Wednesday, April 30, 2014

Blue Chip Equities: Still Reasons for Caution as the Market Awaits the Fed

Monday's update noted the market had reached an inflection zone and could bottom in short order.  The 1858 downside target was captured (and exceeded, as I suspected it would be) during an ugly whipsaw session -- and as of Tuesday, the S&P 500 (SPX) was again testing the 1880-85 resistance zone.

The Fed wraps up a two-day meeting today, and will announce its decision on interest rates.  The consensus expectation is that the Fed will also reduce QE asset purchases by another $10 billion.  Any surprise deviations from that number could generate directional fireworks.  ADP releases its monthly report on hiring today; and the government's Bureau of Made-Up Statistics (BOMUS) will release its initial estimate of first quarter GDP (this number will later be revised approximately 347 times, but no one will pay any attention whatsoever to the revisions, regardless of how dramatic they are).

Looking at the price charts in equities, I'm inclined to simply say that upside potential presently appears fairly limited.  There are two things that could change that:

1.  A sustained breakout over key resistance.
2.  A positive surprise from the Federal Reserve.

The Fed is the ever-present market-moving wildcard, and they're simply going to do whatever they're going to do -- so I'll wait for the announcement and leave it to the economists to speculate in that regard.  Chart-wise, I've broken down the intermediate wave structure in the Dow Jones Industrial Average (INDU) to illustrate why I'm not terribly bullish with prices at current levels.

I should clarify that I'm not exactly full-on bearish here either, because I do respect the fact that the market is in a long-term uptrend, and betting against the trend is always risky business.  I'm not screaming "top" here, because there's nothing screaming "top" in the charts yet -- it's more like there are whispers of the potential for a top, and I'm respecting that.

By way of further clarification:  The blue chips have been stuck in a trading range for months now, so that doesn't give us much to work with there -- yet beta indices have been in intermediate down trends, and that's a shift from the way things have been for the majority of the bull market.  I've also talked about the long bond in prior updates, and I'm still inclined to think the bond rally has farther to run.

On the long-term INDU chart, we can see that five rally waves may be complete or nearly-complete.  The x-factor is still the potential of a subdividing fifth wave extension, which is entirely possible, but difficult to anticipate.  Until INDU sustains a breakout over resistance, it's a moot point, and obviously I can only draw from what's in the charts as of this moment.  

At near-term degree, INDU appears to be in the process of completing five rally waves.  There are already enough waves present in the structure for the rally to be entirely complete, but there's potential for an expanded flat (shown as the blue (A)/(B)/(C)) for one more push up to a marginal new high.

Since it's a Fed day, one option is an early drop in red (4), followed by an "announcement pop" toward red (5), followed by a reversal (the first directional move out of the Fed announcement is often a fake).  Again, though, there are already enough waves for a complete structure, so there may be no "pop" forthcoming.

So that's the long-term and the near-term; now we'll look at the SPX chart for a middle view:

In conclusion, the equities market faces substantial resistance near current levels, and high-beta indices and the long bond are both still warning that caution is warranted in blue chips.  If SPX and INDU can sustain a breakout through resistance, I will of course respect that development accordingly -- but until then, this is a "show me" market.  So while I'm not full-on bearish here, I'm presently inclined to think bears probably have better prospects.  Trade safe.

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