Tuesday's dead cat bounce was followed today by a flat session after starting off negative. The bulls are trying to get their oversold bounce and save the market from a repeat performance of what happened in 1929 and 1987.
The bulls are trying to get their oversold bounce but so far all they've managed to do is prevent a further selloff. The market is due a larger bounce but the bears are licking their chops for a 1929-style crash. They've been pummeled into the ground over the past few years and they're thinking it's payback time. They might have to wait for at least a little longer.
It was a relatively quiet overnight session in equity futures, with ES swinging "only" about 10 points and that was all in the pre-market hour before the cash market opened. It was followed by a little wilder (and wider) swing after the market opened and SPX swung about 13 points, dropping below Monday's low, before starting back up into a midday high that broke it back to breakeven. From there it went sideways for the rest of the afternoon, leaving traders wondering whether or not the morning low put in a tradable bottom.
This morning's ADP Employment report, which came out at 8:15 AM, was credited for some of the pre-market volatility since we also big swings in bond prices, the dollar and the metals. My guess is that traders were trying to figure out what the report might mean for Friday's Payrolls numbers. I'm thinking Friday morning could get a little wild and wooly for the market. In the meantime it's possible the market will simply go on hold Thursday while it waits to get through the report.
I'm going to jump right into tonight's charts because I want to go over why I think the next few days, certainly until we get through Friday, are going to be critical for the market. If we get through Friday without a major whoosh to the downside then we should get a decent bounce into next week. The week after that might not be so pretty for the bulls but we'll cross that bridge when we come to it. It's very important to pay very close attention to what the market tells us tomorrow and Friday.
Starting with the big picture of the DOW, the weekly chart below shows the December 31st high right at its trend line along the highs from 2000-2007 and it stopped a little shy of two price projections off the wave pattern that lined up at roughly 16700. The high at 16588 might have been close enough for government work but if we do get another push higher into March/April we could see price reach a confluence of price and trend lines at that time. But if the December high was THE high, which is the way I'm currently leaning, we should see only a bounce to correct the current decline and then a continuation lower. A break below 15K would be the fat lady singing the blues about the DOW.
Dow Industrials, INDU, Weekly chart
We've got enough of a difference between indexes to make the pattern for the decline from the December/January highs confusing enough to call into question the wave count shown on the DOW's daily chart below. I'm counting it as a 5-wave move down from December and that tells us the trend has reversed to the downside (an impulsive move points in the direction of the dominant trend for the time frame you're looking at). A 5-wave move is also the completion of the leg and that's what we might have here. That means a bounce correction to retrace a portion of the decline could be right around the corner and as I show, a bounce from here could take the DOW back up to the 16K area by the end of opex week (for another bullish opex) before all hell breaks loose to the downside.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 15,700
- bearish below 15,100
As you can see on the above chart, the bounce attempt off Monday's low has run into trouble at its broken 200-dma, near 15479 today. If that continues to hold as resistance through Thursday I think there's a good chance we could see another low before it will be ready for a bigger bounce (light-red dashed line).
The DOW's decline from January 21st, arguably the completion of its rally with a truncated high (to get into agreement with the other indexes) is contained inside a parallel down-channel, shown on its 30-min chart below. If it continues to motor sideways on Thursday, over to its downtrend line (the top of its down-channel) it would be a setup for a decline Friday morning. But if the DOW can break out the top of its down-channel, near 15525 Thursday morning, it would be a more immediate bullish sign that a tradable bottom is already in place.
Dow Industrials, INDU, 30-min chart
I have two downside projections if we see the DOW trade sideways on Thursday and they correlate near 15170. First, two equal legs down from January 21st points to 15170. If the DOW finishes its sideways consolidation near 15460, as shown with the light-red dashed line, the 5th wave in the move down from January 30th would equal the 1st wave at 15173. A new low on Friday with bullish divergence against today's low would be the setup to launch a larger bounce next week. But get bearish if it drops out the bottom of the down-channel.
I've been regularly updating the chart comparison (analog) between what the DOW did in 1929 vs. what it's doing now. There have been several times where a similar pattern has repeated, including the 1987 crash and the 1997 crash in the Hang Seng (Hong Kong). Human reactions tend to repeat and that can be seen in chart patterns. I've been waiting for a larger bounce correction, drawn on the daily chart with the bold-red line, to give us a 2nd wave correction before heading much lower in a 3rd wave down. This would also match what happened following the 1929 top, and maybe we'll get it the bounce next week and into opex week before the bottom falls out. The pattern suggests the latter part of February and into March will be an ugly time for bulls.
I've drawn a dashed line on Tom McClellan's chart to show a bounce followed by a larger crash leg lower. I'll say it again -- this is not a prediction but you've got to admit the way this pattern is playing out it's pretty scary for bulls (as the bears lick their chops and start massively drooling at the prospect). You should never bet on a market crash but it certainly would be smart to make sure you're protected just in case. This pattern says don't even think about buying the dip.
1928-1929 vs. 2012-2014 analog pattern, chart courtesy mcoscillator.com
What's interesting about the analog pattern is that it actually started 5 years ago. As can be seen with the chart comparison below, the rally off the 2009 low mimics very closely the 1924-1929 rally. Most who look at these analog patterns shoo it aside with a wave of the hand and a dismissive "it's different this time." The reasons for why sentiment got as bullish as it did this time, vs. 1929 or 1987 or any of the other parabolic rallies, is not as important as the sentiment itself. The price patterns reflect sentiment changes, not the underlying reasons for the sentiment. Otherwise, why would we have times when the market buys bad news and sells good news?
1924-1929 vs. 2009-2014 analog pattern
Tom DeMark, who first who pointed out this analog pattern back in November, has also been updating his calls recently about the strong similarities at this point. While the price pattern shown above suggests a bounce at least into next week, if not into the end of the month, DeMark is concerned that this week could prove pivotal as to whether we experience a market crash sooner rather than later. Here's a snippet of DeMark's CNBC interview this morning before the market opened, cut down a little to get to the heart of what he said:
"We think the next two to three days are extremely critical...If today were to be an up close [my after-market comment -- it was not] and then tomorrow we close down and we follow [with] a lower opening the next day and trade a little weaker we're probably going to unravel quickly." So here DeMark is speculating that we're not going to get a high bounce, as the pattern in 1929 shows, before "unraveling" to the downside. He combines his TD counts to speculate why it could simply drop from here.
DeMark continued his analysis and this is what I think is very important since today finished down, albeit by a minor amount. He went on to say, "Now, yesterday we did have an up close for most of the major U.S. indices so if we get a down close today and tomorrow we open lower and trade lower, we're probably going to unravel and the news, regardless what it is on Friday, [will be] perceived negative. ... What we're seeing right now, if the market does unravel, I think we'll have a 60% correction, or 40% off the high, which would put us about [SPX] 1100." His interview can be seen here: Tom DeMark CNBC
The major takeaway for me is that the downside projection I showed above, to DOW 15170, wouldn't even be a speed bump if DeMark's analysis is correct here. DeMark has been wrong more often than not during the market rally, predicting several turns that never came (I can relate), so he's clearly just one opinion of many. But I'm listening intently because of the downside risk. Trade very carefully and try not to get caught long this week if we do see a down day on Thursday since it could get ugly on Friday.
Again, a market crash cannot be predicted and to bet on one is usually not a good bet. But in this case one could be forgiven for entering a lottery play with a cheap deep OTM put option and throw it out there -- total loss or a big win. I would go with a March or April option in case we get a longer-lasting bounce into the end of the month before the market tanks. Just know your risk in case it's a total loss (which is why I call it a lottery play).
To give you some perspective of the risk that DeMark is talking about, and which is supported by the DOW's 1929 analog pattern, a 40% decline for SPX from its 1850 high gives us a downside target of 1110, a level last seen in October 2011, noted on the right side of the chart below. This chart was last shown a few weeks ago when I was pointing out the turn window based on some unique time ratios that a fellow trader discovered (and can be seen on many time frames). The potential loss here is clearly significant -- a 3-year rally could be given up in a month, which is really tough to imagine.
SPX weekly chart with turn window
Looking at the above chart, it's certainly apparent now that we had a turn inside the turn window and obviously it remains to be seen if it will be a major high. The DOW topped on December 31st and SPX made only a minor new high (about a point) on January 15th following its December 31st high. Using the .447/.553 ratio off previous turns I see the next potential important turn date next week, which is interesting since that lines up with a possible 2nd wave correction into next week before starting a stronger 3rd wave down. An EW (Elliott Wave) pattern matches well at the moment with the 1929 analog pattern.
Another interesting thing about the high for SPX on January 15th is that it fits a Gann projection to the day. W.D. Gann felt time was much more important than price and I've often mentioned that the Square of Nine chart can be used to determine time/price relationships. He would often use days and points interchangeably to make his predictions. So here's an interesting relationship -- the October 11, 2007 high was at 1576 and adding that number of trading days to the date gives us January 15, 2014, which was the date of last month's high. Most will say it was simply coincidental. Gann would argue with them if he was still alive.
The daily SPX chart below shows a pattern that's very similar to the DOW's, with the one big difference being a minor new high in January (from an EW perspective that's a big deal but I can't help but wonder if some market manipulation is the cause). Disregarding the wave count for now, we see SPX trying to hold support near 1748 but it has remained stuck beneath its broken uptrend line from November 2012, near 1756 today. From here I would turn more bearish below 1730 but like the DOW I'm looking for the start of a big bounce correction into next week that will then set up a 3rd wave decline (possibly not until after we get through opex).
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1799
- bearish below 1730
And now for my proprietary trading indicator, dubbed my MPTS, it shows a nice correlation with the double top on a new and full moon and so far a low near the next new moon, which was on January 30th. The next full moon is February 14th, a week from this Friday and right in front of opex week, and that could mark the bounce high. We'll know more by next week of course.
SPX MPTS daily chart
Now that I've turned rabidly bearish on you, let me show a chart that would normally have me drooling to get long. I'm using the ES chart here with just a few trend lines, an up-channel from June 2013 and the wave count. I've been thinking the time cycles, and a few other things, lined up extremely well for a Major top for the stock market and that's the reason I've been looking for evidence of an impulsive decline to help confirm a reversal. But with a short-term wave pattern to the downside that leaves plenty of room for interpretation, there is the possibility that the pullback is just a sharp a-b-c correction to the decline and the next move will be a new rally leg, as shown on the ES daily chart below.
S&P 500 emini futures, ES, Daily chart
Starting from the October 2011 low there's a way to count the waves such that the June 2013 low is the 4th wave, which is how I labeled the ES chart above. The parallel up-channel from June, the bottom of which is now being tested, along with the wave count inside the up-channel, says we need a final 5th wave up into March to complete the long-term rally. ES 1884 (about SPX 1889) would be the upside target. I can hear the moan of all you bears. This is not a prediction but it is a risk for those who want to hold short through any and all bounces. There's a reason why I say the market is at an important inflection point here. Neither side can afford to get greedy or complacent.
Moving on, NDX bounce where it needed to and is also at a point now where the bulls need to step back in otherwise important support will be lost. There was an intraday break of its uptrend line from June-October, near 3435, and price-level support near 3425 but it's the closing price that matters and NDX closed above both. The decline from January 22nd is a 3-wave move and that could be just an a-b-c pullback, which supports the idea presented on the ES chart above that we could be looking for another rally leg instead of just a bounce high. It's reason enough to stay cautious about the short side. Back above its January 30th high near 3544 would leave the pullback as an a-b-c and that would open the door to possible new highs. But a bounce and then break below 3425 would turn the pattern very bearish (3rd of a 3rd wave down). More price action over the next few days should tell us more.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 3544
- bearish below 3425
Last week the RUT bounced between uptrend lines -- one from April-September 2013, which became resistance once broken on January 27th, and the other from September-October 2013, which acted as support until it was sharply broken on Monday. It almost made it down to price-level support near 1080 today before bouncing and leaving a bullish hammer candlestick at support. It would be confirmed bullish with a white candle on Thursday. I show a rally up to its broken uptrend line from September-October, near 1138 by February 14th (in front of opex) but obviously that's just a guess at the moment. It would be a typical bounce correction before heading much lower. The RUT would turn more bullish back above 1147 (price-level S/R and its 20- and 50-dma's).
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1147
- bearish below 1080
I'm showing the RUT's 30-min chart below because it's one of the clearest examples of why it's too early to turn very bearish. Its decline from January 22nd can easily be viewed as an a-b-c pullback with two equal legs down at 1083.62 (shown on the chart). Today's low was at 1082.72. It also met its price projection at 1087.75 (hidden by candles), which is where the 5th wave in the move down from January 30th is equal to the 1st wave. I had been pointing out a support zone at roughly 1080-1087 based on this pattern and the fact that it's holding means we could see the launch of a new rally leg. But there are of course other alternatives. The a-b-c move down could be a larger-degree wave-A that will lead to a wave-B bounce and then a strong decline in wave-C (light-red dashed line). Or we've got a 1-2, 1-2 wave count to the downside (bold red) and only a relatively small bounce for another 2nd wave correction will then lead to a very strong decline in a 3rd of a 3rd wave down. But it's the achievement of two equal legs down that has my attention at the moment -- that's often a very good sign that the bulls are stepping back in. Bears be careful here. We'll watch it very closely over the next couple of days to see if the very bearish pattern looks like it's setting up.
Russell-2000, RUT, Daily chart
The VIX is warning of a possible reversal after reaching oversold up against a downtrend line from December 2012, near 20. It poked above it during Monday's scary selloff but made a lower high with today's minor new low. That's either bullish complacency or buying in anticipation of a coming rally. Crashes come out of oversold and the market is oversold right now, but odds are for at least a pullback in the VIX here, which supports the idea for a stock market bounce.
Volatility index, VIX, Daily chart
The U.S. dollar has been very choppy for the past 3 months so backing away and looking at the bigger picture with the weekly chart gives us some perspective. As long as the dollar holds above its uptrend line from May 2011, currently near 79.80, it remains bullish. My expectation is for a rally this year up to about 87 before turning back down inside a very large sideways triangle pattern (which will ultimately be bearish).
U.S. Dollar contract, DX, Weekly chart
Gold's weekly chart below shows an expectation that I've had for over a year now -- a drop down to the 1150 area before setting up a bigger bounce. It would turn at least short-term bullish above 1300 and more bullish above its October 2013 high near 1362. But at the moment I think we'll get another leg down and the 1090-1155 area makes for a good downside target zone. A drop to the bottom of a parallel down-channel from its 2011 high by March would be down to about 1125.
Gold continuous contract, GC, Weekly chart
Oil has been in a large $80-110 trading range since peaking at 114 in April 2011, currently near the middle of that range at 97 today. It's been very choppy over the past 3 years and good for trading if you get the direction right but bad for anyone holding positions that move with the direction of oil. The daily chart below shows the recent break of a short-term uptrend line from its January 13th low, which is a line that's parallel to the one that was broken in December. This morning's pre-market high was a back test of the broken uptrend line so a bearish kiss goodbye could follow. The bearish wave count at this point is very bearish since it's pointing to a 3rd of a 3rd wave down in the decline from August. That suggests a very strong move down is coming. But if the bulls can hang on here and push oil above 101 I'd turn at least short-term bullish.
Oil continuous contract, CL, Daily chart
Thursday's economic reports include the usual unemployment claims numbers, which are not expected to change much, and some productivity and labor costs. None of these are market movers so the market will be largely on its own Thursday morning, affected more by what happens globally. Friday will be the big day with the Payrolls numbers. As always, it's hard to judge how the market might react when the Fed's QE reaction is always a guess.
Economic reports and Summary
Tonight I hope I made it clear enough why bulls should be afraid. Be very afraid. The 1929 (and 1987) analog pattern continues to track very closely and it suggests the latter part of February and into March is going to be a bad time for the bulls. As Tom DeMark says, "the market could start to unravel." He thinks it could start to unravel as early as Friday. I think (hope) we'll see a stronger bounce into next week before setting up a trade to take advantage of a strong decline (certainly a time for long positions to be protected).
But it's not all bearish. I showed a couple of examples (with the ES and RUT charts) why the bulls could step back in here and stomp out the bear's lights. Neither side can afford to get complacent. Trades must be carefully protected and profits harvested when the position is threatened. To hold on through a counter move could be suicidal to your account. Now is not the time to let a position go against you since it's very likely we're going to get a big move before the end of February. And if we get a nice 3-wave rally into the end of next week and up against some strong resistance levels I'll be growing my fangs and claws a little longer and go looking for some fresh steak tartar.
Be very careful getting through Friday since the market is vulnerable to a downside disconnect. If we make into Monday with a bounce going then we'll have time to evaluate the move and set up the next potential trading opportunity. Stay safe 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