from April is an a-b-c pullback correction that will be followed by another rally leg (green dashed line). Overlapping last October's high at 1292.66 on Friday (with a low at 1291.88) raises a big warning flag for bulls right here. But on a closing basis (Friday closed at 1295.22) I'm not going to rule out the potential for the start of another rally leg into June/July for the final high for the year. A rally above 1358 would put the bulls back in control but a bounce in the coming week (if we get one) followed by a new low below Friday's would confirm the bearish wave pattern.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1358
- more bearish below 1280 (200-dma)
Getting into the intraday charts is when I'm really struggling with the bearish wave count that says the May high was THE high. Following the first leg down from May and then the bounce/consolidation into the high on May 11th, a 3rd wave down should have been stronger than what we saw. It was showing bullish divergence against the low on May 8th and only achieved equality with the 1st leg down (at 1293.47). This has it looking more like an a-b-c pullback from May 1st instead of something more bearish. If SPX can break above 1333 on Thursday it would be the first bullish sign. Otherwise a sideways consolidation here that's followed by a new low would support the more immediate bearish case. It's possible we'll see an immediate move lower tomorrow, one that quickly drops SPX down to the 1200 area before setting up a larger corrective bounce but so far price has just been chopping up and down, making it difficult to determine the next big move. Trying to keep it simple for now, above 1333 would be bullish and below 1280 would be bearish. Watch the chop in between.
S&P 500, SPX, 60-min chart
To share with you why I'm wondering if the pullback from May 1st could lead to a new high, I want to show a channeling technique that uses EW counts to help identify the correct count. From the May 1st high, the first leg down is either wave-1 or wave-A, which is followed by the bounce in either wave-2 or wave-B (to the May 11th high in this case). After it starts back down again you draw a trend line from the start of the decline through wave-2/B high and snap a parallel line to the bottom of wave-1/A. The bottom of the channel should hold if it's going to be wave-C and but very likely will break if it's going to be wave-3.
Even if the bottom of the channel holds, as long as the bounce doesn't overlap the bottom of wave-1 (and ideally stays inside the down-channel) and then turns back to a new low then it could be a 5-wave move (it might turn into a 7-wave move, like the May 1-9 decline but you won't know until later). But the fact that it held the bottom of the down-channel on Friday was our first warning that we might be looking at a 3-wave move down. And a 3-wave move is a correction, not an impulsive decline. But we didn't get that on Monday and instead it looks like it's either consolidating before another leg down or getting ready to rally.
The 120-min chart below shows the channel technique shown above. The downtrend line from May 1st through the May 11th high defines the control line and a parallel line is attached to the May 8th (or 9th) low. The sideways triangle idea calls for continued consolidation on Thursday and Friday, in which case get ready for another leg down. But if the rally continues and makes it above the key level at 1348 then new highs could very well be coming.
S&P 500, SPX, 120-min chart
The DOW has not crossed below its October high but it came within 30 points of it at today's low. Looking at today's candle I see a very bullish dragonfly doji at support but it closed just below the bottom of the parallel up-channel from October/November. The channel was drawn the same way as discussed above -- a trend line from the October high through the March high and a parallel attached to the November low, which should identify the 4th wave pullback in the rally from October if it's to be a 5-wave move up. If the high is in place and the 1st wave down has completed we could get a very high bounce for a correction before heading lower so we might know for a while if THE high is in place but the DOW would turn at least short-term bullish with a rally above 12700. It would turn more bearish with a break below its 200-dma at 12218.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 12,700
- bearish below 12,280
It's a similar pattern for NDX except that its 2nd leg down for the decline from April 3rd achieved the 162% projection of the 1st leg down, more typical of a 3rd wave. So we could have a 1-2-3 down from April or it might have completed an a-b-c pullback correction that will lead to one more new high for the rally from October. If we use the May high (as a truncated finish to its rally) then it might have finished its 1st wave down and we're only looking for a bounce into the end of the month before it heads lower again.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 2590
- bearish below 2487
There is a downside projection near 716 for the RUT if it's to achieve its H&S bearish price objective. The 2nd leg of the decline from March would be 162% of the 1st leg down near 726. So those are two downside targets if the market continues lower from here. A rally back above 780 would be a bullish heads up and above 790 could point the way to a new high next month.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 790
- stay bearish below 780
The bond rally is looking a little tired. After pulling back from Friday's high and then rallying back up to test the highs today it's leaving a bearish divergence against Friday's high. Last Wednesday I looked at TLT to point out the fact that the rally from March looks like a completing 5-wave move as it was hitting its downtrend line from October-December. But it popped above the line and used it for support on Tuesday so there's clearly more upside potential based on that. But momentum to the upside is clearly waning.
TNX and TYX, the 20- and 30-year yields, are of course the opposite and as can be seen on the TYX chart below, it is again testing its December low at 2.78%. Slightly lower is its October low at 2.69%. As depicted, I think there's a good chance for at least a bounce to correct the decline from March before heading lower, possibly with a bounce up to the 3.2% area before turning back down. Until I see evidence to the contrary I continue to see the potential for a rally back up to the top of its trading range, near 3.5%, before it will be ready for a blast lower into the end of the year (maybe a rally back up to 3.5% would scare Bernanke into pulling out the stops to try to drive yields lower).
30-year Yield, TYX, Daily chart
After chopping sideways since early February, in what looked like a bullish consolidation pattern, the TRAN suddenly dropped out of the pattern and quickly sliced through its 200-dma on Friday before recovering back above it this week. A retest of the bottom of its sideways triangle pattern, nearing its 20-dma at 5145, could leave a bearish kiss goodbye setup. If that happens and the TRAN drops back below Friday's low near 4864 I suspect the rest of the market will be following.
Transportation Index, TRAN, Daily chart
With the worry over the euro the U.S. dollar has been the beneficiary and has had a strong rally over the past month, climbing above both its May high and this week its January high. Short term it's looking ready for a pullback but as the weekly chart below shows, it should proceed higher to the $85 dollar area before consolidating for a few weeks and the higher again. There is of course the possibility that a big save will come for European woes and the euro will rally again. It takes a break below 79.70 on the dollar to indicate it's in trouble. It's due a pullback but then higher again.
U.S. Dollar contract, DX, Weekly chart
Last week gold bounced off its broken downtrend line from August-November, pulled back sharply this week but then got a sharp bounce off this morning's low, leaving a bullish dragonfly doji. It's jerking around with the dollar just like the stock market. I show a bounce up to its downtrend line from last February, near 1620 before continuing lower but obviously it would turn more bullish if it rallies above 1620.
Gold continuous contract, GC, Daily chart
Oil may have finished a 3-wave move down from March 1st, where the 2nd leg down achieved the 162% projection of the 1st leg down. If it bounces back up to the $97 area over the next few weeks it should set up another leg down from there. That's assuming a bottom is in for now.
Oil continuous contract, CL, Daily chart
Tomorrow's economic reports include the durable goods orders and some improvement is expected, although nothing stellar. I have a feeling the market will paying more attention to news across the pond.
Economic reports, summary and Key Trading Levels
The last chart I'll show is AAPL, a stock that I think is a good sentiment indicator for the broader market (forget about Faceplant, I mean Facebook). If traders are feeling good about the market's prospects I think they'll want to own AAPL, and vice versa. And AAPL is looking potentially bullish at the moment. Either that or it's very bearish. The pullback from its April 10th high is a 3-wave move down so far. Counting it as an a-b-c pullback (green labels) shows it achieved two equal legs down at 529 on Friday. This week's bounce has overlapped the April 17th low near 572, which means it's either an a-b-c down or a 1-2, 1-2 wave count to the downside (red labels). The bearish wave count says the next leg down is going to be a screamer so any break below Friday's low near 522 should be taken seriously (get out of longs as fast as you can). So far AAPL has stalled at its trend line along the highs from April 2010, near 575 and its short-term pattern calls for a pullback from that area. A pullback followed by a strong rally higher would be a strong signal that AAPL is going to make a new high. So let price lead the way but stay aware that AAPL could be getting ready for a big move one way or the other.
Apple Inc, AAPL, Daily chart
The market is still hiding its cards and I don't have enough clues yet to determine whether or not we've seen the final high for the year. The market could be due a bounce to retrace a Fib portion of the decline from May 1st. If it's then followed by another leg down that breaks below Friday's lows the market will likely be in more serious trouble. The TRAN and AAPL charts reflect this.
But with possible a-b-c pullbacks from this year's highs there is the potential for another rally leg from here (or following another minor new low), one which could take us to a new high into June and into a turn window the first week of July. There is historical precedence for a June rally in this election year. So stay loose, don't get married to any positions and trade what the market gives us, not your opinion. The market is getting whippy as it reacts to news and you don't want to get stuck on the wrong side of this market. I see a big move coming in the next month and I'd rather miss the move than be on the wrong side of it.
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