After the signals from a week ago, Friday markets staged a strong rally week. Our methodologies were able to nail both the high and low. What is more difficult is going to be what comes next. Was it the end of the correction? In some cases, it was as a stock like BMY gapped up through resistance to make a new high. On the other hand, BIIB broke down and continued to make lower lows. But on average most stocks are mid-range.
Here’s where we were at coming into the week. The Nasdaq is the best example where the last leg of the move down was 64% of the range at 6164.43 and on a 180-minute chart stalled at 44 bars off the high. So, you can see how the price action vibrated with the action to get us to this point. The real answer to the entire move comes down to the type of push lower they get off this 44-bar high vibration. Looking at it on the surface the retracement they are at a 78% retracement at 676 points up. I’d feel more convicted if it were a 78% retracement at 78 bars or 70 points. But we do have 64 bars up on a 30-minute chart, which vibrates with the 64. These are the elements for a high last Friday, but it is questionable as to whether it could sustain.
The Dow also had a reading at the high and it got hit by Walmart to start the week. They didn’t like earnings for the holiday period but is viewed as struggling to keep sales pace with Amazon which is an ongoing problem for everyone. Think about this, 25 years ago Walmart started moving into neighborhoods across the country which put thousands of moms and pops out of business. Now the giant is being threatened by an even bigger Goliath, which the government refuses to break up. The consequence is a stock that is getting crushed this morning.
As I told you in the prior couple of updates, the 610-day high we got for the Dow is from the first low in August 2015. We could go through this whole exercise all over again in July as they hit 610 days from the February 2016 bottom for the rest of the market. It’s very important to understand where markets have come from to know where they could be going. In this case, a double-bottom isn’t going to lead to a pure double top since this was only a 12% correction. But it could lead to a twin top from higher levels later in the year. In this case, we’ll know if this high is easily negated or if it fails to give us a strong retest of the bottom. So, we are not out of the woods by any stretch of the imagination.
I know we don’t live in Australia but in my report this morning I took a deep view of the ASX which has some clear divergences working. Is the correction over? Well, their version of biotech which the closest thing is their healthcare sector was going through the roof making new highs. Even their info-tech (computer) sector totally recovered. On the other hand, their most important sector which is financials is experiencing a dead cat bounce at best. In the near term, their health care can be a market leader for stretches of time. However, at the end of a period of days, if the banks don’t get on the horse it will end up dragging the entire market down. There is a clear divergence and its confusing to people who are trying to decide whether this recent bearish phase is truly over.
Elsewhere gold also hit a high on Friday and had some follow through lower on Monday. Oil was still higher in the overnight action but getting close to important resistance of its own. Remember I told you a couple of weeks back the long-term chart didn’t look like it would sustain to the downside. But we’ve had a decent pullback and now we are having the pushback to it.
Regarding the Washington, DC soap opera it’s a mixed bag. Mueller indicted several low-level Russian actors but more importantly, Deputy AG Rosenstein said, “There is no allegation in the indictment that any American was a knowing participant in this illegal activity.” I suppose "any American" would include President Donald Trump. On the other hand, AG Sessions told Maria Bartiromo after she wouldn’t let him off the hook this time the Department of Justice will be looking into the FISA scandal. The wheels of justice take a long time and for all we know, this investigation could linger into the next time window in July or beyond.
Putting this in proper perspective, markets have responded to my Friday calculation, but they have a long way to go to retesting the lows. I think we are entering a period where we could see divergences and non-confirmations. The prudent thing to do here is to find a sector you like and stick with it. This could turn out to be a market that has a little something for everyone, bulls and bears alike. The early YM action has been mostly down but there are chops to the upside which is creating some confusion.
Finally, the wild card is interest rates. I discussed some of the reasons last week. We are a society that has lots of debt (aside from China). Most of it is in the lower interest rate environment. Areas such as auto and real estate may be confronted with a new reality when rates do spike. For now, the bond market has taken a serious hit in terms of prices and has yet to ease off. It is extended to the downside and due for a bounce but getting the bond market to reverse course at this stage of the game is like getting an oil tanker to change direction.
Until it does, it might be difficult to get the stock market sustaining higher than it has since the low over a week ago. In the long run, I think the Trump rally since the election is close to its peak. I believe 2018 at the very least will experience a leveling off period if not a full-blown correction (we’ve already had one) for the reasons I continue to discuss.