The Federal Reserve announced they were leaving rates unchanged on Wednesday. The markets were expecting this or a quarter percent price decrease. Initially, the markets reacted to the news by moving to the downside recently. The markets immediately reversed the upside rather dramatically showing that investors believed that that may move into an easy stance within a few months.
The big movers came after the bad news that we expected from gold, silver, miners and the U.S. dollar. It is very likely that USD will move lower on an attempt to retest support near 96.50. A weakening U.S. dollar will help to support the stock market and precious metals prices. Additionally, a weaker dollar will help support trade, economic growth, employment and GDP output.
We believe the U.S. stock market is nearing upper resistance. We still believe the think U.S. stocks will eventually try to move above the psychological levels of 3,000 for the S&P 500, 30,000 for the Dow and 340 SPY. This move to new all-time highs will likely result in a scouting-party type of price pattern where price attempts to identify new resistance, slightly above the psychological levels, then reverses back below these levels to retest support.
Our continued belief that a large pennant/flag formation is unfolding has not changed. As technical analysts, we need to wait for the new price peak form before we can identify where the upper channel of the pennant/flag formation is trending. We would urge traders to be conscious that any outside move in the stock markets as a very limited upside potential from current levels. The SPY is trading at 293 and we believe upper resistance will be found slightly above 300. Thus, we really have about a $7 or $8 move to the upside from current levels – only about 3% to 4% more room to the upside.
The transportation index paints a very clear picture of price channels, support and resistance, and expected price rotation going forward. The current price channels indicate a high target area near 5250. This upward channel range is still only 3% or 4% higher from current levels.
After this peak level is reached the market should reverse downward attempting to retest support. We believe we are very close to a market top at this point and believe that the US stock market may attempt to move above the major psychological levels – as indicated above.
A Few Items That Could Change Our Outlook:
A. Positive news regarding trade issues with China
B. Renewing or new central bank easing policies
C. Any type of dramatic positive economic news
D. China attempting to resolve banking issues by taking the problems and addressing them with capital/gold reserves.
Ideally, there are a few opportunities for the stock market rally far beyond the psychological levels. Yet with only about 14 months to go before the U.S. presidential election and no indication that any of our four critical components for renewed price advance are anywhere close to being accomplished, we hold to the belief that the markets will complete the Pennant/Flag formation as we have originally been stating.
We urge traders to pay attention to precious metals and the U.S. and foreign stock markets as we enter this critical phase of the market. We believe the U.S. stock market will continue to rotate within the channels clearly on the transportation index chart. We believe any excessive fear will become evident in the bond markets and precious metals well before the U.S. stock market rotates lower.
In our opinion, this is not the time to buy into technology or the U.S. stock market expecting a massive breakout to the upside. We are urging our clients to be very cautious over the next 30 to 60 days and to trade with short profit targets in mind. There are a lot of moving components throughout the global economy and we are urging our members to be very aware of the larger patterns that are setting up.