Market Stats

Following yesterday afternoon's monster move off the afternoon low we saw the market consolidate for most of the day before pushing higher in the afternoon and into the close. It keeps the bullish pattern alive and did a good job at changing the trend to the upside for now. I'm thinking yesterday's low was the low for the year and next will be our end-of-year rally. It might be a choppy one but at least the pain for the bulls might be over for now.

This morning's economic reports included some information on the employment picture, including the Challenger Job Cuts and ADP Employment Change, and it continues to show a slack employment market. The Challenger report showed a significant increase (211.5%) in the number of announced job cuts. This is obviously a little worrisome.

The ADP employment report released at 8:15 AM and the headline number was 91K jobs added in September. It caused a little spike up in the futures but nothing significant. Small and medium-sized businesses added 96K while large businesses subtracted 5K. Small businesses have shown positive growth, even if slow growth, for 22 consecutive months now. The service sector provided the bulk of the jobs (90K, up from 83K in August) while manufacturing lost 5K. The chart from ADP shows how job growth has stagnated and declined since mid 2010. It's not below zero yet but certainly looks to be threatening that possibility. Perhaps we'll get a tick up in the jobs into the end of the year, supporting the potential for an end-of-year rally.

ADP Employment Report, chart courtesy ADP

We then got the ISM Services number at 10:00 AM and it received only a minor bump in the market. It was slightly better than expected but roughly in line and only a minor drop from last month.

We've been in a whippy market since the August low and it's been a month since the market has been able to move in the same direction for more than 3 days in a row. That pattern may continue for a while longer and it means don't get settled on any direction and get complacent about it. It's a trader's market. Once the market gives us a move that lasts more than 3 days it will then be talking to us. In the meantime we can expect reversals of reversals.

Of course the big reversal was yesterday's. After dropping below the 1100 support level, stopping out longs and sucking in shorts, a couple of big buy programs was all that was needed to spark some short covering which then triggered more short covering and before we knew what happened the DOW rallied 400 points off the low. Just another manic turnaround Tuesday.

But the pattern that is now on the chart is something we've seen several times before at important lows, which makes yesterday's low a potentially important as well. We're looking at the possibility for a low for the year but not for the bear market. I've made my opinion clear that I believe the 2009-2011 rally finished in May (July for NDX) and that I think there's a reasonably good possibility that the market will drop below the 2009 lows. I don't think we ever really got out of the recession and it's not just a double dip recession that's coming but in fact I think in hindsight it will be recognized that we suffered a depression that will likely get worse before it gets better. The stock market will reflect that. That's my opinion fwiw.

But nothing moves in a straight line, not even in strong bear markets. And as traders we relish big moves, not really caring which direction. Down moves happen faster (although yesterday afternoon's rally would argue otherwise) and are fun to trade but for many traders it's simply easier to trade the long side. We might have an opportunity coming up for you.

I think there's a good chance the next bear market decline will look similar to the 2007-2009 decline (except possibly stronger). We've started down similarly this year as we did in 2007. Looking at the comparison chart below, the top chart shows the 2007 top and the bottom chart shows this year's top. I had shown this chart back in July when I had pointed out the expectation for the twin July peaks to be followed by the breakdown.

SPX daily chart, 2007 top vs. 2011 top

Notice the minor new low On March 17, 2008 after a 5-wave decline from the October 2007 high. It followed a choppy consolidation after the January 23, 2008 low and the break of that January low was followed by a spike back up. I've placed a "We are here" note at the early portion of the rebound from the March 2008 low because I'm thinking we're in the same pattern (analog pattern). It bears watching until the pattern changes.

Assuming the analog pattern continues (and there are many examples in the past where we've had a similar pattern), we put in an important low yesterday and quite possibly the low for the year. A 2-month bounce, similar to the March-May 2008 bounce, would take us into the first week of December. A bounce that retraces between 50% and 62% of this year's decline gives us an upside target zone of 1223-1258. If SPX retests its broken H&S neckline in December we could see a bounce up to 1275-1280. So there's clearly some upside potential for a rally into the end of the year. It's next year that we'll have to worry about what kind of decline will follow.

In 1987, the crash into the October low was followed by a slightly lower closing low in December 1987 and then a rally, as can be seen in the chart below. The December low was about 2 months later, which was repeated again with yesterday's low following the August low almost 2 months later. So this is just another example of the analog pattern I'll be following.

SPX daily chart, 1987

Notice the higher low on MACD in December vs. at the October low. Compare that to the daily chart shown a little later in the discussion of today's charts. Also interesting about the 1987 comparison is the December 4th low for the retest. That low could be mirrored by a high this December 4th (which is a Sunday so maybe December 5th). That's clearly just speculation at the moment but it would be an interesting setup.

The news follows the market so this price pattern suggests we'll probably hear about how Europe's debt problems are being solved and by the time the bounce finishes in December we'll have most everyone calling for new highs above this year's 1370. I'll have plenty of warnings by then not to believe it and once again I'll probably be accused of just being a permabear but that's OK. It's just a name. But first things first, we have to see if the bounce off yesterday's low is going to stick. There is still the risk for at least a retest of the low although again, the analog pattern says we will not.

The weekly SPX chart below shows the potential bullish candlestick that we have so far (it could easily change over the next two days) and it's at two important Fib levels. The 50% retracement of the 2007-2009 decline is near 1120 (and yesterday's recovery had SPX closing above that level) and the 38% retracement of the 2009-2011 rally is at 1101.73. Today it closed a point above the 200-week MA near 1143. But you can see that price action has cycled up and down and all around the 200-wma since August so it's a good start but nothing definitive yet as to the next move.

S&P 500, SPX, Weekly chart

On the daily chart I've added a descending wedge pattern for the decline from August 31st. It's a pattern that I've been watching for a few weeks and I've moved it to the top of the probability list. The waning momentum to the downside warned against the more bearish wave count calling for a steep decline in multiple degrees of 3rd waves. The previous bottoming pattern that I showed above is another reason. The top of the wedge (downtrend line from September 20th) is currently near 1165 so that's the level the bulls need to exceed in order to get us out of this choppy mess that we've been in since August. But as depicted with the green path, the choppy price action is probably with us for at least another month. It might be bullish but it's not going to be easy to trade if it bounces as depicted. And the bears might not be finished yet -- there is still the risk of at least a retest of the low, if not a breakdown (dashed red).

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1160
- bearish below 1074

The 120-min chart below focuses on the potential descending wedge pattern. As already mentioned, the bulls are not in a better position until they can break out of this pattern, so above 1165. In the meantime we could see another leg down to another minor new low to finish a larger 5-wave count inside the wedge. A strong break below 1174 is now needed by the bears to prove we've got much lower lows to go, which would open the door for a move down to the 1010-1018 area (possibly as low as 950). Beware more whipsaws while inside the wedge.

S&P 500, SPX, 120-min chart

Dialing in close to look at just the leg up from Tuesday, it's looking like a 5-wave move up with an upside target near 1152 where the 5th wave would equal the 1st wave. I'm showing a quick pop in the morning and then the start of a pullback to correct the rally from yesterday. A 50% retracement from 1152 gives us a downside target for the pullback near 1113. The 5-wave move up, if it holds as such with a pullback following, tells us the short-term trend has changed and to expect at least another leg up once the pullback completes. If we use 1113 as the pullback low, another leg up equal to the leg up from yesterday's low would give us an upside target of 1190. Just some numbers to play with as you plan your own trades.

S&P 500, SPX, 15-min chart

For those who like to use EW (Elliott Wave), I show a MACD technique to help confirm wave counts. The 3rd wave, being the strongest (typically), has a higher MACD high than either the 1st or 5th wave. The bearish divergence that I expect to see with a new high (today's or slightly higher tomorrow morning) would help confirm that it's the 5th wave of the move up from yesterday, setting up a pullback to correct the 5-wave move.

The weekly chart of the DOW shows a nice parallel down-channel and yesterday's low stopped (again) at the mid-line of the channel. It also tagged its 38% retracement of the 2009-2011 rally. The strong rebound off that Fib (10429) and a close back above the long-term uptrend line from 1990-2002 (near 10850) sets up a stronger rally from here, especially if the 5-wave move down from May has completed.

Dow Industrials, INDU, Weekly chart

Key Levels for DOW:
- bullish above 11,150 (downtrend line)
- bearish below 10,400

NDX did a little catching up today and outperformed the other indexes. It's had two strong up days now and is getting close to testing resistance at its broken uptrend line from August 19th, near 2200, and its 50-dma near 2204. Being short-term overbought it's going to have a tough time getting through that resistance level on the first try. Keep in mind that a back test of this resistance followed by a pullback could be a bearish kiss goodbye that leads to further selling.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2210
- bearish below 2042

I've left the bearish wave count on the NDX chart because it demands our attention. While I'm pointing SPX and the DOW higher from here, the wave count on NDX says not so fast bully boy. If NDX drops back below yesterday's low with a sharp decline it's going to be potentially very bearish, as in crash-leg bearish. The bulls will be in serious trouble if that happens. A pullback and then break through resistance, so getting above 2210, is a must-do for the bulls from here.

The same ending wave count on the DOW and SPX is shown on the RUT's chart below. The short-term price pattern points to slightly higher, to about 667, before pulling back for at least a correction of the rally from yesterday. That ties in with the 38% retracement of the 2009-2011 rally, also near 667. Notice the 50% retracement at 605.58 has held. A little higher, near 672, is the downtrend line from July, which is also the top of its descending wedge pattern. A rally above 695 would confirm the break of the downtrend line. A pullback and then break out above 667 would be a bullish move but until then we have to respect the potential for a drop back down for at least a minor new low (only a minor new low would be expected if price chops its way lower instead of dropping sharply through 600).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 695
- bearish below 585

Money has rotated out of bonds and into stocks the past two days, driving the 10-year yield higher after gapping down yesterday (like the stock market). TNX remains trapped in a down-channel and needs to break above 2.00% to get out of it. Its wave count calls for a bigger bounce and leading the stock market higher into November/December looks in the cards from here. If it drops a little lower first I see downside potential to about 1.6% before starting the bigger bounce. The Fed will be doing some buying tomorrow so we'll see if that creates a little downside pressure on TNX, which would again be what I'm looking for in the stock market.

10-year Yield, TNX, Daily chart

The banks led the rally yesterday and tacked on a few more points today. BKX looks like it might have finished the same kind of descending wedge pattern which calls for a breakout to the upside from here. A pullback from here should set up another rally leg that breaks through resistance. However the price pattern over the next month could have it looking like it's simply trapped inside the same trading range it's been in since August. Follow the money if the banks get appreciably stronger (or weaker) from here.

KBW Bank index, BKX, Daily chart

The TRAN looks a tad more bullish than the major indexes if only because it broke its downtrend line from September 16th, which fits as the top of its descending wedge pattern. The larger wave count is hard to reconcile with the bullish descending wedge though and that's keeping a bit cautious about what it might mean. The bearish wave count, like that for NDX, calls for a very sharp selloff from here. At the moment I'm not sure which one to believe on this index and it simply means I have to take one leg at a time until the correct pattern identifies itself. The bulls will want to see just a pullback and then press higher again, which the short-term pattern off yesterday's low supports. After we see another leg up (green) we'll have to evaluate it for the next setup.

Transportation Index, TRAN, Daily chart

The weekly chart below is showing the opposite of what we're seeing on the weekly stock indexes -- a shooting star at this point and it's at its 200-week MA. If this was Friday and the candle looked like that I'd be jumping all over the dollar with a short position (for a trade). Once it corrects its rally from August we should see the dollar rally even stronger into next year.

U.S. Dollar contract, DX, Weekly chart

If the dollar starts a pullback correction it should be help the commodity and stock bulls. But copper is looking vulnerable here and keeping an eye on it will help us gauge what's happening with the global economy. There's lots of talk right now about China slowing down and their slowdown could be more like a crash since they've been propped up for a while now and the global demand for their products has slowed significantly. Copper dropped below its 200-week MA and while it looks ready for a bounce I'm thinking it could be a relatively small bounce for a 4th wave correction within the decline from August 1st. The small bounce should then be followed by further selling into November/December (so the opposite of the bullish expectations for the stock market. This is one thing that will keep me a little cautious about my upside expectations for the stock market.

Copper contract, HG, Weekly chart

Gold dropped to its uptrend line from October 2008 (log price scale) and has managed to consolidate for the past 1-1/2 weeks above it but I think it will break (from here or after a little higher bounce first). I'm showing a drop to its 50-week MA, a bounce back up to the broken uptrend line, perhaps back up to 1650, and then a steeper drop from there into the end of the year. This might be related to the "risk-on" trade as traders get back into the stock market, thinking the European debt problems have been solved.

Gold continuous contract, GC, Weekly chart

If gold and copper manage to hold up and rally with the stock market, one way to play the copper and gold commodities is with Freeport-McMoran (FCX). Yesterday's low in FCX was in the 28-30 support zone (July-August 2010 lows) and the daily candle was a bullish engulfing candlestick, engulfing the two previous trading days. The weekly candlestick could also create a bullish outside up reversal if it holds this week's gains. The risk is that, like gold and copper, we could see a consolidation on top of the 28-30 support zone and then a break of it, in which case play the short side.

Freeport-McMoran Copper and Gold, FCX, Weekly chart

If oil holds yesterday's low near 75 it will leave a bullish divergence on its daily chart. Its weekly chart is oversold and could be setting up to reverse back up, especially if it stays in synch with a stock market rally. Notice the similarity in the pattern since the August low. But it needs to get back above its longer-term uptrend line from 1998-2002, near 80.75, and the mid line of its down-channel from May, near 81.40. So a rally above 81.50 would be at least short-term bullish and could lead to a breakout of its down-channel later this month or November. In the meantime it's in a downtrend and will stay that way below 81.50.

Oil continuous contract, CL, Daily chart

Tomorrow is a quiet day as far as economic reports go -- only the unemployment claims to be reported. Friday is a big day with another payrolls report. The expected number of 50K is small so any upside surprise could spark a nice rally. If we get a pullback on Thursday, which is what I'm expecting, the price pattern would be set up for a nice rally so watch for that to set up (or not).

Economic reports, summary and Key Trading Levels

The stock market may have found its bottom yesterday (it's pretty bad when you lose your bottom, which some of us have done in the stock market, wink). It's a good setup for the start of the end-of-year bounce pattern (a large a-b-c correction to the May-October decline). It might not be easy to trade on the long side but it should at least relieve a lot of angst that the public is currently feeling.

Corrections, which the bounce into December should be, are tough to trade because of the choppy nature of them. Whipsaws and reversals are the name of the game but then so what else is new. Just don't expect a bullish period, if that's what we have in front of us, is going to be an easy time to be long. There will be plenty of sharp drops along the way to scare traders out of their positions. We might even get a scary drop or two in the next week as the market shakes off the bearishness embedded in it.

Continue to play the market in short bursts --when we get a big move and you're riding it, get out and take your money off the table before the market takes it away from you. If you miss a bigger move because you got out early don't get seller's remorse. The next time the market WILL take it away from you if you do not stay disciplined. There's "let your winners run" but that's in a trending market and if anything, right now that should have you short the market. But I'm trying to identify the low that will lead to a trend change. For the next two months the market could be largely trendless if it chops its way higher so do as Jim often suggests -- take your profits too soon (and certainly cut your losses quickly).

We've got a good setup for a continuation higher once we get a pullback (tomorrow) to correct the rally off yesterday's low. Look to buy the pullback. Once we get another leg up (look for another leg up to match the leg up from yesterday) we'll have to see if it consolidates, in which case buy the pullback again. If after two larger legs up we see the market sell off more sharply we'll then be facing a more difficult market to figure out the next move. Hopefully that setup we can worry about next week when I'll be back with you on Wednesday. Good luck until then.

Key Levels for SPX:
- bullish above 1160
- bearish below 1074

Key Levels for DOW:
- bullish above 11,150 (downtrend line)
- bearish below 10,400

Key Levels for NDX:
- bullish above 2210
- bearish below 2042

Key Levels for RUT:
- bullish above 695
- bearish below 585

Keene H. Little, CMT