Market Stats

For more than a week the markets have been glued to every sound bite coming out of Europe and what the plan is for saving Greece. Trichet cancels a meeting and plans to attend a different one about Greece. Let's rally! Merkel says "go pack sand". Let's sell! Today we heard there definitely a plan but it's not much more than "we're from the government and we're here to help". The euro and the dollar have been ping ponging up and down on the same rumor mills. You would think Greece, or more importantly the saving of Greece, holds the key to all that ails us.

I don't need to tell you again what's happening in Greece and the fret of financial collapse in that country. It's only a small country and therefore one would think it will not have much of an impact on the rest of the world. But you're also well aware that the problem is much bigger than Greece and in fact the European Union to a larger extent hinges on what happens with the PIIGS and their enormous levels of debt.

The problem of course is much bigger than any one, two or ten countries. Greece is not the problem and certainly not the source of the problem. Instead they are merely symptoms of the problem. The market is smart enough now to have figured out that a problem with Greece will not be "contained". We were assured in 2007 and 2008 that the problems with subprime mortgages and then Bear Stearns would be contained and that the market needn't worry itself over such small problems. Greece, by itself, is a small problem. The bigger problem is the one it's representing.

I often talk about the stock market being a very good reflector of social mood and that bear markets are caused by a negative shift in social mood. Herd behavior shifts from optimism and excessive risk taking to pessimism and the shunning of risk. The latter causes people to shrink their debt by spending less and saving more and as groups of people we become more protective of what we have. This creates social strife, acrimony and we become downright feisty.

The public unions in Greece have already started their strikes against any government efforts to take away benefits and pay. They simply don't care (or trust) what the government says or needs to do. And any sense that it's due to outside "influence" will only magnify the anger of the Greek people. They'll strike for the benefit of their own members without regard for the greater good.

We saw the same behavior in unions in this country fighting corporations which needed to make cuts in order to survive. It seemed at times the union was happier with the thought that it would be better for the company to fold and everyone lose their jobs rather than have benefits cut for all their members. It becomes a matter of principle not to let the company/government take away anything or else they'll keep taking.

Greece is in the same position now--the country could go bankrupt and nearly all services will have to be cut because outsiders will step in and tell the government what has to be done if they wish to get any money. This will create enormous social pressure and violence. And it won't be "contained" to Greece. All of the other countries that have similar debt problems, including the U.S., will have to deal with an angry populace. The big difference for the U.S. is that we can print more money without as much of a negative impact (hyperinflation) because the dollar is the world's reserve currency and people keep buying up our debt. Woe be the day that stops. Even for the U.S., continuing to print more money will have negative consequences but that problem can is kicked further down the street before having to worry about picking it up.

We also have states (CA, IL and others) that, like the PIIGS, have significant debt problems and an inability to simply create more money. The states must balance their budgets or keep borrowing more at higher and higher interest rates if their debt gets downgraded. I understand there are already 13 states entertaining the idea of secession. Think about that for a moment. Regardless of whether those states have a snowball's chance in hell of seceding from the union, the mere fact that they're considering it is a real eye opener to the difficulties ahead. Anger and frustration, along with isolationist tendencies is just under the surface. And this is following one of the strongest bull market rallies the market has ever seen!

The individual countries in the European Union do not have nearly the same bond to their Union as the states do to the U.S. We're talking about huge differences in people, languages and interests. It doesn't take an enormous amount of imagination to think about how easily it could become "every country for itself" as financial matters heat up and discontent flares up into anger and even geopolitical conflict. Fighting someone else has always been a good way for governments to direct anger outward instead of inward. It's why depressions most often lead to war.

So is Greece a small problem? Clearly yes and no. Will the saving of Greece mean everything's back to normal and we can get on with the bull market? Absolutely not. Again, Greece is a symptom of the problem, not THE problem. Globally we are overloaded with debt and only through pain will we relieve ourselves of that debt, much of it through default (money heaven). The European countries are some of the most vulnerable right now and that's where we'll probably see the first major crack in the dam develop. The central banks have done an excellent job in plugging the leaks but they've used up their wads of gum and have run out of fingers. The market has one more finger for them.

As we saw in 2008, when the market frantically rallied each time we heard a rumor about the Fed coming to the rescue or this or that bank being saved, the rallies were prime times to sell into them. I expect this year will see similar rumors, saves, market rallies and then further selloffs. In other words, sell the news related rallies, including the current one.

The bounce off last Friday's low has chewed up more time than price so there hasn't been much of a change to the weekly charts from last week. As can be seen on the SPX weekly chart below, last week's candle was a doji and this week's candle so far is only a small white candle. I changed the wave count slightly and that has the 1st wave down on the weekly chart pointing to a test of the July low near 870 by the end of March, followed by a bounce into May and then hard down into July. That's obviously just a guess at this time, which is based on my expectation for a strong impulsive decline this year as the bear market resumes its downward pressure. This will clearly be updated along the way once the price pattern develops further.

S&P 500, SPX, Weekly chart

I had been counting the low on January 29th as the end of a 1st wave down from the January high and then last Friday's low would be the 1st wave down of wave 3. That would mean this week's bounce is setting up a very strong 3rd of a 3rd wave down. But I don't like that interpretation any more for a couple of reasons. One, the semiconductor index, and even NDX, doesn't support that count; two, this week's bounce has become larger than the bounce off the January 29th low and that doesn't "smell" right (I always insist on a wave count passing the smell test in following rules and guidelines). So instead I'm counting last Friday's low the completion of the 1st wave down from the January high and this week's bounce is the 2nd wave correction. That wave count still calls for a 3rd wave down but not necessarily as strong as the previous count.

That's a long-winded way of saying I continue to look for strong selling once this week's bounce is finished.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1100
- bearish below 1044

Ideally we'll get a little higher bounce Friday morning and that should be a good setup for a reversal back down through next week and into the end of the month. Therefore, look at a rally tomorrow as an opportunity to get short for next week. But one thing to keep in mind, especially since next week is opex, is that the market could be held up longer. I'll discuss this a little more with the SOX chart later.

Are you ready for a new trading system? I introduced on the Market Monitor this week a brand new trading system that some of you might like. Usually, once a black box trading system has been developed it stops working. More people make money off their black-box sales than people make by using them. So always beware of snake oil salesmen selling you the latest and greatest black box trading software for "only" $4999 because you're such a special person. So, with tongue firmly planted in cheek, I'm offering to you, because you're such a special person, my new black-box trading system and because you're so special you get it for free. I'm calling it the MPTS:

Moon Phase Trading System, S&P 500 Daily chart

I've placed on the chart the location of each occurrence of the new moon and full moon for the past year's rally. It is rather uncanny how the market turns have been around these moon phases. The next moon phase of interest is the new moon on Sunday, February 14th (which happens to be Valentine's Day as well). Monday the 15th is a market holiday. Therefore, there is the potential for a market turn on Friday-Tuesday and as depicted on my MPTS chart, I'm looking for a hard reversal back down and a low near 950 by March 1st, the next full moon.

Basically what the MPTS tells you to do is to fade the current direction of the market heading into a new or full moon. In all seriousness, I would not want to trade the market based on the moon phases, or planetary alignments, but nor do I discount the effects of the solar system on our collective social moods. While I have no way to explain these effects, people like Archie Crawford have had a high success rate trading the market off these kinds of signals. And when I tie in my more "normal" technical tools, such as Fibs, trend lines and EW (Elliott Wave) analysis, I come up with a move down that ties in well with the moon phases.

The 60-min chart below shows this week's bounce is very choppy and looks very corrective, which supports the idea that it will be followed by more selling. The pattern looks like a bear flag and the top of the flag on Friday will be near the 1092 area. However, there are some lower Fib projections for the rally that could have SPX struggling with 1085 and then 1090 above that. Of course the lows of the November-December consolidation near 1085 is another reason that level could be tough to crack. All those traders who kept buying support and are now underwater are going to be looking at a rally back up to 1085 as a thank-you-God-for-letting-me-out trade.

S&P 500, SPX, 60-min chart

All of the indexes look in synch so the DOW's daily chart has the same downside projection once this week's bounce completes, which it looks like it should on Friday. The first downside projection is down to June's high near 8878 by the end of the month, followed by a bounce into mid month and then a continuation lower to test the July low by the end of March.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 10400
- bearish below 9835

Like the others, it looks like NDX has at least a little higher to go before completing its upside pattern. But notice on the chart below where it stopped today--at its broken uptrend line from August-November and its 2000-2007 downtrend line (log scale). It's also just shy of its 38% retracement of the January decline, near 1783, and its 62% retracement of the 2007-2009 decline, near 1781. So today's high of 1780 is right in that nest of resistance. If it manages to break through 1783 on a closing basis (I see some upside potential on an intraday basis, shown on the 60-min chart below the daily chart) we could see it head for 1805 (50% retracement of the January decline) and 1818 (50-dma). But right now I'd be looking to short NDX at resistance (.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 1820
- bearish below 1712

A little closer view of NDX with the 60-min chart below shows an upside target near 1794 that I think it has a good chance of achieving at least on an intraday basis. That's where the a-b-c bounce off last Friday's low would achieve two equal legs up. If it manages a bounce up to that level and looks to be topping out, that's where I'd try a short entry and hold it into next week.

Nasdaq-100, NDX, 60-min chart

The semiconductor index, shown below, has a clean wave count to the downside from its January high and that's what started me leaning towards expecting a bigger bounce this week, which we've now got. As shown on the chart, the 5-wave move down counts well as the completion of a larger degree 1st wave down and this week's bounce is the 2nd wave correction. The bounce could easily become larger and take up more time by holding up or rallying higher into next week. So that's the risk for anyone trying to play the short side tomorrow, especially with February put options. Right now I'm showing a projection at 334.78 where the a-b-c bounce off last Friday's low would achieve two equal legs up.

Semiconductor index, SOX, 60-min chart

If the 3-wave bounce is only going to be a larger degree wave A, of a larger A-B-C bounce for the 2nd wave correction then a pullback next week will be followed by another rally leg to complete a larger correction to the January decline. That would put off the next large selloff but only by about a week, just long enough to hold the market up through opex. Remain aware of that potential.

The significance of the impulsive 5-wave decline from the January high is that it will not stand alone. Once the current bounce finishes, be it this Friday or next Friday, it will be followed by another leg down to equal the first leg down or exceed it. Therefore do not get sucked into believing any hype that the pullback correction is over and happy days are here again, especially if the hype is news related around saving Greece.

Different symbol, same pattern for the RUT. We could see a little higher bounce on Friday but the setup is for a stronger selloff next week (or the week after). I don't think the RUT will be able to make it back up to its broken 50-dma but if it does then it should make for a good setup to watch for a short play to set up there, currently near 617. I think it could struggle with the 610 area if reached.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 617
- bearish below 580

The financial sector looks weak. XLF broke support at both 14 and 13.75, which were the previous lows during its sideways price action since August, and has been bouncing around these levels for the past week. The wave count for the move down from the January high is a very bearish 1-2, 1-2 and looking for a strong 3rd of a 3rd wave down into the end of the month. It could bounce a little higher first but it's not required. The pattern of the bounce from last Friday's low looks very corrective and is pointing to a breakdown right around the corner. Follow the money if the banks start breaking down.

Financial Sector SPDR, XLF, Daily chart

In addition to price-level resistance near 14 for XLF the weekly 50-ema is at 14.24, which will probably hold down any further bounce. This moving average had supported XLF since August but was then broken at the end of January and may act as resistance now. But bullishly, XLF is trying to find support at its broken downtrend line from October 2007-September 2008 (log scale). A successful back test could lead to another rally (possible even if not probable). This makes last Friday's low near 13.50 all the more important for the bulls to hold.

Financial Sector SPDR, XLF, Weekly chart

If the transports manage to bounce a little higher then TRAN will run into resistance at its 38% retracement of the decline from the January high, at 3942, and its downtrend line from May-September 2008, near 3960. If the rally manages to proceed higher next week then the upside target becomes 4000-4070. Otherwise it's going to be a good setup for another leg down.

Transportation Index, TRAN, Daily chart

The Euro and U.S. dollar have been bouncing up and down with the latest non-news and non-plans (we-have-one-but-we're-not-telling-you plan) for Greece. The big fear of course is whether or not the Euro will be able to withstand its first crisis and some believe that it will not. Fear of a collapse in the Euro is what will create a spike in the dollar as money rushes from one to the other. The wave count for the dollar's rally off the November low supports the idea that a big rally is coming, if not immediately then sometime in March/April and running strong into the summer.

U.S. Dollar contract, DX, Daily chart

There are many dollar bears still out there, utterly convinced that the dollar can't rally. The argument against the dollar has to do with the Fed's QE (Quantitative Easing) program, which it's still actively continuing. With the massive printing of dollars to fund our massive debt, the dollar bears (and gold bulls) argue that it can't possibly be bullish for the dollar. Too many dollars decreases their value--it's economics 101 and everybody knows that. But therein lies the rub--if everyone knows that, is there a chance the market is set up to prove them wrong?

If we were talking about just dollars in just the U.S. then of course the Fed's QE program would be highly inflationary and decrease the value of the dollar. Holding dollar-based assets would be crazy. But we don't live in an isolated bubble. The global financial structure will have a greater impact on the dollar and the rest of the world is turning to manure faster than the U.S. When Europe's manure hits the rotary oscillator people will abandon the Euro in droves and rush to the perceived safety of the dollar (and perception is reality), which will of course spike its value. That's what the EW pattern is pointing to as well--a strong rally is coming.

And if the dollar starts to rally strong, all the dollar bears who are short the dollar and long other assets, will need to start covering their carry trades. This would add fuel to the buying frenzy in the dollar which in turn would trigger more buy stops in the dollar. The negative consequence for other asset classes can't be overemphasized. A strong dollar rally and a covering of short trades in the dollar will necessitate a selling of the assets that the carry traders bought with the borrowed dollars. It's part of why I believe the next leg down will be just like we saw in 2008--all asset classes will sell off together and there will once again be nowhere to hide.

Heading into 2008 we kept hearing about how people will run into the safety of gold. We heard that oil will be a good investment because of peak supply. And then when oil started crashing it was supposed to be good for the economy and stocks. None of turned out to be true. The dollar rallied and all other assets sold off. I think we'll see the same thing but potentially even stronger moves than we saw in 2008. At least that's the potential setup.

Looking at gold's pattern, I do in fact see the potential for a strong selloff. The decline from December can be counted as a very bearish setup that calls for a strong "unwinding" of the wave count--3 different degrees of the pattern are calling for a 3rd wave down, so a 3rd of a 3rd of a 3rd wave down is due next. That calls for a very strong decline followed by stair-stepping lower. In other words we could be on the verge of relentless selling in gold over the next couple of months.

Gold continuous contract, GC, Daily chart

In order for this very bearish wave count on gold to be negated the bulls must drive it back above the series of lower highs, the last one being near 1126. In order to do that, we need to see gold above its downtrend line from December, currently near 1104, and then above its 50-dma near 1116. You can see what happened the last time gold tested its downtrend line and 50-dma near 1126. The bounce off the February 5th low looks choppy and corrective, which also points to a higher probability that the bounce will fail. This is an outstanding shorting opportunity with a stop just above the downtrend line or 50-dma. If the wave count is correct you stand to make a lot of money quickly with the next leg down. You can play the emini futures (YG), GLD puts or GLL (inverse ETF) calls. Silver should also be a good trade (YI, SLV puts or ZSL calls).

The wave count for oil is not quite as bearish as gold's but nearly so. The wave count is set up for a steep decline in a 3rd of a 3rd wave down. It has rallied up to potential resistance at its broken uptrend line from February 2009 and its 50-dma. The bearish wave count would be negated with a rally above its previous high at 78.04. It's currently a battle between support at its 200-dma and resistance at its 50-dma.

Oil continuous contract, CL, Daily chart

There are no major market-moving economic reports Friday morning. The retail sales numbers and business inventories could give the market a little nudge one direction or the other but I don't think it will pay much attention.

Economic reports, summary and Key Trading Levels

The Thursday prior to opex has been called "misdirection day" and "head-fake day" by many because for a while it was common to see the market get slammed in one direction, often in the morning, and then reversed hard into opex. Generally it was a spike to the downside so that big money could load up on cheap front-month call options and sell deep ITM puts. Then they'd rake in the money into opex. We've also tended to have bullish opex weeks so that all the sold puts during the month can expire worthless into the trading desks' accounts. But lately that hasn't been working like it used to. Typical--once a pattern is identified and more people starting gaming it, it stops working.

So we're left guessing as to whether or not today was a head-fake day and whether that means we can expect a decline during opex. While opex tends to be bullish, it's equally possible that big money (the big trading desks) know full well that people lean bullish into opex. What better way to collect a whole lot of premium than to take the other side of that trade? If today's rally, and maybe a little more tomorrow, was "helped" along so that these trading desks could pick up cheap front-month puts and sell deep ITM calls, a strong down week next week would once again allow these desks to mop up.

I've mentioned before that bearish opex weeks tend to be very bearish. They're generally bullish even if it's just a mildly bullish sideways/up market. That remains a distinct possibility as I mentioned earlier, where a correction to the January decline could go on a little longer and a little higher. That's the risk if you try shorting the market here.

But I've noticed that when the market turns down during opex there seems to be a lot of scrambling to get positions hedged in front of opex. This generally means buying puts (to cover short puts or hedge long positions) or shorting stock (to hedge short puts or sell positions). Both actions create additional downside pressure on the market which only feeds the selling pressure. That's the setup I see for next week so be careful if you're one of the traders looking for the market to hold up into opex so that your options positions do well.

In summary, I think the market is in danger of a hard decline next week, one that could take the market significantly lower into the end of the month and ultimately much lower into the end of March. That's the setup, not a guarantee. Any additional rally above today's high should be viewed as a shorting opportunity on Friday, one that you'll want to hold over the long weekend (Monday is a trading holiday). That means buy yourself some extra time--no earlier than March and preferably April.

If the market holds up or pushes a little higher next week, especially if it continues to chop its way higher (in a bear flag pattern), it will be an even better setup to get short the market. It's a good setup now to try to get short and if the market does not start down in earnest next week you can then get out and wait for a slightly higher entry point. We'll obviously know better by next Thursday how it's doing.

I hope everyone has a very good long weekend away from the markets and comes back refreshed and ready to do battle. Good luck during the upcoming opex week and I'll be back with you next Thursday.

Key Levels for SPX:
- cautiously bullish above 1100
- bearish below 1044

Key Levels for DOW:
- cautiously bullish above 10400
- bearish below 9835

Key Levels for NDX:
- cautiously bullish above 1820
- bearish below 1712

Key Levels for RUT:
- cautiously bullish above 617
- bearish below 580

Keene H. Little, CMT