Each new iteration of a Fed bailout has had less of a positive impact on the stock market. Today's announcement of another $45B/month in new money didn't even get so much as a thank-you rally.
Not long ago it took only the mere hint by the Fed that they were thinking of helping the market, I mean economy, with new electronically-created money. The market would rally hard for months ahead of that expectation. But as the years have passed and the knowledge of failed QE program after failed QE program has registered with everyone, the Fed has clearly run out of bullets.
As had been expected, the Fed left the discount rate at 0.25% (below zero when accounting for inflation) and said that it would leave the rate there until the cows come home. Well, maybe not until that happens but more like when pigs fly. They might as well have said that instead of saying they'll wait for the unemployment rate to drop below 6.5% before letting their discount rate start rising. Of course when enough people drop off the unemployment rolls and the rate drops below 6.5% they'll simply tell us they meant the U6 rate, which is currently above 14%. Frankly, I have no clue why anyone listens to these buffoons. They've proven beyond a shadow of a doubt that they're clueless.
Actually the Federal Reserve bankers know exactly what they're doing. As a private consortium of bankers they're ripping off the public with the artificial low rates and money creation. The only ones doing well with their programs are the banks and bankers. So who really are the clueless ones?
And speaking of money creation, the Fed also confirmed that they will increase their asset purchases (Treasuries and mortgage-backed securities) with an additional $45B/month starting in January. This replaces the $45B/month that was being used for Operation Twist, the program that was used to roll out short-term Treasuries into longer-term Treasuries (with no net addition to the Fed's balance sheet). With the completion of that program they will now simply buy more Treasuries and mortgage-backed securities and increase the debt on their balance sheet ($1T per year, which is double the rate it's been accumulating debt from 2008 to 2012). The Fed's debt will either be returned to the public, hurting the markets for years to come, or it will be written off with everyone else's debt when the fiat currency system crashes. I'm starting to think the Fed believes this is an end game and won't have to worry about paying it back.
By owning longer-term securities the Fed now has every incentive in the world to let inflation go higher so that it reduces the value of debt over time. Watch their actions over time (letting inflation rise), not their words. Their inflation target for years had been 1%-2% but now their latest statement says they project inflation to be "no more than 2.5%" and if it sneaks up to 3% I'm sure we'll be hearing that that will be their line in the sand. They'll just keep moving the line and let people get used to higher inflation over time. This is a clear case of the fox watching the hen house, promising us he won't eat too many.
But before we have to worry about higher inflation I think we need to get through a bout of deflation, which will be the fly in the ointment for the Fed's plans (and why they'll create more and more money in an attempt to fight deflation). Over the next few years deflation would increase the value of the government's debt, which is of course our debt.
As for the Fed's success in helping the market/economy, we knew this day was coming -- with each passing QE program the positive reaction from the stock market was becoming shorter and shorter. The last one, QE3 for $40B/month that was announced on September 13th, gave us a 1-day rally and a market peak that has yet to be exceeded. Today's QE4 announcement for another $45B/month ($85B/month total) got a positive market reaction that lasted for about an hour. The Fed can't lower interest rates any further and creating money is clearly not working either. The Fed is the true embodiment of Einstein's definition of insanity (doing the same thing over and over again and expecting a different result). The only thing they're doing, which they readily admit now, is monetizing the government debt.
The market is finally beginning to realize the Fed doesn't know what to do and that it's been reduced to simply funding a profligate government. All the king's horses and money can't put Humpty Dumpty together again and Humpty is a mess. Throwing more money at the problem is not the answer since the problem has been, and continues to be, that people and businesses don't want to borrow more. This is compounded by the fact that banks have tightened their lending standards and the only ones who can get a loan are the ones who don't need it. That's quite a switch from pre-2007 days when fogging a mirror was the only requirement to get a loan, and even that requirement was often waived.
The stock market has rallied to this point from 2009 on nothing but hope that the Fed knew what they were doing. We continued to hear "don't fight the Fed" when in fact what we really should have been saying is "don't fight the people who believe in the Fed." Those people are now starting to see the light and the consequence is we're all beginning to see that Emperor Ben wears no clothes.
So now we're left to wonder whether or not we're going to get a Santa Claus rally and if so, from what level will it start. The bounce pattern off the November 16th low, which I'm looking at as a correction to the October-November decline, may have completed today, in which case we could see the market start back down from here. A Santa Claus rally (typically between Christmas and New Year's and the first few days of January) might start from a much lower level. As always, we've got some key price levels on the charts to tell us which side is in control.
The DOW has now made it back up to its broken uptrend line from October 2011, near 13322 today. Assuming for now that the bounce off the November 16th low is just a correction of the decline, this is a natural place for the bounce to finish -- a back test of the broken trend line followed by a kiss goodbye. We wait for the kiss. If there's no kiss and the DOW can push much above 13350, and certainly above 13400, I would instead look for a December rally that will take us to a new high into January, with an upside target of about 13900-14000.
Dow Industrials, INDU, Weekly chart
In addition to back testing its broken uptrend line from October 2011, the DOW also reached the projection for two equal legs up from the November 16th low, at 13305. Today it pushed marginally higher and I see the potential to push marginally higher again on Thursday but not much above 13350 (it would turn more bullish much above that level). Today's daily candle is a gravestone doji at resistance and a red candle on Thursday would confirm a reversal signal. A drop below 13100 would also confirm the top of the bounce is in place.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 13,400
- bearish below 13,100
If the top is in place we should see no more than a bounce to correct this afternoon's decline followed by a continuation lower. That would be a move that would call for the bears to pile in. An early bearish signal would be a drop below Monday afternoon's low near 13160. I show the potential (red dashed line) or another push higher to complete the bounce pattern, with an upside target near 13400, so keep that possibility in mind when trying a short entry.
Dow Industrials, INDU, 60-min chart
Zooming in close to this week's price action, the 10-min chart below shows why I think it's possible we'll see another leg up before a tradable top is put in place. The pattern from Tuesday's high is called an expanded flat a-b-c correction. Wave-a is the 3-wave pullback Tuesday afternoon and wave-b is the 3-wave bounce into this afternoon's high. It's the 3-wave rally to a new high that I do not like as far as calling today's high THE high of the move. It should be a 5-wave move. Notice that today's high tagged the 127% extension of wave-a, at 13329.60 (actually 16 cents shy with a high at 13329.44). This is a very common extension for the b-wave in this pattern. The c-wave, which is the drop from today's high, typically extends down to 162% of the a-wave, which is shown on the chart at 13192. Therefore, a 5-wave move down to that level, with one more drop lower Thursday morning, could set up a rally leg to the 13350-13360 area so be careful about getting sucked into a short trade tomorrow morning. Tomorrow I'll be watching a bounce very carefully for a short entry but ready to flip long for a quick trade before the better shorting opportunity late Thursday or Friday.
Dow Industrials, INDU, 10-min chart
From a timing perspective, there is an important Gann Square of Nine turn date this Friday, December 14th. If you're at all familiar with this chart, which I've shown before, December 14th is 90 degrees in time from the September 14th high and on the same vector as SPX 1430. SPX 1430 also is 6 squares up from the March 2009 low and therefore from a Gann perspective, December 14th and SPX 1430 is a very important time/price square-out.
In addition to the December 14th Gann turn date there is a new moon tomorrow, December 13th. For all those who roll their eyes whenever I mention the moon I can only ask you why you would ignore a trade signal that seems to work, no matter what it is. I don't have to understand how MACD works but when it gives me a trade signal that aligns with other signals I pay attention. I might not know how the computers control my car but I do know that when I turn my key it will start. My MPTS chart below shows the number of times this year that the market has turned on or around the new moon. Why? Who gives a rip. It happens and it happens regularly. With price setting up the way it is, the timing of this new moon needs to be paid attention to.
S&P 500, SPX, MPTS Daily chart
SPX finished a little shy of its broken uptrend line from October 2011 (using the log price scale on this one since it has already climbed back above the line when using the arithmetic price scale). The top of a rising wedge for its bounce off the November 16th low crosses the broken uptrend line near 1444 tomorrow and I'm showing a rally to that level before the top is in place. However, the inability to hold above the price-level resistance zone at 1429-1434 for the past two days, along with today's gravestone doji, leaves me wondering if today's high was it. Because of the pattern I showed on the DOW's 10-min chart I'm leaning toward getting one more new high but I can't count the number of times I've missed a move down because I was waiting for "one more new high." We'll have to let price lead the way and a break much below 1420 would have me thinking we're not going to get a new high. Much above 1450 and I'd be thinking higher highs into January (green dashed line).
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1435
- bearish below 1398
This week's rally brought NDX back up to its December 3rd high at 2699 (5 points shy of it today). That high was from a gap up and then it immediately reversed back down, creating a key reversal day. Between price-level resistance at 2700 and its downtrend line from September-October at the same level today, it's a tough resistance level to crack. By the same token, it would therefore be bullish above 2700. Today it gapped up again to near the December 3rd high and again immediately sold off, which is obviously showing us a distribution pattern at resistance. But this today's close kept it above its 50- and 200-dma's, which are crossing (the 50 down through the 200) near 2673. A further break below that level would be bearish and a rally above 2700, and holds above 2700, would be bullish.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 2700
- bearish below 2620
A driver for both the tech indexes and a good reflection on the economy is the semiconductor index. I often say "as go the semis, so go the techs and as go the techs so goes the broader market averages." I therefore like to keep an eye on what the SOX is doing and at the moment it's a setup only the bears could like, but it wouldn't take much more of a rally to turn it into something a lot more bullish. However, before thinking bullish about the SOX, and the broader market, we need to consider the bearish potential right in front of us.
The decline from September into the October low fits well as a leading diagonal (descending wedge) for a 1st wave down (of a larger 3rd wave underway from the September high). The lower low in November looks to be part of a larger a-b-c bounce pattern off the October low into today's high (the same expanded flat a-b-c correction as shown on the DOW's 10-min chart but obviously for a correction within a larger decline this time). Notice the similarity to the a-b-c bounce off the June-July lows with the current a-b-c bounce being a smaller version (fractal) of the larger a-b-c. Both are 2nd wave corrections with the current one being the 2nd wave correction within a larger-degree 3rd wave down.
Semiconductor index, SOX, Daily chart
For the current a-b-c bounce up from October, the c-wave is the leg up from November 16th and the target for it is 162% of the October-November bounce, which points to 389.82 and that was achieved on Tuesday with a high of 390.17 and a slightly higher high today at 391.29. It's also testing its 200-dma, at 389.60, and has been unable to hold it the past two days. Slightly higher is the downtrend line from the March-September highs, currently near 393, so a rally above that level would be more bullish but at the moment this is a strong setup for a reversal and the start of the next leg down.
The downtrend line from March connects 3 degrees of 2nd wave corrections, with the largest-degree 2nd wave being the late-March high, followed by a smaller-degree 2nd wave correction up to the September high and now the next smaller-degree 2nd wave correction up to the current high. The next move down with this wave count would be the 3rd wave of a 3rd wave of the larger-degree 3rd wave down. To say that the decline would be strong over the next several months would be an understatement and that's why this is a significant warning to those who are feeling bullish about the market (but without confirmation of a reversal yet).
Now we look at the weekly chart to see how all this fits in the bigger picture. The significance of the setup is that we have more fractal patterns and this time they're H&S patterns surrounding these multiple 2nd wave corrections. As I've noted on the chart, we have a H&S pattern for the right shoulders at two smaller degrees following the March high. The neckline for all of them is the line along the lows from August 2009, currently near 354 -- break that support line and it will be bombs away. The multitude of repeating (fractal) patterns support the bearish wave count and until the bulls can blow through resistance near 393, which includes the 50-week MA, this chart is showing a clear and present danger to bulls.
Semiconductor index, SOX, Weekly chart
The other "tell" for tech stocks, as well as the broader market, has been AAPL, which moves the NDX by its sheer weight in the index. AAPL is also an important sentiment stock since it's a good measure of "risk-on, risk-off" when looking at what fund managers are willing to do with their accounts. There's plenty of speculation about the reasons for AAPL's selling this month, mostly tax related, but the bottom line is that the selling in AAPL might be a worrisome sign for the broader market. While there's been an effort to hold up the indexes into year-end, a comparison of NDX to AAPL is telling us something is going to give.
The comparison chart below shows NDX and AAPL have been tied together very closely. This is a daily chart and if I showed the weekly chart I could easily argue that AAPL leads NDX -- whenever AAPL held back we soon got a pullback in NDX and when AAPL started to rally, NDX would quickly follow. The daily chart shows the divergence this month and that's the worrisome part. As AAPL drops lower NDX has been pushed higher. Again, this could all be tax related but at the moment it's a significant divergence and a warning sign considering the fact that AAPL tends to lead the way.
AAPL vs. NDX, Daily chart
The RUT managed to close its October 19th gap with this morning's gap up. But it then proceeded to immediately sell off. It got a bounce following the FOMC to a lower high and then sold off hard the rest of the day. The RUT leading the way downstairs is never a good sign for the market -- there are bad people down there. By closing below yesterday's close today's candle is a bearish engulfing candlestick at resistance, which gives us a key reversal day as an outside down day. This is a bearish looking chart right here and now. The bulls need a close above 838 to negate this.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 838
- bearish below 798
The Fed will be moving its Treasury holdings out into the longer-dated maturities so we'll see what the 30-year is up to. Yields climbed higher following the FOMC announcement, which meant bonds sold off. Interesting reaction to the Fed saying they're going to add demand for bonds. Also interesting is that the daily pattern looks very similar to what I showed for the SOX --today's rally took it up to resistance at its downtrend line from June 2011 as well as its 200-dma, both near 2.9%. The bounce off the November 16th low has achieved two equal legs up at 2.888%, which looks good for the completion of an a-b-c bounce correction to the October-November decline (sounding familiar yet?). It's a good setup for a reversal back down and the wave count calls for a strong decline in a 3rd of a 3rd wave down. This would be negated with a further rally, especially if TYX gets above its October high at 3.007%. If that happens I'm sure the stock market will also be rallying higher.
30-year Yield, TYX, Daily chart
The banking index, BKX, came close to achieving the price projection at 50.29 for two equal legs up from November 16th, with a high of 50.18 today. It was unable to hold the break above its downtrend line from 2010-2011, currently near 49.84 (log price scale) and today's candle is a shooting star at resistance. As with the other indexes, a red candle on Thursday would be a confirmed reversal pattern. It has slightly more upside potential to the top of its up-channel, near 50.60. so even though it would be potentially bullish above 50.30 I'd be careful about a head-fake break to the upside.
KBW Bank index, BKX, Daily chart
Next is a pattern that supports more rally into the end of this month. A few weeks ago I mentioned the TRAN looked like it's in a bull flag consolidation pattern since June and a break above the top of the flag, near 5170, could see a move up to at least 5333 where it would have two equal legs up from the June low. At the end of this month that level crosses the broken uptrend line from 2009-2011, making for a good upside target for now. It stays bullish as long as it stays above its December 4th low at 5041 although I'd become concerned about its rally if it drops back below its December 5th high at 5142. Yesterday and today it struggled with a downtrend line from March-May, near 5225 (today's high), and a small consolidation this week should lead to another push higher into the end of the month if the a-b-c move up from early June is to complete. The broader market should support this if it's to happen, otherwise expect a truncated finish.
Transportation Index, TRAN, Daily chart
The U.S. dollar spiked down on the FOMC announcement but then bounced back up. There was a bad tick showing a low of 79.36 but I don't think it got much below 79.70 and held its uptrend line from October 2011 (I erased the bad tick on the chart below). A drop below that line, confirmed with a drop below its December 5th low at 79.56, would be bearish but until that happens I'll continue with my belief that the dollar is going to rally from here. Needless to say, it needs to get going now or else.
U.S. Dollar contract, DX, Daily chart
As with the dollar, it's not clear which direction commodities are going to head in the next day or two. Gold looks like it's ready to roll back over but it takes a break below last Friday's low near 1684 to confirm it. In the meantime I see the potential for another rally leg up to 1768 by the end of the month to achieve two equal legs in its bounce off the November 5th low where it crosses the top of a parallel up-channel for the bounce. A rally above 1735 is needed to improve the chances of that happening. I lean short gold here but not with a lot of conviction.
Gold continuous contract, GC, Daily chart
It's the same with oil as with gold -- I lean short from here but not with a lot of conviction. As with gold, it's being held down by both the 20- and 50-dmas and a drop below yesterday's low at 85.68 would be confirmation that another leg down is underway, with an initial downside target near 79. There's a lot of resistance to a rally between 87 and 90.
Oil continuous contract, CL, Daily chart
Tomorrow's economic reports include the usual unemployment claims numbers as well as retail sales and PPI. Retail sales may have been negatively affected by Hurricane Sandy but they're still expected to show growth for November following October's decline. PPI (wholesalers' inflation rate) is expected to decline another -0.5% for November, following October's -0.2% (do I smell some deflation?) while the core PPI rate (excludes food and energy) is expected to rise to +0.1% from October's -0.2%. Businesses building inventory, or not, is part of the GDP formula so we'll see if there are any surprises from the expected slowdown to +0.3%.
Economic reports and Summary
Looking at the daily charts I want to jump on this market and get short for what I think will be a large decline this month. That desire is of course tempered with the thought that the Santa Claus rally is going to bite me in the butt just when I think it's ready to let go to the downside. So any shorting activity this month needs to be done with one eye looking over your shoulder to see if bulls are on the run.
The short-term charts, as shown on the DOW, have me thinking we'll get a quick low Thursday morning but then a fairly strong rally (DOW 150-200 points) to finish off the bounce from November 16th. Based on this I think it will not be a good time to short any further breakdown tomorrow morning but instead wait to see what kind of bounce we get and if a nice 3-wave bounce sets up and looks ready to roll back over then short it and keep a tight stop. A bounce followed by a new low below whatever low is put in (today's or tomorrow's) will be the green light to get into a bigger short position.
If we do get a minor new high, perhaps DOW 13350-13400 (SPX 1440-1445), that's when I think we'll have a better shorting opportunity and it's what I'll be watching for and reporting on. It could be a very good setup for a market decline into next week.
Keep in mind that the Thursday prior to opex tends to be a head-fake day, normally with a morning low followed by a rally that lasts through opex (next week). That's another reason for caution about the short side. But the bears have Gann and a new moon on their side, which calls for a reversal of the current move (heading up into the turn date so looking for a reversal back down) and based on time and price I think it's very risky to be long right here, especially if we get a minor new high into tomorrow/Friday and start back down. I would not want to be long over the weekend.
If you don't like playing the short side, keep your stops tight on long positions to protect profits. If you like the short side then I think there's a very good trading opportunity setting up. I'll call it when I see it and in the meantime 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