Market Stats

You would have thought the bears dropped down into the fields and started mauling defenseless calves today. The squealing of the calves had the poppa bulls charging after the bears to protect their young and the bears scurried back up the hill into the trees. Today's sharp rally off the morning low proved yet again the dip-buying strategy is the winning one. Complacency about that will one day bite big time but so far it's a winner.

Not a lot of points were added to the board today but that's not what counts. It's the fact that losses have been limited to so little. Buyers are so sure this market can't decline that they're getting giddy with call buying. VIX took a spike up yesterday and this morning but quickly collapsed back down near the week's low, which is in complacently low territory, where previous market highs have been made. Call buyers are swamping put buyers so there seems to be a high expectation for another bullish opex week. Today's ISEE call/put reading was 160 and as I had mentioned in the weekend wrap, with the chart showing the trend higher in this number, readings over 150 warn of an impending top in the market.

Based on the price patterns and some other things I'm looking at I think there's a good possibility we'll see the rally continue at least into the early part of next week, if not the whole week, so the call buyers could come out winners again. Opex weeks tend to be bullish and so far it's setting up that way again.

But with bullish sentiment running at an extreme I think it's important to remember that this market is one major news item away from a downside break. Without a lot of shorts in the market to help cushion any selling (by being buyers of last resort at support levels) we could see selling get out of hand quickly. So as I'll show in the charts, the trend is your friend but this friend is starting to grow fangs and is getting thirsty. Don't turn your back on him.

Today's winning sector was retail, thanks to strong same-store sales data that was stronger than even the past three months (although it's recognized that an early Easter probably skewed the results to the positive side for March and will hurt April). The other winning sectors included the banks/brokers, cyclical and some energy indexes. Trailing today were the semiconductors, healthcare/drugs and utilities. Tonight I'm going to cover the utilities as a comparison to the other indexes and the fact that it was lower today will fit my discussion about them.

I've got a number of charts to review tonight and a discussion about the bond market a little later so I'm going to jump right into it. For tonight's wrap I want to start with the granddaddy of the indexes, the Wilshire 5000. As a measure of all stocks it should be the best reflector of stock market sentiment and this week it reached a potentially important level. Therefore it will be important to watch price action in this index over the next week or so.

Starting with its weekly chart, I'm showing a wave count for the rally from March 2009 that makes the most sense to me right now. It can't be considered an impulsive move up because of the overlapping highs and lows within the move up, especially in the latter half of 2009. It counts better as a corrective count and that's what's keeps me leaning towards the idea that we will get a complete retracement of the corrective rally (meaning new lows below the March 2009 low).

Wilshire 5000, DWC, Weekly chart

The wave count is called a triple zigzag and is labeled as w-x-y-x-z where the w, y and z waves are essentially a-b-c moves or something a little more complex. There are no quadruple zigzags and therefore the conclusion of the current move should be the last for the bounce off the March 2009 low. That gets a check in the bearish column since the conclusion of the leg up from February will be the conclusion of the rally from March 2009. There should be Fibonacci relationships between the waves and that's what I'm showing on the chart. Wave-z, the move up from November, is 62% of wave-w (the March-June 2009 leg up) at 12407. Tuesday's high near 12420. So it gets two checks in the bearish column.

Next, DWC has a 62% retracement of the 2007-2009 decline at 12437. Tuesday's high was 17 points (0.1%) shy of the target. Close enough for government work. Three checks in the bear's column. The 200-week moving average is at 12422. The 200-wma stopped the bounce back in August 2008 (which then led to the crash leg lower) after it was broken in June 2008. Again, the high of 12420 was close enough so four checks in the bear's column. Tuesday's high also tagged the trend line along the highs from October-January, which looks to be the top of a rising wedge pattern. Check #5. RSI has bounced back up to its broken uptrend line, a common occurrence at the final price high. Check #6. So far the only check in the bull's column, which is a big one, is that the market is clearly in an uptrend.

Wilshire 5000, DWC, Daily chart

Another interesting weekly chart is for the other big index, the NYSE. I show the same triple zigzag wave count for its rally from March 2009 and this time there's a price relationship between wave-w and waves y through z--they're both equal at 7602 and Tuesday's high was 7616. So far the weekly candle is a doji right at its downtrend line from October 2007. A red candle next week is needed to confirm the doji as a reversal pattern and not just indecision before pressing higher again.

NYSE Composite, NYA, Weekly chart

A little closer view of the NYSE shows it found support today at its January and March highs near 7480. Today's candle is a bullish hammer at that support level and it held its uptrend line from February, as well as its downtrend line from October 2007. This chart gives me the feeling we could see a rally into next week, shown with the dashed line. Bears need to see a break below 7420 to indicate we've got at least a larger pullback correction in progress. Otherwise the bulls still own this chart.

NYSE Composite, NYA, Daily chart

The SPX weekly chart shows a little more upside potential when looking at the top of its rising wedge, 200-wma and the 62% retracement of the 2007-2009 decline. With those three things lining up in the 1210-1230 area next week it gives us a tight target zone for a continuation higher into opex week.

S&P 500, SPX, Weekly chart

The interesting thing about moving higher into next week is that it would also give us a 9 on the TD Sequential weekly count, a number commonly followed by a reversal. The daily TD count would achieve 9 on Monday so stay alert to the possibility we'll get a high on Monday and that's it.

Before SPX can get up to that higher zone it will meet potential resistance at the Gann level of 1204 (discussed in last weekend's wrap), a trend line along the highs from October-January near 1201 and a Fib projection for the final 5th wave of the leg up from February that's near 1208. So we've got a lower target zone of about 1201-1208. As mentioned for the Wilshire 5000, a break of this morning's low near 1175 would be a strong indication we've seen the high. Below the March 31st low at 1165.77 would be better confirmation and then below 1150 would be the green light to start looking for bounces to short.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1180
- bearish below 1150

Today's rally off the low can be counted as an impulsive 5-wave move. That suggests a pullback into Friday morning and then a continuation higher at least into mid week. The fact that SPX was able to climb back above its broken uptrend line from February is a bullish sign as well. So look for a pullback in the morning as a day-trading opportunity on the long side. I say day trading because I would not want to carry long positions overnight. It's becoming too risky for that. If any selling takes SPX below today's low near 1175 it would be a strong indication the high is already in place, in which case the pattern would call for some strong selling tomorrow instead of a rally.

S&P 500, SPX, 60-min chart

The DOW has been relatively weak and may be one of the first to break below its March 31st low, near 10833. That would be a heads up that a high is in place. If the others were to proceed to new highs without the DOW, which is something we've seen at previous major highs, it would be the kind of intermarket divergence that's never a good sign at tops (but is a positive sign at market bottoms). Back below the January high near 10730 and then eventually below the uptrend line from March 2009 through the February low, currently near 10630, is what the bears need to see. The trend is still up and the dipsters (buyers of the dips) continue to win the battle with the bears. So this game is for the bulls to lose. A continuation higher into opex could see the DOW pressing up towards the 11100 area.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 11000
- bearish below 10730

The Nasdaq is firmly within its up-channel from February and therefore there's nothing bearish about its chart. This morning's low found support at its uptrend line and therefore, until proven otherwise, it looks like the rally should continue into next week. An upside target, based on some projections, is near 2500.But the trend line along the highs from September-January, near 2458, could hold price down as it forms a small rising wedge pattern from March 31st and then break lower.

Nasdaq Composite, COMPQ, Daily chart

Key Levels for COMPQ:
- cautiously bullish above 2432
- bearish below 2383

The wave count for Nasdaq's move up from February shows it too is in its 5th wave and as such traders need to be cautious about the long side. The 5th wave could end suddenly at any time now and reverse on a dime. A break of its uptrend line should therefore be taken seriously and trail your stops up below it. This morning's low at 2413.74 is now important for the bulls to defend.

The semiconductor index stayed weak all day today. It bounced off this morning's low as well but it formed a relatively shallow pattern that looks more like a bear flag. This morning's low broke its uptrend line from February but by the close it was able to close on the trend line so it saved itself from a closing break. If it can continue rallying into next week we could see another run to the top of its rising wedge pattern, maybe even up to 390 by the end of the week. But as with the others, a break of this morning's low at 368.29 would be a confirmed break down.

Semiconductor index, SOX, Daily chart

The RUT hasn't done anything wrong yet and still looks good for a run higher into opex. Upside projections near 710 and then 730 continue to look good for now. The upper target, where the 5th wave of the move up from February would equal the 1st wave, matches up with the top of its parallel up-channel for price action since February and the trend line along the highs since November-January, all crossing next Wednesday, April 14th. That would be a very interesting setup if it gets there and looks ready to roll over. But with the seriously bearish divergence on the chart I have my doubts it can rally that much more. But it takes a break below 677 to say the bears have wrestled the ball away from the bulls.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 690
- bearish below 677

The chart patterns on the bonds point to the possibility that yields are very close to breaking major resistance and that a break higher could result in an acceleration higher. That would put a lot of pressure on anyone needing to borrow money, such as our government. Most of us follow the stock market and give the bond market a cursory glance every once in a while. But considering the impact the bond market has on the rest of the markets I think now is an important time to learn more what's happening.

It can be complicated trying to understand the various bonds, interest rate swaps, derivatives, etc. but basically we're at a tipping point. I posted this article from Minyanville earlier in the week on the Market Monitor and wanted to include it in tonight's wrap because I think it does an excellent job explaining the wall we're about to hit: Hitting the Wall. Technicals and fundamentals are coming together that are warning us that things could soon change and have a significant impact on our economy and markets.

I've received questions lately about the bond market, what it means to us and what the Fed/Treasury role is in all this. I thought it might be a good opportunity to explain, briefly, why you should care about the bond market even if you've never bought one or care to in the future.

--I have never really understood the FED/treasury role. Can you explain what kind of purpose the treasuries have and what makes then different from bonds? I guess treasuries are basically short term bonds, right?
--Does the Fed issue treasuries so that they can do QE (so that they can buy government bonds)?
--Maybe all the toxic assets have been bought by the FED by now, so the banks won't have this easy money anymore available?
--Of course the banks can still borrow at 0% from the FED, no? So theoretically this QE could go on indefinitely?

U.S. Treasuries are used to fund the U.S. government's debt. Just as a company or a municipality will sell bonds to fund their relatively short-term needs, so too does the U.S. government need to sell bonds (Treasuries) to fund its operations. The Treasury Dept. sells the bonds but the Central Bank (the Federal Reserve Banking System, which are private banks, not government) attempts to influence lending activity through several policy methods. They can act as lender of last resort in the event of a national banking crisis, which of course we've been in since 2007.

The Fed is currently buying up toxic assets, including mortgages (they now own about 80% of the mortgages), from the major banks (the 12 banks making up the Federal Reserve Banking System) and that money is then used by the banks to theoretically lend to consumers and businesses. Since loan demand is way down (which is what happens in a period of credit contraction, as evidenced by yesterday's credit report which showed a surprising contraction), the banks have instead been leveraging up the money from the Fed to purchase other assets. These assets have included stocks, bonds and commodities (and a reason their trading desks have been the prime contributor over the past year to their enormous profits). The past year's stock market rally has been largely a result of this money from the Fed's QE (quantitative easing) program.

Therefore the cessation of mortgage purchases by the Fed, supposedly at the end of March, will dry up some of the supply of money coming into the stock market. BTW, when the Fed tries to unload all that mortgage paper back to the market it's going to put additional pressure on the home mortgage businesses because there will be too much paper out there. The Fed is going to have tie up their capital for a long time in this paper, much of which could shrivel and die as more and more people default on their mortgages. But that's for another discussion.

With the large banks of the Federal Reserve system buying up huge quantities of U.S. Treasuries it has kept up demand for them and that keeps the prices up and therefore yields down. This has been the primary goal of the Fed. While they care about the stock market and its influence on consumer and business sentiment, what the Fed really would like to control is the bond market. Through the sales of toxic assets and mortgages to the Fed, and borrowing money at virtually zero interest rates, the banks have been given a boat load of money to "invest" in U.S. Treasuries and thereby make an instant profit on that money received from the Fed (through the credit spread).

So the banks make a profit on the money from the Fed and the Fed stimulates demand for U.S. Treasuries so that the government's debt can be funded. While foreign countries have been buying fewer Treasuries, the banks (and retail buyers, primarily through bond funds) have become bigger buyers. And if that buying pressure lessens, because of less money from the Fed, then buying pressure for Treasuries will drop off, prices will drop and yields will rise.

The U.S. government still has demand for money to fuel its enormous debt and the only way to get their bonds sold, if the demand from the banks starts to weaken, will be to make the bonds more enticing to investors. Therefore the prices will have to drop in order to increase the yields. And an increase in Treasury yields will offer more competition to stocks and that will put pressure on stock prices. So you can see how the bond market, which is 10 times the size of the stock market, has a huge influence over the markets, and the Fed. The Fed will be forced by the bond market to follow them and we're currently sitting at an inflection point in the bond market.

So now we look at the chart of the 30-year yield to see what it's telling us. If you look at "price" action since the 1994 high you can see that yields have stayed inside a perfect parallel down-channel since that high of 7.91% and it's presently knocking on the door to be let out of the channel. A break above 4.85% would be a break of the 16-year down-channel. I've also drawn an inverse H&S pattern for a possible reversal pattern that has been built since 2007. The projection out of that pattern is up to 7.1%.

30-year-Yield, TYX, Weekly chart

If the 30-year were to get back above the psychologically important 5% it could have a lot of people rushing into the long bond for perceived safety of return as opposed to the stock market, which is at a historically low yield level (one of the indications we're not at the beginning stages of a longer-term bull market as many would like to believe).

But if bond rates do head back down and TYX drops below its September 2009 low at 3.89%, there's a good chance we'll see rates head to new lows, probably 2%. That would likely mean panic in the air about the stock market, like in 2008, as investors rush for the safety of Treasuries no matter what the return is. As long as TYX stays between 4.85% and 3.89% the bond market, and the stock market, should remain relatively calm.

The BKX bank index hit a potentially important level on Wednesday. After foiling a great bearish setup following its high on March 25th, which left some very bearish candlestick patterns, the pullback held the uptrend line from February 5th and pressed sharply higher on Monday and Tuesday. In so doing it actually did a nicer job completing the wave count for the rally from February.

KBW Bank index, BKX, Daily chart

BKX's high also tagged the Fib projection at 55.31 (Wednesday's high was 55.47 so close enough for government work, for we know they're active in the banks), where the 2nd leg of the move up from November achieved 162% of the 1st leg up. It also hit its trend line along the highs since May 2009 and did a throw-over above the trend line along the highs from January. At the same time RSI bounced back up for a retest of its broken uptrend line.

As of last night I was pounding the table about what a great short play setup it was. And then today it rallied right back up to test the high (but no new high, yet). This is an index that's going to try my patience. It now looks like it will rally at least marginally higher but I wouldn't trust it in the least. It's still a good finish for its rally so any drop back below this morning's low at 53.89 would be a strong sell signal. One of these days the setup for a reversal is going to work and it's going to work extremely well.

There's not much to add to the home builders index tonight. It's following the script so far of falling out of bed once its rising wedge pattern completed. I don't see any reason yet to change my expectation for a relatively fast decline back to the December low. The home builders should be a leading indicator for our economy and therefore the stock market.

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

The Transports pushed to a new high today and in so doing it tagged the price projection at 4461.14 for two equal legs up from November (today's high was 4461.61, for a 47-cent throw-over). We might see a pullback and another push higher but at this point its short term pattern is very choppy and therefore hard to decipher. As with the others, a drop below this morning's low at 4379 would indicate the top is in place. The new high is so far being met with a nasty negative divergence.

Transportation Index, TRAN, Daily chart

As I mentioned earlier, intermarket divergence is common at tops, and bottoms, and right now we have a divergence with the Utilities not keeping up with the Dow Joneses. It could be the Utes have been worried about higher interest rates because they are much more interest rate sensitive than other industries (they borrow a lot of money for their operations). In fact the underperformance of the Utilities is typically a predictor of higher rates to come (or vice versa). Looking at a comparison of the DOW, the Transports and the Utilities shows what to watch for:

DOW, TRAN and Utilities (UTY) indexes, Weekly charts

The first thing we see is that the DOW and TRAN are essentially mirroring each other so that's good. Dow Theory looks for divergence between the two to help determine when the market may be near a reversal point. So far we have no such signal. The DOW is a little weaker when you look at how much of their declines each has retraced.

Now compare both to the UTY and you can see the Utes have not been able to keep up since the low in February, or from March 2009 for that matter (retracing only a little more than 38%). So we've got negative intermarket divergence there and the last time that happened was the bounce into the May 2008 high where the DOW did not confirm the new high in the TRAN, nor did the UTY. I labeled the H&S pattern for the UTY's price action back in 2007-2008 and the break of its neckline led to the crash lower in 2008. Now we've got a smaller H&S top forming on UTY, the neckline of which is slightly above the January low. Keep an eye on the Utes as it was an excellent predictor last time and I suspect it will be again. And if they're predicting higher interest rates, which comes to pass with a move by TYX above 4.85%, the overall stock market will not be happy about it (because it will depress the economy further and prove to the market that the Fed is in fact powerless to stop it). So much to watch, so little time...

There's not much to add to the discussion on the dollar since the weekend wrap. The strong bounce last Friday has seen some follow through to the upside but what's not clear yet is whether that bounce will lead to more highs, depicted in bold green, or if instead it's part of a larger pullback correction, depicted in light dashed green. Let price lead the way--above 82.52 will be bullish whereas a drop below 80.52 will indicate we're in the early stages of a correction to the rally from November to March (which will then be followed by a stronger rally this summer. A stronger dollar will be tied to higher Treasury yields.

U.S. Dollar contract, DX, Daily chart

After gold pushed above the key level at 1136, indicating it is in a larger bounce pattern off the February low, it has achieved its first Fib price target near 1147, which is where the 2nd leg up is 62% of the 1st leg up. The second target is near 1186 for equality. That projection crosses the top of a parallel up-channel from February (bear flag?) next week so the bulls have some work to do to make that happen. Obviously it might not get there (or stop there) but the pattern would at least look best now with a small consolidation and then a new high at least up to the January high of 1163. The larger price pattern from December continues to point to another leg down, as depicted, once the current bounce finishes.

Gold continuous contract, GC, Daily chart

Oil also achieved its minimum upside target of 87.22 (Tuesday's high was 13 cents shy) where the 2nd leg of the move up from February achieved 62% of the 1st leg up. It also did a small throw-over above its trend line along the highs from October-January and its rising wedge pattern from February. So it's a good setup for a reversal back down. But today's candle looks bullish so if there's bullish follow through we could see oil head at least marginally higher to a target at 87.72, which is based on equality between the 1st and 5th waves in the move up from the low on March 22nd (depicted with the dashed line).

Oil continuous contract, CL, Daily chart

The unemployment claims data showed a worsening in the jobs situation but who really believes these numbers? They're so massaged and picked over, and then later revised, that I don't even pay attention to them anymore. Unfortunately it all means it's terribly depressing for those who are losing their jobs. The evidence is not good for them to find work in less than six months. More unemployment means more credit contraction means less spending means poorer economic performance means lower stock market. The only one that doesn't get it is the stock market. But I suspect we're now very close to seeing that change. But in the meantime, respect the uptrend--price is king.

Economic reports, summary and Key Trading Levels

There's only one economic report Friday morning but hardly a market mover. The market will essentially be on its own and it's a bit of a coin toss for direction. It might even just go sideways and frustrate both sides heading into the weekend.

Next week is opex and part of today's volatility (including yesterday's selloff) may have been more opex related than anything else. We're finding opex action seems to be happening more and more the week prior to opex. That's been leaving opex week itself boringly quiet. Based on the price pattern for this week's pullback and then today's bounce, I'm leaning towards further upside once we finish a pullback in the morning. At least the setup is there for a pullback in the morning in which case watch for some Fib retracement of today's bounce off the morning low. It could be a good opportunity to scalp a long play except I'd make it a day trade only.

I believe the market is too risky to hold long positions overnight now. The wave count, trend lines, Fibs, waning momentum, etc., etc. point to an end to the rally at any time now. A negative news event overnight could result in a nasty surprise to the bulls in the morning. It's simply not worth the risk, imho, to squeeze another percent out of the market when you're risking a quick couple of percent to the downside, especially if you can't watch the market during the day or can only get out at the end of the day (mutual funds). Remember the phrase pigs get fat, hogs get slaughtered.

Good setups for short plays still are not working so that tells us something right there. The dipsters are alive and well and look at every dip as a great buying opportunity. Their strategy continues to be a winning one. Of course the volume is pitifully low so I'm not sure who's doing the buying. Well, I think I know but then I'm one of those conspiracy theorists. The VIX is now back down to a level not seen since October 2007 and May 2008, both of which marked tops in the market. It was a warning in those two months and it's a warning now. ISEE call/put ratio is a big warning. Those who do not heed these warnings and continue to blindly plow full speed ahead on the long side are simply unaware of the dangers ahead.

Timing reversals is always hard, especially tops. Tops seem to go on forever whereas bottoms are typically capitulation moves and get reversed quickly. Remember that the next time down. So I keep probing for the top and I thought yesterday was a good setup. Today's bounce didn't negate it but it sure spoiled it. Therefore I'm looking for a continuation of the rally into next week, even if only to marginal new highs, and based on where we are in the price patterns I think that could be it. But as always, it's the move down that counts and right now we have no evidence based on the decline.

Keep the SOX on your radar as well. If it breaks this morning's low it's going to be a strong indication the rest of the market will soon follow. And if today's lows are taken out then the price pattern turns immediately bearish. I would start looking for bounces to short after that happens. We're not there yet so both sides need to exercise caution. Good luck as we head into opex week and I'll be back with you next Thursday.

Key Levels for SPX:
- cautiously bullish above 1180
- bearish below 1150

Key Levels for DOW:
- cautiously bullish above 11000
- bearish below 10730

Key Levels for COMPQ:
- cautiously bullish above 2432
- bearish below 2383

Key Levels for RUT:
- cautiously bullish above 690
- bearish below 677

Keene H. Little, CMT