Market Stats

There were no economic reports of significance this morning and no market-moving earnings announcements. Equity futures had sold off some during the early overnight session but then climbed back once the European markets opened and Italy had a successful bond auction, relieving a lot of fears that the auction would not go well. Does anyone doubt that the central banks were both directly and indirectly involved with the bond purchases? Regardless, with the relief over the successful bond auction led to a rally in Europe and equity futures that were pointing us higher this morning. And then the bulls will complain that the bear ate my rally.

Just before our market opened for trading I was watching the dollar suddenly start a move to the upside and out of the congestion it's been in since last week and it broke its downtrend line from December 14th. It looked potentially important but it was only the start. The dollar shot higher, rallying almost a dollar, topping before the lunch hour. I could find no news that caused it. The euro did just the opposite, breaking its uptrend line from December 14th and then breaking its December 14th low, hitting a low of 1.2911 this morning before consolidating (which makes it look like it will head lower still). It is near its January 2011 low so it will be telling if that level doesn't hold. That kind of move in the euro/dollar clearly had a negative impact on stocks and commodities today.

Since the August low in the stock market the trading volume has been slowly declining, as can be seen with the 10-dma of volume on the SPY chart below. And then following the low last week on December 19th the rally into yesterday's high was on pitifully low volume. I've said before that volume is a bull's friend but not necessarily a bear's friend. A rally without volume is always suspect, even if it is a holiday week. The fact that today's selloff was on higher volume than Friday's and yesterday's is an indication that there's just not much conviction behind the buying but more conviction when selling.

SPDR S&P 500, SPY, Daily chart with volume

The bulls will argue that while today's volume was stronger than the previous two days it was still very low, to which I say so what. For one thing, it's relative to the buying and second, volume is not a bear's friend. When you see a big spike in volume in selling you should be thinking reversal. While the slow volume since last week's low can be blamed on the holidays it doesn't explain why this holiday would be so much slower than previous Christmas holidays. Some data from Larry Levin (tradingadvantage.com), which is unverified by me, includes the following about ES (the S&P 500 emini contract), in yesterday's update:

"Overall volume has been dropping due to the holiday but today's [Tuesday's] data was the worst full day's volume I can ever remember. Five days ago on the 20th overall volume for the ES was -24% below the average. Four days ago the volume was -15% below the average. Three days ago the volume was -39% below the average. Two days ago the volume was -66% below the average. Today's volume (Tuesday) was a sickening sight -- it was -72% BELOW THE AVERAGE. What do all of these days have in common? They were all up days!"

Today's turn back down from resistance could be the start of something bigger. I've been talking about a potential turn window that ran from December 24th (new moon) to December 28th (an important Bradley Model turn date) and possibly to January 2nd to include some cycle dates as well as Gann. Yesterday's high was one trading day on either side of the first two dates. The last important Bradley Model turn date was July 29-30, but the market didn't wait that long and topped out on July 7th and then tested that high on July 21st. The previous important date before July was February 17th, which was the day before the February high.

On the Bradley chart below you can check the minor turn dates between July and December to see that they came close to turns in the market. This model predicts turns but not direction so you have to see which direction the market is headed into a turn date to predict the next move. The market rallied into the December 28th turn date and therefore the prediction is for a reversal back down.

Bradley Model for 2011, chart courtesy Manfred Zimmel

So we've a got a very low-volume rally into a potentially important turn date and a reversal at resistance or back below resistance. That looks ominous for the bulls. Now it looks like we've got an impulsive decline from yesterday's high, which also points to a reversal of the uptrend. It could be an early call but I'm thinking tonight that Santa has gone AWOL on us. As Jim mentioned previously, when Santa fails to call, the bears will visit Fraud, I mean Broad and Wall.

Last week I mentioned I thought we could be very close to our setup to get short the market by the time I got back with you this week. I think we've now got our setup. I'll start out tonight's chart review with the DOW since it had a nice setup heading into this week's high (even though it failed a little short of its upside target). On its weekly chart I'm showing the 78.6% retracement of the May-October decline. Typically retracements are in the 38%-62% area but this market has been doing deep retracements for years, possibly because the bulls have been getting a little help from our friends. This is not your father's market.

Dow Industrials, INDU, Weekly chart

The May 2011 high was a little more than a 78.6% retracement of the 2007-2009 decline (SPX stopped only 5 points shy of its 78.6% retracement). The 2009-2011 rally is a 2nd wave correction to the 1st wave (2007-2009) decline and now we have a fractal of that pattern. The May-October decline is a smaller degree 1st wave and the October-December rally is a smaller degree 2nd wave correction, also retracing 78.6% of the 1st wave. As can be seen on the chart above, the 78.6% retracement of this year's May-October decline is at 12347 and yesterday's high was at 12328, 9 points shy. Could be close enough for government work.

This fractal pattern leaves the market set up with a 1-2, 1-2 wave count to the downside from the 2007 high, which means the next move down will be a 3rd of a 3rd wave decline. It will be the strongest move of the bear market that we've seen so far. But before that move gets started, if the bulls step back in and drive the DOW higher into the end of the week, there are two Fib projections at 12370 and 12394 and then trendline resistance near 12500.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,200
- bearish below 12,120

The two slightly higher Fib projections are shown on the DOW's 60-min chart below. The bounce pattern off the October low can be considered a double zigzag wave count, which consist of two a-b-c rallies separated by an x-wave pullback. The October rally is the first a-b-c and the rally from November 25th is the second a-b-c. This 2nd a-b-c would be 62% of the 1st one at 12394. For the 2nd a-b-c move (the rally from November 25th), its c-wave would be 62% of the a-wave at 12369. The DOW has stopped just short of its 12347-12394 Fib zone and may be related to the extraordinary weakness we're seeing in the current leg up from last week. A drop below its December 20th high near 12117 would confirm the top is in place. If we get a bounce tomorrow, which looks probable following the 5-wave move down from yesterday, it will be a shorting opportunity (using yesterday's high for your stop). If the rally has finished we will not see that level (12328) for many years.

Dow Industrials, INDU, 60-min chart

Before moving to the other indexes, I wanted to show a reason to believe the triangle patterns that so many are looking at, including the cheerleaders on CNBC, are bearish continuation patterns. Instead of a 1st wave down from May to October followed by a 2nd wave correction into December we could have wave-A down to October followed by a sideways B-wave triangle pattern into December. Whereas the wave 1-2, 1-2 setup calls for a strong 3rd of a 3rd wave down, the wave A-B setup calls for a strong C-wave down as the next big move. For the next move it doesn't really matter how we label the move down from May. The next move will be a strong selloff into at least the 1st quarter of 2012. It's too early to get hung up on the exact wave count except when trying to make projections further out into 2016. But here's how the A-B-C count looks on the NYSE chart:

NYSE Composite index, NYA, Daily chart

Regardless of wave counts, the thing that stands out on the NYSE chart is the failure yesterday at the downtrend line from July-October, leaving a small doji star. That doji has been followed by today's red candle, a reversal candlestick pattern, and price dropped back below its broken downtrend line from October 27th, leaving a head-fake break above the downtrend line (a bull trap). The head-fake break is very common in sideways triangles that go past the 3/4 point (price should break out between half and three quarters of the way into the triangle otherwise look for a late breakout to first be a head fake). At the moment it looks like the NYSE could get a bounce off its 20 and 50-dma's, both located near 7395, but should then continue lower. Short the next bounce with your stop at Tuesday's high.

Comparing SPX to the DOW, it was not as strong in its bounce correction to the May-October decline. This mirrors somewhat its retracement of its 2007-2009, which was 5 points shy of its 78.6% retracement while the DOW had retraced a little more than 78.6%. Now the DOW came close to a 78.6% retracement of this year's May-October decline while SPX struggled to retrace a little more than 62%, at 1257.58. Interestingly, the December 2010 close was at virtually the same level -- 1257.64. Pure coincidence I'm sure (wink). On its daily chart I'm showing the DOW's and NYA's wave counts and refer to the triangle count on the 60-min chart following the daily chart below.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1260
- bearish below 1243

Supporting the wave count on the NYA chart, and the reason for showing it, is the wave count and projections on the SPX 60-min chart below. The E-wave up from December 19th is 62% of the C-wave (the leg up from November 25th to December 7th) at 1269.36, a common relationship between the waves within a triangle. For wave E, which needs to be a 3-wave move, the c-wave is 62% of the a-wave at 1269.96 so you can see the Fib correlation just shy of 1270. Yesterday's high was at 1269.37. I don't make this stuff up and it's important when the market talks to us like this. Today's decline, especially since it's a 5-wave move down, speaks volumes about yesterday's high being THE high. Proof will be in the rearview mirror but right now we've got a very bearish setup.

S&P 500, SPX, 60-min chart

NDX had made it through its 20-dma and then 200-dma Friday and yesterday and tagged its 50-dma yesterday, breaking its downtrend line from November in the process. Too bad it was on such miserably low volume and pulled back into the close to finish at its downtrend line. This was followed by today's bearish engulfing candle (engulfing Friday's and yesterday's rally) and now the drop back below the three moving averages looks like a reversal. Short the next bounce and use 2300 for a stop.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2300
- bearish below 2222

The RUT, which has been weaker than the blue chips (noting the defensive action there), is currently showing some divergence at the moment by holding at its broken downtrend line from July and its 20-dma, both located near 734. It should be good for a bounce on Thursday but as with the others it should be a very good shorting opportunity, using Tuesday's high for your stop. An a-b-c-d-e triangle pattern from the October low shows the RUT broken above the top of the triangle (downtrend line from October 27th) but closed back inside the triangle today. This is a very typical way for the e-wave to finish, creating a head-fake break and trapping traders in the move (bull trap in this case). That downtrend line acted as resistance, to the penny, on a retest with this afternoon's bounce before dropping lower into the close.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 800
- bearish below 778

Bonds rallied today, driving yields lower and the stock market followed bond yields (the dollar-bond-stocks/commodities relationship continues to hold tight). As with stocks, TYX (30-year yield) had broken its downtrend line from October 27th on Friday but dropped back below the trend line today, leaving a failed breakout attempt. Its wave pattern is not clear but could be setup for a big decline, which points to heavy buying in bonds (to the detriment of stocks). A rally in TYX back above 3.08%, Friday's high, would be at least short-term bullish (for stocks too).

30-year Yield, TYX, Daily chart

A longer-term view of TYX shows a parallel down-channel that continues to point to lower yields. Many are calling for a big correction in bond prices, saying bonds are the next bubble to pop. They say the situation is much like the dot.bomb setup into 2000. I wonder if these same people simply can't believe that bonds could outperform stocks for so long (since 1999). The monthly chart below is not log scale and it shows no parabolic move whatsoever. It's not a bubble waiting to be popped and it can be argued that the deflationary cycle that we're in means lower yields ahead. A drop to the bottom of the parallel down-channel by 2014 would mean the 30-year yield will be around 1.5% (which is pretty extraordinary when you think about that), which of course means higher bond prices into that time frame. Only in hindsight will we know if this happens but for now I'd say bonds are still a better investment than stocks.

30-year Yield, TYX, Monthly chart

Banks have been doing well lately, but the BKX has struggled with $40 since August and continues to do so. It managed to climb above it briefly at the end of October and one day in early November but other than that it has found $40 to be resistance. It last bounced up to that level on December 5th and Friday and Tuesday had it once again testing this line of resistance and today's pullback shows resistance still holding. The next line of resistance is its downtrend line from February-July near 41.30. If it breaks below 38.40 it will confirm the reversal back down so whichever way it goes from here, follow the money.

KBW Bank index, BKX, Daily chart

Following the October low in the transports the bounce pattern has built an ascending wedge (flat top, rising bottom). This fits as a bearish continuation pattern following the May-October rally (triangle following a move are typically continuation patterns). Yesterday's high was a minor throw-over above the top of the triangle. I see the potential for another rally attempt for a minor break above the top of the pattern, especially since it's holding support at its downtrend line from July through the December 5th high and its 200-dma at 4974. A bounce followed by a break below 4900 would confirm the top is likely in place.

Transportation Index, TRAN, Daily chart

As already mentioned at the beginning of tonight's report the dollar spiked up today and based on the consolidation pattern following this morning's rally it looks like there will be more to the upside even if there's to be a little more of a pullback/consolidation before heading higher. As long as its uptrend line holds, which is near this morning's low near 80, we should be looking for the dollar to make it higher. A break below 79.50 would confirm something more bearish is happening.

U.S. Dollar contract, DX, Daily chart

One reason why I have the key level to the downside at 79.50, other than potential support at its broken downtrend line from October 4th and its 20-dma at 79.64, another leg down that equals the December 18-21 decline would drop the dollar to 79.50. Today's rally stopped right at the projection for two equal legs up in a potential A-B-C bounce off the December 21st low, at 81.01 (today's high was 81.02). It was also a near retest of the December 18th high (Sunday night) at 81.07. The fact that it stopped practically to the penny at the 81.02 projection makes me wonder if today's rally in the dollar was the completion of an A-B-C bounce that will be followed by another pullback. That would clearly be bullish for at least another leg up for the stock market and therefore deserves close watching for the rest of the week.

U.S. Dollar contract, DX, 60-min chart

The spike in the dollar hurt commodities in general, including the metals. Gold dropped marginally below its uptrend line from October 2008, which had supported the pullback to the December 15th low. The pattern calls for a little lower, a bounce into mid January and then a continuation lower, with a downside target at 1421.50 for two equal legs down from August. There's greater downside potential but it will be evaluated if and when gold drops lower and we can see what kind of price pattern it has to the downside.

Gold continuous contract, GC, Daily chart

Oil has been much stronger than the metals, ignoring what the dollar's been up to but it was harder to ignore today's move. The dollar tried to poke above its downtrend line from May-November yesterday and today but couldn't do it. If oil is able to push higher we could see a test of its November high but at this point it looks like it could start back down.

Oil continuous contract, CL, Daily chart

After today's virtually non-existent economic reports, tomorrow will at least have a few more. The usual unemployment claims data will be followed by the Chicago PMI shortly after the open. It's expected to decline somewhat from November. Pending home sales are expected to be positive but not by much. Crude inventories could move the oil market if there's a big change since there's still some fear about Iran's threat to block the flow of oil.

Economic reports, summary and Key Trading Levels

Today's decline looks impulsive (5-wave move down) and that's an early indication of a trend change. Proof would be a bounce to correct the decline from yesterday and then a drop below whatever low gets put in here (today's or a minor new low tomorrow). That would confirm we've seen the high for the bounce and the significance of this is that the completion should mean the bear market decline will now resume. The October-December price consolidation, correcting the May-October decline, should lead to an even stronger decline that we saw this year.

Based on this expectation I think we have a golden opportunity to play the short side. If you don't like the short side (or can't play it in your retirement account), there are a plethora of inverse ETFs that you can buy to take advantage of a decline. If you're only able to use mutual funds there are several "short" funds such as the Rydex funds. To sit on the sidelines in cash in the coming year because you don't want to get hurt in a decline is smart. Sitting in a short trade will be even smarter. As traders we can do something not many other people even think about doing -- making money in a bear market decline. We're getting our setup here for a very good trading opportunity on the short side.

A bounce tomorrow, assuming we'll get one, will be your opportunity to get short and use yesterday's high for your stop. If we get one more minor new high into early next week it will be your next shorting opportunity. We can evaluate that possibility next Wednesday. As always, be careful trading this market, especially this week with the low volume and added volatility if the few players hit it with a couple of buy or sell programs.

Key Levels for SPX:
- bullish above 1260
- bearish below 1243

Key Levels for DOW:
- bullish above 12,200
- bearish below 12,120

Key Levels for NDX:
- bullish above 2300
- bearish below 2222

Key Levels for RUT:
- bullish above 800
- bearish below 778

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying