Market Stats

There were no significant economic reports for the market to fuss over and no major headlines about what's happening in MENA (Mid East, North Africa) to disturb the market. The DOW closed down -1 point. Any questions?

As has been true for much of this week, the techs were relatively weak. The SOX spent the entire day in the red and finished down -3%. That put pressure on the tech indexes which closed down about -0.5%. The RUT was also a little weaker than the blue chips, closing down -0.4%. The blue chips held up better and that's always a little worrisome since it has me thinking defensive -- money rotates into the relative safety of the big caps if there's worry about a coming decline. With the market consolidating sideways for the past 1-1/2 weeks it would be more bullish to see money rotating into the techs and small caps. So that might be a hint for how things will resolve here.

If you tried trading today there's a good chance you fed your broker but not yourself. If you are a fast day trader (get in and get out quick with some profits) you had another good trading day as even this afternoon provided some nice trading opportunities between the trend lines of a down-channel (bull flag?). Otherwise if you were trying to get positioned for the next move, and keeping a relatively tight stop on your plays you probably got whacked around a bit.

The market is clearly consolidating for what will likely be a big move, or at least that's the potential. There's no shortage of pundits telling us the consolidation following the low in February is bullish and others telling us the volatility that we're currently seeing is evidence of topping price behavior. The daily and intraday price swings certainly tells us there's a big argument going on at the moment and who will win should be known shortly. I've got some important price levels to watch to help get us in on the next good trade.

One thing I'm wondering about is whether March will mark a turning point for the market. March 6th is the anniversary date of the 2009 low, which was on Sunday this year, and the closing low was on March 9th, today. The market seems to love anniversary months if not the specific dates. For example, the October 11, 2007 high followed the October 10, 2002 low.

The month of March has been an important turn month in the past. The March 24, 2000 high was followed by a spike low on March 22, 2001 followed by a rally before plunging to a low in September 2001. There was a high on March 8, 2002 that was retested on March 19th before plunging to the July 2002 low and then October 2002 low. The March 2003 low was on March 12th. In 2005 the March 7 high was not exceeded until July. In 2007 the market dropped to a low on March 5 and retested it on March 14 which then led to a strong rally into July 2007. The low on March 17, 2008 led to the rally into May 2008.

So the natural question is whether or not this March will be an important turn month and since we've rallied into it a turn would mean to the downside. Even if it does turn into a turn month the more immediate question is whether or not we'll first get a new high above February's.

On the SPX weekly chart I've added Fib time projections from the July 1st low that are based on the March 2009 - April 2010 rally. In other words I want to see how the 2nd leg of the A-B-C rally from March 2009 is relating to the 1st leg since the two legs of an A-B-C move are often related in both price and time. The price relationship is shown with the price projection at 1352.67, which is where the 2nd leg of the rally (wave C) is 62% of the 1st leg of the rally (wave A). The time projections from July 1st, the end of the wave-B pullback, are the vertical lines.

S&P 500, SPX, Weekly chart

Interestingly the 38% time projection marked the low in November and the 50% projection marked the low in January, lending credence to the time relationships. Now the question is whether the 62% projection, which falls on March 14th (so next week on the weekly chart), will mark the pullback low for March. That's certainly the bullish way to view this and I can't argue with that. But if we see a rally into next week then I think it will instead be a price/time setup for a reversal back down. The more immediate question is whether or not we'll see another leg up for the rally out of the current consolidation since the February 24th low.

The daily chart below is messy because of the multiple trend lines trying to identify support/resistance and what kind of pattern might be playing out. The uptrend lines from August-November (the lower one) and November-January (the upper one) have been containing price action since the February 24th low. I've drawn a sideways triangle for the consolidation since that low. I'm projecting a move down out of this consolidation (bold red path) with the alternate wave count calling for another leg up to achieve the 1352.67 price projection on March 14th (light dashed line). At the moment I'd say it's a coin toss as to which will play out. And certainly price could rally higher than 1353 (the top of the larger rising wedge pattern is near 1370).

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1332 to 1353 - ?
- bearish below 1304

Based on my reading I think most traders are looking for an upside resolution out of the current price consolidation since the February 24th low. Many are comparing it to the consolidation following the November pullback. But I see enough differences between the two consolidation patterns that keeps me somewhat neutral to perhaps leaning bearish. The emini ES chart below shows the volume associated with the pattern and as noted on the chart, the volume tended to spike at the conclusion of the selling during the November consolidation. The current consolidation is seeing the volume spike at the start of the selling. The November selling was punctuated with brief bouts of capitulation whereas the March selling shows signs of institutional sell orders (liquidation), followed by recoveries and then more selling. In other words, distribution of inventory rather than accumulation.

S&P 500 e-mini contract, ES, 120-min all-hours chart

The other difference between the two consolidations is the higher volume during the current one, which again could be a sign of distribution rather than accumulation. And of course if too many traders are leaning to the upside out of this typically bullish pattern, a break to the downside would likely be followed by strong selling. So follow the break but be careful if you're only thinking long out of this.

Another messy chart with multiple trend lines is the 60-min chart below. While I'm showing the downtrend line from February 18th, which could be the top of a bullish sideways triangle pattern, the bold blue lines show an ascending triangle instead. This is following the spike down from February 18th and as such would be a bearish continuation pattern. In other words, depending on the color of your glasses you'll see what you want to see. Remain open to all possibilities here since it's a coin toss. Even for a bearish resolution I'm showing the possibility for one last stab higher to 1334 where the move up from Monday would have two equal legs up and finish the larger corrective pattern from the February 24th low. A small break above the triangle would leave a head-fake breakout followed by a reversal. Above 1334 would be bullish and a break below the triangle, so below 1304, would be bearish.

S&P 500, SPX, 60-min chart

As noted on the daily SPX chart above, there is a Gann level at 1354 that could come into play if we get another leg up. The fact that the Fibs point to 1353 and Gann points to 1354 could be very significant, especially in a potentially important turn window (March). Again, this is not a prediction but simply a short-term possibility for the bears to consider in their risk analysis, especially if you're in March long puts or short calls. In the meantime there is downside risk and back below 1304 would mean get short and hang on for the ride.

To show where the 1354 comes from, the Square of Nine chart points to 1347 and 1354, highlighted at the bottom of the chart below, as two potentially important levels. The February high came within 3 points of the lower target and the 62% projection for the rally from July at 1352.67 would essentially be within a point of the upper number. So we either topped or we could see a minor new high according to the Fib time/price projection and Gann chart. The following Square of Nine chart shows the important levels identified on the red radials (the spiral at the center is there simply to show this chart is based on the Fibonacci spiral).

Gann Square of Nine

You can see that 1347 is on the same radial but opposite 768 and 1576, the October 2002 low and October 2007 high, respectively. The other radial shows 666, the March 2009 low, and then 1354 at the opposite end. I can't explain why (can anyone explain why Fibonacci defines so much in our universe on down to cell structure?) but it's uncanny how well it works. Or at least it shows us levels to watch for potential reversals. So we've either already had the reversal off 1344 or else we have the potential to get a retest or minor new high to 1353-1354 and if it were to happen by March 14th it would be an even more powerful setup.

Deja vu with 1987?

Now to a discussion why our current location may be very important. I presented a short-term bullish idea for SPX to rally to at least a minor new high so now here's a bearish projection and it's a scary one.

Jeff Cooper often writes about Gann cycles and other cyclical studies and has pointed out recently many similarities between the lead-up to the 1987 crash and where we are today. That's not a prediction for a 1987-style crash but it is something to be aware of. As he often says, patterns may not repeat but they often rhyme. When I look at the price pattern between then and now I can certainly see a fractal pattern playing out as we get what looks like a corrective bounce off the February 24th low.

Following the August 1987 high there was a sharp drop to the uptrend line from January 1987 and then a 3-wave corrective bounce off it. The break of that uptrend line, followed by the break of the low at the trend line, is what led to the crash. Anyone paying attention to that trend line could have saved themselves a lot of trouble.

SPX 1987 and 2011

Compare that to where we are today -- the rally pattern from last August has followed a very similar pattern (the fractal) and the sharp decline from the February high found support at the uptrend line from August and has so far led to a corrective bounce above the uptrend line, just as it did in 1987. If SPX drops below its uptrend line and breaks below the February 24th low near 1294 I don't think I'd want to hang around on the long side, daring the market to repeat what it did in 1987. Again, that's not a prediction but it's something I see as a high-risk potential for the market right now. We never know where or when a Black Swan event will occur.

For the DOW's consolidation pattern since February 24th I've drawn a bear flag rather than a sideways triangle as shown on the SPX daily chart. Either is just a guess at the moment but what's bearish is the choppy price pattern on top of its uptrend line from August-November. Typically this leads to a break of support. The top of the flag is currently near 12320 and therefore a rally above that level, that holds above that level, would be a bullish breakout and could target 12600 into opex week, a typically bullish week. Otherwise a drop below 12040 would be a confirmed breakdown from the bear flag and the uptrend line. Let price lead the way and avoid whipsaws in the middle.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,320 to 12,600
- bearish below 12,040

OK, here's a question -- how many times can an index bang on support before it breaks? NDX has now used its 50-dma seven times since February 23rd and is still holding. That might not be a record but it's certainly getting old. The longer support (or resistance) is tested the weaker it becomes. As traders keep buying support it's chewing up that buying power and making those buyers more and more nervous each time it's tested. We end up with a lot of longs that are nervous sellers-in-waiting. At this point I'd be surprised if the 50-dma holds. The SOX firmly broke its 50-dma today after using it as support since February 23rd.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2420
- bearish below 2307

On the RUT's daily chart below I'm showing yet a different pattern for the price action since its February 23rd low. It could be forming a rising wedge pattern which would fit as an ending diagonal 5th wave, which calls for at least a test of the February high and probably a minor new high. It's currently stuck between its broken uptrend line from August-January as resistance and its 50-dma as support. I think it's going to break down but any strong rally out of this, as in above 840 with no sign of slowing, could be very bullish so bears don't want to hold onto a short position hoping it will come back down. Stop yourself out and then wait for it to prove it's going to come back down. If you're long I would use a close below the 50-dma as an important exit signal.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 829 to 840-850
- bearish below 805

Bonds have pulled back some since their highs on February 28th but the pattern still looks good for a further rally. TLT has dropped back down to its broken downtrend line from late December and could drop a little lower yet (retest the February 9th low?) but after a 5-wave move down from August 2010 it's due at least a correction of that decline. If bonds do get a bigger bounce that's going to put some pressure on stocks (rotation out of stocks and into bonds).

20+ Year Treasury ETF, TLT, Daily chart

Unless the banks are going to head for new highs following the bounce off the February low, the BIX looks like it could be building a H&S topping pattern since January's left shoulder. The neckline is near 148.30 and a downside projection for the pattern is near 136, only slightly below the 200-dma at 137.53.

Banking index, BIX, Daily chart

Bank of America (BAC) got a lot of the credit for yesterday's rally, thanks to their projections into 2013-2014 (no mention of 2011 or 2012). Excuse me while I sneeze. And they say they need permission from the Fed to pay a dividend, buy back stock and probably to go to the bathroom. And the market rallied on this non-news? What's truly amazing is the fact that the market paid any attention at all to it. At any rate what's interesting is that the rally took BAC right up to its downtrend line from January's high (February's lower high was a bearish non-confirmation of the broader market's new high). It almost closed its February 22nd gap at 14.75 but missed it by a few pennies (yesterday's high was 14.70). It would be bullish above 14.75 but makes for a great short play right here, with a stop at 15.

Bank of America Corp, BAC, Daily chart

The TRAN has been struggling the past two days at its 62% retracement of the February decline. The choppy bounce pattern suggests it's in a correction of the decline and therefore should be looking for the resumption of the selling once the bounce completes.

Transportation Index, TRAN, Daily chart

The U.S. dollar might not be finished pulling back but with the continuing bullish divergence at the lows, along with a very bearish sentiment (Daily Sentiment Index is showing only 7% bulls, a reading that has led to dollar bottoms in the past), tells me we should be looking for a rally soon. The bottom might be in, which would be better confirmed with a rally above 77.30, and once the dollar starts to rally I suspect it will be strong. There will be a lot unwinding to be done as the short-the-dollar-long-everything-else trade gets reversed.

U.S. Dollar contract, DX, Daily chart

The DSI reading of 7% bulls for the dollar is reflected in the actions taken by the hedge funds and forex dealers who are currently betting record amounts against the dollar. CME data shows that dollar short positions increased dramatically in the last week of February from about 200K contracts to 281K contracts. The dollar amount of shorts zoomed higher by $11.5B to $39B, which is $3B more than the previous record high in 2007. Most are convinced the U.S. dollar will continue to lose its appeal as the world's reserve currency and are heavily shorting the dollar on this expectation. We know what happens when too many bet in the same direction.

While I agree with them that the policy actions by the Fed and the profligate spending by the U.S. government is reason to believe the dollar is circling the drain and that high inflation is on its way, I continue to believe most are early on this call. I think we have a bigger problem with another round of debt destruction (paying it down and defaulting), which is deflationary, and this will cause another swoon in the stock market. People will likely rush back into the U.S. dollar for its relative safety (relative being the operative word).

If the dollar does begin to rally, and especially if it rallies strong, commodities, including gold, will take a hit. I'm seeing topping patterns in many commodities, including copper. But so far gold looks strong and it's been in a steep up-channel since the end of January and remains bullish as long as it stays in the channel, the bottom of which is currently near 1422. A break below 1410 would be a confirmed breakdown. In the meantime the pattern would look best with a new high and I've depicted a move up to 1466 and to the mid line of the up-channel by the end of next week.

Gold continuous contract, GC, Daily chart

The reason I'm using 1466 for the price projection is because that's the 127% extension of the December-January decline, a very common reversal level. The two other common upside targets are at 113% (1448 and almost reached) and 161.8% (1508), which would also be up to the top of a longer-term up-channel from 2005 (not shown on the daily chart above). So stay long gold until it proves the leg up from January has completed. Once this rally leg is finished it will be due a very large, multi-month pullback so keep your stops tight if you don't want to ride out a deep correction.

Oil may be topping here, or at least that's the setup. It did a small throw-over above the top of a potential rising wedge pattern and closed slightly back inside, so far leaving a doji star at resistance. It has also achieved a 62% retracement of its 2008-2009 decline. If oil keeps rallying I'll redraw the lines to identify a parallel up-channel, the top of which is near 118 (where the dashed line points to).

Oil continuous contract, CL, Weekly chart

If you trade USO as your oil substitute the first thing you'll notice in the chart below is how weak it's been compared to oil itself. While oil has retraced a little more than 62% of its 2008-2009 decline USO hasn't even retraced 21.4% yet. We've heard many times that you should not use an ETF for a longer-term buy-and-hold strategy and this is a vivid example why that's true. At any rate, USO also is set up for a reversal from here. It has reached the top of its rising wedge pattern, which is obviously a lot flatter than oil's, and achieved the price projection at 42.78 where the c-wave of its A-B-C bounce off the February 2009 low is 62% of the a-wave. Monday's high was 42.83. Weekly RSI is overbought so a long trade from here would be riskier than a short trade.

U.S. Oil fund, USO, Weekly chart

The quiet week for economic reports continues Thursday with no big changes expected from the prior reports. The market will once again be left to fend for itself and react to any overseas news.

Economic reports, summary and Key Trading Levels

Oil continues to get the blame/credit for market declines/rallies, with the explanation changing on a daily basis depending on what each is doing. It's comical to listen to the pundits use oil to explain the reason for the stock market's move. The bottom line is that oil and the stock market are more often in synch than not. What's interesting though is what happens after a strong rally in oil.

I've consumed enough electronic ink tonight, not to mention your valuable time, so I won't get into the details tonight about what's happening with oil and why it's a harbinger of bad things to come for the stock market but I'll try to get to it next week. While oil and the stock market mirror each other, strong spikes in the price of oil have consistently led to tops for both oil and the stock market. The current spike fits the historical pattern so that's another strike against a continuation of the current rally. For this reason I'm watching oil very closely for hints of a top.

The stock market looks vulnerable. The indexes have either broken uptrend lines, which they're trying to retest, or they're holding above their trend lines (or 50-dma's) but not making a strong effort to get some distance away from support. This has it looking like the indexes are consolidating in front of a selloff. This market has had an uncanny ability to shrug off bearish patterns and start another rally so that remains possible. But I could only guess about that happening again and in the meantime the chart patterns are more bearish than bullish and therefore I have to lean that way. Keep your stops up close if you're long the market and continue to ride it higher if that's the way it goes.

If you're short, or looking to get short, a breakdown could happen fast and therefore have a trading plan ready to go and then execute without having to react to the moment. Know how, when and where you'll enter and know before you pull the trigger where your stop will be. This is a whippy market and it's making it difficult for both sides to enter a trade with a reasonably close stop without getting whipped out of your trade. One method is to trade smaller with a much wider stop and then add to winning trades.

Let the market prove itself -- let price lead the way. Follow the key levels above and hopefully a break either to the upside or downside will then see follow through. If not, stop yourself out and husband your cash carefully so that you have enough fare (capital) to ride the next bus.

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

Key Levels for SPX:
- bullish above 1332 to 1353 - ?
- bearish below 1304

Key Levels for DOW:
- bullish above 12,320 to 12,600
- bearish below 12,040

Key Levels for NDX:
- bullish above 2420
- bearish below 2307

Key Levels for RUT:
- bullish above 829 to 840-850
- bearish below 805

Keene H. Little, CMT