Market Stats

Prior to today's open the overnight action in equity futures left little to go on and the day opened near the flat line. There had been an overnight dip back down to yesterday afternoon's lows and it looked like it was going to be tested right after the cash market opened. The market headed lower and quickly dropped below yesterday afternoon's lows which then became resistance to the afternoon bounce (except for NDX which was the only index to challenge yesterday afternoon's high). Other than the tech indexes, which showed relative strength all day (thank in part to the SOX), the day felt heavy and the bears had a turn at bat again.

This morning's economic reports did not help traders' mood as both the employment picture and non-manufacturing services were weaker than expected. The Challenger Job Cuts report at least showed some improvement with layoff announcements down from March's 41,528 to April's 36,490 (-12%), which was also below the year-ago level of 38,326 (-5%). But the ADP report showed employment in the nonfarm private sector was 179K in April (seasonally adjusted), which was less than the 202K that was expected. Lessening the impact of that was an upward revision in the March number from 201K to 206K. For the year we're seeing employment gains of about 200K per month, which is arguably not enough to absorb the new workers entering the workforce each month, let alone the millions of unemployed.

A report that appeared to knock a leg out from under the market this morning (and a downward reaction just before 10:00 AM suggests the news was leaked) was the ISM Services number, which was also a disappointment. While it continues to show growth (anything over 50), it's another indication of a slowing in the growth. This is not something that is priced into the market right now (which is priced to perfection and continued strong growth). The 52.8 reading was less than had been expected (57.4) and less than March (57.3).

The decline in the ISM was due primarily to a decline in new orders growth, dropping from 64.1 in March to 52.7 in April (-18%), which of course doesn't give us warm and fuzzies about the future. The employment index dropped from 53.7 to 51.9, further supporting the evidence of a slowing in hiring. Most economists see this is just a correction within the larger growth pattern. They could be correct but they were saying the same exact thing at the 2007 high.

What did increase was the prices paid component for the 2nd month in a row. All 18 non-manufacturing industries reported an increase in prices paid. However, not to worry because it's only "transitory". The increase in prices paid will of course mean lower profits since a lot of these higher prices have not yet been passed through to the consumers of these services. The concern, which is the uncertainty portion of this report, is that we could be starting a new trend which will cause downward projections to GDP, profits and employment, which is not something the market is priced for. The graph of ISM Services shows the sharp drop since the peak in February.

ISM Service Index, chart courtesy briefing.com

Another possible source of angst for the market is the looming Federal debt ceiling crisis. Timothy If-my-lips-are-moving-I'm-lying-Geithner has been trying hard to convince lawmakers that the sky will fall if they don't raise the debt ceiling. Today he was out saying the cities and states will suffer as early as Friday since the Treasury will have to stop issuing special securities that help the local and state governments pay their debt. I'm not sure what that's all about but it sounds ominous and I'm sure that's exactly what Geithner is trying to imply.

Considering the near-shutdown of the government a few weeks ago over the difficulties in agreeing on the cuts that weren't really cuts, one can only imagine the battle that's going on in Congress right now. And since the market hates uncertainty, especially as it relates to the potential impact to the global financial system, this process is about as uncertain as it gets. However, when looking into this issue of "special securities" it would appear to be more of an annoyance for the states and municipalities as to where they can invest borrowed funds (from bond sales) rather than direct issuance of money from the Fed. In other words it's another scare tactic by Geithner. As I said, if his lips are moving....

Let's move on to the charts to see what this week's decline has done to them. Starting off with a weekly view of SPX, Monday's high at 1370.58 was a little shy of two price levels I've got on its weekly chart. At 1381.50 is the 78.6% retracement of the 2007-2008 decline, typically the "line in the sand" for a correction -- anything more than that will most often lead to a complete retracement. At 1389.81 is a price projection based on two equal legs for the rally from July, which calls the rally a double zigzag wave count with two a-b-c moves separated by an x-wave. With the x-wave as the pullback in November the 2nd a-b-c rally is the move up since then. I'll show a little different version of this count on the DWC chart later, that better accounts for a top here and now but this count supports the idea that we'll see a final new high later this month (dashed line) that would likely accomplish the price levels noted above. A drop below 1294 would confirm we've seen the high. As shown on RSI, there is a strong possibility we've got a double top with bearish divergence.

S&P 500, SPX, Weekly chart

Until SPX drops below 1294 we still have to consider the possibility we're getting just a pullback before pressing higher one more time (to complete a 5-wave move up from March). A drop below 1319 would be a bearish heads up while a rally above 1367 would likely mean a rally up to 1385-1390.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1367 and more bullish above 1390
- bearish below 1340 and more bearish below 1319

There is a support zone between 1340 and 1344, the early-April and February highs, respectively. Today's low was 1341.50. It's possible that's the entire pullback we'll see but from a time perspective, and to work off a little more of the overbought conditions on the daily chart, I'm thinking we'll see at least a little more of a pullback. If SPX climbs above 1350 and breaks out of its down-channel shown on the chart below, we could see a higher bounce and then back down. Or we might get a minor new low tomorrow and then a bounce before heading lower again. The price pattern remains unclear (not impulsive) and that leaves me guessing as to the short-term moves we can expect. If we do get another leg up for the bounce off today's low then keep an eye on the 1355-1360 area for resistance. Much above 1360 would improve the chances for a new high sooner rather than later. Bottom line is to be careful about a choppy pattern until key levels are broken either to the upside or downside.

S&P 500, SPX, 60-min chart

The chart below shows a slight difference in the wave count for the move up from July. This is for you EW'ers who are trying to figure out the wave count with me and to help explain how we could finish the rally with a 3-wave move up from March. Basically it's a triple zigzag count with three a-b-c moves separated by an x-wave between each. The three a-b-c's are noted on the chart below and the interesting thing about where the rally ended (on other indexes as well) is that the 3rd a-b-c was equal to the 1st a-b-c at 14444.60. The equivalent level for SPX was 1367.38 and is shown on its daily chart above. It also stopped near the mid line of its up-channel, a common occurrence on the last leg up in a parallel up-channel (or vice versa in a down-channel). I like the symmetry of the move and consider this a strong possibility, which says the rally finished on Monday. So far DWC is finding support at its February and early-April highs and 38% retracement of the leg up from April 18th, call near 14200 so a drop below that level would be bearish.

Total Market Index, DWC, Daily chart

The DOW is showing a different kind of projection but again showing some symmetry in the rally from July. Using the November pullback as the center point of the rally, two equal legs up is at 12766. The DOW shot above this level by about 100 points but can be considered a throw-over finish. The DOW has been relatively strong and looks the most bullish with a choppy pullback so we could still see a larger pullback but of all the indexes it's the DOW that has me thinking we'll head higher one more time as soon as the pullback has completed.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,850
- bearish below 12,450

At almost 2418 on Monday the NDX came close to achieving two equal legs up from March, which is at 2425. It's exactly the same for NDX as the others -- the current pullback could be followed by one more push higher into the May (opex week high?) and the choppy pattern for its pullback continues to support that possibility. It takes a break below 2325 to increase the probability that we're into a more serious decline.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2425
- bearish below 2325

Of the indexes reviewed here the RUT looks the most bearish. Its decline looks impulsive and that suggests at most a bounce to correct this week's decline and then a continuation of the selloff. It could be we're simply in a whippier index (which is true since it's a higher-volatility index) and we'll get a strong whip back up (dashed line) but I wouldn't feel bullish about the RUT until it gets back above 860. A break below 826 would be a sufficient enough break of support to suggest a steeper selloff to the March low is next. The RUT's daily chart is showing a clear negative divergence at a double top, but it doesn't mean we can't see another new high with another divergence. It's simply warning us that the rally is clearly running out of steam, if not already completely exhausted.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 860
- bearish below 826

While the stock market rallied last week we were getting a divergence with the bond market that we haven't seen for a while. The bond market was also rallying, which drops the yield. TNX, the 10-year yield, and the stock market have been running in synch for quite a while so the divergence last week was warning us of something. Either the bond and stock markets were going to start running together or the stock market was going to join TNX to the downside. At the moment TNX is winning the battle. I think TNX will work its way lower to the 3.1%-3.4% area (Fib retracement, price projection and bottom of down-channel) but perhaps not without a bounce first. Back above 3.4% would be a bullish heads up but until then I'm thinking lower still. I know a couple of you are watching this closely as it relates to home mortgages.

10-year Yield, TNX, Daily chart

The Fed is of course interested in bond yields since they've been intent on lowering them with their QE program. To this end they've not been successful but that's probably because money managers would rather chase performance in the stock and commodity markets, both of which have clearly benefitted from the Fed's largess. The banks should be beneficiaries of the extra money coming in that can invest in loans, including mortgages. But the data still shows demand for mortgages is way off and the Fed has had difficulty increasing the money supply through the banking system's fractional reserve system. The monetary base has been ticking higher this year so the Fed is having some success. Now they'll be battling inflation before their job is done and that's the corner they've painted themselves into

The banking index, BIX, says all the efforts to reflate them have not been terribly successful. The succession of lower highs and lower lows since February has created a parallel down-channel and as expected the BIX bounced off the bottom of its channel and yesterday closed marginally above the mid line of the channel. But today's decline created a bearish engulfing candlestick back below the mid line. It looks ready to resume its decline. But if the market supports a further rally in the banks we could see it head for the 148 area.

Banking index, BIX, Daily chart

The Transports were very bullish last week, culminating in a spike high on Monday that then left a shooting star candlestick. Today's strong decline dropped it back below the top of a potential expanding triangle pattern, leaving a throw-over above it. When viewing the chart with the arithmetic price scale the uptrend line from March is where the TRAN found support today. Using the log price scale, that same uptrend line was resistance to the bounces in early and late April. A break below 5370 would confirm we've probably seen the high, otherwise a bounce off support here could lead to another press higher.

Transportation Index, TRAN, Daily chart

The dollar has been working hard to hold support near 73. It's not clear yet who is going to win the battle at support here but as of today there's one potentially big supporter for the few remaining dollar bulls (of which there are fewer than 5%). Not many charting programs include the DeMark Sequential indicator but for those who follow the TD signals the dollar has finished a monthly and daily TD buy setup. These are longer-term signals and with the dollar oversold, unloved (95+% bearish sentiment) and near support there's a good possibility the buy setup could see some follow through.

Many continue to look for the dollar's demise so it's ripe for short covering. It looks like it's currently trying to find support near 73, at the bottom of a large parallel down-channel from 2009 (I showed the weekly chart of this on April 27th) and near the same level it looks to be trying to find support at the bottom of a shorter-term parallel down-channel for its decline from January. It's either basing for a pop higher or it's consolidating before another decline. We should know very soon.

U.S. Dollar contract, DX, Daily chart

The dollar hasn't moved much in the past week but the metals sure have. While gold hasn't seen quite the strong selling we've seen in silver it also didn't have quite the same parabolic climb. But from its high of 1577.40 to today's close at 1516.40 it has lost $61 (-4%). If the dollar starts a bounce it will be interesting to see what additional pressure it puts on stocks and commodities. Right now gold is sitting on support at its uptrend line from late March. From a wave count perspective I see the possibility for one last hurrah for gold with a push to a new high, maybe $1600 that many have been calling for. It takes a break below 1465 to more strongly suggest there are no more highs for gold for a while.

Gold continuous contract, GC, Daily chart

From last week's high at 49.82 to today's close at 39.41 silver has lost $10.41 (-21%). In the past three days silver sold off at the fastest pace in more than 25 year (since the 1980 high). I can't begin to tell you how many arguments I've had recently with silver bulls, even after showing them what happened following the spike high into January 1980. If I only had a dime for each time I heard "it's different this time" and how there's a shortage in silver, etc. etc., I'd be very rich. There is no "it's different this time". That's what makes it the same every time.

The big question now is whether the increased volatility in silver will result in another strong bounce back up. I think the technical damage is done but I also know there's still a lot of bullish sentiment in silver, even after this week's shellacking. Who was brave enough to step in and do some buying today and stop the decline where it did. For one, silver hit its 50-dma at 38.95 (the low was 38.94). It could be good for a bounce but quite honestly I think traders are risking bloody hands trying to catch this falling knife.

Depending on how you're trading silver, the 50-dma support will change how you play it here. Wait for confirmation that support will hold before stepping in to buy it (I like to see a bounce and then a test of support with bullish divergence). If you miss a rally, so what. If you're short silver from early this week (congratulations) I'd suggest pulling your stop down tight now -- no sense in giving anything back after such a strong decline. Take your money and run (and take your spouse out to dinner as a way to make up for your sullenness while glued to the computer screen uttering obscenities under your breath and ignoring your significant other). I'm projecting a little lower before a bounce and then lower but that's somewhat of a guess right here. There is also the possibility for another run higher (dashed line) so manage trades on either side very carefully. This is the wild pony to ride.

Silver contract, Daily chart

Last week I mentioned the $114.99 upside target for oil, which is the level where the rally would achieve two equal legs up from February 2009 (in a big A-B-C bounce correction to its 2008-2009 decline). It came within 16 cents of that target and has since sold off fairly sharply and has convincingly broken its uptrend line from February. If it continues lower from here it should find support near 105-106 (previous low and 50-dma). There is the possibility it will get a new high later this month, especially if the stock and commodity markets are doing the same thing, but with the bearish divergences at the new highs, confirmed with the break of its uptrend line, I think the higher odds scenario is that the high is now in place. Keep in mind the longer-term pattern calls for another leg down that could be similar to the 2008-2009 decline (even if not nearly as fast).

Oil continuous contract, CL, Daily chart

Another metal that's worth watching is copper. This metal has a tight relationship to the global economy so watch the chart of copper is often a good predictor of the economy and in turn the broader stock market. Tom McClellan (his parents developed the McClellan Oscillator) recently published two charts that I thought were very telling. The chart below shows the relationship between the price of copper and the net short position of commercial traders (smart money). Hedge fund managers are considered the speculators, not the smart money. Commercial traders tend to leg into positions over time and therefore start building their position early. They're rarely wrong on the longer-term swings.

Copper vs. COT report, Weekly chart courtesy mcoscillator.com

You can see in the chart above that the net short position is at the highest level it's been since 2007, even higher than the peak in commodity prices in 2008. They were at their highest net long position at the bottom in early 2009. These traders know what they're doing and right now they're betting big on the decline in copper prices. It's usually a good idea to bet with these guys but you obviously don't want to be early with them.

As copper relates to the stock market, the chart below shows how predictive copper has been. Each time there's been a divergence between copper and the stock market copper usually wins. The latest divergence is between the February high in copper and lower highs since then while the stock market has been whistling past the graveyard on up to new highs. I strongly suspect the S&P will turn down to join copper rather than the other way around.

Copper vs. S&P 500, Daily chart courtesy mcoscillator.com

Tomorrow's economic reports kick off with the unemployment claims and any continuation of bad news on the job front could further depress the market at this point. No major surprises are expected but a high number of unemployed could spook traders into worrying what the Friday payrolls number will look like.

Economic reports, summary and Key Trading Levels

We've got early indications of a possible top to the stock market and plenty of signals (including a new moon on Monday) that tell us to be looking for a top rather than more rally. It doesn't mean we can't get another rally leg as I discussed above but if we were to get a new high it should be viewed as an outstanding shorting opportunity rather than climbing aboard and riding it much higher (you can ride it but be ready to jump off quickly). We know what happens during overnight sessions.

There's been technical damage to the charts and suggest caution by the bulls. But the bears have not delivered a knockout punch and therefore have to remain wary of another rally attempt. The hard part will be deciphering a bounce as to whether or not it's the start of something bigger to the upside or just a correction of this week's decline. Based on the time factor I think the market needs a little more work to the downside and therefore suggest caution about buying a bounce. But if we get a bounce and then another leg down that does not break some good support levels then the bears will need to remain cautious as well.

It's a good time for both sides to relax, sit on your hands for a little bit and let the price pattern show us the way. I suggest short-term (day) trades until this clears up. A break below the key levels should be a good time to initiate position trades on the short side while a break above the key levels to the upside would be a good day-trading opportunity for the bulls but be ready to bail quickly.

Be careful over the next week and good luck. I'll be back with you next Wednesday.

Key Levels for SPX:
- bullish above 1367 and more bullish above 1390
- bearish below 1340 and more bearish below 1319

Key Levels for DOW:
- bullish above 12,850
- bearish below 12,450

Key Levels for NDX:
- bullish above 2425
- bearish below 2325

Key Levels for RUT:
- bullish above 860
- bearish below 826

Keene H. Little, CMT