Market Stats

I have a potential emergency call-away hanging over my head this afternoon and need to finish tonight's newsletter sooner than normal. I want to quickly discuss each chart and get as much done as I can so forgive some brevity to tonight's report. And please excuse any typos since I didn't have a chance to go back and reread.

The market was on hold for most of the day, especially following the strong bounce in the past 4 days (which was due at least a breather), waiting for the results of the FOMC meeting and then Bernanke's news conference. Even thought the market wasn't expecting any changes, nor anything special from Bernanke, it's the unknown that keeps traders on the sidelines until the event passes.

The FOMC announcement was a complete non-event as the Fed announced it was going to keep the targeted Fed funds rate between 0% and 0.25% and end QE2, as planned, at the end of June with the completion of its $600B bond purchase program (8 more days and the amount of the daily purchases is declining -- chart later). The Fed reiterated its concern that the economic recovery is proceeding at a slower pace than the Committee had expected and that the labor market is also "weaker than anticipated". They're recognizing that inflation has increased slightly but are confident that it will correct as "the effects of past energy and other commodity price increases dissipate."

Bernanke then held a news conference at 2:15 PM to talk some more about their forecast. The Fed has cut their forecast for growth for the second time this year. The GDP forecast for 2011 had been lowered from their 3.4%-3.9% estimate in January to 3.1%-3.3% in April and today's forecast is now 2.7%-2.9%. Anyone willing to bet it will lowered again next quarter. They're always caught chasing it instead of actually forecasting it. Their forecast for 2012 was lowered from April's 3.5%-4.2% to 3.3%-3.7%.

Core inflation is expected to be between 1.5% and 1.8% this year, up from 1.3% to 1.6% in their previous forecast. Both of those forecasts are going in the wrong direction. Their PCE (Personal Consumption Expenditures) price index is expected to climb between 2.3% and 2.5%, which is a narrowing of their previous forecast for 2.1% to 2.8%.

The Fed is more worried about unemployment as well, which of course fits the slowing economic forecast. Their 2011 forecast changed from 8.4%-8.7% in April to today's estimate of 8.6%-8.9%.

Bernanke said he's "prepared to take additional actions if conditions warranted" without being specific to what he means (no surprise). He's already mentioned in the past that one step that he could take would be to charge banks interest on their deposits with the Fed Reserve Bank. In this way he would hope the banks would be further enticed to lend it out to the public instead. The only problem with that concept is that the banks first need willing borrowers and the ability to borrow. With significantly increased borrowing standards (back to the way it used to be, so not more fog-a-mirror qualifications), it's become more difficult to find borrowers.

The other "additional actions" could certainly mean QE3 but I think most realize that for Bernanke to do that at this point would mean the economy is really hurting and "damn the inflation monster, full speed ahead". Bernanke knows QE3 would spark a very serious inflation problem, which is the rock, but doesn't have many other cards to play, which is the hard place. I'm not so sure an announced QE3 (he's already going to have QE-1/2 with the Fed's repurchase program) would help the market at this point (other than a quick flash to the upside) since most would realize it would be a Hail Mary pass).

Yesterday' rally may have had a little help from the Fed. This update was from Tom McClellan at mcoscillator.com:

"There is an important reason why there is some extra push upward today Tuesday. The Fed was only anticipating doing a purchase of around $4.5 billion on Monday in POMOs as part of QE2, but the actual amount was $9.198 billion. That's right, they did an extra $4.7 billion above what was published on their schedule of expected purchases.

Pumping the extra money into the banking system helps to provide extra fuel for pushing the market higher.

POMO vs. SPX daily chart, courtesy mcoscillator.com

If they go back to following their announced schedule, the punchbowl is going to be getting pulled away and the fuel for a sustained rally will go away along with it.

It is worth noting that this indicator does not always work correctly for modeling stock prices. There are 3 notable inversions during the time period shown in this chart. Following each, the SP500 quickly got back on track with what POMOs were doing. The end of POMOs later this month does not bode well for a market about to go through POMO-withdrawal."

And what the Fed confirmed for us today is that there will not be a follow-on QE3. This will drain some liquidity from the market which is the lifeblood.

The SPX weekly chart is showing price bounced off the trend line from the April 2010 high through the March 2011 low but in somewhat neutral territory. It could climb as high as the broken uptrend line from March 2009 to retest the May high (log scale) but I think the higher-odds play is for a resumption of the selling once the current bounce has finished.

S&P 500, SPX, Weekly chart

After falling out of its parallel down-channel from May it then jumped back above the bottom of the channel, which was bullish, but today closed back below the channel, which is bearish. If the correction to the decline has finished we should see it head down to the 1250 area if not 1225. Upside potential remains to the 1320 area.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1320
- stay bearish below 1295

The 60-min chart below shows the small parallel up-channel from last Thursday's low and today's close was a marginal break of the bottom of the channel (as well as back below the larger down-channel shown on the daily chart above). But the channels and a trend line along the highs since June 7th could support it here for another leg up to the 1310 area to complete a 5-wave move up from last Thursday. A break below 1280 would leave this week's bounce a confirmed 3-wave correction to the decline and point to a new low.

S&P 500, SPX, 60-min chart

There's an interesting analog (pattern comparison or fractal) between the Nikkei 225 and SPX, as shown in the chart below. The price highs for SPX since 2000 could be exaggerated as compared to the Nikkei due to the massive liquidity injections from the Fed but the highs and lows line up fairly well. As noted on the chart, the May high is slightly later than the equivalent high for the Nikkei in 2000 but so was the 2007 high a little later than the Nikkei's 1996 high. The bursting of a bubble often follows a very similar path and if the Nikkei's path is pointing to our next move we're looking at another leg down in the bear market to a new low around February 2013.

Nikkei 225 (1984-2011) vs. (SPX 1994-2011)

The DOW has a very similar pattern to SPX but at least it's still back inside its down-channel from May. There's an upside resistance zone at 12300-12400 but the failure to close back above its November-March uptrend line could spell trouble for the bulls. Stay bearish below today's high.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,400
- bearish below 12,200

This week's bounce took NDX up to the top of a parallel down-channel and fits as the 4th wave correction within the decline from May. It's a setup for the bounce to be followed by another leg down to about 2100 in early July (perhaps around a turn date on July 8th). If the 5-wave move completes as depicted we'll then see a correction of the move down from May and I'll look for a "normal" 50% retracement in about 62% of the time. From 2100 that would give us a bounce back up to 2259 by August 18th. The uptrend line from March 2009 through the July 2010 low, which is where NDX bounced on Thursday and Monday, will be broken with another leg down and then a retest of it would be a natural resistance level. That line crosses 2259 on August 11th, making for a nice projection for the bounce off 2100, assuming it will first drop down to that level. There is the potential that the decline from May is a 1-2, 1-2 wave count to the downside (since both bounces are sharp), which calls for a very sharp and strong decline from here. A break below the bottom of the channel would be very bearish.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2300
- bearish below 2255

Another 5-wave move down from the August bounce would then be expected. If it equals the May-July decline (again, assuming it drops to 2100 in July), we'll see a decline to about 1940 into September. More than likely it would be a stronger decline than that and the 162% projection points to the 1750 area, which would be near the 2010 lows. So that's a good downside target for this year since that leg down would then be followed by a bounce/consolidation into the end of the year before heading lower again in early 2011.

The RUT is kind of in no-man's land at the moment, hanging in space. Bearishly it has stalled at the May low and the setup is the same as the others -- looking for the start of the next leg of its decline, which would like head for the uptrend line from March 2009 through the August 2010 low, near 740. Upside potential is to about 830 although I think that's unlikely.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 830
- bearish below 810

The KBW bank index, BKX, almost rallied back up to its broken uptrend line from August-November but stalled at the mid line of its down-channel from February, which is bearish. A rally above 48 would target the 49.50 area but a decline from here has a good chance of breaking down below its down-channel. First support would be near 44, the trend line along the lows from November 2009-August 2010.

KBW Bank index, BKX, Daily chart

The Transports got a lift this morning with a little help from FedEx (FDX), which posted solid earnings this morning. FDX reported a 33% increase in its fiscal Q4 earnings, citing an improvement in the global economy. Total revenue was +12% to $10.55B vs. the $10.41B expected by analysts. This is very positive news since shipping products means products are being made in the first place but it begs the question what next quarter is going to look like since we've since seen a drastic slowdown in the economies. But that's for another day and today the TRAN was up.

But this morning's lift was short-lived and the TRAN dropped back into negative territory into the close. It left a very bearish looking shooting star at resistance and has "SELL" written all over it.

Transportation Index, TRAN, Daily chart

The U.S. dollar has now pulled back more than it should have if the rally off the June 7th low was to remain bullish. It's still possible for a breakout to the upside (green path), as long as it holds above the June 14th low at 74.23 but if the dollar drops down to the uptrend line from May, currently near 73.95, it's going to look like a sideways triangle pattern might play out. This would be a bearish continuation pattern that calls for another leg down once the pattern completes (light red dashed line). We've got time to watch and evaluate what's happening but at the moment I'm neutral the dollar.

U.S. Dollar contract, DX, Daily chart

With the dollar pulling back it has helped gold rally back up towards recent highs. A trend line along the highs since the early-May decline shows upside potential to a marginal new high above May's 1577.40. The pattern of the bounce off the May 5th low is either very bullish, meaning a sharp rally is coming and one that will take gold up to 1700 before it even takes a breath, (so far an unlikely expectation considering the bearish divergence), or it's an ending pattern for the bounce which will be followed by another leg down (the scenario I think will play out. It takes a break below 1510 to indicate the next decline is underway, although a break of the uptrend line from March and the 50-dma will be a bearish heads up.

Gold continuous contract, GC, Daily chart

There are more than a few of us trying to trade silver on the short side so I'll show a couple extra charts on it tonight. While gold has pressed back up towards its highs, silver has been marching sideways as if waiting for gold to finish so that it can resume its decline. A downtrend line from May 31st is near 36.80 and could see the conclusion to its bounce attempt from June 14th. A break below 34.90 would indicate the next leg down has started. In the meantime there is the potential for silver to continue higher to the downtrend line from May 11th, which is the top of a larger sideways triangle pattern and is currently near 38. So far the pattern, whether it stops near 36.80 (today's high was 36.77) or heads up to 38, supports the bearish wave count calling for another leg down.

Silver continuous contract, SI, 240-min chart

Silver's daily chart shows how price has been consolidating sideways since the initial decline in early May. MACD came out of oversold but is staying negative just beneath the zero line. The expectation is that this bearish continuation pattern will be followed by another leg down (leg down into it so another leg down out of it. The widest point of the triangle projects down to 25, which is near the uptrend line from 2008. If silver drops the same as the 1st leg down that gives us a downside target in the 20-21 area.

Silver continuous contract, SI, Daily chart

Back on June 8th I showed a comparison between 1980 and today for silver, noting the similar pattern (fractal) that has developed following the May 2011 high as the one following the January 1980 high (the chart comparison was done by Tom McClellan). I've added to the chart what price has done since posting it two weeks ago and as you can see, the analogy continues to hold and points to the possibility that the next leg down is literally right around the corner. Only time will tell if the analogy holds and we get another strong decline that could see silver down to the first support level near 25 quickly (before the middle of July) and potentially down to 20 if 25 doesn't hold.

Silver, 1979-1980 vs. 2011, chart courtesy mcoscillator.com chart

Oil held above its 200-dma on Friday and Monday and looks like it should at least test its broken H&S neckline near 96. Back above 96 would be at least short-term bullish but at the moment I'm expecting to see oil turn back down and head for its first downside target near 82, with lower potential to 77.

Oil continuous contract, CL, Daily chart

The unemployment claims and new-home sales are the only economic reports tomorrow so the market will be pretty much on its own to deal with the results of the FOMC meeting and Bernanke's non-committal to help the market any further.

Economic reports, summary and Key Trading Levels

Equity futures dropped further in after-hours so that's not a good omen for tomorrow. If overseas markets show any kind of negative reaction to the Fed's news (and worries over a slowing U.S. economy) it might not be a pretty day on Thursday (unless you're short).

As pointed out on the charts, the rally off last Thursday's lows has relieved the short-term oversold conditions and we could see the resumption of the selling from here. If the rally, especially on Tuesday, was a short-covering event helped by the Fed's POMO, it leaves the market even more vulnerable to selling as those shorts get back in and just add to the selling pressure. When the Fed will ever learn this is the big question.

The potential for a waterfall decline from here is significant. I would want to get through this month (where fund managers may add to the selling pressure if they become worried about their bottom line) before considering the long side of the market. Catching falling knives is going to be dangerous. The crash flag flies until the end of this month.

But if the bulls step back in immediately tomorrow morning then we should get at least another leg up before starting a pullback, which at that point would have the potential for being just a pullback before rallying higher into July. So tomorrow's direction should set the tone for the rest of the month.

Sorry again for tonight's report being a little shorter than normal but there's an emergency delivery for my daughter-in-law that I have to attend to. Good luck tomorrow and the rest of this month and I'll be back with you next Wednesday.

Key Levels for SPX:
- bullish above 1320
- stay bearish below 1295

Key Levels for DOW:
- bullish above 12,400
- bearish below 12,200

Key Levels for NDX:
- bullish above 2300
- bearish below 2255

Key Levels for RUT:
- bullish above 830
- bearish below 810

Keene H. Little, CMT