Market Stats

The decline from the May 2nd high has been a choppy affair and appears to be losing momentum to the downside. So while important support levels have been broken, and retested today (so far a failed retest), the pullback has been somewhat orderly and corrective. This holds out the possibility for another rally attempt but the bulls need to get going soon and not let the market drop much further, otherwise the selling could become a lot more intense.

The day started out relatively quietly, especially considering the overnight futures which had dropped sharply (I couldn't find any news to explain it). ES (the S&P 500 emini futures) had dropped -12.50 from the 4:00 PM close yesterday. That would have had SPX testing 1300 and breaking potentially important support in the 1305-1310 area. But the futures rallied back up overnight and gave back only half of it into the opening bell. That kept SPX from having to drop through support and the bulls stepped in immediately and lifted it back into the green. The day was spent in positive territory although it wasn't a rally to write home about.

The economic reports at 8:30 AM caused a little selloff in the futures as the numbers came in a little worse than expected. The durable goods orders came in at -3.6%, worse than the expected decline of -2% and much worse than the +4.4% for March, giving us a swing of -8% from March to April. The drop was primarily due to lower demand for aircraft (which is a volatile component of the report) and autos. The disruption of car parts from Japan got the blame.

Excluding the transportation component, orders were down "only" -1.5%, which was a reversal from +2.5% in March. This should be no surprise considering the fast slowdown we've seen in the recent manufacturing surveys. Japan's parts distribution may be getting the blame but there's clearly more going on here than just parts flow. Each new high (such as the one in March) has been in a series of lower highs since the spike up in 2009, indicating a weakening of the recovery for some time. I suspect we'll be seeing more negative numbers in the coming year.

Home sales, the mortgage index and home prices were all reported today but everyone expects the numbers to get worse before they get better so these are not a market mover. Sales actually ticked up slightly to 323K, from 301K in March, and the spring selling season is clearly at work. Even prices ticked up marginally in April vs. March -- up +0.3% -- following the -1.5% in March.

The closer we get to the holiday weekend the quieter the market will get. There may have been some position squaring today in front of the weekend as many traders are going to want to close up their trading desks before Friday. Trading volume continues to be on the light side but was a tad more than yesterday's. Price action was mildly bullish but the price pattern says we had some churning and may have been an indication of more distribution (selling into the rally). That doesn't preclude at least a higher bounce but so far there's no evidence of a strong rally coming.

So we'll jump right into the charts to see what's setting up in front of the holiday weekend as we head towards the end of the month (last trading day of the month is Tuesday following the holiday on Monday).

The SPX weekly chart shows support by the longer-term uptrend line from March 2009 through the August 2010 low is going to be an important trend line for the bulls to hold -- it's currently near the April low at 1294.70. Not drawn on the chart is another uptrend line from November through the March low (for the 2nd a-b-c move up from July). That trend line is currently near 1300, which is what I thought was going to be tested this morning based on the overnight low in the futures. But the recovery started before the opening bell.

S&P 500, SPX, Weekly chart

As long as SPX remains above the April low there remains the potential for another push higher, shown on the chart with a new high in June to about 1390. If that happens I suspect we'll see a continuation of the bearish divergence on the oscillators and it would be a short play of the year if it sets up.

If SPX drops below 1294 it could open up the flood gates to much lower lows and quickly. The pullback pattern so far looks like a bullish descending wedge, as drawn on the daily chart below, and a break above 1340 would indicate a new high into June is very likely. But if price breaks below 1305 and stays below then a very bearish wave count from the May 2nd high could start a series of strong waves to the downside.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1340
- bearish below 1305

As mentioned above, a break below 1300 and the uptrend lines from March 2009 and November-March would be a confirmed breakdown. It would be a signal to get short and hang on for the ride down (probably quickly down to 1240-1250 before much of a bounce). As noted at the bottom of the daily chart above, the oscillators are not giving me any indication that it's ready for a bigger bounce (it doesn't mean it can't rally but usually these provide fair warning). The failure of the rally at its broken 50-dma is a bearish kiss goodbye so far so the bulls know what they need to do.

The 60-min chart below looks more closely at the decline from May 2nd. This morning's low closed the April 20th gap at 1312.46 and provided the bounce that the bulls jumped on. But today's bounce is only a 3-wave move (corrective) and stopped at the 38% retracement of the leg down from May 19th, so not a strong bounce yet and could be all we'll see. A drop below the bottom of the descending wedge pattern would be a very bearish move (be careful of a head-fake break followed by a rally back up inside the wedge, which would be a buy signal). Once again, the lack of bullish divergence should be a little worrisome to bulls. Bulls need to break the series of lower highs, starting with a break of the downtrend line from May 2nd, currently near 1340.

S&P 500, SPX, 60-min chart

The DOW fought gallantly to get back above its 50-dma but closed about 13 points below it. The day finished as a doji so it was an indecision day. It held support at its uptrend line from March 2009 but remains under its 50-dma. Following the break of either should be good for a trade into next week at least. I'm showing one short-term bullish possibility that's not on the other charts and that's for a higher bounce into next week followed by a resumption of the selling. This possibility is based on the completion of the 1st wave down at this morning's low (for you EW'ers it would be a leading diagonal 1st wave, which I don't like because of the lack of impulsive waves to the downside but I don't like any count in this sloppy price environment). Follow the trend lines since they appear to be working for now.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,634
- bearish below 12,300

And speaking of ugly price patterns, the NDX chart is next. It looks weaker than the others, especially since it has clearly broken its 50-dma (and not retested) and its uptrend line from March. Depending on whether I'm looking at the daily chart with or without the log scale I see price has either broken its longer-term uptrend lines or hasn't tested them yet (the chart below is arithmetic scale). The one thing the bulls have going for them after today is that it found support at the 50% retracement of the March-May rally. They were also able to hold potential support at the broken downtrend line from February. A move back above the 50-dma and broken uptrend line, near 2337, is required to turn the NDX bullish and back above the last high near 2375 to indicate a probable new high in June.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2375
- bearish below 2275

The RUT was the clear leader today and that could be a bullish sign for the market. It did not sell off in the final 20 minutes of the day, as the other indexes did, and held most of the day's gains, finishing up +1.3% vs. the others at +0.3%. The daily candlestick is a bullish engulfing pattern at potential support (the bottom of a bullish descending wedge). Going with just the RUT this evening I'd be turning bullish here. It's too bad there are no bullish divergences at the lows within the descending wedge since that's not confirming the bullish pattern. A breakdown instead, especially in this more volatile index, would likely see very strong selling. So take a break below 806 seriously.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 840
- bearish below 806

TNX looks like it's trying to find a bottom at support near its 50-week MA near 3.08%. I think it's ready for a bounce, perhaps after one more minor new low, and then we'll start to get some clues as to what kind of bounce we can expect. A break below 3% would probably be followed by a move down to 2.87% (62% retracement of the rally from October 2010). If TNX does start to rally back up we could see the stock market do the same.

10-year Yield, TNX, Weekly chart

Taking a little wider view of the banking sector tonight, the weekly chart of XLF below shows the break of the uptrend line from March 2009 in April followed by a retest of the line into the May 2nd high. The decline from there left a bearish kiss goodbye. But the bulls have a chance to recover here -- the 50-week MA acted as resistance for most of 2010 before the bulls finally broke above it in December. This is the first time it has returned to the 50-wma since the break above it and typically the first test will be support. Assuming this sector gets a bounce we'll then have to watch how it does, especially if it's able to make it up to the downtrend line from May 2nd, currently near 16.20, which is also near the 50-dma. It's possible we'll see price bounce between its 50-wma and 50-dma before we get a clearer idea as to where it will head into the summer.

Financial sector ETF, XLF, Weekly chart

I'll continue to show upside potential for the TRAN until proven otherwise (with a decline below 5300 although it would be more bearish below 5250), but the price pattern has become very choppy, like the broader indexes, and that makes it very difficult to figure out where it's headed over the next few weeks. I'm showing what we could see into mid June if the market has new highs ahead but it's just a guess. Even the trend lines are a mess. The only thing holding so far is the 50-dma, near 5320, which is bullish until it breaks.

Transportation Index, TRAN, Daily chart

At each resistance level the dollar has stalled but then continued higher -- the downtrend line from February, 50-dma, 38% retracement of the decline from November and soon, I think, at the downtrend line from June, near 76.60. If the dollar pulls back that would be supportive for a rally in the stock and commodity markets, and vice versa.

U.S. Dollar contract, DX, Daily chart

The commodities index, CRB, has been consolidating sideways since the initial decline from May 2nd and it's possible the consolidation finished with today's bounce, but only if it starts back down right away from here, otherwise there's higher bounce potential up to the 50-dma near 354. Based on the choppy price action following the spike down earlier this month we should see another leg down, which is what I'm projecting. Keep in mind that the stock market and the commodities markets will very likely trade in the same direction (even if not day to day). So the question about the stock market's direction will be confirmed if we get a move out of this congestion in the coming week.

Commodity index, CRB, Daily chart

Gold is nearing the level where its bounce off the May 5th low will have two equal legs up, which is at 1535.40. Today's high was 1532.50. The a-b-c bounce off the low does a good job correcting the decline, especially since it's near the 62% retracement of the decline, at 1533.51. If it is just an a-b-c correction we'll soon see gold head back down and make new lows. If it's not an a-b-c correction and gold rallies above 1553 (78.6% retracement) we should see a move similar to what I've depicted with the green dashed line and a move up to at least 1600.

Gold continuous contract, GC, Daily chart

Drawing a little parallel up-channel for silver's bounce shows a potential bear flag pattern following its decline in early May. Today's bounce tagged the top of the flag so there's the potential for more selling from here. A little more upside potential exists to 39 where it would run into the 38% retracement of the decline, its 50-dma and the trend line along the highs from 2006-2008. The bounce high on May 11th, at 39.47, is also a common resistance level (top of the 4th wave in the move down from April 25th). This will likely be a strong resistance area if reached. A drop below 34.19 would indicate new lows are coming.

Silver continuous contract, SI, Daily chart

Oil's pattern is similar to the commodity index and will likely trade in synch with the other commodities. There's additional upside potential to 104.99 for two equal legs in an a-b-c bounce off the May 6th low but I'm watching the broken uptrend line from February 2009, near 102.20 for resistance (highlighted on the chart below). Above 105 would be a bullish move, especially if the commodity index is also rallying while the stock market is rallying and the dollar is declining.

Oil continuous contract, CL, Daily chart

With the price at the gas pump staying high (prices in Seattle remain above $4/gal) and food prices continuing to climb on their "transitory" trajectory, it's going to be important how the consumer reacts. As we all know by now, a recovery without consumer spending is not going to happen. So watching the retail index, RLX, is going to provide some clues in that regard. This index topped out before the broader averages in 2007 and what I'm seeing at the moment is not encouraging.

As you can see in the chart below, the last push higher into the May 2nd high was able to push marginally above the early-2007 high but hasn't been able to hold it. It also failed at the mid line of its parallel up-channel from 2009. The new high in May left a bearish divergence against the December and February highs, and even against the April 2010 high. It's not a strong showing there. If it does roll over from here it will be an early indication that the consumer is pulling back and that a recession is likely coming.

Retail index, RLX, Weekly chart

Tomorrow's economic reports include the usual unemployment numbers and the 2nd estimate of GDP. No revisions are expected so unless it's a nasty surprise we should not see a market reaction.

Economic reports, summary and Key Trading Levels

It was a relatively quiet day today and it could get quieter as we get closer to the weekend. I suspect Friday will be a real snoozer. Futures were down hard during the overnight session but rescued before the open. There could be some support coming in from the Fed's continuing POMO, which runs through June (and then some form of continuation as repurchases), and this could explain the relatively controlled decline since May 2nd (and the choppy pattern that's hard to decipher).

This choppiness in the pullback looks potentially bullish (a choppy pullback in a descending wedge pattern is usually bullish) except for the lack of bullish divergences at new lows. It's possible we're at the start of a stealth decline, with distribution as selling into rallies, which will suddenly break to the downside. Be ready for that possibility.

The pattern requires patience and small trading (if at all) while we wait for resolution. A break below the key levels to the downside warrants jumping on it and riding it lower. A break to the upside is likely to be a choppy rally and it will be hard to stay in a trade. Selling bull put spreads, after a break to the upside, could work as you let it chop around above your position into June's opex. Otherwise bull put spreads are a little more dangerous than usual (because of the threat of a fast and hard breakdown).

Keep the dollar and commodities on your radar and look for the stock market and commodities markets to be in synch with each other and opposite to what the dollar is doing -- this will enhance the probability of your trade working out in your favor. Stay away from the market if each is going their own way. Good luck and I'll be back with you next Wednesday.

Key Levels for SPX:
- bullish above 1340
- bearish below 1305

Key Levels for DOW:
- bullish above 12,634
- bearish below 12,300

Key Levels for NDX:
- bullish above 2375
- bearish below 2275

Key Levels for RUT:
- bullish above 840
- bearish below 806

Keene H. Little, CMT