Market Stats

Todd and I switched this week so that I can enjoy my family later this week as my son gets married this coming weekend (3rd and final one to tie the knot).

Meredith Whitney, a well known banking analyst, has been very negative about the banks in the past couple of years. She has stated that she did not believe their numbers and felt they had a long tough road ahead of them. Today she surprised the street with an upgrade on Goldman Sachs saying she believes they'll have a solid quarter. I'm not sure what changed her mind about the banks but the shorts covered and are asking questions later. The bulls loved it and bought into the rally. The combination gave the market a nice up day with the S&P 500 up a healthy 22 points for a +2.5% gain on the day. The banking index (BIX) was up +7.3%. Now all eyes will be on Goldie to see if they come through. Whether we get a sell-the-news event can only be guessed this evening.

The techs had started off the day in the red and looked to set a negative tone for the market. But they too joined in the fun and rallied +2%. Nearly all sectors were in the green so it was a broad-based rally. The health care index (a defensive play so traders shunned it today) was one of the few in the red but only marginally.

I had updated a bunch of weekly charts during the day and I want to show some of them tonight. I unfortunately had a lot of internet connection problems this afternoon and therefore I'm running behind but need to get this out on time. I'm cutting my normal commentary short so that I can catch up and review the charts. I would have just beat up on the banks further anyway (wink).

The SPX weekly chart has changed very little over the past few weeks. The weekly candles are sliding down underneath the downtrend line from May 2008 so it's a mixed signal--it's bearish that price hasn't been able to break the downtrend line but it's bullish in that it hasn't dropped sharply away from it. The trend line currently sits near 918 so a break above it would be bullish. Until that happens we have to respect the possibility for a larger downside move (dark red). The pink wave count calls for a pullback to correct the March-June rally and then another leg up to complete a larger 3-wave correction to the October 2007-March 2009 decline.

S&P 500, SPX, Weekly chart

The daily chart shows better how price has been chopping its way lower underneath its downtrend line from May 2008. The overlapping price structure is what maintains the possibility that the pullback from June is simply a correction of the rally and not the start of something bigger to the downside. The tough part about corrections is that they can morph into larger corrections and it's tough to figure out where they could end. An impulsive 5-wave move is easy--once 5 waves completes you know there's a reversal coming. So I continue to struggle with the wave count in the pullback and can only show key levels where the bullish vs. the bearish price projection moves up to top slot.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 920
- bearish below 905

Bullishly it rallied back above the H&S neckline that is drawn horizontally on the chart near 875, instead of an upward slant that's drawn across the bottoms of the two shoulders (shown on the 120-min chart below). But the current bounce may form the right shoulder. You can see how inaccurate these things can be. Plus the fact that there are too many people watching this pattern. This is a pattern being reported by anyone who understands what a chart is telling them and when everyone sees the same thing you can bet it's not going to work.

The downtrend line from May 2008 is obviously being respected by traders and therefore a move above it would be bullish. Until that happens, and watch MACD and RSI for confirmation (above the zero line and above 52, respectively), we have a weak market that's getting weaker as the green-shoot theory is proven wrong. But price is king and if that downtrend line breaks then you follow price and not your opinion.

Moving in a little closer to look at the parallel down-channel since the June high, today's rally took SPX up to the 50% retracement of the decline from July 1st, the last time it touched the downtrend line from May 2008. The bounce off last Wednesday's low is a 3-wave move so far and as such is just a correction to the decline. A drop below 875 would leave it a correction and it would be a bearish signal.

S&P 500, SPX, 120-min chart

The DOW's weekly chart shows price sliding lower like SPX but this time on top of a parallel down-channel from May 2008 that it broke above in June. The long-term uptrend line from 1987-1994 is near 8000 and that could offer support if it drops down to that level. A break down back inside the channel would be bearish. I show a large a-b-c bounce off the March low, in dark red, for the correction to the 2007-2009 decline, getting the DOW perhaps back up to the 10,000 mark. That's just a guess at this time but I see the potential for that if it doesn't start breaking down harder in the next month.

Dow Industrials, INDU, Weekly chart
The daily chart shows a downtrend line from the June high, along with the 50-dma and 200-dma, and you can see there's lots of resistance between today's closing price of 8331 and 8462. If the bulls can manage to punch the DOW up above 8475 I'd say we have a bullish market on our hands. But until that happens, if you like playing the short side and see a good setup I'd be looking for a shorting opportunity for another leg down.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 8475
- bearish below 8085

The weekly chart of NDX has been shown a few times and it's the one chart that has me thinking we could see a rally from here to a new high in early August to put the finishing touches on a rising wedge pattern from the March low. I've been curious to see if a turning window for this week would work out but it will be only a minor low or high if it does.

Nasdaq-100, NDX, Weekly chart

If the price plays out as shown in pink on the chart, to complete the rising wedge pattern it would be very bearish longer-term. It would first call for a fast retracement of the whole thing and that would mean back to the March lows. Second, the wave count for the move down from October 2007 would call for another leg down of equal size. In other words another decline from wherever the current rally ends to equal the 2007-2009 decline. Bulls really don't want to see the market rally from here as depicted in pink. Bears will be licking their chops for the setup from there.

The dark red price path also shows a move down to a new low (or test of the low) as part of the decline from October. From there we would get the bigger correction to the decline. Instead of down to a new low we could get a deeper retracement and then another rally leg, similar to what I showed for the DOW and SPX.

The daily chart shows the 3-wave pullback from June which leaves it as a correction so far. It could turn right back down, shown in dark red, as part of a larger correction (a break below 1395 would confirm that) but a continuation of the rally, shown in pink, is the one that would worry me big time if I were a longer-term oriented bull. Above 1475 would have me looking for a run up to the 1620 area.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 1475
- bearish below 1395

Just for a little short-term perspective thrown in tonight, the reason I started to feel a little more bearish by today's close is because of what I saw as ending patterns to today's rally. The 10-min chart shows a small rising wedge pattern and might get a quick pop higher in the morning but if the bearish wedge pattern is the correct pattern here, it will quickly be followed by selling. Since the bounce off last Wednesday's low is only a 3-wave move so far (labeled A-B-C on the chart), a drop below this morning's low would signal new lows ahead.

Nasdaq-100, NDX, 10-min chart

The weekly chart of the RUT is a combination of the one for the DOW and SPX--the pullback is right on top of its down-channel. I see the potential for slightly lower and then another leg up as part of a larger a-b-c bounce off the March low or a drop over the next couple of months to a new low or test of the low.

Russell-2000, RUT, Weekly chart

The January high of 519 was resistance for the July 1st high so that's the level for the bulls to break. Like the others, the pattern for the decline from June is choppy and leaves open several possibilities for how deep it could go (or it could be finished pulling back). Play your trades short term for the time being. The RUT continues to find support at its 200-dma and that's bullish if it holds.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 520
- bearish below 473

For an even longer view of interest rates, the following chart shows the 30-year yield since 1998 (the high in the parallel down-channel was 7.9% in 1994). It did a perfect tap of the bottom of the channel in November 2008 at 2.5% and I expect it to soon rally up to the top of the channel near 5%. From there we should see a pullback into early next year before continuing its rally well into 2012 and beyond (when inflation becomes much more of a problem).

30-year Yield, TYX, Monthly chart

The ETF for Treasuries, TLT, shows price is in a resistance zone between about 95.50 and 98.00. It's trying to recapture its broken uptrend line from June 2007 and will obviously be bearish if it falls back down. Above 98 though would be bullish and that would mean lower yields. But I think it will test the June 2007 low before bouncing into 2010 before heading lower again.

20+ Year Treasury ETF, TLT, Weekly chart

Since the banks got most of the attention today it certainly pays to take a look at the chart of BIX, starting with its weekly view. The consolidation near the May high looks bullish and weekly MACD holding above the zero line looks bullish. All the bulls have to do is break that downtrend line from September 2007 and then its 50-week moving average (currently near 124). If the BIX gets above 125 then I'll start to feel a little more bullish about this chart. But until then, shorting resistance is not a bad idea.

Banking index, BIX, Weekly chart

Looking a little closer at the consolidation since the May high (I mentioned last week that so far it's been bearish that it hasn't been able to exceed its May high while the broader market did), we see it attempting to break above the top of its down-channel. It also closed at its 50-dma. The 200-dma is not far above, near 113 and then the downtrend line from September 2007 is just above that. The 50-dma held down the last bounce into the June 30th high. So the bulls have a big fight ahead of them with the bears who, unlike the converted Meredith Whitney, feel the banks are about to deal with round two in bad loan write-downs.

Banking index, BIX, Daily chart

A longer-term view of the home builders, since their high back in 2005 shows price has stayed within a parallel down-channel and I don't think it's ready to break out yet. It should have one more new low this year to finish the leg down from 2005. The bullish divergence on MACD shows the waning selling momentum, which is not surprising considering how far it has dropped. The big question is whether this index portends the future for housing prices and the stock market. If past history repeats...

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

There's been a lot of anticipation of high inflation due to the huge amount of money printing the Fed has been doing. The only trouble is that money is being destroyed (through the credit collapse) faster than the Fed is creating it with their printing presses running 24/7 and extra helicopters hired to drop it on the banks (who aren't lending). It's estimated that over $14T has been lost so far and the Fed has created $2T. When a credit contraction (defaults, less borrowing, more saving) removes money from the system faster than it can be created we have a deflationary environment. I think inflation will be a huge problem in a couple of years but not yet.

Deflation will depress the prices of all assets, commodities included. So the commodity equity index is important to watch in this regard. After a price collapse from the 2008 high we've seen a 3-wave bounce correct the decline. If the deflationary force is to rear its ugly head we will see a further collapse in prices and that's what I'm showing on its weekly chart.

Commodity Related index, CRX, Weekly chart

I keep talking about the need for gold to get another leg down before I'll be interested in buying it and the weekly chart shows the large A-B-C correction I'm expecting to see. It calls for a drop down to perhaps the 644 level later this year to tag to the bottom of a parallel down-channel and the 50% retracement of the 2001-2008 rally. I think that would present a "golden" buying opportunity.

Gold continuous contract, GC, Weekly chart

If oil follows the same path, which is currently different than the others so I'm not as sure about that, we'll see another leg down in oil prices as well. Currently price is holding its uptrend line from February but if that breaks we could see more selling and a break of its longer-term 1998-2002 uptrend line where it found support in January and February of this year.

Oil continuous contract, CL, Weekly chart

There were no major economic reports to speak of for today but tomorrow will be a little busier with PPI and sales figures. If core PPI drops further into negative territory (called negative inflation, not deflation, buy our Fed) we could see a market reaction to that. Same thing if retail sales comes in disappointingly low. Otherwise we probably won't see much of a reaction to these reports.

Economic reports, summary and Key Trading Levels

In summary for where we are in this market, it is maintaining the potential to rally a little further if the bulls can follow through after today's rally. The reaction to Goldman Sachs' earnings should tell us plenty. There may have been a lot of expectations for the banks to show strong earnings and once they do there may not be much left after that. Most everyone knows the banks are increasing their earnings through hocus pocus and the alchemy of cooked books and make believe market values. The economy continues to slow and the green shoots of recovery are getting dirt kicked over them. So if "good" earnings are sold that will tell us volumes about what's probably next for the market.

But from a pure chart perspective I can see the distinct possibility for another rally leg into August. I happen to believe that would be a very bearish move considering what will likely happen next but we can worry about that setup if and when it arrives. Don't argue with the tape--if it acts bullish then so should you.

But to keep bulls on their toes and always checking their rear view mirrors, we're getting a plethora of signs that the economy, and financial system, are still in serious trouble. Lowry's newsletter publishes some very interesting data on buying and selling power and they recently published some alarming numbers. Their measurement of buying power recently fell below that which was seen at the March low. The significance of this is that it's a strong reason why we'll see the March lows taken out next, whether it's from here or a little higher first.

As Lowry's reports, "Since 1938... there have been no occasions when buying power has reached a new low subsequent to the final market bottom and the start of a new bull market.... There have been instances of tests of buying power lows, but these have accompanied pullbacks in price as, for example, in the test of the bear market low in buying power in 1970 which occurred in the course of a pullback that retraced 62% of the rally from the market low."

So unless it's different this time this statistic is telling us we haven't seen the market lows yet and they could very easily be seen later this year. We've recently had a few 90% down days (90% more selling than buying and selling combined) and that's indicative of distribution of stock, not accumulation. Throw this all into the mix and it begs the question when the market will head back down, not if.

So play the direction the market gives us but continue to play it very carefully. I would be more comfortable pressing my bets to the downside but until I see us in breakdown mode, which I haven't seen yet, I am also quick to trail my stops and take profits often (or losses if the market flips right around and goes against me). I'd rather take a bunch of little wins (and losses) until the longer-term direction becomes clearer and that's my only suggestion at the moment.

Opex may continue to exacerbate any early volatility in the morning around Goldie's earnings so let the dust settle before you throw your hat into the ring. I find opex week to be a tough week to trade and usually wait until the end of the week before I decide which direction I want to trade for the next couple of weeks (such as credit spread positions). Hopefully we'll see one of the key levels broken before Friday arrives so that we have a little better clue than at the moment as to which direction that will be.

Good luck this week and I'll be back with you Thursday of next week.

Key Levels for SPX:
- bullish above 920
- bearish below 905

Key Levels for DOW:
- bullish above 8475
- bearish below 8085

Key Levels for NDX:
- bullish above 1475
- bearish below 1395

Key Levels for RUT:
- bullish above 520
- bearish below 473

Keene H. Little, CMT