Following Wednesday's big post-FOMC rally the bulls did well just to hold their ground today, at least for the DOW. The techs and small caps showed relative weakness. Now we wonder if there will be an encore for the bulls.
The Fed-induced rally yesterday afternoon was followed by consolidation today. The techs and small caps were relative weak but the blue chips were stronger. The DOW was the only index to close in the green but SPX only missed by a point. The DOW's relative strength and the weakness in the techs and small caps shows some defensive action by fund managers and that's not a good sign for the Santa Claus rally, which usually picks up by the middle of December, but the consolidation of the rally (instead of a strong reversal back down) is a good sign for the bulls. We'll probably see a pullback correction but it's looking good for a rally into January.
Yesterday's rally was a perfect example of why trading on news, and what you think the reaction to that news will be, is usually an exercise in frustration. As one trader friend told me, "they played me like a fiddle." Most had been expecting the Fed to hold tight and not make any changes to their asset purchases. Most felt Bernanke would be an idiot to bomb the market at the end of the year with an announcement that the Fed would start tapering now, not later. Most believed an announcement to start tapering now would tank the market. Most would be wrong.
When the FOMC announcement was made and the decision to taper now and not later, the first reaction was a big hit and S&P futures immediately dropped 10 points. Those holding long positions immediately dumped them and new short positions were quickly established. Those were the correct things to do based on everything we've seen from this market when the Fed has talked about tapering and this time it was another surprise with the taper announcement, just as the market was surprised back in September when the Fed did not make the expected announcement to taper. That announcement launched the next leg of the rally into November's high.
So let me see if I can figure this out. The Fed surprises the market with a "no taper" announcement and the market blasts higher. The Fed then surprises the market with "taper now" announcement and the market blasts higher. Huh? BTW, did you know that the word "huh?" is universally understood in any language? But I digress. Trading the market based on what you think the Fed will do is hard enough. Trading the market based on how you think the market will react to what the Fed will do is a fool's errand.
As soon as the market rallied hard yesterday afternoon the pundits immediately started telling us it's because the Fed promised low rates forever and that they're not going to use the unemployment rate as a reason to start raising rates. Excuse me for a second -- ah, ah, bullsh** -- gesundheit, thank you. What a crock. The market has known the Fed is on hold with abnormally low rates for as far as the eye can see. The market has known the unemployment rate is a movable goal post and now they've simply announced that they've taken down the goal post.
Yesterday's rally was a massive manipulation, pure and simple. The Fed knew the reaction by the market would be horrible and they put into place a way to prevent it. Putting $85B (or more) into the hands of the banks' trading desks with instructions to "buy big and keep on buying after the FOMC announcement" is all it took. The pullback into the announcement was probably engineered as well so that the rubber band could be pulled back, sucking in the shorts, and then slamming them with some big buy programs, using the short covering to help launch the rally. I'm sure the bank's trading desks felt like it was taking candy from a baby.
The charts told me in front of the FOMC announcement to expect a snap to the downside so that the SPX could tag its 50-dma (near 1768) to match what the futures had done Sunday evening and that would be the time the computer programs would kick in with large buy programs. It played out to perfection. It's why I keep on insisting that we follow the charts, which is hard enough, and to ignore the news (especially how you think the market will react to the news). I just like to know what big news is coming so that I can see which way to lean based on what the charts are telling me. News provides the catalyst but not the direction.
What the Fed did or did not do to the market yesterday is of course all speculation on my part and I believe they manipulated the market only because I'm a conspiracy theorist (wink). But most will admit yesterday's reaction was completely different than how the market has responded in the past. And have you see what bonds have done? Not much. Bonds whipsawed a bit following the announcement and then sold off some but yields are still trading in the range of the past 2 weeks. The 30-year yield is still stuck in its 4-week trading range. The bond market is much harder to manipulate but I find it interesting that bonds have held up better than expected. I guess the market feels a drop of only $5B/month into Treasuries is not much of a change.
At any rate, the Fed's circus show is now behind us and now we get to figure out whether the bulls can get some follow through to yesterday's rally. So far it's looking favorable for them but as I'll get into with tonight's charts, we've got some guidelines to watch to see that they stay on track and we could be looking for a major top in just a few weeks.
Today's economic reports included the unemployment claims and new filings moved a little higher, surprising most who thought the number would decline. Last week the number jumped up from 300K to 368K and the past week it increased to 379K vs. expectations for it to drop back down to 333K. So we've got new Payrolls numbers showing the addition of about 200K jobs and job losses of about 400K. It could be my math but I think we're going backwards. Granted, many of those job losses are balanced by job gains by the unemployed but there's a reason the Fed remains concerned about unemployment, regardless of the actual unemployment rate.
Existing home sales slowed a little more than expected, coming in at a 4.9M annualized rate. This was less than October's 5.12M and less than the expected 5.0M. The Leading Indicators and Philly Fed both came in better than expected, which are probably some of the numbers the Fed was crunching when it decided it's time to start trimming their asset purchases.
While yesterday's rally was clearly strong, strong enough to get the DOW and SPX to close at new all-time highs, we continue to see underlying weakness that calls into question what we're seeing from prices. We've got some long-standing bearish divergence and eventually they'll catch up to price. Two weeks ago I showed a weekly chart comparing SPX to the advance-decline line and pointed out the divergence that's been in place since mid-2012. Even with new price highs for the DOW and SPX we're not seeing new highs for the a-d line, which I'm showing below and comparing it to the NYSE.
NYSE vs. Advance-Decline line, Weekly chart
The advance-decline line made yet another lower high compared to the peaks since June 2012, continuing the sign of a tiring bull market. It's been a long series of higher price highs met with lower numbers of participating stocks, which is a sign the bear is gaining strength while the bull is getting weaker. A shorter-term look at this is with a chart of the cumulative advance-decline line, as shown below. The declining highs in the a-d line since October's price high for SPX (upper chart) shows clearly that the new price highs since October have been on the backs of fewer and fewer stocks, especially in December. We're seeing an effort to push the indexes higher but many other stocks are not participating. It doesn't prevent the indexes from continuing to push higher, just as they've been doing with lower participation, but it's a warning that the rally is on its last legs. It will matter when it matters but it's another sign of an ending bull market.
SPX vs. Cumulative Advance-Decline line, Daily chart
The price pattern for SPX is starting to look a little clearer now that we've had what looks like a corrective pullback from the November 29th high followed by yesterday's strong rally. The rally should be the kickoff to the final rally leg for the 5th wave in the leg up from August, which in turn should complete the 5th wave in the move up from October 2011 and that in turn will complete an A-B-C move up from 2009, which would clear the way for the bear to enter the room.
I've got an upside target zone for SPX at 1845-1870 and the timing looks to be early- to mid-January. The 1845 projection is where the 5th wave, which is the move up from August, would equal the 1st wave in the rally from October 2011. The 1870 projection is where the 5th wave in the move up from August would equal the 1st wave. The move up from yesterday's low should also be a 5-wave move and once it develops a little further I should be able to get a tighter upside projection for it.
S&P 500, SPX, Weekly chart
I've talked recently about a cycle turn date in early January, January 10th to be exact. This comes from a confluence of cycles between longer and shorter-term peaks and valleys in the price pattern and it's currently lining up to be a major turning point. Whether these turn points mark highs or lows can't be known in advance but instead only as the date arrives. If we rally into the turn date, which is the way it's currently setting up, then it will mark a top.
In addition to the cycles there's a very interesting analog that compares the price pattern for the DOW between 1928-1929 and 2012-2013. This has been discussed by Tom DeMark, mentioned by Bloomberg and other financial sites and Tom McClellan has been discussing it recently, showing what I think is the clearest analog pattern. His first article was published on November 27th (1929 Analog) in which he talked about analogs in general and this one specifically. He was kind enough to send me an updated chart through yesterday's price:
DOW analog between 1928-1929 and 2012-2013, chart courtesy mcoscillator.com
All analog patterns are not exact copies but instead you look for general form and it's hard to argue against the present comparison of the rally from 2012 to the rally from 1928 that led to the 1929 high. As McClellan noted on his chart, the analog points to January 14th for a high and from a price perspective I see the potential for a high near 16700.
Interestingly, that's the projection I've been showing on the DOW's weekly chart -- the projection for two equal legs up from 2009 is at 16686 and the 2nd leg of the 3-wave move up from October 2011 would be 162% of the 1st leg up at 16702. If we get a high near 16700 on or around January 10-14 with a 5-wave move up from the December 12th low I'm going to get pretty excited about the shorting opportunity from there. But for now it's bullish and remains so above the December 12th low at 15703.
Dow Industrials, INDU, Weekly chart
Notice that the DOW has pushed back up to its trend line along the highs from 2000-2007. While I believe there's a little more rally left we have to remain aware of the potential for just another test of resistance before falling away from here. The above chart is with the arithmetic price scale but when I change it to the log price scale that trend line from 2000-2007 is higher, currently near 16520. On the daily chart below I'm using the log scale and I show how a 5-wave move up from last week might play out. Currently the DOW is up against its trend line along the highs from May 2011 - August 2013 and could be ready for a pullback correction before heading higher.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 16,175
- bearish below 15,700
If the DOW makes it up to the 16700 area that would mean another 500 points, which translates to about 50 points for SPX and gives us an equivalent upside target around 1860. That level crosses the trend line across the highs since September 19th on January 6th and the 1870 projection, where the 5th wave in the move up from August would equal the 1st wave, crosses the trend line on January 13th, only a day short of the January 14th projection on the DOW analog chart. And all of these dates are very close to the January 10th cycle turn date. Price and time come together there and now we wait to see if it will happen (the charts remain bullish until proven otherwise).
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1812
- bearish below 1750
It's the same setup for NDX as it is for the blue chips. Yesterday's post-FOMC spike down should be the completion of the pullback from its December 9th high and now we're looking for the 5th wave to complete the leg up from November, which in turn will complete the rally pattern from 2009. I've got trend lines crossing a price projection at 3607 (for two equal legs up from October) on January 2-3 so we'll see how this plays out. The short-term pattern supports the idea for a quick drop back down to a new low, perhaps down to its 50-dma near 3400, and then a final rally leg but at this point I consider that a lower probability.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 3520
- bearish below 3400
One stock not participating in yesterday's euphoric response was AAPL. In my December 11th market wrap I had pointed out that AAPL looked ready to start back down after reaching a price target/resistance on December 5th. It achieved the projection at 575.86 for two equal legs up from April, which fits well as an A-B-C bounce correction to its 2012-2013 decline. At the same time it had poked above the top of a rising wedge pattern for the bounce and then closed back below it, creating a sell signal. It has continued lower since then and while we don't have proof yet the top of its bounce is in place, the setup remains bearish.
Keeping the bigger picture in mind, the weekly chart of AAPL below shows the setup. It needs to break its uptrend line from June, currently near 530 (which is also where its 50-dma is located), to confirm the bears are in control otherwise there remains the potential for another leg up to tag the 62% retracement at 582.84. At the moment it's finding support at its shorter-term uptrend line from September, near 540, and its 50% retracement of the 2012-2013 decline at 545
Apple Inc., AAPL, Weekly chart
The RUT is full of 3-wave moves and that makes it more difficult to figure out in real time what it's up to. So far the bounce off the December 12th low has done a back test of its broken uptrend line from October, which it broke below on December 11th. Yesterday's back test was followed by a pullback today and the bear in me see a kiss goodbye that will lead to a stronger selloff. Or it might lead to a continuation of a choppy pullback into early January before starting back up. Both scenarios are not supported by the other indexes and therefore I'm remaining short-term bullish but the RUT has me wondering. I'm assuming for now it will pull back to correct the leg up from the 12th and then continue higher. I show an upside target near 1170 but my confidence in that projection is low. Just keep it in mind if you're getting anxious to short it.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 800
- bearish below 778
The dollar was volatile after the FOMC's announcement yesterday and spiked quickly below its H&S neckline that runs across the lows from February 2012. That was quickly followed by a strong reversal and it tacked on a few more points today. After finally reaching down to its neckline, which I had been looking for since its high in early November, it looks ready to rally again. The first upside target is 82.02 where the rally off the October low will achieve two equal legs, but I think it will head much higher than that.
U.S. Dollar contract, DX, Daily chart
The traders who are not happy about the Fed tapering asset purchases are the gold bugs. Gold got crushed today, down -46 (-3.8%) to 1187. It did not get as high a bounce as I thought it would last week and is instead staying in the lower half of a down-channel from its February high. It is now close to achieving two equal legs down from August, at 1178.80, which would also be a test of its June low at 1179.40, which could set up a bounce/rally.
Gold continuous contract, GC, Daily chart
If gold's decline from August is a b-wave in what will become a larger A-B-C bounce off the June low we should be very close to finding a tradable bottom for gold (the c-wave rally would likely make it above 1500, maybe even up to 1600, in a relatively sharp move up into early 2014). But a decline much below 1178 could see a stronger selloff, especially if it breaks below 1155, which is the 62% retracement of the 2008-2011 rally. Sentiment is very bearish on gold and from a contrarian perspective that means gold bears need to be very careful.
On December 5th oil had broken its downtrend line from August-September and last week dropped back down for a back test. It held and today it pushed above last week's highs. It looks good for a rally at least up to its downtrend line from May 2011 - March 2012, near 101, which is slightly above the level where the 2nd leg of the rally off the November 27th low would be 62% of the 1st leg (100.52). Two equal legs up would target 103.19, just below price-level resistance near 104. Once the bounce has finished I'm looking for oil to head lower.
Oil continuous contract, CL, Daily chart
The only economic reports for tomorrow will be the 3rd estimates for GDP and no changes are expected. The bulls will be on their own to come up with another reason to rally the market.
Economic reports and Summary
The Fed-induced rally Wednesday afternoon saw no follow through today. That's the bad news. The good news is that the bears weren't able to put together a counter-attack. The pullback/consolidation looks bullish but I see the potential for a larger pullback into Monday/Tuesday before heading higher again. Tuesday will be a half-day trading session and of course Wednesday is Christmas holiday. Santa Claus might be late but so far it's looking like he'll show up.
The price patterns on the charts supported the post-FOMC rally and it looks good for a continuation of the rally into early- to mid-January. At that point we'd have price and time coming together for what's setting up to be a major turning point and the return of the bear. The rally into January could be a choppy mess with some whipsaw price action, which could be aggravated by low trading volume the rest of the month. I like the long side for now but only by keeping the exit door propped open with my foot as I lean long. Keep trades short term, take profits early and cut losses quickly.
Good luck and I hope you have a very merry Christmas and New Year. I'll be back with you in a couple of weeks after the New Year is underway (my Wednesday wraps fall on Christmas and New Year's day). Feel free to contact me if any questions about how the market is setting up in the meantime.
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
Annual End of Year Renewal Special
It is that time of year again when we offer the best prices of the year on a package of our top newsletters. If you have been a subscriber for several years you know this is the best price and best deal of the year.
Please follow the link below to see for yourself the EOY subscription special for 2014. You will not be disappointed!