Market Stats

Today was only a 16-point range for SPX. How boring (smile). The volatility of the market is great if you can catch some of the intraday moves. For those who don't like to day trade, this market is like watching a ping pong match.

The bulls liked the fact that the market didn't give back any of yesterday's strong gains. The bears like the fact that those strong gains were once again on light volume (the lightest since the May 13th high). Both tried valiantly to take control of the market today but neither succeeded. It appeared that the market is essentially on hold until we get through Friday's jobs reports. Friday could give us some important clues as to what we can expect next week and quite possibly for the month.

I like to follow historical patterns because one of the things I study is fractal patterns. The same patterns often show up in different time frames as well as in the past. When we trade triangle patterns, flags and H&S tops we are is essence trading fractal patterns. Studying patterns of the past can be helpful to see how the market may react today. For whatever reason, and we don't always understand why, our brains seem to react in the same way to the same stimuli when presented in the same way.

The study of analog patterns in the market (comparisons of one time period to the current one) is a way to identify the next potential move in the market. Analogs eventually break but it is nevertheless interesting to follow them when they become visible. We've looked at the analog between the 1929 and 1930s to the current period, the similarities between the 1929 crash setup and 1987 (and interestingly, the same setup today) and a bubble in one asset vs. another. Since the tech crash in 2000 we've also looked at an analog between the Nikkei 225 index and the Nasdaq. We've still got a close correlation as the chart below shows.

Nikkei 225 index and Nasdaq Composite analog, chart courtesy McClellan Financial Publications

Analog patterns can't be followed to the day but it is rather interesting to see how closely these two patterns correlate. As indicated on the chart, a turn date of June 10th (next Thursday) is predicted by this analog. We are of course within the window of that turn date since it can't be relied upon to be precise. And the analog could break at any time so using this solely for trading signals is not wise, but it does give you a heads up that we could be facing a significant downturn and back towards the February low. This happens to correlate nicely with my own assessment of where we are in the wave pattern.

Jeff Cooper, who has a subscription service at Minyanville, like to look for similar patterns from the past as well. By several different measures, relating price to time (Gann Square of Nine chart) and comparing the 1929 and 1987 crashes to where we are currently he sees June 6th as a very important date. For example, 40 days after the April 26th high is June 6th. It was 40 days after the highs in 1929 and 1987 when the crash started. June 6th is this Sunday so Friday/Monday are setting up as a turn date according to his studies. That's close enough to June 10th as well.

SPX 1107 is an important level in Cooper's work and then 1111-1115 if SPX can get above 1107. Today's high was 1105.67, just under the 200-dma at 1106.26. As I'll point out on my charts, I'm looking at the same levels as I'm sure are many traders. The big question tonight is how the market is going to react to the jobs report tomorrow morning. Any hard selloff on the news could kick off a major bear run. If on the other hand we get some more rally, even if after a pullback first, there is the potential for at least a little higher before upside price targets are hit and in and around the June 6-10 time period (but again, we're now within the +/- window).

SPX continues to find support at its long-term uptrend line from 1990-2002. Its 50-week moving average is also located at 1079 and is providing support. And there's the February low at 1044.50 that's been support. Needless to say, when SPX breaks below 1040 it's going to hit a lot of stops. The price pattern is set up for a strong decline so hitting all the stops that are parked just beneath the current market will only add to the selling pressure. The current wave count calls for a very strong decline which is not easy to project (a 3rd of a 3rd wave down typically surpasses "normal" extensions. However, based on some extended Fib projections and previous price levels I think it's quite possible we'll see SPX drop down to the July 2009 low, near 870, by the end of this month. From there it should stair step lower into July and get down to around 750 before setting up a larger bounce to correct the decline from April.

S&P 500, SPX, Weekly chart

The daily chart below shows the wave count for the move down from April and why I'm saying we should get ready for a 3rd of a 3rd wave down. The bounce off the flash-crash low on May 6th was a 2nd wave correction. So we started the 3rd wave down from May 13th. The low on May 25th was the 1st wave of the larger 3rd wave (the 3rd wave will itself be a 5-wave move down). That makes the bounce off the May 25th low another 2nd wave correction. Once the current bounce has completed, which might have happened today, the 3rd of the 3rd wave down will commence. The last time we had this kind of setup was the high in August 2008, which led to the crash lower into October, which you can see on the left side of the weekly chart above. In addition to all the stops below 1040, selling could become exacerbated by money managers bailing out of their positions in order to protect profits into the end of the month/quarter.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1135
- bearish below 1069

SPX wasn't able to quite make it up to its 200-dma today so it continues to look like resistance. If the market rallies following the jobs report Friday morning then we could see SPX make it up to the 1115 area, possibly higher (dashed line on the daily chart above. The risk is for a downside disconnect to begin at any time and it's the reason I'm suggesting nibbling on shorts at new highs, manage it tightly to see if it holds and then add to the position on the way down. The way down could be marked with large gaps to the downside which makes new entries difficult (shorting in the hole is never fun).

The 60-min chart below is a mess because I'm trying to show three different possibilities for the next few days so please bear with me on the chart. It's difficult enough keeping up with corrective wave patterns (there are eleven of them vs. just one impulse pattern) during live trading on the Market Monitor but to try to give some clues what might happen over the next week is even more challenging. So I wanted to go over a couple of ideas and suggestions what to watch for.

The dark red price path is the one I'm thinking is the highest probability but that and $2.50 will get you a latte at Starbucks. During the trading day on Thursday I kept thinking we'd get a final leg up to about 1108-1110 to complete the A-B-C bounce off the May 25th low. So I'm showing a quick move higher Friday morning followed by the start of a selloff. Notice how that would have SPX tagging its downtrend line from May 3rd. But an immediate selloff Friday morning, with a break below 1085, would suggest we've seen the high for the bounce.

S&P 500, SPX, 60-min chart

The pink price depiction on the above chart is the path price should take if the bounce pattern from May 25th is a double zigzag (a-b-c-x-a-b-c) which still needs the final c-wave up. The price projection for it is to about 1128 although there would not be smooth sailing up to that level--there are plenty of land mines for the bulls to step on. That scenario clearly calls for a very positive reaction to the jobs report.

The light red dashed line shows an idea for a choppy rally into Monday that eats up time but doesn't give us a whole lot more points. The rising wedge pattern that I show for that scenario would likely achieve gap closure (from May 20th) near 1115 but probably not much more. All scenarios call the bounce off the May 25th low as a correction to the decline and not the start of something bigger to the upside. There's always the potential for more upside but the odds favor a little more rally at the most and then the start of a hard selloff into the end of the month.

Like SPX, the DOW was stopped by its 200-dma, again. It left a little spinning top doji at resistance so any red candle on Friday would create a candlestick sell signal. If we do get a strong rally on Friday and into Monday, there is upside potential to 10500.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 10675
- bearish below 10013

NDX has been a little stronger than the blue chips during the bounce from the May 25th low. It has now retraced 62% of the decline from May 13th (at 1896.40). But the bounce has developed a rising wedge appearance (more easily seen on a 60-min chart) and it rallied up to the top of it today. The wave pattern can be counted as complete at this point and therefore suggests we could start a selloff on Friday. A break below 1832 would signal we've seen the top. Otherwise a stronger rally on Friday could drive NDX up to close its May 14th gap at 1944.85, which would be close to its 50-dma at 1948.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 1945
- bearish below 1832

I want to run through the different time frames for the RUT this evening because it's a good index to follow for a sense of what the market might do. Fear and greed show up quickly in this index vs. the blue chips. The May 25th low didn't quite make it down to its 50-week moving average and now the bounce has made it up to its 200-week MA. It has also bounced back up to its broken uptrend line from March 2009. Weekly RSI has barely lifted during the bounce over the past two weeks and remains underneath its broken uptrend line from March 2009. It looks like a setup for a reversal back down. I'm showing the same kind of price projection that I showed on SPX, with an initial hard drop down to the July low near 475 by the end of June and then stair-step lower into July to about the November 2008 low near 370. From there we should see a big bounce back up to correct the leg down from April.

Russell-2000, RUT, Weekly chart

The daily chart below shows price struggling with its broken uptrend line from March 2009 and today's rally stopped at its 20-ema. If it can push higher over the next day or two there is upside potential to about 693 where it would test its 50-dma.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 700
- bearish below 640

As shown on the 60-min chart below, the 693 level is also where the bounce off the May 25th low would achieve two equal legs up. The first Fib level is has to get through is near 673 which is where the 2nd leg of the bounce would achieve 62% of the 1st leg. Only slightly higher at 674.79 the RUT would close the May 20th gap. An immediate drop below 655 would spell trouble for the bulls but it takes a break below 640 to confirm we've seen the high for the bounce. As a reminder, the "MOAP" on the chart is for the "Mother Of All Puts" since it's one of those rare setups that can make you a lot of money in a short period of time. Just manage your risk carefully and don't get carried away (pigs get fat, hogs get slaughtered).

Russell-2000, RUT, 60-min chart

The banks have looked relatively weak during the bounce off the May 25th low. On the BIX chart below you can see it has been more or less consolidating sideways as though it's simply waiting for the rest of the market to finish with its bigger bounce. There's a little higher potential for the banks to bounce but the message from the banks is pretty clear right here--get ready for the next leg down.

Banking index, BIX, Daily chart

The home builders index also remains weaker relative to the broader market. They led to the downside last time and look to be doing the same this time. This index looks like it's ready to break down hard at any moment.

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

The Transports look like the rest of the market (which is remarkably true for most indexes and sectors--the market is in synch for a break to the downside). There's higher potential up to the 4500 area but the minimums for the bounce off the May 25th low have now been achieved so it has the green light to drop.

Transportation Index, TRAN, Daily chart

The U.S. dollar's sideways consolidation since the high on May 18th formed a picture-perfect ascending triangle with the required 5-wave move inside it (labeled a-b-c-d-e) as of this morning's low. I had mentioned on the Market Monitor this morning that the dollar should now rally out of this consolidation and complete its 5th wave for the move up from March 17th, as depicted on the chart below. Once that leg up has finished it will complete the larger 5-wave move up from November and set the dollar up for a multi-month correction of the December-June rally.

U.S. Dollar contract, DX, 480-min chart

The daily chart of the dollar below shows what a typical 3-wave pullback correction through the summer might look like. A retracement of about 50% of the dollar's rally in 62% of the time it took for the rally gives us a downside target near 82 by October. That might be where the 200-dma is by then. The bullish sentiment in the dollar and bearish sentiment in the euro are at extremes and are screaming for reversals in each. So if you're trading the currencies don't overstay your welcome if you're long the dollar and/or short the euro. The euro should rally back up some into October, essentially a mirror version of the dollar.

U.S. Dollar contract, DX, Daily chart

If the dollar is getting ready for a pullback (after another new high into June) it begs the question what it will do for the stock market and commodities. Bottom line, I don't think it will have much of a correlation over the next few months. For one thing the dollar will be entering a corrective phase of a longer-term rally and therefore may not have much of an impact on other sectors. Second, I think the commodity market and stock market are set up for a significant decline, regardless of what the dollar does. It's going to be their turn in the barrel.

Gold's bounce off the May 21st low should be over. We've seen the 1st wave down, the 2nd wave bounce into the June 1st high and now it should be starting the 3rd wave down, which means we should see strong selling in gold soon. It should drop relatively quickly down to its 200-dma, consolidate for a bit and then break lower before setting up a larger bounce as part of a larger decline this year.

Gold continuous contract, GC, Daily chart

If the stock market and gold both head lower this month I don't think there will be much hope for the gold miners to hold up. The pattern for GDX fully supports a strong bout of selling into June as the 3rd wave down gets underway. Notice the bounce into Tuesday's high banged into its broken uptrend line from March and left a bearish kiss goodbye. MACD was only able to make it back up to the zero line through the entire bounce off the May 21st low. Rolling over from the zero line is a sell signal.

Gold Miners, GDX, Daily chart

I show oil selling off from here as well but it needs to do it immediately. If it pushes higher to its 200-dam and broken uptrend line from July 2009, it will likely pullback from that resistance but the move up from May 20th would look impulsive (5-wave) at that point and suggest we might only see a pullback and then head higher again. It would be doing do without the support of other commodities or the stock market but perhaps there would be greater global events that support a stronger bounce back up. In any case, the pattern is not clear at the moment unless it starts down in earnest from here, in which case it will be in synch with the rest of the markets.

Oil continuous contract, CL, Daily chart

Thursday morning was busy with economic reports but the market paid virtually no attention to any of them. The futures barely rippled at 8:30 AM and the other reports at 10:00 may have cause a little selloff but nothing major. The factory orders came in a little disappointing, showing a slowdown in the making. But it too was basically ignored.

Friday morning is of course the Big Kahuna of economic reports since our economy is so dependent on the mighty consumer, who's not doing a lot of consuming when it's their jobs that are being consumed. Everyone is waiting with baited breath for some improvements in the jobs picture.

Speaking of baited breath, Obama's Foot-In-Mouth V.P. already spilled the beans by making a statement yesterday about the jobs report blowing away anything we've seen so far. Many are crediting Wednesday afternoon's rally on Biden's statement. And that now begs the question what kind of reaction can we expect on the release of the actual number? Did the price already get baked in? Will it be a sell-the-news reaction? What if it's not that great after all and Biden was mistakenly optimistic? We never know how the market will react to a given economic report but this time we have a few added wrinkles to deal with. Could be interesting.

Economic reports, summary and Key Trading Levels

Summarizing tonight's charts, the various indexes and sectors remain remarkably in synch and suggest the bounce off the May 25th low is a correction to the leg down from May 13th. Once the bounce correction finishes we should be setup for a very hard decline (3rd of a 3rd wave in EW terminology) that takes us much lower into the end of June. There are a lot of nervous money managers sitting in positions and wondering if they should bail and protect profits from last year (we're already down from the start of this year). Any further into the negative for this year is not something fund managers want to have to explain away to their customers. Therefore any selling this month, being the end of the 2nd quarter, could become exacerbated with selling to protect profits (sell first, ask questions later). The wave pattern setup suggests they're going to be doing just that. There are now a lot of stops placed just below the recent lows so when they get triggered we could see an avalanche of selling.

Now is a good time to start nibbling on the short side, especially if you can't watch the market during the day. You may have to live through a little more upside to the market so manage your risk (size) carefully. Buying some inverse ETFs, especially as protection against any longs you might be stuck with in your retirement account, and some puts is a great way to manage risk (with puts you know what your maximum risk is). As your short play becomes profitable and you can lower your stops to protect profits you can then start legging into new positions to grow your position size while maintain good risk management.

I've talked about MOAP (Mother Of All Puts) before but you'll only hear it from me perhaps once every couple of years, if that much. It's a relatively rare setup and when it comes it pays to take advantage of it. That's the setup we now have. There are of course no guarantees this one will work--I've had a couple in the past get spoiled by the market's unwillingness to sell off. That's why risk management is so important. But when the setup comes along I'll play it every time since the gains from it will easily wipe out small losses. If you haven't played the short side before, give this one a try with just a little bit of money. You'll be hooked on playing the short side after that (stronger and faster moves than playing the long side).

Speaking of playing the short side, and the fact that moves happen faster, I was recently talking with a trader who shared with me his trading profits in the 1990s (the big bull run). He made about 2/3 of his profits on the short side during that time (he is primarily a day trader). In this case we have an opportunity to play the short side with swing and position trades, but you have to be willing to let the market go big against your position a few times as the market works its way lower. Those bear market rallies, like on Wednesday, spook a lot of players out and then they get stuck on the sidelines because they're afraid to get back in. Get short and ride it down this month and let's make some money.

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

Key Levels for SPX:
- cautiously bullish above 1135
- bearish below 1069

Key Levels for DOW:
- cautiously bullish above 10675
- bearish below 10013

Key Levels for NDX:
- cautiously bullish above 1945
- bearish below 1832

Key Levels for RUT:
- cautiously bullish above 700
- bearish below 640

Keene H. Little, CMT
Chartered Market Technician