Market Stats

The market started the day with another gap up but at this point it might have been an exhaustion gap. It was the 5th gap up since the August 31st low so it's getting more difficult to find bulls for some follow through to the gap up, or more likely the market is running out of shorts to scare away. This morning's spike up following the unemployment numbers looked like the last of the shorts may have been throwing in the towel.

In what is becoming standard practice with the unemployment data, the weekly numbers continue to get revised higher the following week. Last week's number was revised higher from 472K to 478K while continuing claims were revised 24K higher to 4480K. This morning's report showed 451K vs. the 470K expected, down -27K from last week's revised number. The "less bad" number was all the shorts needed to hear and they scrambled to cover their positions. Now we wait until next week to see what this week's number is revised to.

Continuing claims came in at 4478K vs. 4445K expected, down -2K from last week's revised number. It wasn't good news about the employment situation (-27K for initial claims is clutching at straws by the bulls) but the market is desperate for good news of any kind.

The trade balance figure for July was -$42.8B, a slight improvement over June's -$49.9B. The number was helped by an increase in exports (led by capital goods) and a decrease in imports (led by reduced consumer spending). We continue to pump money out of our economy at a high rate of speed.

Once the economic reports were out of the way the market opened the day much higher and then stopped. And I mean stopped. The high for the day was made by 9:32 AM. The DOW ran up nearly 90 points in 2 minutes and that was the high of the day. Later I'll show a chart of SPX that points out the gap moves in the past week, which gave us our rally--almost the entire rally occurred before the cash market opened each morning.

The market has been very volatile (not reflected in the VIX) since the April high. We've seen many panic-driven days, both up and down, as marked by 90% days (where the trading volume is 90% to the upside or downside). As of Friday, September 3rd, we've had the same number of 90% upside days (Friday being the last one) as downside days, both at 14. That's 28 90% days which is unprecedented (nearly 1 out of every 3 trading days has been a panic-driven day, often closing at the high or the low of the day only to get reversed the following day). It's the mark of the machines doing the trading and when a direction gets going the machines just pile on. May's flash crash could easily happen again.

After all this volatility we sit near the middle of this year's trading range, which is at SPX 1115 (this morning's high was 1110). But volatility normally precedes a big market move. If we get a fast and strong move to the upside there's a good chance it will be a blow-off top so it would not be a good time to hang around long if that happens. If we get a strong move to the downside it will likely be sustained and a kickoff to the next leg down in the secular bear market that we're in.

In amongst all this volatility we've had some 6 or 7 Hindenburg Omens. This does not guarantee that we'll get a market crash but no crash has occurred without a confirmed Hindenburg Omen signal and we now have multiple signals and confirmation.

There are some cycle studies pointing to September 9-11 as a turn window so that urges caution by the bulls since we're rallying into this turn window. The rock-solid MPTS (wink) says we should be looking for a turn back down as well. The market rallied into the new moon (yesterday) and therefore the signal is for a reversal back down. Actually the new moon occurred after yesterday's close so this morning's quick high fits the turn equally well.

S&P 500 MPTS daily chart

The bullish sentiment has quickly taken over the market again. The number of calls vs. puts is getting us into reversal territory again. The ISEE call/put ratio jumped up to 154 yesterday as traders scrambled to get onboard the long side of the market. This is not a timing tool but once the reading gets over 150 it gives us a heads up warning that things are getting frothy again to the upside.

ISEE Call/Put index

The Daily Sentiment Index (DSI from trade-futures.com) and the Investor Intelligence weekly advisors survey both show a majority of bulls. In the past 42 weeks, since last November when the market was essentially where it is now, there have been only 2 weeks that were net bearish according to the Investor Intelligence. The market has made its way sideways but the market participants have been net bullish for 95% of the time. At significant market bottoms, such as 1982 and 1994-1995, the sentiment was net bearish for 34 out of 35 weeks (1982) and for 46 consecutive weeks (1994-1995).

The DSI currently shows 71% S&P bulls. Compare this to 2% bulls at the March 2009 low. The AAII survey does show net bearish sentiment but only at -11%. Compare that to -51% at the March 2009 low. Therefore there's lots of room to run in the sentiment picture before one can even start to think there's too much bearish sentiment.

The VIX continues to show complacency as it drops down to previous lows. One divergence showing up though is between the VIX and SPX as SPX made a new high today for the move up from late August whereas the VIX has not yet made a lower low. The VIX also gave us a reversal signal on Tuesday. Last Friday it closed below its lower Bollinger Band and then Monday it closed back up inside the band. This creates a reversal signal and the two previous times were in January and April, just before stock market highs. SPX is also hitting the top of its Bollinger Band, which is coming down as price is heading up, usually a setup for a reversal.

The last two VIX reversal signals were January 12th and April 12th, while the SPX peaked on January 14th and 19th (double top) and April 26th so you can see there's a little bit of a lag time between the VIX signal and the market's top (2 to 11 days by the last two signals). We're now inside that lag window as it's now 3 days since the reversal).

Volatility index, VIX, vs. SPX Daily chart

As for the longer term prospects for the stock market, I've often discussed the fact that the consumer is not going to be helping this time around for the economic recovery. Consumer spending, which constitutes about 70% of our economic engine, has been declining as the consumer retrenches and pays off debt and socks away more into savings. It's a natural cycle following the credit and spending binge we've been on for the past couple of decades. When you look at the stock market vs. the personal savings rate it tells an interesting story. The following chart shows both since 1959:

Personal Savings Rate vs. S&P 500 index, 1959-2010

As you can see, consumer spending has been very good for the economy and stock market. A downtrend lien for the savings rate was broken in 2008 and tested in 2010. A continuation higher in the savings rate will likely cause the opposite in the stock market. This is a longer-term fundamental that is part of the bear market cycle we're currently in. Those who declare we're in a new bull market ignore historical cycles and charts like this one.

Moving in a little closer to the S&P 500 from the above chart, the weekly chart below shows the price action since the end of May has gone sideways and crossed from the bottom of a down-channel to the top of the channel (with a marginal break above it this week). If the bulls can keep the rally alive for another week or two we could see SPX head for its downtrend line from October 2007, currently near 1160, before dropping lower into the end of the year (dashed line). The risk for the bulls is that the bounce is topping here and now and we'll start back down for the bottom of the channel (or worse). Note that the 50-week moving average, at 1105.56, is acting as resistance (we've got a little star doji sitting on it right now, which if followed by a red candle next week would create an evening star reversal pattern). One other thing to note from this chart is that MACD has not been able to climb back above the zero line since the bounce off the July 1st low, which is bearish.

S&P 500, SPX, Weekly chart

On the daily chart below, which shows how price is playing with the top of its down-channel (and left a bearish shooting star there today), I've added a sideways triangle pattern from the June high and July low. Since the May low this could be a b-wave triangle which will have an a-b-c-d-e wave count. The current leg up from the end of August would be the e-wave which can end shy of the top of the triangle or do a throw-over. In other words the rally could end here or after a push back up to the 1130 area. The 1158 projection is where the bounce off the July low would have two equal legs up. If SPX pushes above 1115 we should see 1130 and if it pushes above 1130 we should see 1158. If it does rally above 1130 there will be many calling for much higher levels coming out of an inverse H&S (more on that in a bit) and it would be just like this market to suck in the bulls on that kind of move and then spring the trap door. But first let's see if SPX can capture 1115.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish to 1130-1135 and then to 1158
- bearish below 1080 and more bearish below 1040

I mentioned the inverse H&S pattern above. Everyone is seeing H&S patterns everywhere, both inverted and upright. One thing to remember about H&S patterns is that they're most effective at the end of a long run. So a H&S in the middle of a run is typically not going to work. It's a bit like seeing animals in cloud formations--we all see our favorite patterns.

Looking at the SPX daily chart above, the current pullback from April's high has many looking at an inverted H&S pattern with the left shoulder in May, the head at the July 1st low and the right shoulder in August. A break above 1130 by this pattern projects up to about 1250 (1010 low to 1130 high = 120 points + 1130 = 1250). But with an unreliable pattern where it's located that's a bogus projection.

Some are now pointing to a possible H&S topping pattern since the May low with the left shoulder in June, the head in early August and the right shoulder being built now. A break of the neckline near 1040 projects down to 950 (1130 high to the neckline near 1030 = 100 points and a break from about 1050 - 100 = 950). Again, this is in the middle of a consolidation since the May low and is very likely not a H&S pattern (meaning the downside projection from it is probably not valid). Interestingly, 950 is a support level from the January and May 2009 highs and therefore does make for a good downside target.

However, when you look at the weekly chart above you can still visualize a H&S topping pattern since the left shoulder in January 2010, the head in April and the right shoulder in August. The neckline is shown in bold blue on the daily chart and a break of it near 990 would project down to 796 (1220 high down to neckline near 1026 = 194 points so 990 - 194 = 796). I'm using some Fib relationships between waves to make my projection and the next leg down shown on the weekly chart would take SPX down to about 840 before consolidating and dropping further into the new year.

Moving in closer with the 60-min chart, since the low on August 31st, each of the 6 trading days since then has been started with a gap move. Of those 6 days 5 were gaps to the upside. Almost the entire rally from August 31st happened before the cash market opened. It's a very good example of the manipulation we're seeing during the after-hours sessions so as to get the market moving at the open, with a clear bias to push the market higher. This is not normal trading and unless you were positioned prior to the next trading day there wasn't much left to trade. I can't help but believe this is going to come back and bite the market big time but until it does it is what we have to deal with.

S&P 500, SPX, 60-min chart

From a slightly shorter timeframe than the daily chart, I'm showing on the chart above the possible moves over the next few days. The first thing is that the rally may have finished at this morning's high--the exhaustion gap. An immediate move lower on Friday would strongly suggest that. But if the market pushes a little higher then SPX 1115 is the first upside target to finish the rally. If the bulls can overcome resistance there they should then be able to push it up to 1130 for a retest of the June and August highs (and the top of the potential sideways triangle pattern shown on the daily chart). The negative divergence since September 3rd (last Friday's high) is a warning to those chasing the market higher.

The DOW has been struggling with its 200-dma this week and so far that moving average is winning the battle. For the past 4 days in a row the DOW keeps getting beat back by this average and today's shooting star doji at that resistance line looks bearish. If the bulls can push through it I see an upside target near 10620 and then potentially all the way up to 11042 but I will admit I'm having trouble envisioning that kind of rally from here. The downtrend line from April is currently near 10550 so that's another line of resistance that the bulls will have to contend with if they can get through 10450 on a closing basis.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 10570
- bearish below 9940

NDX has been relatively strong this week and has driven up closest to the top of a potential sideways triangle pattern, the same as shown on the SPX chart. If NDX can rally above 1919 it will open up to the door to 1966 where the bounce off the July 1st low would have two equal legs up. But at this point the sideways triangle can be considered complete and the next move should be a decline below the July 1st low (1595 would be two equal legs down from April).

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 1919
- bearish below 1765

While NDX was rallying strongly since last week the semiconductor index was blowing raspberries and not cooperating with the tech rally. Its underperformance has been a bearish divergence and a tech rally without the semis is suspicious. After pressing up to a resistance zone of 326-331 last Friday it dropped back down and looks ready to resume its decline. That would be a drag on the techs and the rest of the market.

Semiconductor index, SOX, Daily chart

The RUT has been relatively weak this week as well and is again a bearish divergence compared to the blue chips and big caps. It's a defensive move when money leaves the small caps for the safety of the big caps. The RUT has been struggling with both its downtrend line from April and its 200-dma. It's been using its 50-dma as support and a break above 645 would be bullish for a run at least up to the 660 area to reach the top of a potential sideways triangle pattern. Otherwise a break below its 50-dma and 20-ema (624) would be a sell signal.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 665
- bearish below 590

The BKX banking index tagged both its downtrend line from April and its 50-dma today and was rejected by both. A continuation lower on Friday would be a sell signal whereas a push higher would then have to deal with its 200-dma at 48.38.

KBW Bank index, BKX, Daily chart

The Trannies were weak today relative the broader market. Between it and the SOX I haven't had a good feeling about the bulls' efforts to rally this market, especially when it's been created in the pre-market hours. The TRAN has been struggling with its downtrend line from April, a fairly common theme this week. If it can close above today's high near 4447 it could have a shot at the price projection near 4663 for two equal legs up from July 1st. A drop below the cluster of moving averages (20-ema, 50-sma and 200-sma) around 4254-4281 would be a sell signal.

Transportation Index, TRAN, Daily chart

The commodity related equity index continues to mirror the broader stock market and is in a slightly different triangle pattern, which is more like a rising wedge pattern since the May low. But the outcome should be the same and the only question is whether this index will reach the top of the wedge or not, currently near a Fib price projection near 793. A drop back below its downtrend line from April and its 200-dma near 768 would be a sell signal.

Commodity Related Equity index, CRX, Daily chart

Gold has essentially tested its June high and is still within a rising wedge pattern from the late-July low. So it has further upside potential to the top of a larger wedge pattern (shown on the weekly chart next) near 1285. But a break below its uptrend line from July 28th (minor break today) and its 20-ema, near 1238 and climbing, would be the first be bearish heads up that the rally has finished. Note the break of the uptrend line on RSI, the first indication that the rally is about to break.

Gold continuous contract, GC, Daily chart

The bigger picture of gold shows how it has been working its way up underneath its broken uptrend line from October 2008. The price highs since November 2009 have been showing strong negative divergence. To expect gold to go much here from here would be expecting a bit much. I think it will be just the opposite--look for a strong decline as the bear market takes a bite out of gold bulls as well as everyone else.

Gold continuous contract, GC, Weekly chart

Silver has been showing a little more relative strength to gold lately and in so doing it has pressed up to the top of a rising wedge pattern that it's been in since the July 2009 low and November 2009 high. For the last two weeks I've been posting the silver weekly chart suggesting traders watch for a push to about 20.20-20.30 to complete its rally (looking for a small throw-over above the top of its wedge pattern). The high so far is 20.18 so it might push a little higher but today's decline in both gold and silver are a warning shot across the bow of the USS Metalship.

Silver continuous contract, SI, Weekly chart

The gold miners may be giving us a heads up about the metals as well. Today's big red candle looks a little ominous. The decline found support at its broken/recovered uptrend line from February, and just above its 20-ema, so there's still hope for the bulls for at least one more push higher. The last line of defense for this index is the bottom of its up-channel from July, currently near 51.50. Below that should indicate the next big leg down is underway. Note the same bearish divergence at the new highs as gold.

Gold Miners, GDX, Daily chart

Oil has been consolidating since its August 25th low. The 20-ema has been holding it down although it made a quick poke above it yesterday but wasn't quite able to make it up to its 50-dma. If the bounce gets a little bigger I see the potential for oil to make it up to its 200-dma near 77.48 but the pattern since August 25th is not at all bullish. It's a bearish continuation pattern and the next leg down could start at any time, and it should be strong to the downside.

Oil continuous contract, CL, Daily chart

The only major economic report Friday morning is the wholesale inventories report, which should not move the market.

Economic reports, summary and Key Trading Levels

The market should be left on its own Friday, reacting to whatever news comes from overseas. If the lifters show up again in the early-morning hours we'll get another gap up to start the day. If most of the shorts are out of the market and/or the bulls are tired and out of money then the gap up will meet the same fate as today's gap.

There are some cycle dates pointing to September 9-11 as a turn window and SPX 1104-1115 are pivotal levels. If SPX is able to capture 1115 and keep the rally alive past Monday then there's a good chance we'll see the June and August highs near 1130 at least tested. The sideways triangle pattern discussed with its daily chart suggests we'll get no more than a throw-over above 1130 so be careful on any break above that level that does not hold--it would be a bull trap and the next leg down from there could be to 950 in less than a month. But if 1130 is exceeded and held for more than a day we should see the 1158 target achieved (two equal legs up from July). For now I would not have higher expectations than that. All this talk about SPX 1250 is not a reasonable expectation (imo) but obviously that will warrant further review if and when SPX achieves 1158.

The Gann Square of Nine chart points to 1104 as being pivotal (180 degrees up from the 1040 low). The midpoint of this year's range is 1115, which is also the 200-dma. That's why a move above 1115 would be bullish. Back below 1084 would be bearish. In between could be marked with a lot of choppy price action so stay cautious in this gappy market. With the multiple Hindenburg Omen signals (confirmed), the VIX reversal signal, the turn-cycle date, a potential misdirection day today before opex and the 1101-1115 resistance area holding, I'll continue to give the nod to the bears until proven otherwise. A drop back down below Thursday's lows would be bearish and likely an indication the rally has finished.

We're heading into opex week be careful about unexpected moves coming out of nowhere. Good luck and I'll be back with you next Monday or Wednesday (I'll need to switch since I'll be traveling back home to Seattle next week).

Key Levels for SPX:
- cautiously bullish to 1130-1135 and then to 1158
- bearish below 1080 and more bearish below 1040

Key Levels for DOW:
- cautiously bullish above 10570
- bearish below 9940

Key Levels for NDX:
- cautiously bullish above 1919
- bearish below 1765

Key Levels for RUT:
- cautiously bullish above 665
- bearish below 590

Keene H. Little, CMT