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The blue chips are having a great time right now--we've seen a very nice rally from the March low. So, is 13 going to be unlucky number? The DOW is now up 13 out of the past 14 days, truly a great performance. And in that time it has added 500 points. I just wish the techs and small caps were keeping up. I think the market needs some support from the tech stocks and small caps in order to give this a more bullish feel.

It also needs better volume support and market breadth--it's the second day in a row that the DOW has closed in the green with negative breadth (11 stocks were up while 19 were down). While one should never argue with price (the final arbiter), a look under the hood is showing some leaks and cracked belts. Even a look at the numbers in the above table shows the negative breadth today, which is a little worse than yesterday's numbers. The total down volume and declining issues beat out up volume and advancing issues. The lower than usual put/call ratio says people are feeling a little too bullish here (but this might be affected by opex activities).

When I see money rotating out of the higher-beta stocks like techs and small caps and heading for the blue chips, as we saw happening towards the end of the rally into February, it was a warning that many were getting defensive (easier to quickly bail from your long stock holdings if you're in large blue chips than the smaller high-beta stocks). So the question is whether or not we're seeing something similar again. The lack of total volume is another worrying factor. And speaking of market breadth, the NYSE a/d was .762 today which is worse than yesterday's .938, this while the NYSE close marginally in the green. Here's an update to the NYSE vs. volume chart I showed yesterday:

NYSE (NYA) vs. Total Volume chart, Daily

The NYSE put in another all-time high again today but it did it on lower volume, again. This can't continue. Today's candle is what's called a long-legged doji and indicates lots of indecision (a battle between the bulls and the bears). This follows yesterday's doji. This could be one reason for the lower volume so any move higher out of this, with volume, would be bullish. But what I see so far does not inspire bullishness in me. Looking a little closer shows the potential significance of the 9655 Fib level that I had pointed out in Tuesday's Wrap.

NYSE (NYA) chart, 60-min

Today the NYSE pressed up again for another test of that 9655 level, getting up as high as 9658.26. But after dropping into the close it's leaving a bearish divergence on the chart, especially if it continues lower on Thursday. The bulls will want to see this either continue higher (duh) or consolidate sideways/down for another day or two before resuming its upward journey.

And while we're looking over the NYSE, this daily chart shows another reason the current level is acting as resistance.

NYSE (NYA) chart, Daily

The old broken uptrend line from July and the trend line along the highs from May 2006 is where price stopped and closed so traders are still paying attention to these. We've seen price press up along the underside of broken uptrend lines before (think DOW most of the end of last year) so that's entirely possible here.

A phenomenon that we're seeing today, that's never been experienced before, has to do with the plethora of ETFs (Exchange Traded Funds). These basket-of-stock funds trade like stocks (except you can short them on a down tick, which could be trouble later) and hot money is chasing these ETFs instead of hand picking stocks of interest. It makes sense--just one order and you've purchased a bunch of stocks. But what this means is that all stocks in that basket are being purchased regardless of whether a stock in the fund deserves to be bought or not.

In other words you could have a lame stock within the ETF that deserves to be sold instead of bought but because someone buys the ETF that weak stock gets bought right along with the rest of them. This is creating a situation where very often top price is being paid for a crappy stock. Whether this explains the strong performance in a large index like the NYSE is hard to say. The bottom line is that the ETFs may be causing both buying panics on the upside just as they might cause selling panics on the downside.

When I look over the blue chippers I'm feeling bullish this market so it's time to sell (wink). After the February high and drop into the March low I've been looking for an end to the current bounce as an opportunity to get short again for the next ride down. Now that the market (blue chips anyway) keeps pushing higher I'm starting to feel downright bullish about all this. So from a contrarian sense this would be your signal to cover your longs and get short.

I'm only kidding of course (am I?) but you get the idea. This market has turned nearly everyone bullish and while I've seen some reports about excessive bearishness, such as the put/call ratios and fewer bullish advisors, I've also seen many of these sentiment indicators in neutral territory. Quite honestly I've never figured out a good way to time the market with sentiment indicators anyway. They're good for a heads up but I'll be dipped if I can trade off them.


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Economic reports

There was only one economic report scheduled for today and it was the Crude Inventories report. The big numbers that came out of today's report have to do with rising refinery capacity and very strong gasoline demand. While refineries are pumping more gasoline, the greater demand has caused a drop in supplies of 30M barrels over the past 10 weeks, with the level now 5.6% below the year-ago level. This caused gasoline futures to jump back up off the 3-week low yesterday. Refineries operated at 90.4%, up from 88.4% the week before. Crude and distillate inventories were also down a little from the previous week.

And with that let's look at the charts.

DOW chart, Daily

I had mentioned yesterday that the DOW had been struggling with the Fib projection at 12796 (which was also its previous high) but if it were able to push a little higher then the Fib projection at 12814 (two equal legs up from March 14th) should get tagged. The DOW ran up through this level but then settled back under it. If the bulls can keep this going then there's very little in its way up to the 13K area. In the move up from March 14 the 2nd leg would be 162% of the 1st leg at 12995 and that's the top of its steep parallel up-channel from the March lows (shown on the 60-min chart below).

As the dark red wave count shows, the current bounce off the March low can still be a b-wave in a larger A-B-C move down from the February high, but it will have to turn down right quick as they say in the south. If on the other hand, the DOW can press higher and follow something like the green price pattern, and especially if it continues on relatively weak volume and breadth, then this will clearly be a blow-off top.

DOW chart, 60-min

The closer view shows the 12814 Fib level and how price closed below it. If the DOW rolls back over from here it will leave a bearish divergence at today's high (which is not surprising considering the lack of market breadth today). The bears need to break this below 12593 to turn it more immediately bearish. If a pullback finds support around 12700 and then heads higher again, it will look bullish for a push to a new high (for a 5-wave move up from March 30th which is depicted on the SPX 60-min chart below).

SPX chart, Daily

While the DOW has tagged its Fib level for two equal legs up from March 14th, the equivalent level for the SPX is just under 1484. So SPX is relatively weaker than the DOW at the moment, which is not surprising since it appears the DOW is getting all the loving lately in an apparent effort to jam the most-public number higher this week.

SPX chart, 60-min

I mentioned for the DOW 60-min chart a possible 5-wave move up from March 30th if we get a corrective pullback shown in green. That would be followed by a new high (maybe tagging the 1484 level if not sooner) and then I'll be watch the following pullback after that to see if it's another corrective one or something sharper to the downside. The bears need to break below 1448 to confirm the rally is finished.

OEX chart, Daily

While the OEX also closed marginally in the green today, it also did it on negative breadth--46 stocks were up while 56 stocks were down. I discussed the Fibs when I use the March 2003 low as the end of the bear market leg down from the 2000 high. The 62% retracement of that move is at 675.97 and today's high was 675.93. The Fib zone that I'm interested in watching (explained in last night's Wrap with the OEX chart) is 676-680 so the lower end of it was tagged today. Whether that's it or not we'll soon find out but heads up here for a potential high for the bounce.

Nasdaq-100 (NDX) chart, Daily

While the NDX closed up from its low, it closed down on the day. The COMP did a little worse and demonstrated again that money seems to be rotating into the larger caps even if the tech large caps did not do quite as well as the blue chips. NDX could just consolidate though before pressing higher so there's nothing bearish about the daily chart yet.

Nasdaq-100 (NDX) chart, 60-min

If the NDX is to have a 5-wave move up from the April 12th low (for wave-C), then the 5th wave would equal the 1st wave just under 1850 (which would also be a retest of the highs in January and February). But very often the 5th wave only goes to 62% of the 1st wave and that's at 1839.53, which is shown on the chart. Today's high was 1839.31. Following that tag there was a sharp sell off into the close. It could be just part of a larger consolidation that we'll see into the end of the week, which would be bullish for a move up next week, or we saw the high this afternoon. It takes a break below 1815 to confirm the rally is finished.

It's finally time to review the SMH chart since it's at an important level.

Semiconductor ETF (SMH) chart, Daily

Here we are, 6 months almost to the day and SMH is back to where it was back in October. As shown on the chart SMH made it up to the top of the consolidation pattern and pulled back. Normally this is a very bullish pattern and I'm more than tempted to recommend buying a breakout. In fact a break above the line at 35.80 that is followed by a successful retest would be a great buying opportunity. Watch for that.

But what I'm worried about is a head fake break that finishes the consolidation followed by a price collapse. Let's face it, this pattern has everyone and their brother leaning long the semis and it wouldn't be the first time we've seen this kind of pattern fail. And when obviously bullish patterns like this fail, they fail hard. Let it prove itself before you get super bullish this sector. If it can break out then next resistance is 36.20 (62% retracement of the 2006 decline) and then 37.43 (downtrend line from January 2004 and the 2nd leg up from the July 2006 low will equal 62% of the 1st leg up).

Russell-2000 (RUT) chart, Daily

The RUT's daily chart looks similar to the NDX in that it could be in the process of finishing its rally in an ascending wedge. After a minor break above the broken uptrend line from August the RUT fell back down. If it consolidates then it should press higher again. But the minimums have been met to call this bounce complete so be careful.

Russell-2000 (RUT) chart, 60-min

As shown with the green wave count we could see a sideways/down consolidation lead to another push higher. The RUT should stay above its uptrend line from March 14th if that's to happen. Any break below 816 would confirm the rally is finished.

BIX banking index, Daily chart

Banks had a very strong day, thanks in large part to JP Morgan's strong earnings numbers this morning (and thanks to their trading team for their "risk-free" trading results). With the break of the downtrend line and the 50 and 200 moving averages, the banks suddenly turned much more bullish. Now the question is how high and what is the pattern. My first guess, based as much on the broader market as anything else, is that the current rally leg is wave-c of an a-b-c bounce from the March 14th low. If so then two equal legs up from that low is at 405.42 so that's what I'm showing. I'll have to see more price action before I can guess what else might be playing out here.

Brokerage (XBD) index, Daily chart

Countering the bullish picture that has suddenly developed in the banks is what I see in the brokers. Ideally we'd have these two indexes in synch for the market so it'll be important to keep a watch on this one. The brokerage index bounced up to its broken uptrend line from June 2006 and then pulled back. As with the banks, if the a-b-c bounce off the March 14th low gets two equal legs up then the upside target is 253.03. But the move up from March 30th can count complete after today's move and since it stopped at that broken uptrend line it has me thinking this may have finished its bounce. Keep the brokers and banks in view to help determine where this market is headed next. A break below its March 30th low, as with the banks, would be immediately bearish.

U.S. Home Construction Index chart, DJUSHB, Daily

There were more analysts out today declaring we've probably seen the bottom in the housing sector. Bless their little hearts. I'm an optimist by nature but I have to hand it to these guys--they have the ability to look past any data (or common sense) that goes against their hope for a bottom. As this leg up develops I'll be watching closely to see how it develops but without getting into the details of what it will look like depending on what it is, it will probably fail at or below its 200-dma near 660.

It may never get to the 200-dma if the 50-dma, which has now crossed below the 200 and is coming down fast, stops the price rise. I'm actually glad to see a bigger bounce here since the bullish divergences were suggesting it was coming and this will relieve a lot of the oversold conditions. But as I've been saying for a long time, this index has an enormous amount of waste that must be cleansed from the system in order to give us back a healthy industry.

While the real estate and housing analysts look out over the horizon with their finger, um, in the wind, they should be looking at lumber prices.

Lumber chart, May contract, Daily

The price of lumber has tipped back over and is heading for its lows. It should easily break them. The traders in lumber do not see any demand on the horizon that the housing analysts are desperately trying to see.

Oil chart, ETF (USO), Daily

While the oil fund is breaking its uptrend line and 50-dma, the oil contract has held those support levels so it's a coin toss which way this headed next. I think it will break down and any further decline tomorrow would probably confirm it. Otherwise this could be just a corrective pullback that will lead to another push higher in which case the 200-dma would likely be hit.

Oil Index chart, Daily

The oil index is throwing out dojis which indicates indecision (battle) but I believe this will roll over and start heading lower. A break below 660 would confirm at least a larger pullback is in progress.

Transportation Index chart, TRAN, Daily

The Trannies got another nice boost today and they may not be quite done yet. The short term pattern of the rally would look best with a consolidation followed by another push higher in order to finish the wave count. However, there's another potential wave count that calls today's high the end of the rally so the next pullback will be key (as is true with the broader market). A corrective sideway/down consolidation will probably be bullish whereas a sharper decline below 5050 would likely be bearish. Certainly a drop back below 5000 would be a second failure to hold above the May 2006 high and would have people bailing.

U.S. Dollar chart, Daily

There's nothing like kicking a guy while he's down. That's probably how dollar bulls feel right now. Of course there are less than 10% that are bullish the dollar right now so there aren't many to be found. That sentiment number has now been below 10 for 3 days straight and the last time that happened was in May 2006 which marked a significant low for the dollar at the time. Price is currently "under-throwing" the bottom of the descending wedge pattern I have drawn on the chart so any rally back above 81.80 would be a buy signal. The only thing I'm wondering at this point is whether or not the dollar will hit the Fib projection at 81.03, either now or after a small bounce.

The euro hit resistance at the same time so it's looking ready for a reversal as well:

Euro chart, June contract, Daily

The trend line along highs since May 2006 is where the euro stopped today. As can be seen on the MACD, a turn back down here would leave a nasty bearish divergence. For you Forex traders, it looks like a good time to buy the USD/EUR pair.

The Canadian dollar also hit resistance today by a downtrend line from May 2006 and the 62% retracement of its drop to the February 2007 low. So it would appear that currencies are ready for a reversal. A bouncing US dollar would likely be depressive for gold.

Gold chart, StreetTrack Gold ETF (GLD), Daily

The US dollar has sold off fairly hard the past few days but gold has not been able to climb any further (nor silver). That could be suggesting some smart gold players are using this opportunity to unload some inventory to eager buyers once gold got above its downtrend line from May 2006. The bullish interpretation of the consolidation in gold is that we'll see an upside resolution, and that's the way I'd normally be leaning here on gold. But the currencies have me thinking we'll get a reversal there and that has me leaning bearish on gold. Therefore in this case I'm thinking the consolidation may be distribution and not accumulation. But I also recognize the potential for the currencies and gold to give a final burst in their current trend before reversing hard (common in the commodities and currencies).

Results of today's economic reports and tomorrow's reports include the following:

The Leading Economic Indicators (LEI) and Philly Fed index could move the market if there are any surprises but other than that we're left to deal with opex. Today was relatively quiet and sometimes there's a flurry of activity on Thursday of opex but usually all positions have been squared by then and it gets very quiet and boring on Thursday and Friday. That could actually help the bulls since a consolidation into the end of the week would look bullish from an EW perspective.

Bottom line is we need to see what kind of pullback we get next. Sloppy choppy sideways/down and we should look for another leg up before potentially setting up a top or at least a larger pullback. But a sharp drop that takes out the key levels to the downside that I have marked on the chart will set us up for potentially the next big decline.

The market is still vulnerable to downside surprises (like what hit the market at the end of February) so don't get complacent here. If you're long and enjoying the ride, great. But know where your exit is and how you would handle a gap down over your stop. We're getting stretched so don't be bashful about taking profits and trade lightly and quickly right now.

If you can't watch the market intraday I'd be very tempted to just stand aside, or play the long side as long as you're comfortable knowing you'll be able to exit where you want (overnight trading will be your risk). Buying a few longer term puts (out beyond June) is not a bad way to at least hedge your position until you can start liquidating some positions during a decline. It's early to recommend an aggressive short play if you can't follow it closely. If we start to break down there will be plenty of time to recognize it and then use bounces to get short.

Good luck and I'll see you back here next Wednesday and on the Market Monitor tomorrow.

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