Market Stats

Friday, April 14th is the next new moon, arriving at 1:04 AM. Since the market is not trading at that hour (at least not in the U.S.), might today's top have satisfied the turn date based on the phases of the moon? I've been showing my MPTS (Moon Phase Trading System), with tongue firmly planted in cheek, to show why we don't need charts, trend lines, stochastics, EW (Elliott Wave) or a finger to the wind to figure out how to trade the market. Just get out your moon phase book (USNO moon phases) and play a reversal of whichever direction the market is going into the new or full moon. Set your stop at a percent above or below your trade and then repeat at the next phase. It would have worked like a charm for the past year. Here's the updated chart:

MPTS for S&P 500 chart

I am of course kidding (am I?) but you can see how uncanny it's been with the market turns happening around the new and full moons. When you make your millions off this black box system you can send me royalty checks each month.

After last week's plunge I had said last Thursday night that I wasn't sure how we should treat the spike low (as far as technical analysis goes). It would appear to me that the low should be treated as a real low and while it may have been deeper because of the mini crash (when computers stop handling orders and bids are pulled, it's a crash) it was nonetheless real. By that I mean the levels where the decline stopped was no accident and therefore they need to be treated as actual lows and we can't make believe they're not really there.

From an EW perspective I am also using last Thursday's low as the conclusion of the 1st wave down from April 26th. The bounce pattern since that low fits as a steep 3-wave bounce and therefore it is so far a correction to the decline and fits as the 2nd wave correction. I'll get into this more with the charts but it means we're due a 3rd wave down and 3rd waves are stronger than 1st waves. Gulp.

After Monday's strong rally (one of the strongest) the market had a difficult time tacking on additional points this week. In fact the pattern for price action since Monday's spike high has looked more like an ending pattern (shallow rising wedge) than something more bullish. The market used up all its buying power on the Monday rally. The shorts covered but the bulls are looking at this and thinking "um, no thanks, I've had enough." Last week's decline scared to hoohoo out of traders and I would bet many now have stops sucked up tight. If the small rising wedges break down, and we got a hint of it breaking down as we headed into the close today, there could be beaucoup stops just below.

Many have reported the statistic noted by Jason Goepfert from SentimentTrader.com where he reported that there have been six times that the market has gapped up more than 4%. Three of them were in 1987 and three were in 2008. As he stated, "In every case the gap up was eventually filled and usually pretty quickly." So the precedent has been set for us to look for Monday's gap to be filled sooner rather than later. For the DOW/SPX that means back down to 10378/1110.56. That's still 400 DOW points lower. In 2008 those huge gap-up days were also quickly reversed as the market continued to head lower.

So big gap-up days are actually bearish. They punch shorts out of the market which then leaves it vulnerable to a quick drop back down (lack of shorts means lack of buying power to start the buying as the market drops). This is what's so ludicrous about politicians blaming shorts for declines in the market. Shorts add needed liquidity to bulls who want to buy for a long play as well as in steep declines when bulls want out quickly. If shorts are not allowed, or are not there for whatever reason, bids are pulled and the market crashes lower, like last Thursday. The market becomes more vulnerable to a disconnect to the downside when politicians start limiting shorts in the market. Germany's Merkel wants to punish speculators. Well here's a clue Ms. Merkel, you do that and the market will punish you more severely.

I'm going to start with a chart of the Shanghai Composite index (SSEC) tonight because it's telling us a story. Unfortunately it's not a story for little children because it's a story about grizzly bears and how they tear apart and eat baby bulls. The baby bulls are the retail crowd who consistently get sucked in at the top of a rally while big-money funds (the wise old bulls) rotate out of stocks and leave it to the poor defenseless wannabe bulls to be left as food for the hungry bears

SSEC had been consolidating in a sideways triangle pattern since its high in August 2009 and this pattern, following the rally off its November 2008 low, looked like a bullish consolidation pattern, and typically that would be the way to treat the pattern. When a bullish pattern, in this case the sideways triangle following the rally in the August 2009 high, fails it tends to fail hard. Once SSEC broke below the bottom of the triangle in April it quickly took out the February low and recently broke the September 2009 low. It will likely retrace fairly quickly back to the November 2008 low.

Shanghai Composite index, SSEC, Daily chart

This is the grizzly starting to tear into the poor hapless little bulls. It's time to protect yourselves and go find the wise old bulls to hide underneath. You'll recognize them--they've switched their horns for bear claws and are now stealing the food from their little bulls who were so trusting of the wise old bulls when they were told it was safe to go out into the pastures. I understand the leader of these wise old bulls is named Chief Goldman.

Note that SSEC found a low in November 2008, which was in advance of our low in March 2009. It found a high in August 2009, made a lower high in November/December 2009 and additional lower highs in January and April 2010. In the meantime our markets were making new highs. But that divergence was a heads up that something was wrong. Remember, China's production needs an outlet in the rest of the world and if SSEC was unable to make new highs with our markets then it was a warning that China was weakening because of lack of demand for its products from the rest of the world.

Another sector that has been warning us is the utility sector. This sector is dependent on the health of the economy (more production needs more electricity, gas, water, etc.) so an economy that's growing, as we've been told, should require more from utility companies and their stock prices should reflect that. But the economy's growth is another fairy tale. The real growth has been in the government and its spending is wasteful. The only growth has come from government stimulus which is fleeting at best. The weekly chart of the utility sector is not encouraging.

Utility index, UTY, Weekly chart

The top in 2007 was a H&S pattern and the break of the neckline in August 2009 lead to a flush to the downside. After the bounce off the March 2009 low UTY peaked in December 2009 and the April high looks like a right shoulder of another H&S topping pattern. It's also important to note that the 2009 rally was only able to retrace a little more than 38% of its decline, further attesting to the fact that the economy is really not improving much. Last week's mini crash poked below the neckline and any further drop below last week's low could usher in some strong selling.

The DOW's weekly chart shows last week's decline was a sharp break of its uptrend line from March 2009 and this week's rally is a retest of the broken uptrend line. Clearly a drop back down from here would be bearish and leave a kiss goodbye at support-turned-resistance. When a support level breaks many traders use the opportunity to get out of their trades when price returns to the scene of the crime. I call it the "thank you God" trades as traders swear to their god that they will never ever trade without stops again. It's why support turns into resistance.

Dow Industrials, INDU, Weekly chart

Looking at the daily chart below, after breaking below both its 20-ema, which supported the really from February, and its 50-dma last week, the DOW came back up for a retest of the them and poked marginally above, currently located at 10880 and 10871, resp. Today's early-morning high was 10920. It was looking like the DOW was going to hold above its broken, and then recaptured, uptrend line from March 2009 through the February 2010 low. But the drop into the close has the DOW marginally back below its uptrend line. This is an untested trend line and therefore we don't know how much credence to give it. RSI has relieved its oversold condition and bounced up to its mid line at 50. In a decline it's common to see the 50-60 level act as resistance so the curling over at the 50 is bearish.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 10970
- bearish below 10770

After a deep plunge last week, which people are still trying to blame on something (as if selling is so outrageous that there must have been a glitch somewhere--that's how bullish everyone is right now), this week's bounce has been very strong. It has a lot of traders thinking the market has survived another bullet, and they might be right. Certainly any continuation higher, other than maybe a quick pop higher that fails right away on Friday, would be bullish since new highs would then be expected.

But as I show on the 60-min chart below, the retracement of the decline was just shy of 78.6% (10961). Last week's decline finished the 1st wave down from April 26th and this week's rally has been a 2nd wave correction (until proven otherwise). I show the same 78.6% retracement for the smaller degree 2nd wave correction for the bounce into the April 29th high. Do you remember the volatility at that time and how each bounce whacked shorts out of their trades, only to be followed by more selling the next day? It happened again on the May 3rd bounce. And then the bottom started to fall out.

Dow Industrials, INDU, 60-min chart

So this week's near 78.6% retracement is right in line with previous retracements. It's doing a good job whacking the shorts out of the market, which in turn leaves it vulnerable to the downside (like last week). This time the 2nd wave correction is a larger degree and the next 3rd wave down, being a larger degree, should put last week's decline to shame (in points if not speed). At least that's the potential. Longs need to be extremely cautious here and think very seriously about exiting or at least buying lots of insurance.

SPX is finding support at its broken-then-recovered uptrend line from March 2009. If the bulls can hold that line, near today's low of 1156, and get it above 1187 I'd feel more bullish about the market (for the short term). But the failure at both its 20-ema (1172.18) and 50-sma (1174.33) is bearish. Also, as noted on the chart, the 20 crossing down through the 50 is a sell signal (known as the Death Cross). This signal will be used by many money managers as a sell signal.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1187
- bearish below 1150

Using the log price scale on the NDX daily chart, you can see how the broken uptrend line from March has now been acting as resistance. A drop back down from here would leave a bearish kiss goodbye. It also closed back below both its 20-ema and 50-sma. RSI is curling back over from the 50 line. This is a good indication that the bears are forcing the bulls to punt.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 2000
- bearish below 1937

The RUT has been one of the more bullish sectors and is indicative of traders pushing aside their fears of the market and wanting to jump right back into the riskier stocks. This is another measure of excessive bullish sentiment. Instead of being scared by what happened last week many are thinking it was just a fluke, a fat-fingered trade, a trading glitch, anything besides real selling. So they're viewing the "dip" as a great buying opportunity. If I'm right about the wave count, looking for a 3rd wave down, this is one of the reasons why 3rd waves are so strong. The 2nd wave corrections are thought by many (most?) to be an indication that the previous decline was just a correction and that new highs are coming. Disappointment from foiled expectations leads to panic selling in the 3rd wave down. It's the reason the 3rd wave is nicknamed the "recognition" wave, as traders recognize that something more serious is going on. That's the setup as I see it for the RUT right here. I suspect the RUT will lead to the downside and its 200-dma should act only as a speed bump.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 725
- bearish below 690

If the RUT was strong this week, the banks were stronger. At least relative to their previous highs. Last week's decline was not nearly as sharp in the banks as it was in most others. Looking at the BIX I even feel a little bullish about what it could do here. I see upside potential to the top of its parallel up-channel from July 2009. But I don't see it doing that if the broader market is getting ready to tuck tail and run. The bears will look at this chart and see a triple top with MAJOR bearish divergence. And that has me leaning to an immediate turn back down, leaving a truncated 5th wave for its pattern.

S&P Bank index, BIX, Daily chart

The TRAN bounced up and tagged the bottom of a small flag pattern that had finished its rally in April. So far it remains potentially bullish since it held above its 20-ema (green line) but any continuation lower will support the bear's case here.

Transportation Index, TRAN, Daily chart

The U.S. dollar had started a pullback from last Thursday's high where it poked out the top of its parallel up-channel from November's low. But the dollar found support at the mid line of the channel on Monday and has since pushed to a new high. It could be part of a larger sideways consolidation pattern, which is what I'm depicting with the solid green line, but any higher, especially if the top of the channel acts as support, will be a very bullish sign. It might start to look like gold's parabolic climb in that case (as fears drive traders into the dollar).

U.S. Dollar contract, DX, Daily chart

There was a little burst higher in the dollar this afternoon, which pushed the dollar to new highs and it may have come as a result of a statement from the CEO of Deutsche Bank. Josef Ackerman stated that he continues to be worried about Greece's ability to pay its debt. He said if Greece defaults it could create a "kind of meltdown". Mr. Ackerman's comments back in 2007 presaged the banking crisis that few others saw coming.

Gold and the dollar have become disconnected. The primary reason for that I think is because gold has become the emotional metal of choice. Fear, especially of inflation from the continued profligacy of governments and about more debt being piled onto existing debt, has created a high demand for gold, regardless of what the dollar is doing. That fear could continue to drive the shiny metal much higher. The higher gold rallies the higher the projections now. Kind of reminds me of the DOW 40,000 predictions.

The fears of inflation are predictions of inflation and an attempt to get out in front of it. What if those predictions prove to be untrue? While so many people are facing east and worrying about the inflation monster, out of the west and from the dark forest comes the deflation monster, unseen by most. It's another scary story not suitable for little children.

The only sign of inflation is the rising price of gold. But as David Rosenberg said recently about money supply, "If you haven't noticed, real M2 is down year-over-year for the first time in 15 years. A reconstituted real M3 is deflating now year-over-year for the first time in 50 years. Wake us up in 2015 when the inflation comes." A declining money supply is deflationary; that's the definition of inflation (not prices of goods, which is a consequence of deflation). Debt destruction (paying it off or defaulting) results in a drop in money supply, and it's happening. I think gold bulls are wrong.

The Daily Sentiment Index (DSI) for gold hit 97% on Wednesday (trade-futures.com) and the 10-dma is above 90%. Said another way, there are only 3% that are bearish gold right now. I'm definitely in the minority here and actually feeling more comfortable than if I were part of the bullish crowd right now. The extreme sentiment reading is occurring at the time gold is essentially testing December's high so there is a risk for gold bulls that gold is double topping here and now.

On gold's daily chart below I'm showing a pullback and then a new high into the end of the month. The wave count is a challenge right now but that down-up sequence would do a good job completing the wave count that I think fits best. Gold has reached a Fib target zone of 1249-1277 (Wednesday's high was 1249.20) so the rally can be considered complete at any time. A drop below the April 5th high of 1195.80 would say the top is very likely in place. Below 1156 would confirm it.

Gold continuous contract, GC, Daily chart

On the next chart below I'm using a slightly different wave count on gold's weekly chart as I watch to see which one will fit better. It doesn't much matter in the short term because both point to a potential high here or slightly higher and then a significant decline. Gold has pushed marginally above the top of a longer-term parallel up-channel from July 2005, as it did in December 2009 and up to the mid line of its parallel up-channel from October 2009. It's in its final wave for the move up from the October 2009 low and the mid line of the channel is a common resistance level for the final wave. I'm therefore alert to the possibility that the rally could be finished now (but as the daily chart above shows, we could get a minor pullback and new high before the rally is finished).

Gold continuous contract, GC, Weekly chart

Silver finally did some catching up to gold and made a marginal new high above the December high, but was unable to hold it. The DSI reading for silver jumped up from 78% to 90% bulls on Tuesday and then 95% on Wednesday. This is an extraordinary jump in a matter of days and speaks volumes about how excited traders are to be in the shiny metals and may be a strong indication of capitulation, which is common to the upside in commodities, including the metals (v-tops are common in commodities vs. rounded bottoms, just the opposite of stocks). Gold analysts are tripping over each other with higher and higher price projections and whenever this happens it's usually a very good indicator that the trend is close to exhaustion.

Silver continuous contract, SI, Daily chart

Oil's weekly chart below shows today's drop has broken its rising wedge pattern for price action since July 2009. Notice the similarity of this pattern to the one on the DOW's 60-min chart above. It's a nice fractal pattern and an excellent example of how these patterns play out in all different time frames. Today's decline also has oil dropping below its 50-week moving average. The pattern calls for a complete retracement of the bounce off the January 2009 low (33.20).

Oil continuous contract, CL, Weekly chart

Tomorrow's economic reports include the retail sales. The retail sector has been on fire since its November 2008 low, retracing more than 78.6% of the 2007-2008 decline. Its rally from February formed a very narrow up-channel as it steadily rose higher. But the break down, especially last week, has been strong. It looks like traders in retail stocks are getting some information that does not support the rosy outlook many have had. So watch the reaction around tomorrow's numbers, especially if you own some retailers. The rest of the reports should not have much of an impact as long as they're close to expectations.

Economic reports, summary and Key Trading Levels

To summarize tonight's charts, the afternoon selloff hinted that the bounce from last Thursday's low may have completed. The breakdown from the shallow rising wedge patterns since Monday's high suggest we could see a fast decline back down to at least close Monday's gaps. The wave count suggests the decline will not stop there. Nothing goes in a straight line (although it looked like last Thursday) and I expect we'll see lots of volatility.

If you're playing the short side of the market you can trade often and quickly and try to avoid the whipsaw spikes back to the upside, like this week's. Or you can get yourself short for a bigger ride down and just keep your stops well above the fray and let the bulls and bears duke it out well below you. The risk with that technique is that the market will come roaring back and a good profit will turn to dust. Trust me, I know of what I speak.

Because I find it difficult to actively trade and write market commentary at the same time, I've chosen swing and position trading over day trading. If I get into a day trade my analysis and writing take a hit. So I've found a compromise that works for me. Many of you work full time jobs and can't watch the market all day. Some can only do end-of-day analysis. Swing and position trading is clearly what you need to do.

And the market over the past year has not been kind to those who hold positions for very long, especially bearish positions. That could be about to change but understand the risk if that's the kind of trader you are or want to be. I rode most of 2008 down with very little trading until February/March 2009 (except for selling new options each month). But I want to tell you, there were some wild days in there where my account lost and won big on different days. If you want to put on a longer term trade and let it take advantage of a big move you've got to be able to stomach some huge moves against your position.

The other method is to simply play each leg of a move. Identify the trend, draw your trend line and simply decide at the end of each trading day, based on the closing price, whether or not you want to still be in the trade (or enter a trade). Think of a simple trend line and your decision is easy--stay in the trade if price is to the left of the line and out of the trade if price is to the right of the line. Works for both bullish plays with an uptrend line and bearish plays with a downtrend line.

OK, on to my forecast. I tried this back in January after I thought we had made a market high and the next leg down was starting. But the market decided it needed one more new high, similar to what it did in 2007 after making a high in July and then another new high in October (the patterns here are very similar which makes the April high even more convincing). Based on my belief that the market's bounce off the March 2009 high completes the correction to the 2007-2009 decline, it's time to take another look at where this market may be headed.

Before getting to the last charts, a reminder about how I make the projections. I use EW analysis, trend channels and Fibonacci projections/retracements and the waves are drawn with typical price and time relationships between them. One warning about this year comes from Arch Crawford who makes predictions based on the alignment of heavenly bodies (not the Bo Derek kind). I haven't a clue what he does but I do know he's more right than wrong so I like to know what he's saying. And he's saying the particular arrangement of planets, sun and moon this summer will create the worst market crash ever witnessed. The Bradley Model points to a hard-down year this year. The prediction is for July +/- 2 months so the crash flag has been hoisted and will remain aloft from May through September. The depiction on my charts may therefore be conservative.

The weekly chart below shows a projection down to 500 by the fall of 2011. The pattern calls for a 5-wave move down to complete the larger degree 3rd wave (the larger degree 1st wave is the move down from 2007 to 2009 and the 2nd wave is the bounce from March 2009 to April 2010). The 1st wave of wave (3) will be a move down to about 940-950 by the end of June. A 2nd wave correction back up to about 1060 in August would then lead to the 3rd of a 3rd wave down into the fall. The 3rd of a 3rd wave is what I call the crash wave. It's the strongest move of the series and if Arch Crawford is right I think it will happen after August. FWIW.

S&P 500, SPX, Weekly chart

Once the large degree 3rd wave has completed in the fall of 2011, we'll be due a large consolidation of the decline that will likely last a couple of years and be one ugly market environment. Traders only and we should do well because there will be plenty of trading opportunities but you'll want to play both sides of the market. As shown in the monthly chart below, that 4th wave correction should last into mid 2014. From there we'd be due one more leg down for the 5th wave (of the very large A-B-C pullback from the 2000 high) to complete the bear market in 2016. I've got a downside target for Mr. Bear at some Fib projections in the 315 area. That would take it down to near the October 1990 low. The equivalent low for the DOW is about 2300. That sounds low but it's not nearly as low as others are predicting, such as Bob Prechter's 400.

S&P 500, SPX, Weekly chart

Speaking of Bob Prechter, he's done some really good work with cycle studies and shows the bear market should end in June 2016. He's been able to pinpoint it that precisely. I'll try to free up some space in my next wrap to show some things he's done.

Speaking of my next wrap, John will be filling in for me next week as I attend another trading seminar. So I'll be back with you Thursday the 27th. Good luck next week during opex and watch the volatility, especially if we start back down.

Key Levels for SPX:
- cautiously bullish above 1187
- bearish below 1150

Key Levels for DOW:
- cautiously bullish above 10970
- bearish below 10770

Key Levels for NDX:
- cautiously bullish above 2000
- bearish below 1937

Key Levels for RUT:
- cautiously bullish above 725
- bearish below 690

Keene H. Little, CMT