Market Stats

Todd and I have switched places this week so he will be back with you on Wednesday. I will do the best I can tonight but I lost my internet connection for most of the day and it's been sporadic since the market closed. I'll focus on getting charts updated but I will not be able to add as much information to tonight's wrap as usual, which many of you might think is a good thing. ;-)

Equity futures shot higher when they opened Sunday evening, as expected with the good news out of Italy. A new PM and a newly approved austerity vote had many feeling bullish about the prospects for avoiding another Greece-like moment. But as the European markets traded they started trading lower. The DAX, which is a good barometer for sentiment about how well the European markets will fare through all this, finished off its low but still down -1.4%.

The euro, which shot higher with equity futures Sunday evening, started back down almost immediately. It appeared to be a sell-the-news reaction. The U.S. dollar did the opposite, opening lower Sunday evening and then rallying strongly for most of the day. I was expecting a brief move lower in the dollar and move higher in equity futures followed by a reversal into Monday morning, which is what we got. The price pattern supported such a move for each and if we're putting in an important high, there is precedent for an overnight high in the futures that does not get matched by the cash indexes. So far, that's what we've got.

There were no economic reports of significance so stocks were on their own this morning. One piece of bullish news this morning came from a Warren Buffet announcing that Berkshire Hathaway had acquired at $10.4B stake in IBM (approximately 5.4%). As usual, the market often thinks that what's good for Buffet is good for the market and IBM shot higher out of the gate. But then it too sold off for the rest of the day, finishing down by 3 cents. Ominously for IBM, this morning's gap up was above recent highs since October 28th near 188, which it had tried three times to break above but failed. Today's selloff and back below 188 leaves a false breakout attempt on its chart and that's not a good sign.

Back to Italy, and possibly why the European market, and by extension, U.S. markets, did not hold up today, there is apparently some concern that the austerity measures that the new PM, Mario Monti, wants to implement might be a little "difficult" for the people to agree to. Peter Brandt sent out an update today describing the potential problem (thanks to George for forwarding this to me):

"The 'Full' Monti in Italy, or the new PM, has sent a letter to the EU about austerity measures to be implemented including:

300,000 public sector job cuts!!!
Raising the retirement age more rapidly
Tax system overhaul
Reintroduction of a property tax called ICI"

Brandt went on to quote an email from an Italian citizen who stated "Here in Italy, a lot of people are scared about the new taxes from Monti...Very bad sentiment from the people..! Ici (the property tax mentioned above) on all homes, account withdrawals, etc."

Brandt then went on to say: "I'm trying to find out if he meant there's a tax on account withdrawals or if he meant if there's a bank run, I'll let you know soon.

"As they say though, every boxer has a fight plan until the first punch is thrown. As for the reforms, they seem significant, whether they can actually be implemented is another story and the time it will take to see any meaningful financial change will likely be far too long with the way Italian bonds are trading, as if they are the next to seek a bail out.

"The key obviously is the ECB, until these fiscal measures, some of which will take 2 years to implement, start to take effect, only the ECB can save Italy and give it enough time, however as has been made clear by the ECB, the Germans and French, the ECB is NOT to be used in this manner.

"Furthermore, the austerity measures being taken will have a dramatic impact on the Italian economy and GDP."

Later in the evening Brandt sent out the following update:

"***DANGER IN ITALY***

"There are no bank runs, or at least that is not what he [Monti] meant. However he said if you go to a bank to withdraw more then (I believe he meant 2000) 2.000 Euro, you need to put in an order and they will call you to come in and pick up the cash when they get it. 'They have no liquidity on hand, I don't know why?'"

My take away from this is that there are two potential problems with the "solution". The first, as with all previous plans, is that the people may not agree to the changes (forcing the Italian Senate to make corrections if they want to keep their jobs). Second, and more importantly, the ECB will be forced to continue buying Italian bonds. The ECB is being credited with supporting the Italian bond market last week, thereby driving yields back below 7%, which they're doing through devious methods by exchanging the bonds with other parties since the ECB is not printing money to do the purchasing -- Germany will have none of that.

To say there is a solution to the Italian debt issue, just because they have a new PM, is to grossly under estimate the significant issues. The retreat in the euro and rally in the dollar, as well as the selloff in the stock markets, was further evidence of lack of trust that the debt issues will go away. The weakness in the banks today tells the story.

Italy also sold a lot of bonds today, hoping to prove there is no problem selling their debt. But the sale did not go quite as well as they had hoped, resulting in higher yields from Friday (6.7% on their 10-year, up +.25). The Italian-German 10-year bond spread widened again today, up 0.36 to 4.92 points (as did the French-German bond spread) but still below last Wednesday's high at 5.53. So the bond market is telling us it's not too sure about the Italian austerity measures and whether or not it will be successful, almost as if to say "good first attempt but we're withholding our approval until we see better evidence of what you say you're going to do."

As mentioned earlier, the new high in equity futures last night, followed by a selloff and no retest of those highs during RTH (regular trading hours) is a bearish signal. The indexes could remain trapped inside their consolidation patterns this week (sideways triangles) so we'll have to see if the lows of the trading ranges hold if tested. Starting off with the SPX weekly chart, last week finished as more or less a doji, finding support at its 20-week MA near 1227 (and the 62% retracement of the 2007-2009 decline at 1228.74) and resistance at its 50-week MA at 1271 (and close to its broken H&S neckline for the 2011 topping pattern, near 1292. On a weekly perspective, SPX would be bullish above 1300 and bearish below 1220.

S&P 500, SPX, Weekly chart

As long as price chops up and down inside a narrowing trading range (sideways triangle) since the October 27th high and November 1st low it will remain potentially bullish. There are a couple of reasons I do not like this interpretation and one of them is because it's too obvious. Anything this obvious (and there are a Lot of people reporting on it) is usually obviously wrong. It could lead to a quick shot above the triangle to create a head-fake break and then start to sell off (so be careful if you buy the breakout -- get out immediately if it drops back inside the triangle pattern). We could also see a selloff from here, which would catch a lot of traders leaning the wrong way (a failed pattern tends to fail hard). But in the meantime we watch and we wait (inside the consolidation pattern is a lot of chop and not a good time to trade) -- above 1278, if it holds, would be bullish and below 1225, if it holds, would be bearish.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1278
- bearish below 1225

The 60-min chart below shows the sideways triangle pattern and the only thing that did not happen today was a tag of the top of the triangle, near 1272 this morning (which would also have been a test of its broken uptrend line from November 1st and its 200-dma, also at 1272). But as mentioned earlier, ES (S&P emini futures) did test its equivalent level Sunday evening. Today's gap down (more easily seen on SPY) was not filled and the combination of the futures hitting the target and the unfilled gap could be a bearish omen for the market. Time and further price action will tell us for sure.

S&P 500, SPX, 60-min chart

Friday's rally in the DOW had it up testing its broken uptrend line from October 4th so today's decline could be considered a bearish kiss goodbye and the start of a stronger selloff. A break below Friday's low at 11896 would also be a break below its 20-dma, the moving average that has been supporting pullbacks. So the bears know what they need to do and bulls know what line they need to defend.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,190
- bearish below 11,737

NDX tried to get back above its 20-dma on Friday, closing marginally above, but was unable to hold above today. But today's candle formed an inside day and as such is not telling us anything other than it's consolidating before making a bigger move. However, the two-day candlestick pattern is a bearish harami, a reversal pattern, which would be confirmed if NDX closes lower tomorrow.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2400
- bearish below 2298

The RUT looks like SPX with a potential sideways triangle forming since the October 27th high, which would be bullish if it breaks to the upside. The widest part of the triangle, projected from the point it breaks out, gives us an upside target of about 800, which would obviously be a nice trade on the long side. As mentioned earlier, if you buy a breakout above the triangle pattern I would want to see confirmation with a break above the November 8th high near 757 and no more pullback than a test of the top of the triangle. A break back inside would be a breakout failure (head-fake and a bull trap). A break below 718 would suggest it's not a bullish triangle consolidation pattern, in which case we could see a hard selloff from it (failed bullish pattern).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 757
- bearish below 718

The bearish wave count shown on the RUT's 60-min chart below is a setup for a very strong selloff this week. It would need some kind of news catalyst to prompt the selloff, something that would be considered very bad for the markets. We can all guess but we have no idea what could prompt a scary selloff. I say scary because the bearish wave count calls for an unwinding of three degrees of 3rd waves, which is a setup for a screamer of a move down (think flash crash). I always hate even mentioning these because the chances of seeing it happen are very small. I mention it because of the risk if it does happen -- it would catch a lot of traders leaning bullish right now (the sentiment numbers back that up). So treat a break below 730 as potentially serious. But if the price action remains choppy, especially with a move back up tomorrow, we could see the sideways triangle play out the rest of the week before it will be ready to start a rally in front of Thanksgiving (a traditionally bullish week).

Russell-2000, RUT, Daily chart

There's not much to add to what's going on in the U.S. Treasuries market since price continue to consolidate sideways with the stock market. Both markets appear to be on hold while we wait for some further word/evidence as to what will happen with the European debt issue.

Depending on the color of your glasses you will see the banks as building a bullish triangle pattern (like the broader indexes) or you'll see a bearish break and retest of the uptrend line from October 4th. The retest was on Friday and the drop away (banks were the weaker index today) has left a bearish kiss goodbye. The bulls need to defend the November 1st low near 38 whereas the bears need to kick it off that ledge and then follow it down. The triangle pattern calls for a move up to the top of it and then a drop back down to the bottom of it, something that could take the rest of this week, before rallying out of the consolidation.

KBW Bank index, BKX, Daily chart

Friday's rally had the TRAN also bouncing back up to its broken uptrend line from October 4th, and just shy of testing again its 200-dma at 5010. The pattern to the upside leaves a lot to be desired from a bullish perspective and could be in an ending pattern for its rally. So a break above 5070, its October 27th high would be bullish but I'd be real careful about it (keep your stop close by). A drop below last Wednesday's low near 4755could see some strong follow through to the downside but keep an eye on potential support at 4643 (two equal legs down from October 27th, about 4600 (50-dma) and then 4431 (2nd leg of decline from October 27th equal to 162% of the 1st leg down. The TRAN trades well technically so it is a good proxy for the broader averages.

Transportation Index, TRAN, Daily chart

The dollar was looking pretty bearish after the drop from last Thursday's high. Much of what I read over the weekend was bullish the euro (due to Italy's "save") and bearish the dollar. It dropped down to its 20-dma and used it to launch today's rally. The overnight low (out of the gate Sunday evening) did a good job finishing its pullback pattern which set up today's rally, which closed back above its 50-dma and supports the idea that we're going to see a stronger dollar rally this week. A push back above 78 would be bullish, confirmed with a break above last Thursday's high at 78.42. Otherwise a drop back down could target the 76.35 (two equal legs down from last Thursday) and then 76 to test its 200-dma before rallying again.

U.S. Dollar contract, DX, Daily chart

To help keep the dollar in perspective, there is a bearish pattern that calls for the dollar to break down but it's a very long-term bearish pattern -- a big sideways triangle that could see the dollar stay trapped between 74 on the lower end and 88 on the upper end for another 5 years before breaking down (presumably one of the last fiat currencies to say adios). But that big triangle pattern is just a guess (it fits the very long-term price pattern calling for an ultimate failure of the dollar) and in the meantime there is reason to believe we'll see the dollar rally to the 88 area before the end of next year.

U.S. Dollar contract, DX, Weekly chart

If the dollar drops a little lower from here before starting another rally leg we could see gold dart up to the top of a rising wedge pattern for its bounce off the September low. Nothing has changed my opinion about gold -- once this bounce is finished, which it might have already done, we should see a strong decline that takes it down towards 1420 (1450-ish if it first get a new high). A break below 1736, last Thursday's low, would confirm the high for the bounce is in place (which should coincide with a breakout to the upside in the dollar).

Gold continuous contract, GC, Daily chart

Silver continues to run a little weaker than gold, which is not surprising considering it's more of an industrial metal than gold and it's telling us there are worries about a global slowdown in the economy (keep in mind that most of the economic reports that we've been getting are lagging indicators). Silver has not matched the new high that gold made last week. It's continuing to be held down by its 50-dma, now at 34.41, so the bulls would love to see that broken to the upside. If that happens and gold makes a run up to a new high, we could silver try for a run up to its 200-dma (36.72) and the top of its rising wedge pattern near 37.35, where it crosses the 62% retracement of the August-September decline and its broken uptrend line from May-June.

Silver continuous contract, SI, Daily chart

Oil reached its upside target that I had pointed out last week -- the 98.91-99.60 Fib zone (2nd leg of the a-b-c bounce off the August low achieved 162% of the 1st leg and it retraced 62% of the May-October decline) and did so while still in the lower half of its up-channel from October 4th. It could certainly press higher and we have no confirmation of a reversal back down but that's the setup here. In fact, as I'll show on its weekly chart further below, there's a broken uptrend line near 100.75. Only a couple more days will tell us whether or not the reversal is going to happen.

Oil continuous contract, CL, Daily chart

For those of you using TradeStation, you have the ability to remove price (candles) from your charts, which allows you to look at other technical indicators without the "distraction" of price. I'm sure there are other charting packages that enable you to do the same thing but Qcharts is not one of them. However, I was able to snap a picture of my chart just before the candles popped in and you can see the consolidation patterns and channels, making for an interesting perspective. Try it if your charting package enables it.

Oil continuous contract, CL, Daily chart, no price data

I'll show two weekly charts of oil to help demonstrate the use of the log price scale vs. the arithmetic price scale, something that's important to do, especially when using trend lines. On the weekly chart below, using the log price scale, the uptrend line from February 2009 through the May 2010 low was broken for good back in May 2011 and is not longer a factor. The longer-term uptrend line from 1998-2001 has been supporting the pullbacks since oil got back above it in May 2009 (with almost a real breakdown into the October 4th low). Other than that, there's not much on the weekly chart alerting us to what price could do from here.

Oil continuous contract, CL, Weekly chart, log price scale

Now we look at the same weekly chart using the arithmetic price scale and the first thing that jumps out at you is that broken uptrend line from 2009 -- the current bounce is almost back up to it, currently sitting a little higher near 100.75 but nearly tagged at last week's high. Setting up for a back test and bearish kiss goodbye? As for the uptrend line from 1998-2001, it's now down on top of the same uptrend line from 1998-2008, which is way down near 40. As for downside targets, assuming oil is getting ready for another leg down, two equal legs down from May 2011 would take oil down to 60.57 and if the 2nd leg down becomes 162% of the 1st leg down, it would target 36.39, near those two uptrend lines that are top of each other. Guess which downside target I think oil will head for in the coming year?

Oil continuous contract, CL, Weekly chart, log price scale

Tomorrow will see a few more economic reports than we saw today, including some inflation data (PPI), retail sales and the Empire Manufacturing index, which is expected to improve to zero. That would be treated as a good thing since no growth is better than negative growth. The rest of the week will give us plenty of data on inflation, economic growth and unemployment, everything the market would like to focus on instead of Europe. As for Europe, we'll have to stay on our toes to see what other shoes might drop.

Economic reports, summary and Key Trading Levels

This being opex week we could see the market hold up and the sideways triangle patterns could do the holding. If prices action remains choppy and a little whippy, holding within the confines of the triangle pattern (downtrend line from October 27th and uptrend line from November 1st) we should see a bullish resolution out of it although that might not come until next week. Sideways triangle patterns tend to play out longer than it has so far and next week would be good timing for it, especially in front of Thanksgiving, a typically bullish week.

But a lot of traders are watching this bullish sideways triangle playing out and most are getting ready to go long out of it. Watch for the possibility of a head-fake break above it and then a collapse back down inside the triangle. That would be your clue to get short, not long.

As shown on the SPX and RUT 60-min charts, there is the possibility we're on the edge of a stronger selloff from here. The bearish wave count possibility calls for a strong decline this week. A break below last week's lows would be bearish and I would look to short bounces if that happens.

So watch the chop, watch for a possible head-fake break to the upside (but stay long a breakout as long as it doesn't drop back under the downtrend line from October 27th) and play the short side if prices break below last week's lows. Simple, no? If only. Good luck and I'll be back with you a week from Wednesday, right in front of Thanksgiving. I'll be back with you next Wednesday.

Key Levels for SPX:
- bullish above 1278
- bearish below 1225

Key Levels for DOW:
- bullish above 12,190
- bearish below 11,737

Key Levels for NDX:
- bullish above 2400
- bearish below 2298

Key Levels for RUT:
- bullish above 757
- bearish below 718

Keene H. Little, CMT