Market Stats

Today's trading started with the usual gap up, this courtesy of Intel which reported good earnings last night. Unfortunately unless you were already positioned for today's rally there were no opportunities to participate in the rally shortly after the opening bell. If you bought the open you might be at break even for the day. Fortunately for those who might have bought after the opening bell it's looking like we'll have another gap up to start tomorrow's trading since AAPL reported good numbers.

The market is bullish but you had to know it in advance if you wanted to participate. But actually the indexes aren't telling the whole story at the moment. We've got a mixed market and the fractured nature of the indexes and sectors makes today's rally a little suspicious. I won't call it manipulated since we know that can't happen (cough) but it would be nice if all sectors were as bullish as the broader averages. Of course another rally during the overnight session not supported by more buying during the day is also suspicious but so far that tactic has worked very well, especially since the March low, so there's no telling how much longer that will continue.

I don't want to be picky about a strong rally but it needs to be better supported if we're to expect it to hold up. Volume continues to be lighter on the up days than down days although it was at least stronger than yesterday's rally. But considering the DOW made a new high for April (not yet confirmed by the other indexes) it's a little surprising that the total NYSE volume was less than a billion shares (952 million). Breadth was relatively strong at slightly less than 5:1 up to down volume (but not as strong as the 90% down day on Monday). We saw similar market breadth and volume numbers today that we've seen at previous highs for the market so it will be important what the market does tomorrow. So far the futures are up strong again so it's looking positive but it will be the end of the day that's important.

Another disturbing aspect of today's rally was the absence of the banks and transports which were both notably absent from today's rally and these two sectors need to be on board in order to make a rally more believable. In fact the BIX had a terrible day -- down -2.3% while the blue chips rallied about +1.4%. The 3rd leg of that stool is the SOX and at least that one joined in (although it could still struggle with its 50-dma which held back the early-April rally as well). At any rate, until we get some follow through to the upside, with all three cylinders firing, it's wise to keep your hand on your wallet.

This morning's rally was partly attributed by some to rumors that the Fed is going to pursue QE3 once QE2 is finished. I think we all recognize that the Fed will need to do something following QE2 because the markets are not doing well without the extra liquidity push from the Fed. It's arguable as to how much the Fed's newly created money is directly helping the stock market vs. the bullish expectation that it's creating in participants. Most are basing their buying not on fundamental data but instead on the belief that the Fed won't let anything bad happen. But for now we'll just keep it simple and say that the Fed's support is needed to keep the stock market up. They'll talk a good game even if they don't throw a lot of dollars behind their talk. They'll continue to hope market buyers keep doing their buying.

It's also arguable as to how much the Fed's money is helping the monetary base and credit. Banks have not been doing well lately when you look at their loan business. Consumers and businesses are simply not drinking the Kool-Aid and taking on more debt. But investors have been more than eager to take on more debt. HYG is the High-Yield Corporate Bond ETF and it's a good measure of investors' willingness to take on risk (this is essentially the junk bond fund where investors are willing to take on additional risk for the higher yield). It continues to hold near its highs since last November but the 92.30 area is resistance and the negative divergence on the weekly chart below shows the buying effort is fading. Another rollover from here would not be a good signal for the stock market so this bears watching over the next couple of weeks.

High-Yield Corporate Bond ETF, HYG, Weekly chart

As for the various indexes the DOW looks the most bullish, along with the techs, and I've got a couple of upside Fib targets to watch if the rally is able to extend a little higher. So I'll start off with the DOW's weekly chart this week to show what I'll be watching for over the next couple of days/weeks. Based on the wave relationships in the move up from March 2009 and the leg up from July 2010 I see upside potential to 12459, 12573 and 12766. That's a 300-point spread so not terribly helpful at the moment but I wanted to point out those levels so that we can see how the DOW behaves around them if reached.

There is a parallel up-channel for price action since the July low and currently the DOW is fighting to get back above the mid line of the channel, which also coincides with the lower Fib target at 12459 (today's high was 12475 and it closed at 12453). If the Fib targets do not hold the DOW back then there is the top of the channel that will be near 13370 by May's opex week. The bulls will want to see the DOW press higher in order to negate the very bearish negative divergence as shown on RSI. A break below Monday's low near 12093 would say we've seen the high.

Dow Industrials, INDU, Weekly chart

The daily chart below shows the DOW has tested the April 6th high, which was a test of the April high. The bearish divergence on the weekly chart is shown on the daily RSI as well and a failure here would be a triple top. Needless to say, the bulls really need to keep things going here. A broken uptrend line from August-November, which stopped the rally into early April, will be up near 12800 by the end of the month. That level coincides with the upper Fib target of 12766 mentioned on the weekly chart. If the DOW drops back down from here and breaks below 12200 it would be back below its 50-dma and an uptrend line from March, which would be the first sell signal on the daily chart.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,450
- bearish below 12,200

The DOW's 60-min chart below shows it to be short-term overbought and the price pattern for the leg up from Monday looks close to finishing a 5-wave move up. I show another pop higher for tomorrow followed by at least a pullback before possibly heading higher (green dashed line). The more bearish possibility is that this week's rally is completing the move up from March. The wave pattern is not at all clear at the moment, especially since it looks different between the indexes and therefore I'll simply say the DOW is bullish until it breaks below 12250.

Dow Industrials, INDU, 60-min chart

The SPX daily chart below shows it lagging the DOW in respect to its April high near 1340 (and of course its February high near 1344). If the market is able to rally some more from here then the upside target at 1353-1358 still stands. It could go higher but I'd want to first see it get through this target zone before turning much more bullish. If we're into a much stronger rally leg then the top of its parallel up-channel could see SPX up to the 1450 area by May's opex. If it instead drops below Monday's low near 1294 it would indicate the rally is over.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1340
- bearish below 1294

There is an alternate wave count to that shown on the DOW's chart and that is for a larger a-b-c bounce off the April 14th low (the lower low on Monday makes it an expanded flat correction in EW terminology). This kind of flat correction typically sees a strong c-wave rally which is what we have from Monday. This pattern calls for another high tomorrow that then gets quickly reversed. So we might see just a pullback correction before heading higher, as shown on the 60-min chart below with the green dashed line, but the risk is for a hard reversal back down. A break below 1310 would be a bearish heads up that the bounce is finished and down we go. Based on this chart I'd be cautiously long above 1310, nervously long and anxiously short below 1310 and aggressively short below 1294.

S&P 500, SPX, 60-min chart

As noted in today's headline, the Nasdaq had its best day since last October 5th. NDX gapped up this morning above its downtrend line from February and well above its 50-dma which had been giving it trouble in the past week. It seems to be the favored way to take care of resistance in this market -- just gap it up and over it and get the shorts running for cover and longs rushing to get in. As with the DOW and SPX, its short-term pattern would look best with another pop higher tomorrow but a retest of the March 3rd high near 2376 might prove to be tough resistance. Either a pullback before pressing higher or the start of the next decline should follow shortly. A break below 2306 is needed to put the bulls on the defensive.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2376
- bearish below 2306

The RUT continues to dance to its own music and while its rally was also strong today its daily and 60-min patterns are similar to SPX (but a little weaker in its bounce so far). It's been bullish in that it continued to hold above it 50-dma and as long as that holds true the bulls will remain in charge. I show the key level to the downside at Monday's low near 816 but another break of its 50-dma near 821 would be risky for the bulls.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 850
- bearish below 816

The wave count shown on the RUT's 60-min chart below is the same as that shown on the SPX 60-min chart, which is an a-b-c bounce off the April 14th low. There are a couple of reasons why I like this wave count but we'll have to see whether or not the market agrees. The first thing to watch Thursday morning is for a rally to an upside target area around 846.50 followed by a turn back down. As shown on its chart there are two price projections there: the first is where the c-wave (the rally from Monday) will be 162% of the a-wave (the April 14-15 rally); the second is at 846.65 where the 5th wave of the c-wave would be equal to the 1st wave. It's nice confluence there and would be a very good setup for a reversal to play. Then trail your stop lower in case it's just a pullback that will lead to another rally leg (green dashed line). Of all the indexes this one has the cleanest wave count so I'll be watching it closely to see if it does the best job guiding us.

Russell-2000, RUT, 60-min chart

I keep watching TNX (10-year yield) for confirmation of the stock market rally and so far it's not confirming it. Today's close is close to last Friday's close and it's nowhere near challenging its April 8th high. Unless the bond-stock market relationship is diverging this is a big caution flag on the track at the moment. Last week's candle was a bearish engulfing candle at resistance (downtrend line from 2007). TNX has "sell" written all over it and if TNX declines further (bonds rallying) I think there's a good chance the stock market will follow. Keep your eye on TNX.

10-year Treasury Yield, TNX, Weekly chart

The other "money" to watch are the banking indexes. While the blue chips rallied strong today the BIX declined -2.3%. That's more than a divergence! That's a strong signal that something is wrong so either the banks need to get up off the ground and join the major indexes or else the major indexes will tuck tail and turn south.

One supportive thing I see in the BIX is that it should be ready to bounce (or look out below if it doesn't). It dropped down to the bottom of a parallel down-channel from February and its 200-dma. If it doesn't bounce from here there is something seriously smelly-wrong with the banking sector. So a bounce in the banks could support a further rally attempt in the broader averages.

Banking index, BIX, Daily chart

Another weak sector today was the Transportation index, and again, not a good sign when you'd like to see the DOW Industrials and Transports in synch. The TRAN popped higher this morning but then sold off hard and spent most of the day in the red. A late-day rally put it into the green and its bounce looks like it should get a little more lift tomorrow but if this afternoon's bounce is followed by another decline that breaks today's low I'd be very leery about any further market rally.

Transportation Index, TRAN, Daily chart

The dollar got beat up again today and may have been a result of the rumors that the Fed is going to continue to trash the dollar in the name of supporting the market, um, I mean economy. Today's decline brought the dollar down close to the bottom of its descending wedge and November 2009 low at 74.23. The bullish divergence continues so it's the same song as I've been singing for a while now -- once this pattern completes we should see a strong rally out of it. Bearish sentiment remains pegged at 90+% bears so it's ripe for short covering.

U.S. Dollar contract, DX, Daily chart

With the dollar still falling it's given the metals, and most other commodities, a continuing lift higher and gold has now made it above $1500 and close to a potential upside target near $1530. The top of a long-term parallel up-channel from 1999-2000 is near 1530 and a shorter-term trend line along the highs since December is also near 1530. The combination could make for a tough area to punch through and with the dollar so close to a potential bottom it's probably more than just coincidence that the two could be nearing a major turning point, either this week or next.

Gold continuous contract, GC, Weekly chart

While oil holds its highs it's not getting the love that the metals are seeing (especially silver which I'll cover below). Oil hasn't been able to tag its price target at 114.99 yet but could do so if it gets one more push to a new high where it would also tag the top of its rising wedge pattern for its bounce off the January 2009 low. It takes a break below 102.70 to indicate we've probably seen the high.

Oil continuous contract, CL, Weekly chart

Silver has gone nuts. I've been inundated with emails and newsletters telling me why this is the best time to buy silver, how undervalued it is compared to past gold/silver ratios, how it's going to $100 quickly (along with gold heading for $3000), etc. We don't have very many opportunities to watch a full-fledged parabolic rally in motion. Actually if you've been in the market for the past 12 years you've witnessed more bubbles in succession than in the history of the market probably.

At any rate, even if you don't want to play silver it's going to be fun to watch this one so I'll keep updating charts along the way from here. Starting with a quarterly chart of silver below, it shows the January 1980 high at 50.50 and it clearly looks like that's where silver is headed at the moment. As noted on the chart, this chart is using the log price scale and when you can draw a parabolic arc on a log scale chart you know you've got a parabolic move in progress. This is a bubble, pure and simple, and all bubbles end the same, no exception, no ifs, ands or buts. This one will end badly for anyone buying it now and not using protective stops.

Silver continuous contract, GC, Quarterly chart

As noted on the chart above, the last parabolic climb into the January 1980 high (when the Hunt brothers were trying to corner the market and then got wiped out) was followed by a crash in the price of silver. It dropped from $50 to $11 in only 4 months. I think the same thing will happen again and have been recommending using some play money to short silver here. Use options since you know exactly what you're risking and play it small -- it's a lottery play since you're risking a dollar to make 20.

Use puts on SLV (no August puts so go out to at least October and several strikes OTM since this play is purely to catch the crash so don't risk a lot of money). Or you can buy calls on ZSL (go out to at least August).

Moving in a little closer, the weekly chart below looks at the rally from 2008, which is the leg up following the last spike down on the right side of the quarterly chart above. I've placed another parabolic arc on the chart to show how this leg has also gone parabolic (so a parabolic finish to a parabolic climb). The wave count shows the 5th waves extending, which is exactly what I expect to see in a blow-off move like this. When these arcs start breaking we'll know the rally is finished.

Silver continuous contract, GC, Weekly chart

Zooming in a lot closer with the 60-min chart below it's also showing a parabolic climb but I'm using steepening uptrend lines instead of an arc. The top of a parallel up-channel for the leg up from April 12th is where today's rally stopped. This channel is drawn by using an uptrend line from the 2nd wave low to the 4th wave low and then attaching a parallel to the top of the 3rd wave. This is often where the 5th wave will stop so it's possible today's rally put in the finishing touches to silver's rally. It was a good reason to try shorting silver there (with puts, understanding you could be throwing your money down a hole). I show a little more upside tomorrow but obviously picking a top in silver is fraught with danger. Go carefully if you want to try it.

Silver continuous contract, GC, 60-min chart

Tomorrow's economic reports include the Philly Fed report and it's expected to come in quite a bit less than the March number. I wonder if a bad number could spark the start of a pullback/selloff so watch for that possibility if we get a pop higher into this report. The Leading Economic Indicators is also expected to come in weaker. Of course if these two numbers come in stronger than expected it could spark a further rally to complete the move up from Monday. Or a good number would mean economic strength and that would mean the Fed might back off in spiking the punch bowl, so good news could be bad news. Or will be bad news be bad news or maybe it will be good. Play the market's reaction, not the news.

Economic reports, summary and Key Trading Levels

AAPL reported after the bell and pleased the market. Futures shot higher right after the close and both AAPL and futures held most of their gains as this goes to press. So we could be looking at another bullish overnight session to start Thursday with a gap up (is there any other way?). Be careful with this one though since the short-term pattern would look good with another new high and then a reversal to at least correct the leg up from Monday.

Assuming we get a new high and then a pullback it should provide lots of clues as to what the market should do into the end of the month. If we get a choppy pullback that then leads to another push higher above this week's high it will be potentially very bullish. Who knows, we could see a blow-off move to the upside in the stock market just as we're seeing with silver right now (said tongue-in-cheek since I do not expect that to happen since it's primarily a commodities thing).

But if a new high is followed by a more serious decline, especially with a break below Monday's low, it would indicate that this week's rally was the conclusion to a bounce correction off the April 14th low (shown on the SPX and RUT 60-min charts). So we have to let the price pattern play out a little longer before we'll have the answer for next week.

The new rally certainly has the market feeling bullish and the collapse in the VIX is right in line with the uber bullish sentiment in just about all surveys. The wall of worry has gone the way of the Berlin Wall and that should at least be a little worrisome to the bulls. Be careful out there and good luck. I'll be back with you next Wednesday.

Key Levels for SPX:
- bullish above 1340
- bearish below 1294

Key Levels for SPX:
- bullish above 12,450
- bearish below 12,200

Key Levels for NDX:
- bullish above 2376
- bearish below 2306

Key Levels for RUT:
- bullish above 850
- bearish below 816

Keene H. Little, CMT