Market Stats

Today's trading volume was marginally higher than yesterday's, which was the lightest trading day of the year. The broader averages were pushed higher today (without the help of the banks so that's a little worrisome) but without stronger volume behind it there will remain some doubt as to how much longer it can last. But with month/quarter end now only a week away we could see the market remain listless as the market runs out the clock so that the bulls can win the quarter. If the market starts back down there's a good chance fund managers will not hang around again, hoping for a recovery before the end of the quarter. Instead they'll likely pull the plug and protect profits. It's this latter scenario that we need to be concerned about and the low-volume rallies are not giving us warm and fuzzies.

The bulk of the rally from last Wednesday's low has occurred during the overnight sessions in the futures market and then the cash market played catch-up in the first 30 minutes of trading. The rest of each day following those gaps saw the market pulling back. So not only did the market not rally during the day but actually gave back some of the overnight rally each day. That's hardly bullish but obviously if you're in a bullish position you really don't care how it rallies. Ugly rallies are better than no rallies (unless of course you're in bearish positions).

With the strong bounce it has collapsed the VIX back down into the teens and that's another danger sign for the bulls to pay attention to. A low-volume rally (lack of conviction by the institutions) combined with a collapse in the VIX is a bearish setup. So while points may be getting posted on the bull's side I would caution all those in long positions to not get complacent here. It smells like a bull trap to me.

That pattern of the overnight rally followed by the regular-hours dip changed on Tuesday as there was no gap up Tuesday morning and no rally during the day so the day ended down a little. This morning also had no overnight rally (although they tried) and started off with a small gap down followed by some more selling. That selling turned into a bear trap as the market rallied steadily higher for the once the low was put in near 10:00 AM. Now the bulls need some follow through on Thursday.

This morning's report on new home sales was dismal and this followed yesterday's report on existing home sales, which was also dismal. The housing market is not healthy and it's not going to get healthier for probably at least another year, after we get through the slug of mortgage resets that peak in early 2012. In the meantime the number of foreclosures will continue to climb as will the amount of inventory on the market. It's why most realize we'll see another year of declining prices and sales. Considering the impact that this will have on the economy it's amazing the market is rallying at all.

I received the following observation/question from Andy:

"Please help me understand this market. Oil is over $105 and climbing. Existing home sales were down dramatically. New Home sales were down dramatically. Home prices were down and look like they will continue to fall. Banks are going to ramp up foreclosures, which means home building will continue to slump. Unemployment is near 9% and in real terms is much higher.

"So, ALL THE REAL THINGS THAT MATTER TO US COMMON FOLKS point to an economy that is going nowhere (well unless you consider "down" as going somewhere). Not to mention increasing cost of living expenses (such as gas and food).

"And did I mention the still real threat of a nuclear "issue" in Japan as well as rampant civil unrest around the globe?

"Yet the markets don't seem to care. It's as if "the markets" seem to be thinking... "Things have been so bad for so long, and are just getting worse. Therefore, things MUST have to start getting better since things cannot just keep getting worse."

"So am I crazy to still think we should be on the lookout for a serious market decline?"

What Andy just described is the disconnect between Wall Street and Main Street and it's what's angering so many people (the "fat cat bankers" will be even more hated in the coming year). All of the issues he mentioned are being ignored right now with the "hope" that it will improve soon -- as he said, it can't get worse, right? There's certainly a lot of hope that the Fed's easy-money policy will continue to float more financial boats. I think that hope is misplaced and I've placed my bets accordingly. Only time will tell if that hope is once again dashed upon the rocks of despair.

New home sales had dropped from January's 284K (which was itself revised lower from 301K) to 250K, for a -16.9% drop. This is another record low and well below the 290K expected by most economists. Comparing to the same month last year, sales were down -28%. The reduction in sales was matched by a large drop in the median sales price as well -- down almost -14% which is the biggest one-month percentage decline on record as well. There is currently an 8.9-month supply of houses on the market, up from 7.4 months in January and 8.0 months in February 2010. No matter what color lipstick you put on this pig it's still ugly (and yet the market rallied).

The only question is how long the stock market can stay disconnected from the real world. We'll know it when it happens since we have a front-row seat.

So let's dive into the charts and see if at least they're telling us anything. I'll start with the DOW's weekly chart tonight. After breaking its uptrend line from August it has now bounced back up and is very close to testing it. There is of course the possibility for another leg up, just like what happened following the previous pullbacks in the rally since last July. Certainly that's what the bulls are expecting to see. Back above the trend line, currently near 12200, would be bullish but until that happens it's setting up for a classic test of support-turned-resistance. A drop back below last week's low near 11555 would tell us the next leg down is in progress.

Dow Industrials, INDU, Weekly chart

The daily chart below shows more clearly the possible coming test of the broken uptrend line. The only problem I see about the expectation for at least a test is that it might not happen. Let's face it, it would be a perfect opportunity for bulls to take some profits off the table, especially after surviving that sharp decline into last week's low, and for the bears to climb aboard for a low-risk entry. The market is usually not so kind to provide that nice a setup. More likely we'll see either a throw-over above the line to catch a lot of stops and pull in some bullish traders, or fail short of the line and then get both sides chasing the market back down. I'm thinking the former but obviously price will let us know soon enough.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,280
- bearish below 11,550

The 30-min chart below shows the stair-step move up from last Wednesday. The spikes to the upside into Friday's high were a result of the overnight rallies and gaps to the upside, which were then followed by the bull-flag consolidations. The longer consolidation on Monday and Tuesday was followed by today's rally to a marginal new high, which so far is leaving a negative divergence shown on MACD. The rally is just shy of the downtrend line from February. The wave count (a double zigzag with two a-b-c's separated by an x-wave) calls for an end to the bounce here or maybe a little higher. The price projections shown on the chart are to show the relationships between the rally legs and the first projection for the current rally leg from this morning is near 12128 where it will be 62% of the rally leg on Friday morning. It will be equal to the Friday rally at 12224. A break below this morning's low near 11972 would be the first clue that the bounce has probably finished.

Dow Industrials, INDU, 30-min chart

SPX has the same pattern as the DOW but hasn't been able to quite make it up to its 50-dma, now at 1304.32. It would also close the March 14th gap down by tagging 1304.23 so that makes for a nice upside target if the bulls can push the market a little higher tomorrow. If it doesn't start to break down from here (or 1304) I see upside potential to the 1320 area and then more bullish if it gets above that level. If that happens I see upside potential to about 1400 and as much as the economic news stinks this kind of move would be entirely possible if the Fed starts hinting about QE3 coming, even if it's going to be a reduced version of QE2. At SPX 1400 it would run into the trend line along the highs from last August and price-level support/resistance from November 2007 and April/June 2008. But if this morning's low near 1284 is broken then it would help confirm that today's rally was likely the last leg up for the bounce from Wednesday.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1320
- bearish below 1284

The analogue pattern that I had been watching between 1987 and today has diverged a little since last Wednesday's low. The high bounce back up could still be part of the pattern but obviously not if it climbs back above the March 3rd high. In 1987 when it started down from the bounce into early October, which is equivalent to the bounce into the March 3rd high this year, it started down at a high rate of speed and then led to the crash in mid October. The past week's high bounce may be diverging enough to suggest the same pattern is not playing out.

SPX 1987 vs. Today

Some similarities still persist though, especially as related to time and moving averages, and for this reason I'm continuing to watch the analogue pattern. For example, on the 20th trading day following the August high in 1987 the S&P had a sharp bounce back up to the 20 and 50-dma's, which had the 20-dma crossing down through the 50-dma at the time. It managed to push marginally higher over the next 8 trading days before starting down in earnest, with a sharp drop back down on the 30th trading day following the August 1987 high, which then led to the crash.

Counting 20 trading days from the February 18th high gets us to Monday, March 21st, which was also a test of the 20 and 50-dma's (just shy of them) as the 20-dma crosses down through the 50-dma. If it were to do the same thing as it did in 1987 it would consolidate for a few days (check) and then push marginally higher to perhaps the 1320 area by the 30th trading day, which puts it at April 4th. That would see the market holding up through month/quarter end and the first couple of trading days of the new month. As happened in 1987, a move back above the 50-dma would get the majority feeling very bullish again but with April being an important turn month in the past, including the most recent one when the market topped in April 2010, I'd be careful about jumping aboard that northbound train. Certainly a rally above the 50-dma and then a drop back down through it should have everyone very defensive.

The scenario laid out above, for a quick rally back above the 50-dma, would be short-term bullish into Monday, April 4th but then very bearish following that. So I'll continue to keep my eye on this analogue pattern and update it again next week.

There's another analogue pattern that says the market might not hold up as well in the short term. There's a similar pattern to last May that's now playing out which points to a major selloff if not a crash. Interestingly, once again the bounce off the initial decline from the April 2010 high (the early-May flash crash) made it back up to the 50-dma and the 20-dma was about to cross down through the 50-dma. The following points of similarity are identified out on the chart below:

#1 -- following the highs for the year (April 2010 and February 2011) there was a 3-wave decline with a sharp decline for the 2nd leg down (the one in 2010 was exaggerated by the flash crash)
#2 -- following the decline there was a sharp bounce up to the 50-dma (almost there now)
#3 -- following the bounce to the 50-dma in May 2010 there was a stronger decline to a new low which took it down to the previous low (February 2010)

As noted on the chart, the decline from the retest of the broken 50-dma was about 125 points so an equal move from SPX 1300 would take it down to 1175, which is also the previous low -- in November 2010.

SPX May 2010 vs. Today

Analogue patterns are interesting and not always accurate of course. If anything they give us a pattern to watch for follow through so that's what I'm doing here. This one says be careful from here (or 1304 at the 50-dma), especially if it starts breaking down from here.

If you're following EW counts with me you'll notice that I changed the move down on the DOW and SPX charts to an a-b-c decline and for the bearish scenario it will be part of a larger corrective decline (which the entire bear market has consisted of). It will continue to make counting waves difficult so be sure you're using other technical tools to back up your counts.

For NDX I'm sticking with a more bearish wave count that calls the decline a series of 1st and 2nd waves which calls for a strong decline in a 3rd of a 3rd wave down as the next move. I'm keeping this because it fits well on NDX and because I want to stay aware of the potential for a very strong decline right around the corner. This in fact would support the analogue patterns discussed above for SPX. So a break below last week's low near NDX 2189 and then its uptrend line from March 2009 near 2140 (log scale) would likely usher in some very strong selling. If the bulls can drive NDX above 2325 to get above its 50-dma then we could be looking for a new high.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2325
- bearish below 2189

The RUT was a little weaker today than the other indexes, which is a little out of character since it's been stronger recently. It was unable to make a new high for the week or even test Monday's highs as the others did (the DOW was the strongest today in that regard). But the RUT is holding above its 50-dma (it recovered after this morning's dip below it) and the next resistance level is near 816.50 where it will run into its downtrend line from February. If it can climb over that it could then make a run for it up to close its March 14th gap at 821.19 where it would also test its broken uptrend line from November. Clear sailing above that level to new highs. But a drop below this morning's low near 799 would likely be followed by stronger selling.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 828
- bearish below 799

This past week has seen the banking indexes bounce around their H&S necklines and up to the downtrend lines from February. BIX is a good representative of what's going on and shows resistance at the downtrend line held and today broke back below its neckline near 148.30. It bounced back up but was unable to get back above its neckline and closed down for the day. It remains bearish below the neckline at 148.29. Any follow through to the downside from here will likely target the 200-dma near 138 or a little lower to its H&S price objective near 135.70. As depicted on its chart below, the bearish price pattern calls for a sharp decline and then stair-step lower in April before setting up a bigger bounce into May. It takes a rally above 154.43 to negate the bearish pattern and turn it bullish instead.

Banking index, BIX, Daily chart

As depicted in last week's update on the TRAN, it bounced back up to its broken uptrend line along the lows since October, as well as its 62% retracement of its February decline and now appears to be ready to resume its decline. At least that's the bearish setup. Any continuation above Monday's high near 5175 could bring us at least a test of the February high near 5300. A break below 4900 should usher in stronger selling as it heads lower into April and possibly into May as depicted below.

Transportation Index, TRAN, Daily chart

This afternoon it was announced that Portugal's lawmakers who oppose the government's austerity program won the day and shot down the plan. The euro declined on the news. I would expect we'll hear more of these stories as lawmakers respond to their constituents who are mad as hell that they're being forced to bail out the government's bailout of the banks. We're hearing more and more "let the banks fail" and that chorus is going to get louder and louder. Portugal is considered the next domino to drop, following Greece and then Ireland. Ireland's people are also starting to balk more about their austerity program and Greece will not likely be able to implement any further austerity programs. The bond market has already ratcheted up the yields, knowing the risk for getting paid back has increased considerably. This in effect is negating the austerity programs' success and the people have about had it. All of this will likely depress the euro further and could finally get the dollar off the mat.

The U.S. dollar has now dropped slightly below the November low but with today's bounce it has recovered back above the low at 75.63. I see downside risk to about 74.75 if it drops down to the bottom of its descending wedge pattern from December but the first bullish sign for the dollar would be a break of its downtrend line from January, near 76.40 on Friday. It needs to rally above 77.40 to confirm we've seen a low for the dollar. With only 5% bulls (DSI from trade-futures.com) it's ripe for a short squeeze.

U.S. Dollar contract, DX, Daily chart

Gold has pushed back up to its March highs and looks like it will head higher. At least it better head higher otherwise it will be a double top with a significant negative divergence against the March highs. On the weekly chart below there is also a negative divergence against the October-January highs. I'm showing upside potential to the top of its rising wedge pattern, near 1520 in mid April, which will hold as long as the uptrend line from January 2009 holds, currently near 1365 (log scale). If instead the double-top pattern on the daily and weekly charts is followed by a drop below last week's low at 1380.70, which would also be a break below its 50-dma (where it bounced off of on March 15th), that would likely be our indication of an important top in place.

Gold continuous contract, GC, Weekly chart

Oil has bounced back up towards its March 7th high at 106.95. It would be bullish above that level simply because it would be breaking to a new high but with the very negative divergence shown on the chart below, and with price back up to the trend line along the highs from 2009, I'm more inclined to think double top here. There's a price projection just shy of 115 if it can press higher otherwise this is so far painting a bearish setup.

Oil continuous contract, CL, Daily chart

Tomorrow's economic reports include the usual unemployment claims numbers and the durable goods numbers. The durable goods number is expected to decline so unless there's a big upside surprise it will not likely have much of an effect on the pre-market futures. The durable goods number ex the transportation goods is expected to improve from being negative in January. Friday's GDP numbers have a greater potential to move the market, especially since several economists have been starting to lower their projections for the year.

Economic reports, summary and Key Trading Levels

I came across two different pieces of information that should cause even the strongest bulls to give pause about where the market goes from here. A chart from thechartstore.com shows the rolling 102-week returns for the stock market and the most recent 102-week period shows a little more than a 100% return. The last time that happened was during the rallies off the 1932 low and then into the 1937 high. The last time this kind of return was experienced was the Great Depression so for those who think it's different this time just because we've had a strong rally the past two years, this chart may disabuse you of that idea:

Rolling 102-week returns on S&P, chart courtesy thechartstore.com

The table below the chart shows the returns following the previous times the market had a +100% return. The statistics are not encouraging for the bulls. Will it be different this time? I guess you could bet your money that way.

The other statistic has to do with the relationship between the stock market, and economy, and the price of oil. More specifically it has to do with how quickly the price of oil changes (since oil and the stock market mirror each other closely). Jim Debevec wrote an analysis about this for Minyanville on March 7th. The bottom line is that in the prior 5 oil spikes, which the current one classifies as, the stock market started a bear market decline at least 3 months prior to the peak price in oil. If the February high for the stock market was THE high then this statistic tells us oil might not peak until at least May, which would also make the spike longer lasting than the previous five.

For the stock market the more significant point here is that the odds of a bear market starting from the oil spike are nearly 100%. It also means a bear market for oil following its peak. You can't get much better odds than that. Now all we need to know is where and when to enter longer-term bearish positions. This is a copy of the chart from Debevec's article:

Relationship between oil spikes and stock market performance, chart courtesy James Debevec, Minyanville.com

Summary
We've had a very bullish bounce back up from last Wednesday's low and in some ways it's too bullish, at least from a sentiment perspective. If the bulls need a wall of worry to climb then they better find another wall quickly since the current one just crumbled to the ground from the weight of too many bulls. VIX has collapsed back down into the teens and this says there is no worry. Certainly the lack of desire for put protection is worrisome to the health of the rally. And other than today's low-volume rally (worrisome in itself), the past week's rally was created entirely in the overnight futures market which we know is more easily manipulated. Other than that the bulk of the rally may have been created on the backs of short covering (hence the low volume). The combination of short covering and a rally built on overnight futures leaves a big air pocket below us. And that air pocket could be filled in a day.

So the rally is bullish until it's not but when it's not it could turn very bearish in a hurry. The price pattern, with the overlapping highs and lows within the bounce, says it's a correction instead of something more bullish. That's why I continue to lean to the short side in my own personal trading. If SPX manages to close above the 50-dma near 1304 I'll back off. If it rallies above 1320 I'll get bullish. In between is no-man's land where you're bound to get shot by both sides if you don't first step on a land mine.

The wave count for the bounce says it might have completed today or will complete with only a minor new high and therefore I'm recommending tight stops on long positions and get ready to short the market if this morning's lows are violated. But shorts obviously need to exercise caution and let price action dictate when to get short. Right now it's bullish until proven otherwise. If you're long and the market drops below today's low, and certainly below last week's low, don't stubbornly hold on thinking it will bounce back again. If the 1987 or 2010 analogues play out that bounce back might take a long time and from a much lower level.

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

Key Levels for SPX:
- bullish above 1320
- bearish below 1284

Key Levels for DOW:
- bullish above 12,280
- bearish below 11,550

Key Levels for NDX:
- bullish above 2325
- bearish below 2189

Key Levels for RUT:
- bullish above 828
- bearish below 799

Keene H. Little, CMT