Market Stats

The morning was looking somewhat bullish with the futures up in the pre-market session following the drubbing the market took yesterday, especially with the little capitulation selloff into the close. This normally sets up a reversal but those hopes were quickly dashed once the opening bell rang. The selling was obviously not finished yesterday and it continued strong in the early morning. But by the end of the day it was looking much better for the bulls, or at least not as good for the bears.

The initial employment reports were not that bad but certainly not good either. The Challenger, Gray & Christmas report showed announced job cuts in July climbed significantly -- up 60%, to a 16-month high of 66,414 in July. The bulk of that number came from just a few firms -- Merck, Borders, Cisco, Lockheed Martin and Boston Scientific. As John Challenger, the CEO of Challenger, Gray & Christmas, noted, these are the firms that have been somewhat immune to large layoffs so it's a disturbing trend.

The ADP report then came out and showed an increase in payrolls of 114K in July, which was better than the 100K figure that was expected. June was also revised higher to 157K from 145K. These figures do not include government payrolls and if the governments continued to lay off people in July we could see another dismal employment report this Friday. Expectations for the Friday number are around 75K jobs (vs. June's 18K) and for the unemployment rate to remain the same at 9.2%.

Factory orders and the ISM Services numbers came out at 10:00 AM and these probably helped spark additional selling that took the market to its lows by about 10:30 AM. Factory orders declined -0.8%, the same as the downwardly revised number for June (from -0.6% to -0.8%), which was slightly better than the expected -1.0%.

ISM Services came in at 52.7%, which is still in expansion territory (above 50) but slower than June's 53.3% and also below expectations for a slight bump up to 53.5%. The number had peaked at 59.7% in February and has been sliding lower since. New orders showed further slowing, coming in at 51.7% and disturbingly, the backlog of orders dropped another 4.5 percentage points to 44%. Considering the services industry employs 80% of our people, this is not good news for the unemployed (or employed).

Factory orders were also disappointing, falling -0.8% to $440.7B in June. May's number was downwardly revised to show +0.6% growth instead of the previously reported +0.8%. Building inventories helped but unfortunately they're at a level not seen since the collection of numbers started in 1992.

With all the bad economic news we received this morning it was not a surprise to see the market sell off again, especially following the disappointment with our government's inability to rein in spending (the agreement merely slowed, marginally, our accumulation of debt). Following the debt ceiling agreement, the market was not at all happy with the vote earlier in the week. As Bill V. noted to me, "Perhaps the reason the stock market isn't responding better to the big news so far from D.C. is the fact that the total first phase just put into effect will lower federal spending a whopping $21 billion NEXT YEAR. But perhaps the heroic new "commission" will come in later to save the day." The market knows a bad deal when it sees one. Our elected leaders are by name only. They're actually worthless and gutless. I'd tell you how I really feel about them but I don't want to offend you (wink).

It's clear that the selling has done some real damage now -- 8 straight days prior to today and it was looking for a while like it was going to be 9, something that is extremely rare in the market. So let's see where we stand as of tonight.

Starting out with the SPX weekly chart, following the break of the uptrend line from March 2009 through the August 2010 low (near 1310 in early June), the bounce off the June 16th low, especially with the strong rally in the final week of June (thanks in large part to the Fed's $76B injection), managed a test of the broken uptrend line at the July 7th high. The decline from there left a bearish kiss goodbye. That was the longer-term sell signal for the market. Since then it has dropped below the June 16th low (1258.07), confirming the breakdown. Additional downside potential is to support in the 1220-1227 area which is based on the previous highs in April and November 2010. A break below 1220 would be particularly bearish while a rally back above 1320 would be bullish. We could see the market chop around for a bit in between over the next couple of weeks.

S&P 500, SPX, Weekly chart

Looking at the daily chart below, the immediate reaction upon seeing today's daily candle is BUY! Almost without fail, each time we've had one of those bullish hammers at support (call it the 1250 area), it's been a good setup to get long for at least a trade. It will be interesting to see what develops over the next couple of days since I see the possibility for just a choppy bounce up to about 1282 by next week for a correction of the decline from July 21st before heading lower again (bold red path). A rally above 1296, the July 18th low, would at least negate the bearish wave count that I have on the chart and increase the potential for a much higher bounce (even the possibility for a new annual high into September but I'm from Missouri on that one). There remains a risk (smaller than it was this morning) for another drop lower to the next level of support at 1220-1227).

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1296
- bearish below 1249 and more bearish below 1220

There's an interesting correlation between the patterns seen at the 2007 top and now the 2011 top, shown in the two charts below. In 2007 there was a H&S top and the right shoulder was a minor (head-fake) break above the downtrend line from the head. It dropped back below the downtrend line and then tried one more time in late December before dropping like a stone into January 2008. The pattern in 2011 is showing a similar H&S top and the June rally had SPX breaking back above the downtrend line from the head (the May high). It was a much larger break of the downtrend line but I can easily explain that away by saying Bernanke didn't inject the same $76B in December 2008 as he did in the last week of June. In other words, this year's head-fake break had a lot of liquidity behind it but resulted in the same thing -- a break back below the downtrend line. As noted on the lower chart, a break below the neckline of the H&S pattern resulted in a swift decline into the following month. Therefore, remain aware of the risk for the same thing to play out from here. The downside objective out of this year's H&S pattern (the height of the head above the neckline, projected from the neckline break) is to 1148, close to the 200-week MA at 1158. That neckline is currently near 1263, about 3 points above today's close.

SPX, 2007 vs. 2011 Top, Daily charts

The above comparison is uber bearish if today's bounce is followed by renewed selling. But there's another interesting comparison between the VIX and SPX, especially with today's bullish candlestick. As shown in the two charts below, the VIX had closed outside its upper Bollinger Band last Friday and then closed back inside the band on Monday, which creates a reversal signal. SPX also closed below the bottom of its band yesterday and closed inside it today, confirming the VIX reversal signal. When we've seen this setup in the past, such as the March and June lows, we got strong rallies to follow. Chatter in a few different trading groups I follow is highlighting this scenario. I get the feeling that perhaps too many are looking for this bullish scenario and from a contrarian perspective the more bearish scenario shown above may be the real one. It will require close management of your trades over the next week until this sorts out.

SPX-VIX with Bollinger Bands, Daily charts

Today's low hit a downside objective based on the M-top in July (the July 7th and 21st highs). The height of the July 7th high above the bottom of the valley between the highs (1296) is projected down from the valley low to give us 1235.36. Today's low was 1234.56 so I'd call it close enough for government work. This morning's decline tagged the projection near 1249 where the 2nd leg of the decline from July 7th achieved 162% of the 1st leg down and it closed the gap from December 20th at 1247.15. So those three downside targets were achieved and the rally off them leaves the pattern looking at least short-term bullish. I'm showing a bounce up to the broken uptrend line from March 2009 - August 2010, near 1280 and then a minor new low down to the 1225 area before bouncing stronger into early September (to set up a stronger decline). The more bearish pattern, as discussed above with the 2007-2011 comparison, says any bounce followed by a new low from here has the potential to crash lower.

S&P 500, SPX, 120-min chart

Another downside objective was achieved today (and then some) -- the DOW's double-top pattern between May and July had a downside objective at 11840, which is based on the height of the tops above the valley and projected down from the valley bottom. Today's candlestick is another bullish hammer at support (its 50-week MA is at 11789). For those of you following EW, I'm using a different bearish wave count on the DOW than on SPX. I'm calling today's low the end of the 1st wave down from July 21st which means we're looking for a high bounce for a 2nd wave correction. I'm showing a bounce back up to the 12300 area before rolling back over into what should be stronger selling. Choppy price action that stays below 11975 keeps it bearish whereas above 12K at least opens the door to the possibility for a higher bounce. So we'll know more after a week's worth of price action from here. If the market instead drops back down, the next potential support level is near 11450, the November 2010 high.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,600
- bearish below 11,975

The techs have remained relatively strong throughout the recent selling. The tech indexes were the first ones back in the green today. At this morning's low NDX came very close to testing its uptrend line from March 2009 - July 2010, the same trend line that supported the decline into June's low. The rally off this morning's low got NDX back above its 200-dma, which it had dropped below this morning, and is now targeting its broken 50-dma near 2316, which is where this afternoon's rally was stopped. The pattern for its decline is not clear enough to declare a tradable bottom in for now and I see the possibility for another drop down to test its uptrend line before a bigger bounce (possibly more). The day's strong reversal does not point to a retest of the low but remain aware of the possibility.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2400
- bearish below 2250

The RUT came close to tagging its uptrend line from March 2009 - August 2010 (pretty common theme) and left a bullish hammer today at that support line. Now all it needs to do is get back above its H&S neckline near 773, which is what stopped today's rally. From here it could get a little sideways/up consolidation and then a minor new low or if the bounce becomes stronger then I see the possibility for a rally back up to its 50-dma (813) before heading back down. There will remain a more bullish possibility for a run to new highs for the year but at the moment I don't see that happening (but remain aware of the potential).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 830
- bearish below 773

Fear of owning stocks has been far greater than fear of owning bonds, even with the concern about downgrades from the rating agencies (which drops the price of bonds while increasing the demand for higher yields to compensate for the additional risk). This has resulted in a flood of money rotating out of stocks and into bonds, spiking yields lower. TNX has dropped from a high of 3.22% on July 1st to a low of 2.55% today, a decline of almost 21% in a month. This is a very unusual move in bonds, which tend to be much slower moving than the stock market. Welcome to a new paradigm with the government's mitts in our market stirring things up.

The weekly chart of TNX shows a long-term sideways triangle pattern that I think is playing out, which means TNX could be near support and ready to turn back up. TLT, the 20+ year Treasury ETF, left a bearish shooting star today following a spike up in the past week, the opposite of the bullish hammer on the stock indexes. For TNX, the uptrend line from December 2008 is the bottom of the potential sideways triangle and the pattern calls for one more bounce up to the top of the triangle, which is the downtrend line from June 2007. The projection that I'm showing is back up to about 3.4% before heading back down to break below 2.5%. But if the current decline drops below 2.5% it will indicate a more bearish pattern, one that could take TNX down to 1% by next year. That would be a clear sign of deflation.

10-year Yield, TNX, Weekly chart

After tagging 141.22 on July 21st (5 cents shy) for two equal legs up from its June low, BIX dropped back down to the June low at 128.36, held (128.32) and then rallied back up above its uptrend line from July 2009 (more or less a neckline to a possible H&S pattern). I see bounce potential back up to its 50-dma at 134.84, possibly back up to its downtrend line from February, near 138, but the expectation at this point is for it to turn back down after its bounce, maybe sooner.

Banking index, BIX, Daily chart

The TRAN looks like one of the more bearish indexes at the moment and that does not bode well for the broader market. This is the index that made a new high in July (unconfirmed by the DOW) and is now well below its 200-dma. Its pattern would look best with a relatively small bounce over the coming week and then lower into mid August before setting up a larger bounce into the end of the month (and then down hard in September).

Transportation Index, TRAN, Daily chart

The stock and bond markets have been doing their wild thing without the benefit or cause of the dollar, which has bounced off its July 27th low but very correctively and not very strong. The dollar looks like it's going to head lower from here, or maybe from slightly higher around 75. Above 75 and I'd start to look at the dollar a little more bullishly.

U.S. Dollar contract, DX, Daily chart

The financial fears are driving people into the metals and gold has rallied strong in the past month. From the low of $1478 at the end of July 1st gold is now up nearly $200 and getting close to the top of a parallel up-channel for its rally from October 2008, near 1690, which is shown on the weekly chart below. Today's high was 1675.90 and the daily candle is a long-legged doji, a potential reversal candlestick. The wave pattern is not clear enough for a high-confidence count but these channels are often good trading tools. So a rally up to the 1690-1700 area will likely be followed by at least a pullback. Depending on the pattern of the pullback it will then provide some clues as to whether or not we should expect a small or large pullback. Gold bulls are not in trouble until gold is back below 1478 but I would not press long bets from here. One negative for gold at the moment is the fact that gold stocks are not rallying with gold and XAU has been significantly weaker (it bounced back up to its broken 200-dma today but was unable to clear it).

Gold continuous contract, GC, Weekly chart

Silver continues to be much weaker than gold but it too has been attempting to hold up while gold pushes higher. Silver has been bumping up against its broken uptrend line from August 2010, with today's high being the 3rd time it has tested the trend line since July 18th. The new highs are being met with bearish divergence. There is additional upside potential to the 43-44 area (62% retracement of the May decline and the 2nd leg of its bounce off the May low equal to 162% of the 1st leg). Once this leg up is complete I expect a full retracement of the 3-wave bounce off the May low and continue lower after that. A drop below 39 is needed to indicate the top of the bounce is in place.

Silver continuous contract, SI, Daily chart

There are many who believe the metals will not sell off if the market is declining, especially if due to financial worries (lots of financial Armageddon stories out there). Keep in mind that we heard the same thing in 2007-2008 when we were experiencing financial fiascos. Even high oil was being blamed for the stock market decline and yet oil traded in synch with the stock market, and I expect it to do the same again. In 2008 silver dropped from more than $21 in March 2008 to below $9 in October 2008. Following the initial decline to the April 2008 low it got a 3-wave bounce into July (a little less than 4 months), similar to the current bounce off this year's May low followed by a 3-wave bounce into August (also a little less than 4 months), and then dropped hard. I expect the same pattern to play out this year

Oil's weekly chart below shows it testing the bottom of its parallel up-channel for its bounce off the January 2009 low. The 3-wave bounce achieved two equal legs up at 114.99 on May 2nd (16 cents shy of that level) and should be followed by another leg down for the decline from July 2008. A break below 89.60 would be a confirmed breakdown from its up-channel.

Oil continuous contract, CL, Daily chart

Tomorrow will be a quiet day for economic reports -- only the unemployment claims numbers. Friday's the big day with the non-farm payrolls numbers (+75K expected), the unemployment rate (expected to remain at 9.2%), hourly earnings average work week and then consumer credit, which all reflect on how well, or poorly, our economy is doing. Expect the market to be moved by these reports. If we rally into them I would expect at least a pullback. If we pull back on Thursday but not to new lows I would expect to see a rally on the reports.

Economic reports, summary and Key Trading Levels

Today's decline looks like it did a good job flushing out the weaker stock holders, which leaves the market "dry" (no more sellers). If the bears sense a recovery, such as this morning's spike back up, they'll add to the buying pressure and push the market higher. But I think the bears smell blood now and they're going to be looking at bounces as just another shorting opportunity. The battle may cause a very choppy market into next week. The choppier it is the more bearish it will be. The bulls need to see the market rocket higher from here and really get the bears running scared again. It's happened many times following days like today so it's certainly not a slam dunk for the bears to just short the bounce and watch it decline again.

By the same token, there is now major technical damage to the charts. The bulls are in trouble and they sense it. They too may be looking at bounces as opportunities (missed higher up) to unload inventory. Today's low is an important one so as long as the pullbacks remain above today's lows the bulls have a shot at getting something back. As shown on the SPX charts, particularly the comparison between 2007 and 2011, the market is very vulnerable right now to a downside disconnect. Protect your positions now if long.

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

Key Levels for SPX:
- bullish above 1296
- bearish below 1249 and more bearish below 1220

- bullish above 12,600
- bearish below 11,975

Key Levels for NDX:
- bullish above 2400
- bearish below 2250

Key Levels for RUT:
- bullish above 830
- bearish below 773

Keene H. Little, CMT