Market Stats

In what should be a very familiar pattern by now, the stock market gapped down and even sold off some more after an initial morning bounce. But by midday the bulls (or someone with a lot more money than most market participants) had decided the bears had had enough fun for one morning. They then methodically and consistently started the buying and drove the market back up to its highs for the day, resulting in a sharp spike up on the 30 and 60-min charts. The techs and small caps were relatively strong (bullish) while the banks were relatively weak (bearish) but there is a pattern that supports a rally in the banks this week, which I'll review with the chart.

The mix between the techs and small caps vs. the blue chips and banks leaves us guessing as to what the market is up to. Was today's midday reversal something the bulls can hang their hats on or was it just a manipulation in a low-volume environment? Does the market have at least a larger pullback coming or was the decline into last week's low all we're going to see? An interesting observation by Richard Russell is that it's bearish when a market gaps down and then rallies back up in the afternoon but still closes lower for the day, which the DOW and SPX did. The rationale behind his observation is that it takes a lot of buying power to rally the market back up but it may have been for naught since no new high was accomplished. It's simply something to be aware of in case we see further weakness on Tuesday.

We've entered a typically bullish period for the stock market so there are a lot of hopeful bulls eagerly waiting to buy the market and enjoy the rally. But what's typical about this year? Were we not supposed to sell in May and go away? Was September/October supposed to be a down period for the market, as it typically is? If none of these things happened, might the typically bullish holiday period turn out to be another market head fake? We of course have no way of knowing the answer but I mention this simply to caution those who are buying because of the historically bullish period between now and the end of the year. There has been nothing typical about this year.

The next argument by the bulls is that we should not fight the Fed. I'm not sure I know what that means. In 2008 did the Fed engineer the market decline? I think the market gives the Fed way too much credit but I suppose it's natural to want to believe that the market can be controlled (we hate not being in control). The market happens to be controlled by something we don't understand very well -- human emotions and mass psychology. When the masses turn the market turns, regardless of what the Fed wants. So again, there is nothing typical about this market, including "don't fight the Fed". The market will do whatever it wants to do and depends on how the traders en masse are feeling. The trick is figuring out what mood is driving the market and right now it's hopeful and therefore bullish. Just be watchful for when hope turns to fear.

Speaking of hope, there's been a lot of it in the market recently. The bullish sentiment continues to hang around in very bullish territory which from a contrarian perspective is bearish. We don't know when the switch will be flipped but when we have a very large bullish component it means the majority are owners of stock. Keep in mind that stock holders are sellers in waiting. It's when the majority of traders is bearish and has sold most of their stock that the market is then ready to rally (short covering as well as a desire to get back into stocks once it appears a bottom is in place).

The Daily Sentiment index (DSI from trade-futures.com), AAII investors' poll and the Investor's Intelligence Advisors' survey have all reached extremes in bullishness not seen since prior to the 2007 market highs. With SPX and the DOW pressed up against their 62% retracement of the 2007-2009 decline I think that's a dangerous combination. We've seen deterioration in the market breadth at the latest high and two weeks ago the number of buying climaxes hit an extreme not seen for at least six years (a buying climax occurs when the stock makes a new high and then closes below the previous day/week).

When mutual fund managers feel bullish they will of course be buyers of stock, especially if they're chasing performance so as not to get beat by their competition or the market (many measure themselves against the S&P 500). One measure of their bullishness is to look at how much cash they have as a percentage of their total assets. Currently it stands at a historically low level of 3.5%. By all these bullish sentiment indicators we've got all four major groups -- individuals, traders, advisory services and fund managers -- universally bullish at an extreme not seen in years.

The current danger for the market is the fact that we have this extreme bullish sentiment at a time when the market breadth shows a clear deterioration in the rally. The combination is usually dangerous for the bulls. Can the market hang on into the end of the year? Absolutely. Is there a risk that it won't and we'll get just the opposite -- a strong selloff instead? Absolutely. Both sides need to be careful here. This market seems to know just one direction at a time, with very little ebb and flow found in a "normal" market.

We're also seeing tops in many of the sectors, commodities and foreign exchanges, which is in keeping with an all-the-same market, especially as it relates the U.S. dollar. The dollar has been beaten down and is still heavily shorted as people hold the carry trade into the holidays. If that trade starts to unwind in a big way there could be some significant reversals in all the other asset classes.

The blue chips were the weaker indexes today so whether that's bullish (money running into the hot stocks in anticipation of the holiday rally) or bearish (from a contrarian perspective) is too hard to tell. We need to trade the individual charts, depending on what you're trading. Starting off with the DOW, the weekly chart shows the possibility for another leg up into the end of the year (dashed line) but I'm having my doubts at the moment about that. If it happens it would mark one of the best shorting opportunities I will have seen since the rally from March 2009 began. A break below the August 9th high near 10720 would negate the short-term bullish potential and instead point to a bigger move down. Keep trades on a tight leash in the meantime while we wait for an answer.

Dow Industrials, INDU, Weekly chart

This week's price direction is up for grabs. As mentioned above, the rally from the midday low to a close that was still in the red left a potentially bearish gravestone doji/hanging man for today's candle. It's possible we'll see the market sell off tomorrow. But considering the bullish tilt to the week it's equally possible we'll see the market at least chop its way higher in a bounce to correct the decline from the November high, which would be part of a larger a-b-c pullback correction prior to heading higher next month (dashed line). As long as any pullback stays above 10720 the bulls will maintain the potential for another rally leg.

Dow Industrials, INDU, chart

Key Levels for DOW:
- cautiously bullish above 11,360
- bearish below 10,720

A broken uptrend line from October 4th currently sits near SPX 1214, which would have it closing the November 12th gap (at 1213.64). If the bounce takes a little longer into the end of the month, the broken uptrend line crosses the April high near 1220 next Monday. So we've got some upside potential to watch for. But a break below 1173, last Tuesday's low, would signal at least a deeper pullback before potentially heading higher again. In either case, as shown by the green wave count, a rally this week would likely lead to another leg down as part of a larger a-b-c pullback before rallying into the end of the year.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1220
- at least short-term bearish below 1173

The choppy price pattern since last Thursday is what makes it more difficult to figure out the short-term direction of the market. If the market rallies tomorrow, two equal legs up from last Tuesday's low would be near 1212, obviously close to filling its November 11th gap. We could see a deeper pullback, triggered with a drop below 1184, before another leg up to finish a 3-wave bounce off last Tuesday's low. Or the market may be chopping up and down in preparation for a stronger selloff (with a drop below 1173). There's simply no good way to tell from here so trade carefully and go for day-trade base hits and get out of the way.

S&P 500, SPX, 60-min chart

Helping the techs today were the semiconductors, with the SOX up +1.1%. The techs and small caps were the only indexes to exceed Friday's highs so that's a bullish sign from the perspective of participants' willingness to take on more risk. That can backfire on the market but at least for now it's bullish. If NDX rallies above 2188 I think there would be a good chance for the new annual highs sooner rather than later. Otherwise, like the blue chips, we could see at least a deeper pullback before pressing back up into the end of the year. Below 2015 would indicate more trouble for the bulls.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 2188
- bearish below 2015

The RUT continues to press up against its broken uptrend line from August through the November 1st low, closing right on today. If it can get back above this trend line and hold it then we'd have a bullish statement. In the meantime the potential is for a bearish kiss goodbye after a retest. The sideways triangle consolidation is just an idea that I'm considering at the moment. Further price action is needed to help determine whether or not there's a good chance for it. A drop below 701 would negate the sideways triangle but still leave open the possibility we'll get an a-b-c pullback to perhaps the 690-700 area before pressing higher again. A break below 672 would negate the bullish potential altogether.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 732
- at least short-term bearish below 701 and longer-term bearish below 672

Bonds, as measured by the TLT, have been rallying since the low on November 15th but so far it's just a 3-wave bounce and therefore fits as a correction to the previous decline. I see a little more upside potential for the bounce to the 98 area (two equal legs up for its bounce off the November 15th low, the 50% retracement of the April-August rally and a broken trend line along the lows from September). Much above 99 would look bullish for TLT but at the moment I see a greater risk for a selloff to continue (despite, or maybe in spite of, what the Fed is trying to accomplish).

20+ Year Treasury ETF, TLT, Weekly chart

This morning, as the broader averages were rallying off their gaps to the downside, the banks were having nothing to do with it. When the banks started making new daily lows in the morning that's when the broader averages started to follow. It was another case of "follow the money". But there's clearly an agenda to lift the broader averages during this holiday-shortened week as the market made a grand effort to rally off the morning lows. But the banks once again were not participating. That remains a warning for this week and potentially longer. As one trader friend said to me, very simply, "banks in trouble = business in trouble = depositors in trouble = economy in trouble = stock market in trouble."

On a longer timeframe we see the same picture between the banks and the broader averages. In the chart below I'm showing a comparison of the BKX and SPY (SPY being 1/10 of SPX and makes for a closer price comparison). Note that back in 2007 the banks started a major divergence from the rest of the market. While SPY went on to make higher highs into October 2007 the banks were not participating. It was one of the signals I used back then to warn about an impending top. You can see it's not a good trading signal but instead just a warning to bulls that we were not looking at the start of another major rally just because it broke above the July high of that year. It was instead a failed retest (double top).

SPY vs. BKX, 2002-2010

Now look at the divergence in 2010 and you can see we have a very similar setup. And the warning is the same -- it's likely that the rally from August is a test of the April high and not the start of a major rally leg. It remains possible for a minor pullback/consolidation and then a new high into the end of the year, but the risk is increasing for bulls if the banks don't start playing some serious catch up.

But the BKX index found support where it needed to today. There is a good possibility we'll see the banks rally this week but they'll need to get started right away on Tuesday. The uptrend line from August held on a closing basis and the setup is good for a bounce to correct the decline from the November high. A break below 44.66 would leave it vulnerable to a stronger breakdown from here.

Banking index, BIX, Daily chart

The TRAN is ping-ponging between the April high and the high on November 15th, near 4880. If the rally continues this week we could see the TRAN head for a new high with an upside target near 5065. Otherwise there is the potential for a stronger selloff to its 50-dma near 4676 or its broken downtrend line from May 2008, near 4600.

Transportation Index, TRAN, Daily chart

Continue to watch the dollar since its moves are usually a good indication what everything else is going to do in reverse. When you see divergence it's a time to be careful. The dollar bounced back up to its downtrend line from June but then pulled back from it again. The pattern would look best with another leg down for an a-b-c pullback to correct the leg up from early November. That would do a nice job at setting it up for a stronger rally and break its downtrend line. That scenario would point to a rally this week in the stock market but then trouble for the bulls into next month. So we watch...

U.S. Dollar contract, DX, Daily chart

If the dollar pulls back we should see gold push a little higher for its bounce. Depending on how the uptrend line from July is drawn the bounce has either bounced back up to retest it or has a little higher to go in order to test it. In either case, the bounce continues to look like a correction of the impulsive decline from the November high. Once the bounce finishes we should see a stronger leg down follow. The big test in that case will be a test of its uptrend line from October 2008, currently down near 1275.

Gold continuous contract, GC, Daily chart

Silver has bounced harder than gold and may be able to test the top of its parallel up-channel from August, currently near 28.40. Like gold, the bounce should be a correction to the decline from the November high and once it completes we should see a very strong selloff in silver.

Silver continuous contract, SI, Daily chart

Oil now looks similar to the metals (all of which are counter to the dollar). The current bounce, which could press a little higher, looks like a correction to the decline off the November high. Once the bounce completes and it breaks down below 80 we should see a stronger selloff.

Oil continuous contract, CL, Daily chart

There were no major economic reports on Monday but tomorrow we'll get the GDP numbers before the market opens, followed by the existing home sales report at 10:00 AM. The minutes to the Fed's last FOMC meeting will be released tomorrow afternoon. Unless there are any surprises, mainly negative ones, we should not see the market react much to these reports. Wednesday is the busy day for economic reports, which could clearly have some influence on the morning's futures.

Economic reports, summary and Key Trading Levels

Hewlett-Packard (HPQ) reported after the bell and the stock did well in after hours. They reported better than expected revenue and earnings. They did not say anything that scared investors away. That had equity futures jumping higher after the bell but they've since sunk back down below the day's closing prices. HPQ has held most of its after-hours gain of about 1.27 from the 43.25 closing price.

We've got two more full days of trading ahead of us this week and then a half day on Friday. Most traders are leaning to the long side in expectation of a normally bullish week. Volume is expected to be light and will get lighter as we get closer to Thursday. This makes for an environment that's challenging for bears looking for an entry. So be careful if you're looking for a short entry.

The flip side of that coin is that we've got too many looking for this week, and beyond, to be bullish. This market has proven over and over that it does not like to accommodate the majority. The rally off today's low without a new high above Friday's for the DOW and SPX is potentially bearish. Therefore be careful if you're looking for a long entry.

It's possible the market may not go anywhere and that would make it a good week to sell option premium. Look for support and resistance, some signs of a reversal and sell a put spread at support and a call spread at resistance. Come back next Monday to collect your premium. Wouldn't it be nice if it were that easy?

The charts are not clear as far as short-term direction (this week) and I could argue equally strongly for a rally as well as a decline. When the charts are not clear enough for a good swing trading opportunity it's a good time to be flat or looking for day trading opportunities. When it's this way in a holiday-shortened week it's doubly important to pick and choose your positions carefully. Remember, flat is a position and oftentimes the one that will make you the most money (by not losing it). Let this market bounce around a little and tell us with breaks of some key levels which direction is probably the one with least resistance. Otherwise you'll risk getting chopped up and whipped out of your trades.

Good luck this week and I hope everyone has a very enjoyable Thanksgiving with family and friends. No matter what our personal situation, we have much to be thankful for. We can always want more, and to hope for a better (fill in the blank), but concentrating on what we do have, especially family and friends, is what gives us perspective. For those of us who trade for a living, it's sure a lot better than working for the man, no matter how frustrating the market can be at times. Happy Thanksgiving. I'll be back with you a week from Wednesday.

Key Levels for SPX:
- cautiously bullish above 1220
- at least short-term bearish below 1173

Key Levels for DOW:
- cautiously bullish above 11,360
- bearish below 10,720

Key Levels for NDX:
- cautiously bullish above 2188
- bearish below 2015

Key Levels for RUT:
- cautiously bullish above 732
- at least short-term bearish below 701 and longer-term bearish below 672

Keene H. Little, CMT