Market Stats

The market has had four straight days of selling and is now short-term oversold with some bullish divergences showing on the charts. It looks ready for a bounce but you know what they say about crashes coming out of oversold and not overbought conditions. As of the end of the day today I see a risk to the downside but I also see some support levels that could hold and possibly give us a bounce that terrorizes the bears. And then there's a more likely pattern that calls for a bounce but one that will lead to stronger selling next week. I'll cover them all in the charts below.

The bulls are surely disappointed to see last week's rally above the 200-day moving averages given back so quickly. At this point the break above looks more like a bull trap (and a move to spook the bears out of their short positions). One reason I'm a little worried, from a trading perspective, about a hard decline from here is that this market has a habit of not letting traders trade. In rallies the move keeps going with nary a pullback to let dipsters in and shorts out. Following small pullbacks and then a continuation higher creates an environment where both sides are forced to chase higher highs. Might the same thing happen on the downside?

We know the market has changed. We now have high-frequency traders who simply get in and out quickly and can have a short-term impact on market moves. And then the quants and their programs are primarily momentum traders and when a move gets going they all pile in. I think that's what's giving us a one-direction market with very little in the way of corrections.

So one of the things that worries me tonight is the possibility we'll see the market continue in a hard decline from here, rather than give us a bounce to let bulls out and bears in. The price pattern is set up for a bounce on Friday so if we don't get it we could be in for some hard selling instead. If we see a choppy decline to minor new lows then it will begin to look more like a bounce is coming, if it doesn't start right away Friday morning.

I struggled today with my internet connection and getting my charts updated so I lost a bit of time. I want to jump right into the charts before I run out of time to get this sent. The weekly chart, unless we get a decent rally on Friday, is going to leave a bearish candlestick for the week. It's a bearish engulfing candle which creates a key reversal outside down week--price gapped higher on Monday for a new weekly high but looks like it will close lower. A red candle for next week would confirm the reversal signal. Currently SPX looks like it's trying to find support on its longer-term uptrend line from 1990-2002. One could view that trend line as a H&S neckline (left shoulder at the January high, head at the April high and the right shoulder at the June high). Another close below the 50-week moving average, at 1090, would be another bearish sign, especially for fund managers.

S&P 500, SPX, Weekly chart

After breaking above its 200-dma last week SPX gave it right back this week. It was a classic bull trap. Today's decline took it down to its broken downtrend line from April through the May 13th high. From a price pattern perspective and that trend line I've been expecting a bounce into Friday/Monday. I thought it had started after this morning's low but when price rolled back over and made another new low that's when I began to wonder if we've got something more bearish going on. The bulls need an immediate rally on Friday, or at most one more up-down sequence to a minor new low, to then set up a bounce to correct this week's decline.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1120
- bearish below 1060

Shown in pink on the above chart, I'm showing the potential for a higher a-b-c bounce off the June low, a possibility that I was no longer considering after this morning's low (which completed a 5-wave move down from Monday's high). But the new low this afternoon creates the possibility that the pullback from Monday is now a correction instead of the start of the next big decline. That forces me to put the short-term bullish possibility back on the chart. A move back above 1120 would suggest the pink path it is.

Zooming in closer to the possible price paths over the next several days, my preferred wave count calls for an immediate rally on Friday and possibly into Monday. A bounce back up to the 1100 area would correct this week's decline and set up a very strong leg down from there (hence the MOAP--Mother Of All Puts--above the top of the bounce). The previous MOAP did not pan out because the decline from April formed a funky looking wave pattern instead. This setup, so far, looks clearer and if correct the move down next week should pick up a lot of speed.

S&P 500, SPX, 60-min chart

Without trying to make this overly complicated, there is a very bearish possibility that we're not going to get much of a bounce at all and instead experience a market that simply lets go to the downside (dash line). A drop below 1060 would be immediately bearish and potentially very bearish (crash leg down). The bullish possibility, with a rally above 1120, is shown in pink.

Looking at a slightly wider view of the DOW's daily chart, I wanted to show the H&S that everyone is noticing. It always worries me when too many notice the same pattern--what's obvious to everyone is obviously wrong. But sometimes it is what it is and the topping pattern since January's left shoulder could very well play out, and in fact I expect it to. The neckline is near 9750 and the downside projection out of it is 8250. Behind that downside projection is a Fib projection at 8193 where the 2nd leg of the decline from April would achieve 162% of the 1st leg down, a common relationship, and therefore that projection into the end of July is entirely possible. That would be roughly 2000 points lopped off the DOW in about a month. I don't show the other possibilities on the DOW's chart that I discussed for the SPX but they're the same.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 10500
- bearish below 10050

Almost all the indexes and sectors sport the same price pattern so following one is essentially following the whole market. NDX's 3-wave bounce off the May 25th low clearly looks complete. This week's sharp decline looks like the kickoff to the 3rd wave down. It takes a rally back above 1920 to suggest another leg, for a higher bounce, is coming. A drop below 1823 would suggest a faster selloff is coming (rather than a bounce first into Friday/Monday).

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 1920
- bearish below 1823

I'm using the NDX 30-min chart below to show the idea that I briefly discussed with the SPX charts, which is the possibility for one more up-down sequence to a minor new low, with continuing bullish divergences, to finish the leg down from Monday. That would then set up a bounce into Monday to correct this week's decline. A drop below 1823 would suggest the small descending wedge idea is not correct and that instead we've got something more immediately bearish playing out. A break above 1869 would indicate the leg down from Monday has completed and that we're going to get at least a 3-wave bounce to correct this week's decline.

Nasdaq-100, NDX, 30-min chart

The semis look the same as the techs so we've got no warning divergences between the two of them. If the SOX does push higher and makes it above 370 we'll probably see at least another push up to the broken uptrend line from March 2009 (which stopped last week's and Monday's rallies). A drop below 340 would be immediately bearish but we could get a bounce before that level breaks.

Semiconductor index, SOX, Daily chart

Monday's rally was stopped by the broken uptrend line from March 2009 and now gives us a new downtrend line off that high. The previous downtrend line through the May 13th high, currently near 657, is where I'm projecting the coming bounce (if we get it). If we get the bounce as shown, the next leg down next week should be a strong one. Above 668 is potentially bullish and below 626 is confirmed bearish.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 668
- bearish below 626

The RUT's 60-min chart shows a clean 5-wave move down to this morning's low, which is what had me convinced the impulsive decline confirms the trend change back to the downside. With the new low this afternoon that could change the wave count (a 7-wave move is corrective and could indicate the week's pullback is only a correction that will now lead to another strong rally leg above Monday's). It's possible the minor new low is simply part of a larger correction as shown in dark red, which is why an immediate rally on Friday would support the idea that we'll get a bounce into the end of the day or into Monday before then selling off more strongly. A break below the 626 level would indicate the possibility that we're into an immediately bearish and strong decline so take a break of that level seriously. If we do get the bounce as depicted it would make for an outstanding shorting opportunity (MOAP).

Russell-2000, RUT, 60-min chart

We're starting to see a significant widening in credit spreads, including the TED spread (the interest rate spread between interbank loans and short-term Treasuries) and that portends bad things for the stock market (when risk averseness shows up for corporate and municipal bonds, as well as lending between banks, it will show up in the stock market as selling instead of buying). Some of that spread is resulting from a decline in U.S. Treasuries but that's also a sign of fear as investors run into the perceived safety of Treasuries rather than stocks and other bonds.

As Treasury yields decline it means bond prices are rising from an increased demand for them. The change in yield has correlated very well with the stock market for the past few years so I continue to watch the 10-year and 30-year. As a side note, yields rose today and closed in the green, which was another reason I did not trust the afternoon selloff and am thinking we'll see a rally on Friday. I'm still not sure about the longer-term view for yields and am simply waiting for "price" to lead the way. Between 3.89% and 4.85% for the 30-year (TYX) we're in no-man's land. It takes a break of one to indicate the longer-term direction. If it breaks below 3.89% it will effectively negate the inverse H&S pattern and quite likely indicate we'll eventually see rates below that which we saw in November 2008 (2.52%). It would indicate another panic run into Treasuries and out of stocks, which is the direction I'm currently leaning. It would also confirm that the primary fear is deflation and not inflation.

30-Year Yield, TYX, Weekly chart

The bounce off the June 8th low for the banks did not make it above the high on May 27th, unlike most other indexes, which showed the relative weakness of the banks. Back above 50 for BKX would be potentially bullish whereas below 47 would be bearish.

KBW Banking index, BKX, Daily chart

The pattern of the decline from April for the Transports still has me wondering if the June 8th low, and not the May 25th low, was the completion of the 1st wave down, as labeled on its chart. In the end it may not matter much, especially if Monday's high was the completion of the correction to the decline from April. The decline from Monday could find support at both its 200-dma and broken downtrend line from April, both crossing on Friday near 4155. A decline below 4150 would be immediately bearish but look for a bounce first. It takes a rally above 4450 to suggest new highs, as depicted with the dashed line.

Transportation Index, TRAN, Daily chart

The U.S. dollar continues to look on track for a multi-month consolidation/correction of its November-June rally. An eventual pullback to the $82 area by October would be a typical correction. The depiction for it is purely speculative since there could be any one of 11 different correction patterns that could play out.

U.S. Dollar contract, DX, Daily chart

Commodities often react to the dollar's moves but if the dollar is going to be consolidating for the next few months commodities could be on their own. In a deflationary environment I expect commodity prices to decline with the stock market so I keep an eye on the CRB as well as the CRX (commodity related equity index). Thanks to Austin for forwarding me the components of the CRX:

Commodity Related Equity index components

No surprise, the pattern of the CRX looks almost identical to the broader indexes. Monday's high should have completed the correction to the decline from April and the next big move should be much lower. Note the 50-dma getting ready to cross below the 200-dma, a sell signal that many fund managers use (the death cross, as in death of the previous up trend).

Commodity Related Equity index, CRX, Daily chart

Gold is not following most other commodities as it is still considered by many to be the alternate currency. If fiat currencies go belly up or inflation gets out of control then gold is the currency of choice. But what most are missing is the fact that gold usually declines when the economy underperforms and it does not do well in deflationary times. I believe both are going to hurt the price of gold over the next year and I view the current price action as topping action. After breaking its uptrend line from May 21st, today's bounce came back up to it. If the top is in we should now see a kiss goodbye after the retest. Back below 1225 would likely mean the decline has begun.

Gold continuous contract, GC, Daily chart

Oil has been a very weak commodity as fears of another economic slowdown take hold (people say we'll get a double-dip recession and it will be years before people recognize that we're actually in a depression which plays out over time). Oil was unable to close back above its broken uptrend line from July 2009 or its 62% retracement of the May decline. The a-b-c bounce off the May low now looks complete and we should see stronger selling start to kick in. As with the CRX, the 50-dma has crossed below the 200-dma, a bearish signal.

Oil continuous contract, CL, Daily chart

Today's economic reports were a mixed bag. The headline number for the durable goods orders was disappointing but "less bad". It does however continue the string of economic numbers that show the economy is clearly slowing down. In Fed speak the Fed said the same thing yesterday.

Friday we get the GDP numbers, which are expected to stay the same as last quarter's. The market would obviously be happy with a number that comes in even slightly better and might even be relieved if they're not worse. There should be no surprises with the sentiment number.

Economic reports, summary and Key Trading Levels

Sorry for the somewhat abbreviated report tonight due to some technical difficulties on my part. But if you're like me (visual) you just want the charts anyway. All those words just make it more difficult to get through (wink).

In a nutshell, the market is very near an inflection point and I wish I had a more solid clue as to which way it's going to go over the next few days. I've outlined the price levels to help judge where the market could be headed next and my preferred wave count calls for a bounce on Friday and possibly into Monday to set up an excellent shorting opportunity (and one of the last best chances to get out of long positions). I also provided levels above that would tell us we're getting another rally leg that will take us above Monday's highs. I do not expect that scenario but the price pattern forces me to keep it on the charts until it's negated (with a drop below the key levels to the downside). I've been surprised by how long and how high this market can rally and therefore I cannot discount the possibility that there's at least one more leg up for the bounce off the May/June lows.

The more bearish wave count calls for immediate and hard selling on Friday. If that happens you'll want to be short over the weekend since it could set up a Black Monday. Will something bad happen over the weekend in Toronto during the G20 meeting? A few plots have already been discovered and foiled. How many more are out there? Now we've got anarchists added into the mix of terrorists, both bent on destruction of the financial system as we know it (our governments are doing a fine job without their help).

Let price lead the way Friday morning and by the afternoon I suspect we'll have a good idea which scenario is playing out. As always, live updates on the Market Monitor will provide some of you a better idea of what we can expect early next week. Good luck and I'll be back with you next Thursday.

Key Levels for SPX:
- cautiously bullish above 1120
- bearish below 1060

Key Levels for DOW:
- cautiously bullish above 10500
- bearish below 10050

Key Levels for NDX:
- cautiously bullish above 1920
- bearish below 1823

Key Levels for RUT:
- cautiously bullish above 668
- bearish below 626

Keene H. Little, CMT