Market Stats

It was another relatively quiet day in the markets, as it's been since last Friday. Prices have been consolidating in a relatively small trading range with marginal new highs to keep a bullish tone to it. SPX has added about 7 points since last Wednesday's newsletter. Exciting, no? At least on the surface it's holding bullish but a look under the hood raises some concerns.

This week is a very quiet one as far as economic reports and earnings go. Companies are in their quiet period and can't say anything until they announce earnings. So the combination is leaving the market hungry for some news and without it we're seeing stagnation in volume and price action. The tightening in the trading range will lead to an expansion of it and as we head for opex next week we could see a volatile one.

The day started off like so many before this -- with another gap up. I was watching the futures climb higher last night and even after the Japanese market opened and started sinking lower our futures just kept climbing. I know, I know, the fact that the Japanese market was selling off meant money was rotating out of their market and into ours. Of course, how could I forget.

Helping sentiment today were two things: one, CSCO had a very good day (+4.9%); and two, the Fed says it will continue its stock purchase program, uh, sorry, make that their bond purchase program (how could I make that mistake?) through June to complete their $600B program. It's been so successful in holding down Treasury rates (Not!) that they want to be sure they continue the program. I'll leave reason #2 alone since it's all baloney. As for CSCO, its rally was based on John Chambers saying they're going to exit its consumer business and concentrate on their business business. OK, I admit too that the market is scratching for news here. The fact that CSCO has been oversold and was still hugging the March low I'm sure helped today (short covering).

As has been true for many days since last July and especially since the March low, the day started with another gap up. It's been a consistent pattern with the overnight rallies but it hasn't helped the regular trading hours (RTH) traders. As we've seen so often in the leg up from March, the initial morning rally was again sold into. I've been keeping track of the rally from March 16th in terms of how much the S&P futures (tracking ES, the e-minis) move in the overnight session, resulting in morning gaps, vs. the moves during the RTH sessions. Most of the overnight moves have been positive and in the 15 trading days since the March 16th close there have been 11 gap-up mornings, 3 gap downs and one opened flat.

On the Market Monitor we've been recommending (with tongue in cheek but with a small amount of seriousness) going long ES at the close and then covering at the open the following morning. John Gray calls it the NTS trade -- the Nocturnal Trading System. With 11 out of 15 successful trades (granted, most of those successful trades were identified in hindsight) that's a 73% success rate and a trading system with that kind of success will make you money.

With mostly gaps to the upside the overnight sessions since March 16th have added 73.25 ES points to the rally. It would have been nice for the bulls if we had seen follow through to the upside following the bullish overnight sessions but during the RTH sessions ES has added only 4 points. So basically what's been happening is we've been getting overnight rallies that create some early-morning liquidity as the cash market plays catch-up, which is then used by smart money managers to unload their inventory a little at a time. Rinse and repeat the next night and day, use the morning rallies to sell into and when done, let the market fall so you can buy it back cheaper. We're now waiting for the part where they let the market fall.

It's abundantly clear with these numbers that the futures market is being manipulated higher each night as a way to hide the distribution that's going on each day. The rally from March 16th is about the clearest sign of distribution (blatantly so) that I can remember seeing. It hasn't helped the bears in short positions but it does give us a heads up that the trend is about to change (or at least make any further upside suspect). If you're in long positions you should be watching this very closely and pulling your stops up tight (trail your stop up below the series of higher lows) and look to lighten your exposure to the long side. It might be a bit early to think short, although it's a good time to start nibbling as the indexes are up against resistance.

I'm going to take a top-down view of the RUT tonight because of its relative strength in the market and see what it might be telling us. Starting off with the weekly chart I've drawn a parallel up-channel for its rally from March 2009 and a couple of internal parallel lines that seem to have captured some of the moves (often a good way to capture the "rhythm" of a move). Currently I see the RUT at potentially strong resistance at the top end of a resistance zone at 840-860, including at the top dotted parallel line that stopped the February rally as well. There is further upside potential to the top of its channel, near 900, but considering the weakness of the current rally leg from March I'm thinking that target would be more than a stretch.

Russell-2000, RUT, Weekly chart

The Fib projection on the above chart just shy of 837 is where the c-wave of the A-B-C bounce off the March 2009 low achieved 62% of the a-wave, a common relationship. The October high at 852.06 was tagged yesterday and it closed about a point above it and added less than a point today. Holding above 852 is bullish although it was a struggle today to make that happen.

On the daily chart below I'm watching a trend line along the highs from April 2010 and February 2011 and the broken uptrend line from August-January. The combination of resistance lines in the 852-858 area, with it being overbought, could prove to be too much for the bulls to conquer. Referring back to the weekly chart above, the c-wave is the move up from last July. It needs to be a 5-wave move to complete it and on the daily chart I'm showing the 5th wave to be the move up from March. Once it completes it will complete the A-B-C bounce off the March 2009 low and set in motion the next leg down in the secular bear market.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 855
- bearish below 837

The 60-min chart below shows the parallel up-channel for the RUT's rally from March. As long as it remains inside this up-channel, the bottom of which is currently near 851, it remains bullish. So a break below today's low near 850 would be a bearish heads up and below 844 would be a strong indication the top is in for the leg up from March. On the chart I made reference to the Fib projection at 854.89 which is the 127% extension of the February-March decline. This extension is a common reversal level and the fact that it falls inside the 852-858 resistance area that I noted on the daily chart is potentially significant.

Russell-2000, RUT, 60-min chart

SPX continues to struggle with the mid line of its parallel up-channel from July. Its resistance zone is 1332-1344 and as shown with the dashed line there is upside potential to 1353-1354 (1353 is a Fib projection for the A-B-C bounce off the March 2009 low and 1354 is a potentially important Gann Square of Nine number as it's opposite the 666 low in March 2009). A bearish heads up would be a break below 1325 and more bearish with a break below 1305.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1344 to 1353-1354
- bearish below 1305

The DOW has been pushing up underneath its broken uptrend line from August-November but not quite touching it, currently near 12,525 tomorrow. One bullish day could get it up there. With the short-term divergences (60-min chart) it's not looking good for that to happen but it remains possible. At the moment it's looking more like a small rolling top is getting put in place as MACD prepares to cross back down. RSI is showing a negative divergence against the February high.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,450 to 12,575-12,600
- bearish below 12,320

NDX is not talking to me. Well, it's talking but it's all gibberish. It's holding above its 50-dma near 2322, which has been tested each day this week, so that's bullish. But it broke its uptrend line from March 16th, gapped back above it this morning and then immediately sold off and closed below the line today. That's bearish. I don't know that I'd trust a break above the March 3rd high near 2376 but it would be at least bullish if it holds above. I would trust a break below 2291 and would want to be in bearish trades from there. Watching and waiting on this one.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2376
- bearish below 2291

The big market, represented by the Total Market Index (Wilshire 5000), shows the same pattern as the other indexes but in some ways it's a little cleaner than the others so I'll go through the same top-down look at this one to show why we may be looking at a top here and now but also recognizing a little more upside potential if the bulls hold the market up into next week (opex).

The February 18th high for DWC came within 25 points of achieving a Fib projection at 14237, where the c-wave of the A-B-C bounce off the March 2009 low would be equal to 62% of the a-wave. Within the c-wave, which is the rally from July, the 5th wave would equal the 1st wave at 12440. So as noted on its weekly chart below, there is an upside resistance zone between 14212 and 14440. It doesn't mean it has to get there or stop there but it does provide a couple of levels to watch if the bulls can push the market higher from here.

Total Market Index, DWC, Weekly chart

Looking at the daily chart below, the first thing that I notice is the topping-tail pattern near resistance (the February high). The same pattern can be seen on the SPX daily chart. Whenever you see a series of candles with the shadows above the body, as we have for the past 4 days, it's another indication of distribution of stock. The highs are not holding and instead traders are selling into those highs. This is a warning to pull your stops up tighter if you're hoping for more upside but moving more into profit protection mode (highly recommended here).

Total Market Index, DWC, Daily chart

On the 60-min chart below it looks like a bullish consolidation pattern at the highs as DWC has marched sideways since last Friday. If I were looking at just the 60-min chart I could be tempted to buy a pullback to the bottom of the consolidation range and look for a breakout to the upside. Watch for that to happen if you're feeling a little bullish yet. But countering the bullish view here is the fact that yesterday it broke its uptrend line from March 16th and then bounced back up to it this morning. It gave it a kiss and then fell away. That's bearish price action so it has me leaning bearish here. A break below the key level at 14K on the daily chart would be a break of the series of higher lows, another bearish sign if it happens.

Total Market Index, DWC, 60-min chart

DWC ties the other indexes together and the picture I get tonight is a bearish one. But it's a very early call since we have no confirmation of a breakdown and no impulsive move down yet. We could get just a pullback and then another launch higher. DWC could get another bounce back up to its broken uptrend line which would not necessarily be bullish but clearly not bearish yet if that happens. In this market I don't discount that possibility for one second. But going with tonight's charts I have to lean bearish.

I had mentioned at the beginning of tonight's report that looking under the hood of the market shows a different market than what we see on the surface (prices). Price is the final arbiter and all of our trading successes and failures clearly care only about price. But if the market breadth doesn't support what we're seeing in price action it will provide us with a heads up for a possible trend change. Certainly the lack of volume is a concern when you've got a strong point gain in the market but no underlying strength behind it. Declines have been on stronger volume than advances and that's another concern.

I think we can all agree that we have a much more manipulated market than probably anyone can remember. The Fed has made it abundantly clear that they want to see a stock market rally so as to make people feel wealthier and will therefore spend more. His wish has come true when it comes to the wealthy as high-end retailers are enjoying an increase in their businesses. But the middle and lower classes continue to get squeezed, especially by the rising commodity prices (food and energy) and their spending is not likely to help other businesses, including autos and homes.

So the manipulation is skewing what we normally expect out of a market and studies comparing today to historical patterns may be difficult at best. Having said that, we can still use past patterns to at least alert us to a possible move/counter-move. Rob Hanna wrote an article this week at greenfaucet.com in which he compared previous low-volume patterns and what followed. The chart below is data that he put together. He looked at prior instances since 1993 (so bull and bear markets) where SPY closed above its 200-dma, at a 10-day high and on the lowest volume for the preceding 20 days. He tracked the performance of a long trade entered at the close that day and then sold one to five days later.

SPY long trades on low volume, chart courtesy greenfaucet.com

The last trade to fit these criteria was a long trade entered at the close on Monday, which had the lowest volume of the year so far. Today's volume was only marginally better but still not the lowest in the preceding 20 days. Rob Hanna's analysis shows that the average trade loses money each of the five days following this setup, with the greatest losses on the 4th and 5th days, which will be Friday and Monday. The average losses are also larger than the average of the fewer winning trades. Again, it could be different this time with all of the Fed's manipulation, but the statistics argue against a successful long trade taken on Monday. So far it hasn't lost money so we'll have to see how it looks by Monday.

Here's a picture of SPY with volume to show the miserable volume we've seen for the rally from March 16th. It's anyone's guess when this will end but with such low volume during a strong price spike I look at this as a big air pocket below us without much support. When price breaks down, and it will, it could go fast. Today's hanging man up against its broken uptrend line from March 16th does have me wondering about tomorrow...

S&P 500 ETF, SPY, Daily chart

Treasury rates and the stock market continue to be more in synch than not (as money rotates back and forth between the bond and stock markets) so I've been keeping my eye on TNX (10-year yield) for additional clues. Since March 28th, when it broke above its short-term downtrend line from February, it has bounced up and down between the broken downtrend line and its previously broken uptrend line from mid January. In so doing it has formed an expanding triangle pattern (similar to the stock market as well), which is a potential topping pattern, and today rallied up to both its broken uptrend line and its downtrend line from 2007, near 3.54% (the day's high was 3.549%).

10-year Yield, TNX, Daily chart

If TNX breaks its downtrend line from 2007 it will also be a break above its 200-week MA, which would obviously be bullish. It2 200-week MA is at 3.546% and it closed at 3.545%. Just a few traders could be watching that level. A bullish break above 3.6% would indicate stronger selling in the bond market and that would be potentially bullish for stocks. But at this point I think the higher-odds play is for a pullback at a minimum for TNX, perhaps down to the 3% area, before rallying again. The more bearish scenario for TNX (bullish for bonds) is for a return back down to the uptrend line from December 2008, near 2.5%. Might the Fed relax its efforts to pump up the stock market and concentrate on getting the bond market back up (and TNX down)? We'll know soon enough.

10-year Yield, TNX, Weekly chart

The banks were getting some loving today and an afternoon rally helped the banking indexes become the strongest sector for the day. Since the March 23rd low for the BIX it has been chopping its way higher in what appears to be a rising wedge pattern. This afternoon it reached a price projection at 152.20 for two equal legs up to complete an a-b-c bounce off its March 17th low, which is also where its 50-dma is currently located. The choppiness (overlapping highs and lows within the bounce pattern) says it's a correction to the decline rather than something more bullish. If the little rising wedge pattern is the correct interpretation, which might have finished today, we should get another leg down that breaks its March 16th low near 145 and then its uptrend line from March 2009 and eventually its 200-dma, which is rising towards 139.

Banking index, BIX, Daily chart

The expanding triangle pattern shown on the TRAN's daily chart below is a bearish topping pattern (and could be the left half of a diamond-top pattern). So the fact that it reversed from the upper trend line is potentially significant. We could see a stronger decline develop from here. I show additional upside potential if the bulls go crazy here and drive it up to 5558 where the 5th wave of the rally from July would equal the 1st wave. At 5310 it met the normal minimum expectation (62% of the 1st wave). We have no confirmation of a reversal yet but that's the current setup.

Transportation Index, TRAN, Daily chart

The poor dollar just can't get off the mat and every time it tries it gets slapped back down. It continues to slide down its broken downtrend line from January, which is not bearish but obviously it's done nothing bullish yet. I'm still expecting a turn back up and a break of the series of lower highs would be the first indication now that the bottom for the dollar is in.

U.S. Dollar contract, DX, Daily chart

Continuing weakness in the dollar is helping commodities hold up, especially the metals. Gold's weekly chart below shows the longer-term rising wedge pattern that it's been in since January 2009. The top of the wedge, which is the top of a parallel up-channel from 2005-2006, is currently near 1530 and that remains the upside potential for now. A break below last week's low near 1410 would suggest we've seen the high.

Gold continuous contract, GC, Weekly chart

While gold's weekly pattern looks strong, silver's weekly pattern looks like it's about to leave earth orbit. I've drawn a parabolic curve on a log-scale chart, which indicates the rally is going vertical. Silver often does this and when it stops rallying and gravity takes over it usually comes back down just as fast. I expect no different this time. When that parabolic arc is broken, confirmed with a break below 36, get short and hang on for the ride (puts on SLV or calls on ZSL or play the e-mini futures -- YI).

Silver continuous contract, GC, Weekly chart

Oil's rally looks downright sedate compared to silver and even to gold. Its weekly chart below shows a little more upside potential to about 115. There it will have two equal legs up from January 2009 and reach the top of its rising wedge pattern. A drop below 102.70 would indicate we've probably already seen the high. As hard as it is to believe, the pattern since the 2008 high calls for another leg down to below the January 2009 low (33.20).

Oil continuous contract, CL, Daily chart

Tomorrow's economic reports include the Thursday unemployment claims numbers, which are expected to tick up a bit, and the consumer credit number in the afternoon. Consumer credit continues to shrink (deflationary) but the market is not paying much attention right now. It has ADD (Attention Deficit Disorder).

Economic reports, summary and Key Trading Levels

The rally is holding on by its finger nails, hoping for some positive news to jolt it higher again. The overnight rallies in the futures are helping (without the gaps to the upside there would be no rally since March 16th) but the selling into the rallies is holding the market back. Smart money is very smartly unloading inventory without causing any panic in the market (they're not called smart money for nothing). The sheeple keep hearing about the new highs and keep buying the inventory from the smart money managers. At least that's the message I'm getting from the charts

If inventory is being quietly liquidated there will soon be a time when the market starts to drop and it could drop hard if the rising wedge patterns are correct (which call for a fast retracement of the rally from March). When it starts breaking down this time I'd be very careful about looking to buy the dip and instead look to sell the rallies. If you try buying be sure to manage your trades carefully and don't let the market go much against you. It might be a while this time before the market comes back up to you (potentially years).

The wave count, trend lines/channels, Fibs and cycle studies point to this week as being potentially important as far as a turn window. Since we've rallied into this window the assumption is that we'll see the market reverse back down. It could accelerate higher instead (you can't be sure which will happen in a turn window) but market breadth and volume have to drastically improve before that will happen. That makes a downside move the more likely move and it could start at any time.

Tomorrow is Thursday before opex, a day known for its head-fake moves. Typically that has meant a down morning followed by the start of a rally into opex. If we see the market rally in the morning and start to sell off again (the pattern of late), this time the selloff could be the start of something bigger so be careful since the market is showing all the signs of an important top being put in.

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

Key Levels for SPX:
- bullish above 1344 to 1353-1354
- bearish below 1305

Key Levels for DOW:
- bullish above 12,450 to 12,575-12,600
- bearish below 12,320

Key Levels for NDX:
- bullish above 2376
- bearish below 2291

Key Levels for RUT:
- bullish above 855
- bearish below 837

Keene H. Little, CMT