Lots more economic data out today.  Unemployment claims jumped 38,000 – much higher than expectations, but personal income also beat (thought to be explained by income shifting by those concerned about higher 2013 tax rates.)

Real Consumer spending is probably the data set that best settles the conflict — up an anemic 0.2% in December (real) versus 0.6% in November.  So, either everyone did their Christmas shopping early this year, or retail sales fell off a cliff.

Against this mixed picture, January Chicago PMI came out at 55.6 versus consensus of 50.5 and December’s 50.0 (revised down from 51.6.)  Employment and new orders shot up, but so did inventories (after contracting for several months).  While, deliveries, prices paid and backlogs continued to contract. In short, this looks like a rebound from the November slow down largely blamed on the fiscal cliff.

Also, not that this is a regional, not national, survey.  It sometimes offers a somewhat, but not always, predictive view of the important national ISM Mfg Index due out tomorrow.  In fact, many of the other regional surveys have shown increasing weakness.  The Chicago vs the national data are compared below.

The market sold off early following the employment data, but rebounded a bit as investors digest the PMI report.  All eyes are on the important data being released tomorrow:

• Non-farm Payroll  8:30 EST
• PMI Mfg  8:58 EST
• Reuters/U of Mich Consumer Sentiment  9:55 EST
• National ISM Mfg  10:00 EST
• December Construction Spending   10:00 EST
• Motor Vehicle Sales

Markit Flash PMI (covering about 85% of respondents) released on Jan 24 showed an acceleration of output, new orders and employment, but a deceleration of export orders, backlogs  and purchases.  Output prices barely moved, and inventories actually increased.

Remember, this is only a survey of purchasing managers.  So, it doesn’t, for instance, differentiate between an expansion based on overly optimistic expectations or one justified by an upturn in demand.  Thus, while it tracks mfg output (as reported by the Fed) in general, respondents’ perceptions are often more optimistic than was ultimately justified by actual outcomes.

We’ll revisit the data tomorrow, but for now it has the appearance of series of lower highs and lower lows, i.e. a falling channel.

There’s no telling what the economic data will look like tomorrow, let alone how the market will react.  But, it’s interesting that the last Flash PMI data, which was generally regarded as very positive, was good for an 8-pt rally on the opening (which was quickly negated for a flat close.)

I’ll also be keeping an eye on construction spending, which has been trending down as shown in the Briefing.com charts below.  Spending on commercial construction has been increasing at a declining rate for some time, and recently began contracting.

The rate of increase in residential construction also recently turned down, so it’ll be interesting to see if this is a trend in the making.

The market has been relatively quiet this morning.  After reaching the lower end of our upside target range yesterday, SPX broke through the red trend line and the white channel midlines we discussed, back-testing the white channel as expected.

Since then, it declined to test the next lower channel bound.  The pattern from here gets very interesting, especially when one considers the RSI channels.

 continued for members…

Note the white channel we’ve been watching is finally being fleshed out this morning.

We haven’t yet reached the bottom, but that’s because of the larger purple channel’s influence.  This is a very unusual channel, with SPX spending virtually all of its time in the upper half, save for one dramatic plunge to the bottom around the end of December — remember the fiscal cliff?

On Dec 31 and Jan 2, SPX rallied 63 points (since the problem was “solved”) ruining a perfectly good Gartley Pattern (yellow) and analog in the process.

With the channel thus established, one would have expected prices to vacillate between its top and bottom.  Instead, we get this very wacky pattern above — leading to several days during which it seemed the market might hold at the .886 (1460) or the previous high of 1474.

Ultimately, of course, the market surged past the 1474 high on Jan 17 on a day when reported housing starts jumped (despite a contrary plunge in permits) and no one cared about the jump in initial claims or the plunge in the Philly Fed index.

Harmonics are very predictive in the 0-.886 range.  Any higher than that, however, and it becomes unclear whether a double top is in the cards or whether the retracement is over and a new high is forthcoming.

All else being equal, this uncertainty translates into potential flat or negative returns.  So, I study other chart patterns, and technical indicators for signs of a change in trend.  Sometimes they’re there and clear, sometimes not.

In the case of this rally, the frequent negative divergence and lack of normal channel behavior combined to make forecasting difficult.  But, we tagged some pretty convincing intersecting Fib levels yesterday that happened to coincide with the purple channel top.

The RSI picture, is less than crystal clear.  Recall that the upside target range was 1509-1518, with 1515.24 and 1518.57 representing potential tops every bit as legitimate as 1409.86 and 1510.19.

So, how can we know whether the top is truly in or we’re heading up to 1518 or higher?  The chart below shows that the recent 1509 high came as daily RSI tagged the yellow channel that dates back to May 2010.

Like the previous tags, it certainly looks extreme.  But, the four previous tags of the channel top consisted of:

Apr 15, 2010:  SPX topped out at 1213, fell to 1193 over the next two days, then rallied back to 1219 on Apr 26 on negative divergence where it started a 2-month 209-pt slide.

Nov 5, 2010:  SPX reached 1227 and corrected only 53 pts before continuing (on negative divergence) to the 1344 Feb 18 top — where SPX then corrected 95 points.

Feb 9 2012: SPX reached 1354 and corrected only 11 pts before continuing higher to put in a top on negative divergence on Apr 2 at 1422.  From there, it fell 158 points.

Sep 14, 2012:  SPX completed a Bat Pattern, the .886 of the 1576 – 666 crash, and fell 130 points over the next two months.  There was no negative divergence.

In other words, 3 of 4 previous tags of the channel top resulted in relatively minor initial declines (20 points, 53 points, 11 points.)  The ultimate defining top came along later on negative divergence — sometimes in a few days, sometimes several months.

The lone exception was the obvious completion of a major pattern that was 5 years in the making.  So, as we look at daily RSI charts, can we draw any conclusions?

To me, the chart suggests caution.  Though the recent top involved two peaks (corresponding to Jan 25 at 1503.26 and Jan 29 at 1509.35) RSI didn’t really dip at all.  Further, the top of the latest (purple) daily RSI channel is not well-defined.

As I’ve drawn it, the bottom fits pretty well.  But, where to set the top?  There are 3-4 potential levels that might be right.  And, setting the channel top at the latest RSI peak means it doesn’t line up well with any of the others (not necessary, but always reassuring!)

I’m a bit nervous that daily RSI found support at the purple channel midline.  While it certainly bodes well for the bearish case that we have negative divergence over the past week or so, I’d sleep better if RSI had pushed down through the midline today.

The 60-min RSI is likewise non-committal — with potential support shown below in the white channel (bottom) and the purple channel (the 25% line.)

Going into the close, I would let caution be your guide.  If you don’t have a strong constitution, but do have the means to hedge your position, it might make sense.  Otherwise, a stop at the 1510 level might make sense given our current short.

 

 

stay tuned…