It was another low-volume trading day but at least it fits for a consolidation day as traders rested. So far that keeps things looking bullish and by the reaction to AAPL's after-hours announcement we could see another rally kick off.
Wednesday's Market Stats
Today started slightly negative and dropped a few points but by 10:00 the day was essentially over; from there the market ran sideways to slightly lower, depending on the index. It looked like a bullish consolidation day even if the pullback/consolidation isn't quite finished yet. But if AAPL's after-hours positive reaction, along with the positive reaction in equity futures, holds into the morning we could see another leg of the rally from April 15th kick into gear.
We had another light day for economic news with some more housing data, which unfortunately shows a continuation of the slowdown in this market. New-home sales declined -14.5% to 384K annualized in March, dropping from 449K in February and lower than the expected 455K. Bad weather got the blame but coming in less than expected, even with the bad-weather excuse, is worrisome. Too much of our economy is dependent upon a healthy housing market and one could hardly call today's number a healthy sign. In fact the chart below shows the negative trend.
New Home Sales and Prices, chart courtesy briefing.com
The top chart shows new home sales and the anemic bounce off the 2010 low. And now the shallow uptrend line for the bounce has been broken and it's possible we're going to start the next leg down from here, following what is essentially a dead-cat bounce. The lower chart, showing median price year-over-year growth, has been declining since peaking in early 2013. Think of the bounce off the 2009 low as a big a-b-c bounce correction to the 2004-2009 decline and now we've started the next leg down.
We've had many reports in the past several months that indicate we've entered (did we ever leave?) another global slowdown. Later I'll show some charts of the commodity index, which I think is a very good measuring tool to use to gauge global economic strength, and there again, the message is not very positive. As traders who play both sides of the fence, an up or down stock market is irrelevant but as people who care about the ramifications of an economic slowdown it is of course a painful period. Trading a bear market can actually make you more money faster than a bull market but if you do well in the next bear market be sure to keep the news to yourself. People who are suffering from a downturn do not want to hear how well you did shorting the market.
The news from around the world continues to look like a global slowdown is in progress. The reports out of China, which might be "massaged" to look better than actual, show China's growth has been contracting for a while and Markit's Chinese manufacturing index for April was the 4th straight month of contraction. We're getting similar metrics from U.S. reports but that hasn't stopped the stock market from continuing to act bullishly.
But the real disconnect seems to be in Europe. Their banks are more leveraged than ours and many of the countries are more indebted. Greece is still in bankruptcy and a depression and will soon be looking for another bailout. Greece has a 28% unemployment rate (youth unemployment is over 61%) and these are the official numbers and therefore probably worse. Spain has almost 27% unemployed (nearly 58% for youth) while Italy suffers from nearly 13% unemployment (nearly 42% for youth). Portugal is also in bad shape and yet Spain, Portugal and Italy have outperformed their European counterparts in the stock market in the past 6 months. One of the top performers has been Greece. Disconnect? Nah, just keep buying until the music stops.
And that's the way it appears to be for all stock markets. GDPs are in decline, manufacturing indexes are in decline, housing markets are in decline, debts are climbing, but heh, me worry? As long as sentiment remains hopeful, which is not a bad thing, investors will continue to pour their money into the stock markets. The risk of course is when the music stops -- don't get complacent and instead be a trader. Get ready to switch sides when the market tells you too. At the moment the markets are telling us to stay bullish but we're all starting to dance on the head of a pin and it won't take much to fall off.
On Monday I mentioned I'll spend a little more time on Wednesday looking over commodities and since there hasn't been much of a change in the stock indexes I'll just quickly move through the 4 I usually look at. SPX has maintained its bullish potential for a move up to its trend line along the highs from December, which will be near 1910 next week. The short-term pattern today suggested another leg down for its pullback, perhaps down to about 1866, before starting back up again, but after-hours futures, if they hold into tomorrow morning, suggest an immediate up day on Thursday. How well it does after the first 30 minutes will be important to watch.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1873
- bearish below 1812
On Monday I used the Gann Square of Nine chart to discuss its alignment with the SPX price chart and the importance of 1910. I was not able to provide a link to the larger version of the Gann chart shown below:
Gann Square of Nine chart, top half
To reiterate the point I wanted to make with this, 1910 is on the same red vector that goes through the important levels of the past, especially the October 2002 low at 768 and the October 2007 high at 1576. Each row of numbers is one "square" away and 1910 is a Fibonacci 8 squares away from 768. It's an important Gann number on the chart, especially since it's also square to important turn dates, which is the perpendicular line at 8:00-2:00, pointing to the October 2002 and 2011 lows and October 2007 and 2012 highs (8:00) and the April 2012 high (2:00). Now we wait to see if the bulls can pull off a new high and how high.
The DOW Industrials showed relative strength today, helped in part by a positive response to Big Air's (Boeing, BA) earnings. Boeing had dropped in the final half hour yesterday and dragged the DOW down with it. But this morning those who sold it (covering long or going short) were caught leaning the wrong way this morning and the stock gapped up +2.37 and opened at 130.09 and ran up to 131.50 before settling at 130.64, +3.09 above yesterday's high. It was good enough for a new intraday high above its bounce highs following the sharp drop from late January into its February 5th low. A close above 131 would be more convincing for this stock's pattern. The bearish interpretation of its pattern is that it just completed a sideways consolidation following the sharp decline and is now ready for the next leg down (two equal legs down from today's high would target 105.70). The worst thing that could happen tomorrow is a gap down, which would leave an evening star doji at resistance. Short the stock if that happens, stop just above 131.
Boeing Co., BA, Daily chart
Like SPX, the DOW continues to show upside potential to a Fib projection at 16735, with possible trouble at its trend line along the highs from 2000-2007, currently near 16662. It would be troublesome for bulls below the 50-dma at 16283 but not bearish until it's below 16015.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 16,735
- bearish below 16,015
AAPL reported earnings after the bell today and its stock was initially halted for trading but it didn't stop the euphoric response seen on the NDX futures (NQ). After reopening for trading AAPL gapped up about $40 from its closing price at 524.74, hit a high of 569.24 and then backed off a little. It looks like it's going to settle around 566 (+41). They announced an additional $30B buyback program that will run through 2015 and more importantly for traders they also announced a 7:1 stock split. This could certainly translate to more excitement for the techs in general. Individual traders are likely to get much more involved with the stock now.
As Tom McClellan noted after the announcement, "AAPL is going to split 7 for 1. Why such a strange amount? Who splits 7 for 1 and not 2, or 4? Today's closing price was $525. Split adjusted, that would be $75, which would make AAPL the 19th most expensive share price among the current 30 stocks in the DJIA. Seems like a pretty naked plea to get added to the Dow."
During the day today AAPL had sold off after back-testing resistance at its broken 20- and 50-dma's, as well as its broken uptrend line from June 2013 and it was looking bearish going into this afternoon's announcement. But it's looking like it caught traders leaning the wrong way and if the after-hours reaction holds into tomorrow morning we'll see the price projection near 569, for two equal rally legs from the end of January, tagged out of the gate.
Apple Inc., AAPL, Daily chart
The 569 projection could explain why the after-hours high was at 569.24 and the risk for bulls is that this might create a euphoric high that's then followed by the start of the next decline. Stock splits are nice but will it be enough to still justify the high price valuation? Will institutions look at this as a gift to unload inventory to the eager-beaver retail investor? It wouldn't be the first time a lasting high was made on such "good" news.
Another back test and potential kiss goodbye is shown on the Facebook (FB) chart below. It had gapped up this morning and hit a high of 63.48, 14 cents shy of a projection for two equal legs up, at 63.62, from its April 7th low and was good enough for a back test of its broken uptrend line from July 2013. The subsequent selloff today leaves a bearish engulfing candlestick (key reversal day with the gap up, new high and lower close) and almost closed Tuesday's gap up (at 61.23 with a low of 61.26). But the after-hours reaction to its earnings looks positive for tomorrow.
Facebook Inc., FB, Daily chart
FB could bounce higher still, especially since it's rallying in after-hours, and its 50-dma at 65.02 is an upside target. The after-hours high is 65.04 and it looks like it's going to settle near 63.60. The March-April decline looks impulsive and the 3-wave bounce off the April 7th low looks like an a-b-c bounce correction that should be followed by another leg down, one that should easily break below the 200-dma, currently near 51.50. But if the bulls aren't done yet and they can recapture the 50-dma we'll then have something potentially more bullish going on (at least for a drive up to the next Fib projection at 68.40).
If AAPL's news ignites another tech rally, which it's certainly capable of doing, it would be something that's supported by the weekly chart of the Nasdaq Composite index, something I've shown recently. The bottom of an up-channel for a 5-wave move up from June 2012 was tested with the April 15th low and if that completed a 4th wave correction then we've got one more rally leg to complete the 5th wave, which is what I'm depicting on the weekly chart below. I show upside potential to 4500-4600 in June but obviously that would have to be evaluated as the rally progressed (and of course we have no idea if we'll this kind of rally). This chart is a strong warning to bears. At the moment, yesterday's high was a back test of the bottom of its broken up-channel for the rally from November 2012 so the bulls want to see the NAZ above 4170 and stay above. In fact I have the key level for the bulls to break at 4225, which is near the 50-dma.
Nasdaq Composite index, COMPQ, Weekly chart
Key Levels for COMPQ:
- bullish above 4225
- bearish below 3940
The RUT remains inside its down-channel for its decline from March, the top of which is now near 1158. Yesterday it closed back above its broken 20-dma but today closed below it, near 1148. But it climbed above price-level resistance at 1147 yesterday and held it on a closing basis today. Assuming the market rallies on Thursday we should see the RUT break above its down-channel but then watch its 50-dma near 1167 for possible resistance. The bearish wave count calls the decline from the March 21st high a leading diagonal (descending wedge) 1st wave down and that means the bounce off the April 15th low is a 2nd wave correction which will then lead to a stronger selloff in a 3rd wave down. In other words, just as traders get most bullish again they'll get trapped with a stronger decline. Don't get complacent here.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1159
- bearish below 1095
The U.S. dollar hasn't moved much in the past week, never mind the past 6 months and until it breaks out of its 79.25-81.50 trading range there's not much to report. But the lack of movement in the dollar hasn't kept the commodities range bound. I use the DJ UBS Commodity index (DJUBS) to keep track of how commodities are doing and at the moment it's looking like a good setup for the resumption of its longer-term decline from 2008. This could mean the dollar is getting ready to rally.
A weekly chart of DJUBS is shown below and it shows an interesting repeating pattern for its bounces. The bounce off the 2009 low retraced a little more than 50% of its 2008-2009 decline before starting back down. Notice the clear 3-wave bounce following that steep decline -- it tells us the entire bounce will likely get completely retraced. Then the bounce off the 2012 low retraced a little more than 50% of its 2011-2012 decline. The next decline from September 2012 to the August 2013 low was followed by a bounce that has come very close to the 50% retracement, at 138.16. I expect this bounce to be followed by more new lows.
DJ UBS Commodity index, DJUBS, Weekly chart, 2007-present
The break of the downtrend line from 2008 looks bullish and has had many expecting a strong rebound in commodity prices. Based on the trend line I can't argue with them. But the larger pattern suggests lower prices and I think the break will turn into a head-fake break. Expanding the weekly chart a bit, the chart below shows the a-b-c bounce pattern off the August 2013 low and the c-wave (the leg up from November 2013, projects to 138.21, which is where it's 162% of the a-wave. That projection "coincidentally" falls on top of the 50% retracement mentioned above, at 138.16. Close Fib correlation like this always grabs my attention.
DJ UBS Commodity index, DJUBS, Weekly chart, 2012-present
The c-wave of the a-b-c bounce off the August 2013 low is shown more closely with the daily chart below. It needs to be a 5-wave move, which it now is with the leg up from March 24th. The 5th wave would equal the 1st wave at 138.66, pretty darn close to the other two Fibs pointing to 138.12 and 138.16. The high so far, last Wednesday, is 137.84, so there's a little more upside potential but once the leg up from March completes we'll see at least a pullback to correct the 5-wave move up from November and likely a stronger decline that should at least challenge the 2009 low.
DJ UBS Commodity index, DJUBS, Daily chart
If the commodity index does turn back down soon, as the chart suggests it will, we would be watching the commodity index confirm the signs of slowing in the global economy. How long the stock market would continue to rally in the face of that is anyone's guess but if the Fed stays on track with its taper program I think it's safe to say the lack of that prop (the 3rd leg of the stool that the Fed built) and a slowing economy would get traders running, not walking, to the nearest exit.
Gold is a different kind of "commodity" since it has real-world currency status but it's still an asset class for investors and I think the next downturn will affect all asset classes, gold included. Gold will likely bottom long before stocks but I still see lower prices for gold before setting up a good opportunity to collect some of the shiny metal. Some cycle studies point to this coming July for an important low. Gold would turn short-term bullish if it gets above 1320, in which case I'd look for a run up to its downtrend line form 2012, currently near 1360.
My preferred EW count for gold has us into the start of a 3rd wave down in the decline from March 17th, which should drop gold down to its December 31st low and another test of the June 2013 low near 1180. A month-long consolidation down there followed by one more drop, perhaps down to the 1090-1100 area (a 50% retracement of its 2001-2011 rally is at 1090) for a low in July is my current projection. From there it should be an outstanding opportunity to pick up some gold for a long-term investment and for when the SHTF in the fiat currency markets.
Gold continuous contract, GC, Daily chart
Silver is more of a commodity but is also used as a currency hedge. It's kind of caught between two worlds, which sometimes compete for attention. Consequently gold and silver don't always trade in synch and while gold looks lower from here I can see the potential for a bounce in silver before it too heads lower. The weekly chart below shows a little pop up to finish its sideway triangle that it's been in since June 2013, perhaps up to about 20.70-21.00, before starting back down. A drop below 18 would indicate it has already started its next leg down and I'm depicting a decline to about 13 by August. Obviously that would have to be evaluated based on future price action. Like gold, once the bottom is in place, assuming sometime this summer, it will be a golden (silven?) opportunity to pick up some silver for a longer-term investment.
Silver continuous contract, SI, Weekly chart
Black gold, otherwise known as oil, is not much better than the dollar -- it's been in one big chopfest since the May 2011 high. It turns short-term bearish below its 200-dma near 100.80, about 75 cents below today's close, and short-term bullish above 105. It would be longer-term bearish below 97 and bullish above 111.
Oil continuous contract, CL, Weekly chart
Dr. Copper is of course one of the most widely watched commodities for clues about our global economy and for quite some time I've been bearish the metal. The breakdown in March and the drop below $3 was a strong warning sign. Since the low at 2.87 on March 19th it has managed to bounce back above $3 but the bounce pattern looks corrective and should be followed by another leg down. After what will likely be a minor new low in May (assuming we'll get the new low) we should see copper make another bounce attempt before dropping much stronger later this year. The December 2008 low at 1.25 will likely be challenged before copper sees its bottom. Copper would not turn bullish again until getting above its February high at 3.32.
Copper continuous contract, HG, Weekly chart
Tomorrow's economic reports include the unemployment claims data and Durable Goods numbers, which are expected to decline slightly from February's numbers.
Economic reports and Summary
The stock market should get a lift tomorrow if the AAPL after-hours ebullience (short covering) holds into the open. There's always the risk that a gap up will get sold into, especially if the rally peters out in the first 30 minutes of trading. But with a price pattern that remains bullish I would be careful about shorting this market. We could be into the blow-off move (although the low volume doesn't support that idea) that will complete the longer-term rally.
Keying off what SPX does in the next week should provide plenty of guidance for the stock market. If it makes it up to the 1910 area and rolls over I'll be all over it with some short positions (tightly managed of course). There could be an effort to max out stock gains into the end of April and then start selling in preparation for the next 6 months which typically is not kind to the market.
But like in 2008, it's possible we'll see a rally into May before the bottom falls out. The longer the stock market remains disconnected from the underlying deteriorating fundamentals, the harder it's going to come back down. Our job as traders is to catch that move back down since it should be a real money maker. But in the meantime, stick with the long side until the market tells us otherwise.
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