Sample weekend Market Wrap (Saturday, December 16, 2017)

Week's Market Stats

Friday's Market Stats

For what is a typically bullish week, this opex started on the weak side but finished positive thanks mostly to Friday's rally. SPX finished Friday +0.9% and that was the gain for the week as well. The RUT's +1.6% gain on Friday saved the week with a +0.6% gain. Friday also drove the indexes into positive territory for the month as well. As can be seen on the second table above, Friday's volume was very strong and the advance-decline volume and a-d line fully supported the rally.

Friday's rally was primarily inspired by bullish optimism that the tax reform bill appears to be heading for passage in the coming week. It's been an anticipatory rally for a long time and what happens after the completion of the bill (with either a signing by President Trump or a failure to get it through Congress) is anyone's guess. The one concern now is what will propel the market higher even if the bill is signed into law. Might we see a sell-the-news reaction? Considering the chart patterns I think there's a good chance of that happening. But we still need to respect the potential for a much higher rally in a stronger blow-off move. I think we'll find out early in the coming week which it's going to be -- Santa loves me, Santa loves me not...

SPX 60-min chart

With Friday's rally SPX made a bullish move by popping above the short-term trend line across the highs from December 4-13, which I've been tracking as the top of a rising wedge pattern. At the moment we have what can be considered a throw-over finish to the pattern, which happens more often than not. The late-afternoon pullback dropped SPX back below the line, near 2675, and then it bounced back up to the line for the close. This left us hanging at the close because it looks like support at the line held the back-test and a launch higher on Monday would be bullish. Conversely, a drop below 2675 on Monday would leave a sell signal -- short against Friday's high would be the play in that case.

If SPX does continue higher on Monday we could see it rally up to the trend line along the highs from September-October, which will be near 2695 by the end of the day Monday. As long as it doesn't make it above 2700, which make the 3rd wave in the move up from December 1st the shortest wave (an EW rule violation), we're into the final 5th wave and once it fails we should get a strong decline. Confirmation of that will not come until SPX drops below last Thursday's low at 2652.

INDU daily chart

For its short-term pattern the Dow has the same rising wedge potential as SPX, although it supports the idea for at least a little higher on Monday before completing its pattern. But on the daily chart I see the possibility for a pullback, maybe to trendline support near 24440 by Tuesday, and then a final leg higher into the end of the week, which would give us a rally into Christmas. In this case, between Christmas and New Year's would be a good time to short the market but obviously we'll have some time to evaluate the setup as the week progresses.

NDX daily chart

The techs had a strong day on Friday and NDX is now approaching the price projection at 6496 where the 5th wave of the rally from August would equal the 1st wave. Slightly higher, near 6510 on Monday, is the top of its up-channel from July, which gives a target area for the rally in the 6500 area. Much above 6515 would be more bullish but so far this is fitting very well as the completion of the rally, especially if the bearish divergence continues to hold (the highs since November show the 5th wave of the 3rd wave is weaker and now the 5th wave is weaker than the 3rd wave, all of which helps confirm the wave count).

RUT daily chart

The RUT was also strong on Friday and it looks bullish with the bounce off support at its 50-dma, at 1505 and the previous trend line along the highs of the October-November consolidation. This line has supported the RUT multiple times since dropping back down to it on December 1st and the bullish divergence against the November low supports the idea for a continuation of the rally. A rally above Friday's high at 1538 would therefore be bullish.

The RUT's choppy pattern since the end of November has been keeping me guessing what the larger pattern is likely to be. I had mentioned in Thursday's market wrap that we could have a larger rising wedge for its rally from August and a rally up to the top of the wedge (the trend line across the highs on October 4 - December 4), currently near 1571, is a distinct possibility. We could see a pullback first before heading higher (bold green) and therefore I'd want to see a break below the bottom of the rising wedge (the uptrend line from August-November), near 1494, before turning more bearish.

The one warning I have for bulls here is that the price pattern off the December 6th low fits as an a-b-c bounce correction with the c-wave being the sharp rally on Friday. In this pattern the c-wave would be 162% of the a-wave at 1538.66 and Friday's high was 1538.06. If the December 4th high was THE high then the 1st wave down into the December 6th low has been followed by a 2nd wave correction and now it's a set up for a strong 3rd wave decline.

What we don't know yet is whether or not another drop lower would be the completion an a-b-c pullback from December 4th or instead a more bearish 1-2-3 move down. That's why I'd want to see a break of the uptrend line from August before turning more bearish. But I think it's important to see the bearish potential in case you're long and want to hold on during a deeper pullback. But also just as important, bears can't get too aggressive yet since there's clearly higher potential, especially if the rally continues on Monday.

Conclusion

With the tax reform bill getting closer to completion (they're buying off, I mean making changes to appease the last couple of hold-out Senators) and it's looking like it should get final passage in the coming week. Assuming the bill gets signed off, the big question for the market is whether we'll see a blow-off rally on the news or if instead we'll see a sell-the-news reaction (buy the rumor, sell the news). There's no question this rally has been driven by hopes the tax bill would pass and once it does (assuming it will pass) the market will go looking for the next reason to buy. If there's no strong reason to buy then there will be a reason to sell and protect profits into the end of the year.

It is the sell-the-news reaction that I'm anticipating and it's why I think the Santa Claus rally was early this year. Typically the first half of December is flat to down and then we get the rally in the second half of the month. This year has been a year of contrariness (such a word?) where it would have been good to be a contrarian when it comes to normal expectations for the year. That might continue this final month of the year where the normal pattern for December gets flipped around. One can only speculate about such things and I'll just stick with the charts and let them tell me when we have a change in the trend. Monday could provide some important clues in this regard.

In the meantime, have a great weekend.

Monday's pivot table

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Sample intraday comments on stock indexes (Wednesday morning, December 13, 2017):

Morning role reversal

The weakness in the techs and small caps yesterday was reversed this morning with their relative strength, although the blue chips are not far behind and the Dow is starting to act stronger again after the first hour of trading (this time it's CAT providing the bulk of the morning gains). Equity futures had sold off early last night but then saw a relatively strong reversal back up. SPX futures rallied 11 points from the overnight low into the open and then quickly added another 4 points in the first 30 minutes of trading. I'm not sure what caused that level of buying interest, other than Big Money simply wanting the market to go higher.

So far it's another pop n stop with pullbacks following the early-morning highs, except for the Dow's continued run higher. SPX held support, thanks to this morning's gap up, and as long as it can stay above 2665 it remains at least short-term bullish. The Dow is getting closer to its Fib 127% projection at 24652 with a high so far just above 24600 (and still climbing as I type) so we'll see if that target level is reached today and what happens from there. It could quickly turn quiet if the market goes into a holding pattern until this afternoon's FOMC announcement.

INDU 60-min chart

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Sample comments on bonds (Wednesday, December 13, 2017):

30-year Yield, TYX, Weekly chart

I like to follow the bond market because it's the smarter one between it and the stock market. The bond market trades more on fundamentals than the stock market and I like to follow the 10-year and 30-year, the latter being a better forecaster for where inflation could be headed. For a while now it looks like the bond market can't figure that out either so we're still waiting for what the bond market thinks.

Following the high in December 2016 and the retest of that high in March 2017, which was also a test of its downtrend line from February 2011 - December 2013, TYX has pulled back but in a choppy pattern. Since June it's been cycling around price-level S/R at 2.85%. I've long believed we have not seen THE lows for bond yields (for years I've been expecting we'll see the 10-year below 1% and the 30-year below 2%) and I can easily argue for a decline from here, or maybe after one more small bounce back up in its sideways pattern that it's been in since the low in late June.

I also see the potential for a higher bounce back up to the downtrend line from 2011-2013, near 3.02-3.05, before heading lower but it's looking vulnerable here. Buying in the bond market, perhaps coincident with a selloff in the stock market, would drive yields lower and that would be a statement from the bond market that they don't see inflation as a problem. If the Fed continues to raise rates in that environment they would likely create a recession, which of course would be bad for the stock market. I'll continue to watch this market carefully for further clues.

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There will also be commentary on the commodities markets, especially the metals and oil, as well as currencies (primarily the US Dollar).

Sample comments on gold (Wednesday, December 13, 2017):

Gold continuous contract, GC, Daily chart

With today's decline in the dollar there was a countermove in gold and it rallied back above its downtrend line from September 2011 - July 2016, currently near 1250. Gold bulls need to see that level hold as support since another drop below it would likely keep going this time. The pattern for gold looks bearish to me but I see the potential for a at least a little higher bounce to price-level S/R near 1265 and possibly up to its broken uptrend line from December 2016 - July 2017, near 1275.

A higher bounce to 1275 would also result in a test of its broken 50-dma. Between 1265 and 1275 gold would run into its broken 20-, 50- and 200-dmas and that's a lot of resistance to plow through. For that reason gold would be bullish above 1275 and even more bullish above price-level S/R near 1300. In the meantime I think the path of least resistance is to the downside.