It's Not What the Fed Does, But How the Market Reacts to its Decision, That Counts
I'll get to the Fed element later, but, first, a few words on the Dow Jones Global Stock Index. Chart 1 shows that it has been experiencing a series of declining peaks and troughs since last November. That's not a bullish sign. Neither is the fact that the 9-day RSI continually falls into the red zone for extended periods and, when it does bounce, it has had trouble getting to an overbought reading. The only occurrence happened in late March; then, it briefly touched that 70 level and immediately reversed.
These are all characteristics of a bear market. In this instance, my best guess is that things won't turn out like 2007-2009, i.e. a full-fledged bear market, but more of a giant frustrating trading range, of which we are currently close to the lower boundaries. In that respect, Monday's action was quite encouraging, as the close for the day held above the early March small double bottom. Also, the price experienced a bullish Japanese hammer day. That certainly does not guarantee a rally, especially as the hammer that formed on the 25 April (1 Hammer) was ineffective. However, coming in conjunction with a false intraday breakdown and an oversold RSI, its chances of "working" are certainly enhanced. Positive one-day action in several sectors making up just over 60% of S&P weighting also adds to the probability of a short-term rally or consolidation, as part of an overall 10-15% trading range.
Most Sectors Experience a Short-Term Reversal of Some Kind
Technology, at approximately 28%, has the largest weighting of any sector. Positive action here is important if the S&P is to move higher. Monday and Friday it formed a "piercing white line", an unusual but often powerful candlestick pattern. It is formed when the first candle in the pattern (Friday's action) experiences a long black real body. The second opens below the low of its predecessor, but closes about half-way up or higher on the first candle's real body. I have placed quotations around "piercing white line" because this pattern barely achieves those requirements.
White lines represent a kind of whipsaw. Such false signals are typically followed by an above average move in the opposite direction, as traders struggle to get back on the right side of the market. This week's pattern does not reflect as strong a whipsaw element as I would like. Note that the KST is still declining, but it has reached a similar level to that which accompanied the previous two lows. Positive action following the white line should enable an upside reversal soon.
Consumer cyclicals are also sporting a piercing white line, but, in this instance, the intraday action also resulted in a whipsaw, making the signal a stronger one.
Healthcare featured a bullish hammer on Monday and could also help to support a more generalized short-term rally.
Finally, price action for the XLF is encouraging, not just because of the bullish hammer but moreso due to the fact that intraday action on Monday took the price well below its red-dashed support trendline, yet it closed well above it. That's whipsaw action, which may well lead to something.
Where are All the Bulls?
Chart 6 has really caught my attention, as the number of AAII bulls has sunk to a record number, and history for that data covers lots of different market conditions. The green arrows show that, when it has reversed from an oversold level in the past, a nice rally has followed. This contrary indicator is still declining. However, given the ray of hope offered by the candlestick action in the four sectors already described, there is a better-than-even chance that it soon will.
The Other Side of the Story
Chart 7 compares the price action of several important market averages, which all have two things in common. First, they are all below their 200-day moving averages. Second, they are also below their solid red breakdown trendlines. The Russell 2000 has already broken below its January/April trading range, thereby leading the rest of the market lower.
It could be argued that the NASDAQ Composite is at the most crucial point of any, as Chart 8 shows it is right at the neckline of a giant 2-year head-and-shoulders top.
Conclusion
The point I am trying to make is that the major averages have, so far, managed to avoid a serious breakdown. However, there are some positive short-term signs that the market can rally over the near-term, thereby avoiding a more serious decline. Also, current readings in AAII sentiment are far more consistent with a low than a market about to break down. Given such a fine balance, it would not be surprising if investors used Wednesday's Fed announcement as an excuse to push the market in either direction. It all boils down as to how much bad news is baked into prices and, in the next couple of days, we are likely to find out.
Good luck and good charting,
Martin J. Pring
The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.
