The day started near the flat line after a relatively quiet overnight session and it continued to consolidate with only a small loss today. The market has been absorbing recent gains and European news, wondering what's next.

Market Stats

This morning we received some reports from around the globe that shows some slowing in economic activity. A report from Europe shows the eurozone's private sector growth climbed slightly in February, but the manufacturing PMI came in at 49.5 and remains in contraction territory (below 50). Italy may be leading the way into a recession but the rest are not far behind. Even Germany, which has remained relatively strong (but dependent on exports), came in at 50.1 vs. expectations for 51.5.

Chinese manufacturing activity also slowed and while their PMI climbed slightly to 49.7 it is still below 50 and has been below 50 for four consecutive months now. Many believe the U.S. will avoid a recession even if the rest of the world slips back into one. I think that's a bit of wishful thinking.

As for U.S. economic reports it was a quiet day. On top of the disappointing news out of Europe and China we had some slightly disappointing news about existing home sales. Sales came in a little lower than expected, at 4.57M units vs. the 4.63M, and December's sales were revised a little lower. Toll Brothers (TOL) released earnings this morning and missed, which caused its stock to take a hit today, down 1.22 (-5.1%) to 22.48. The home builders index was down -2.5% today and is threatening to break its uptrend line from October.

Following last weekend's news about the Greek bailout there have been several reports about the details of the bailout and expectations for how Greece will recover. These reports about projections from the ECB and others, who only want to sweep this problem under the rug, have me thinking "in your dreams." I'm thinking the rest of the world and markets are reacting the same way and the lack of progress following the initial positive reaction to the Greek bailout news may be a result of new worries about what's really been accomplished (or not).

The terms of the bailout agreement are onerous at best for Greece. Not only does it not help them pay for ongoing costs (for which they've been borrowing more money each month) but they also lose control over how they get to spend their money. Sometimes countries can be taken over without a shot being fired (although the people of Greece are not happy about having an unelected leader determine how much pain they have to go through). The banksters have clearly taken over that country in a very undemocratic way.

The assumptions made about Greece's prospects, or at least the assumptions that have been presented to the world, is a really good example of either wishful thinking or outright lies to protect those trying to stay in power. One example of wishful thinking comes from Joe Weisenthal who regularly writes market commentary at Business Insider. In the article he presents a chart that shows assumptions that are being made for Greece's growth in the coming years. From a low of about -6% (contraction) this year they project positive growth by 2014. As Weisenthal stated, "without any jolt, stimulus, or anything, Greece is magically set to return to growth fast." With all the deep structural changes, wage concessions, government job losses and much more, this is a pipe dream and just about everyone knows it. And yet this is what's being presented in an effort to get private investors to belly up to the bar and buy more government bonds.

Projected GDP for Greece, chart courtesy Joe Weisenthal

Getting private investors to continue buying Greek bonds (or any of the government bonds of countries in trouble, is going to be a challenge. The Greek bailout agreement still needs about 2/3 of the private investors to agree to the "voluntary" haircut and we don't know how that will turn out. Now that the ECB has swapped their Greek bonds and made themselves immune to future defaults (by putting private investors behind them) it's going to be difficult to find private investors for future buys.

The unintended consequence (or the "I don't care" consequence) of the ECB moving themselves to the head of the line in protecting themselves against a default is that they just made it much riskier for private investors, which includes investments by other sovereign nations, such as China. The last time the ECB pulled this stunt, by demanding private investors take a large loss on their investments (making it a "voluntary" loss) they later admitted that it was not the right thing to do since it makes it more difficult to get private investors to take on the risk of buying a financially weak country's bonds. So either the ECB doesn't care now (since they probably think they can make all the money that's needed for the banks to do the buying) or they're just stupid and think private buyers won't notice what happened.

The ECB has now put themselves in a position where they will have to be the buyer of last resort (through their "lending" program to the banks so that the banks can do the buying) since private investors may feel the risk is simply not warranted. Or the private buyers will demand a much higher yield to compensate for the added risk, thus making it even more difficult for troubled countries to get the loans they need.

The problem with the ECB "lending" the banks the money needed to buy the bond is the banks could soon push back. They are still "borrowing" the money from the ECB and must pay that money back. If they buy sovereign debt that doesn't get paid back they'll lose the money. The ECB has already declared itself immune from loss so who's going to take the loss? This is where the "unlimited" money printing scheme is flawed -- they can make all the money they want available to the banks but if the banks don't buy the bonds it's worthless money (or worse it will create a huge inflation problem).

With a lack of demand for sovereign debt we'll see yields start to climb again. Irish government bond yields have climbed about 10% in the last two days, reflecting more worries about Ireland's ability to pay back its bonds and investors are worried that they too could be knee-capped by the ECB coming in to rescue Ireland (or any of the other "PIIGS" nations). This is an example of the unintended consequences and why people who think they're smarter than the market actually make it worse. The enormous debt burden of many countries must be dealt with and the only thing the Fed and ECB are doing is masking the problem with more debt. It's why I believe the last bubble to pop will be the debt bubble. Masking the symptoms does not cure the problem. A drug addict does not get better by doubling his drug usage.

Another example of the worry over the Greek bailout deal, with the ECB protecting itself and not private investors, can be seen in the cost of sovereign CDS prices -- they're on the rise this week and just today the CDS prices rose about 2% for Germany and Spain, almost 4.5% for Italy and nearly 5% for France. Things are not getting better and the ECB has in fact made it worse. There's a price to pay for being greedy and the ECB is the epitome of greed.

Our financial system is completely dependent upon faith. We are all users of fiat currencies with no hard assets (such as gold) backing it. The value of the currency is based on what we believe it is. Lose that faith and the whole system will be in jeopardy. Faith in the central banks is necessary to make this work and as we all know, sentiment can turn on a dime (which is now worth a penny). Sentiment drives economies and certainly financial markets. If all the machinations by the central banks make the problem worse rather than better we'll see many more people lose faith in the banks, which in turn causes a run on banks and a rapid draining of liquidity. With the loss of faith in the "controllers" of the money will be a loss of faith in the money itself.

We're already seeing many townships starting up their own currencies for doing business with each other. Bartering systems are starting to flourish. Many are of course flocking into the hard assets, especially gold and silver (more so into gold yesterday and today, and why would that happen if we believed the problem is solved?). Other commodities and land are being purchased because people are losing faith in their government-controlled currencies. This is a trend that will continue and likely accelerate (although the value of hard assets will still take a hit in a deflationary environment) and the mountains of debt will have to be dealt with. Debt will be destroyed, either through paying it down or defaulting and it's simply part of the cycles between credit and debt destruction.

The central banks are conducting a grand financial experiment to stop this cycle but history is clearly against them. They feel it's different this time but people in this situation always feel it's different this time and that they're smarter than people in the past. In the book This Time is Different, by Kenneth Rogoff and Carmen Reinhart, there is plenty of evidence presented that shows countries with debt-to-GDP ratios above 90% find themselves in a lot of trouble. Once it becomes too expensive to pay the interest on the debt the country's politicians are forced to raise taxes and cut government spending. Heard any of that lately? The U.S. debt is currently running over 100% of GDP (way over, such as 300+%, if you include unfunded liabilities such as Social Security and Medicare).

The "solution" that the ECB has come up with for Greece is a way to reduce their debt-to-GDP ratio from the current 160% to 120% by 2020 (and even that's with the rosy assumptions shown earlier for GDP growth). And they think this is a viable plan? The only viable plan is for Greece to default, force the banks to fail (as Iceland did a few years ago), go through maximum pain for a couple of years (high inflation from a return to the Drachma and no outside money available to help them with their costs) and then start to recover.

Greece actually has a long history with defaults. But the part that the bankers and politicians are working so hard to avoid is that little thing called "bank failure." Their jobs are literally riding on a continuation of the status quo and in the process they're destroying the lives of the Greek citizens who have no hope of recovery from this until they untie themselves from the EU. It will happen and everyone knows it will happen.

What everyone also knows is that Greece is not alone. And this is where we come back to faith in the system. The system is broken and as more and more people realize it we'll see less and less faith in those who are trying to "fix" it. All the king's horses and all the king's men will then have trouble putting Humpty Financial Dumpty together again.

In the meantime stock market participants continue to whistle past the graveyard, plugging their collective noses and buying the dips. I know more than a few are simply hoping we don't wake up one morning to a calamity in the markets.

I'm going to start tonight's chart review with a look at the granddaddy index, the DJ Total Stock Market index (DWC), which was once the Wilshire 5000 index. Using its weekly chart I'm presenting an idea for the entire bounce off the March 2009 low being a correction to the 2007-2009 decline. While some of the indexes have made new highs above last May's, the DWC has not quite done the same. But the patterns for the different indexes would be more in synch with a wave count that says the 2009-2012 rally is a correction to the 2007-2009 decline (instead of looking at the 2009-2011 rally being the correction and a new leg down starting from last May). One thing this market likes to do is test previous highs, often with a slightly higher high that gets the bulls excited and then traps them with a sudden break to the downside. This happened at the October 2007 high, which was marginally above the July 2007 high. So a minor new high above last May's might not be as bullish as many are expecting it to be.

The one thing that has been driving me nuts since the March 2009 low is the corrective wave structures, which has been making it very difficult to get a better sense about the market's direction. Even the bounce off the October 2011 low has looked more corrective than impulsive and the weakness behind the rally (low volume, low market breadth, waning momentum) is more indicative of a correction than something stronger. If we were into a more bullish move up we'd have to call the rally from December a 3rd of a 3rd wave up and it simply doesn't have the strong characteristics of that kind of wave. That makes it much more likely to be part of a larger corrective pattern.

In keeping with the idea of a large correction I've labeled the DWC chart below with the multitude of a-b-c moves for the bounce off the March 2009 low, with the larger count for the bounce being a triple zigzag (three a-b-c moves to the upside with each separated by a 3-wave pullback for the x-wave). The important point is that the entire bounce remains a correction to the 2007-2009 decline. A correction to the 5-wave decline (2007-2009) will be followed by another 5-wave move down, one which will at least test if not break the March 2009 low. This will be true whether the next leg down will be a 3rd wave or a c-wave (it will look the same for either). The potential is for the next leg down to be much more severe than the 2007-2009 decline. The leg up from October has stalled at the parallel dotted line that has acted as support in the past (and resistance in early 2009 and mid 2010).

DJ Total Stock Market index, DWC, Weekly chart

For the move up from October, which I've labeled as an a-b-c move up on the weekly chart above, two equal legs up projects to 14483, about 100 points above yesterday's high, and is shown on the daily chart below. That projection crosses the trend line along the highs from December 5th this coming Friday. The uptrend line from December 19th through the February 15th low was tested today and held as resistance. You can see we've got a rising wedge pattern and price is getting pinched. There is a bearish divergence against the highs since February 3rd. Assuming the market will start at least a pullback soon (unless they've been completely outlawed) we'll then have to wait for further evidence as to whether it will be the start of the next major decline or just a pullback before pressing higher again in March. The parallel dotted line, attached to the December 19th low, marks a parallel up-channel for the rally from December, which is near the 50-dma, and a break below the dotted line and 50-dma is needed by the bears to declare a final high is likely in place.

DJ Total Stock Market index, DWC, Daily chart

SPX looks very similar and like the DWC has not been able to get above its May 2011 high yet. I show an expectation for a minor poke above that high (1370.58) to reach the projection at 1376.55 for two equal legs up from October. But if it first drops below 1340 it will tell us the high is already in. From there we'll have to see what kind of pattern develops for the decline (choppy vs. impulsive) as a way to help determine whether or not we're going to get another rally leg in March. A break below its 50-dma and its uptrend line from October, both nearing 1297, would be very bearish.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1377
- bearish below 1340

Zooming in on its rising wedge, it's clear the top and bottom of it are being respected by traders. Another push up into Friday could have SPX tagging the 1376 target to complete its rally. A drop lower tomorrow, with a break of its uptrend line from December 19th, would be the first hint of trouble for the bulls.

S&P 500, SPX, 60-min chart

A broken uptrend line from July 2009 - August 2010 is what stopped the DOW's rally in October. It stopped it again on January 23rd and repeatedly since then, including yesterday. On February 10th the DOW broke its uptrend line from December 19th through the January 30th low and has been nudging up against it since then. In the meantime the bearish divergence shown on RSI since the February 3rd high, along with the break of its uptrend line on RSI from November, is a clear warning to bulls who are trying to hold out for a few more pennies (remember, pigs get fattened, hogs get slaughtered). The DOW could continue to push up underneath the broken uptrend line (if it can get through the one from 2009-2010) and reach up to the 13111 projection (for two equal legs up from October), both of which cross on Friday. A drop below 12750 would tell us the high is in place for now. Then with a decline we'll get some clues as to what kind of high it will have been.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 13,111
- bearish below 12,750

NDX has remained in a very tight up-channel from December. Some would say this is not at all a normal rally as minimal pullbacks were immediately bought but there were no big up days. Just controlled (dare I say manipulated?) buying all the way up. The market manipulators (does anyone still believe we don't have massive manipulation in this market?) know the techs influence the retail crowd and keeping them bullish has been a key strategy. The only question is how much it will backfire. For now there is a little more upside, if the technical tools are useful on this index, to the top of a parallel up-channel from October, currently near 2645 where it crosses the top of the narrow up-channel on Friday. A drop lower tomorrow and a break of the up-channel would be the first bearish warning sign.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2650
- bearish below 2551

The RUT, which has been the weaker index, tested its uptrend line from November at today's midday low (816.67). Near the same location is its 20-dma (815.39). One would think it will be good enough for at least a bounce. A break below 815 would be a bearish heads up, especially on a closing basis, and a break below last Wednesday's low at 811.66 would indicate the top could be in. Until either happens, there remains the potential for another rally leg.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 834
- bearish below 800

The bonds have been in a choppy price pattern since October. The 30-year yield, TYX, is shown below and I think it will remains in a sideways triangle consolidation pattern through March. A break above 3.24% would be bullish yields (bearish bond prices) but as long as this sideways pattern holds (looking for another pullback from here) it will remain longer-term bearish since the triangle pattern is following a leg down into it. Any weakness in yields (strength in prices) would likely be bearish for stocks.

30-year Yield, TYX, Daily chart

The banks surprised me with another high on Tuesday and it's possible the final 5th wave is simply extending higher. Today's weakness resulted in BKX testing its uptrend line from December again so any further drop tomorrow would be a bearish breakdown. Today's weakness in the banks (BKX was down -2%) was not matched by the broader averages but it's a bearish heads up if the banks continue to stay weak.

KBW Bank index, BKX, Daily chart

The Transports have been very weak relative to the broader market. I mentioned last week that we have a bearish non-confirmation between the DOW's new high above its February 3rd high that is not matched by the TRAN (bearish by the Dow Theory). Many pundits have been out recently declaring that relationship is too old to pay attention to anymore. Really? It's different this time? Whenever you hear that, especially by the bulls trying to convince others why a rally will continue, it's time to close your long positions and go to cash (get ready to nibble on the short side).

Today the TRAN closed below its 20-dma and the bottom of a parallel up-channel for the rally from December, which is a guideline for where the 4th wave should find support if indeed we will see a 4th wave correction and then a 5th wave up. A break below the December 5th high near 5067 would rule out the 5th wave idea and more strongly suggest we've already seen an important high.

Transportation Index, TRAN, Daily chart

Another perspective on the Transports is shown with chart below, which overlays the TRAN on top of the DOW. This goes back a year and you can see through its ups and downs the DOW and TRAN have tracked very closely. The last divergence was in July 2011 as the TRAN pressed to a new high above its May high but was not confirmed by the DOW. That bearish non-confirmation was followed by a steep selloff. Now we have the opposite where the DOW has pressed to a new high above its February 3rd high but the TRAN has not. Once again, the bearish non-confirmation could lead to another disconnect to the downside. Note that the BDI (Baltic Dry Index) is still down near its November 2008 low and while the SSEC (Shanghai Composite) has bounced off its January low it's not even close to its November high, which the DOW is clearly above. More divergence. Maybe it is different this time (wink).

DJIA vs. TRAN and compared to BDI and SSEC

The dollar's pullback from its January 13th high to the February 9th low retraced 50% (practically to the penny) of its October-January rally and then bounced back up last week to its 50-dma before pulling back again. Yesterday's low held above an uptrend line from October through the February 9th low, currently near yesterday's low at 78.89, and the potential from here is for the dollar to start another rally leg. But another drop to about 77.60 can't be ruled out yet. That would be a 62% retracement and a test of the uptrend line from October 4th, and perhaps a test of its 200-dma by that time. Below 77 would turn the dollar more bearish.

U.S. Dollar contract, DX, Daily chart

As projected last week, gold has now made it back up to its broken uptrend line from 2008-2011, which is where the rally into the February 2nd and 3rd highs stopped. The new high is being met with bearish divergence (so far) but it hasn't rolled over yet to confirm the divergence. At the moment it's simply a warning that gold's bounce may be close to finishing at resistance. Not shown on the chart is a projection to 1793 which is where the December-February rally would be equal to the August-November rally. So above 1800 would be a more bullish statement by the gold bugs.

Gold continuous contract, GC, Daily chart

The weekly chart of silver shows an interesting setup if it can push a little higher. Next week the downtrend line from April 2011 intersects the projection at 35.69 for two equal legs in the a-b-c bounce off last September's low. Near the same location, at 35.75, is its 50-week MA, a moving average that silver has respected (as both support and resistance) in the past. Assuming silver will get another leg down in the larger pullback pattern, the downside projection for this year will be near $12. But a break above 36 would point to a probable move up to the $41 area and potentially higher this year.

Silver continuous contract, SI, Weekly chart

Oil hit its upside target today at 106.65 (the high was 106.72) where an a-b-c bounce off its December low has two equal legs. At the same level is the broken uptrend line from February 2009, which supported price last June before breaking in August and has been resistance since November. The last time this trend line was tested was the January 4-5 highs. Also at the same level, at 106.29, is the 78.6% retracement of the May-October 2011 decline. With RSI now into overbought as it hits this potential resistance it's a good setup for a reversal. The bearish wave count calls for a resumption of the selling, with a downside target near $70 this year. That would happen if the global economy does in fact fall into another recession. A drop below 99 would strongly favor the bearish projection while a rally above 107, that holds above, would likely point to a new high for oil (above the May high near 115).

Oil continuous contract, CL, Daily chart

There's not likely to be anything market moving in tomorrow morning's economic reports. Friday's sentiment and home sales could move the market if there are any big surprises. For now I think the market continues to focus on worries about Greece and the bigger impact on the other European countries. The natives are starting to get restless.

Economic reports, summary and Key Trading Levels

This has been a resilient market if nothing else. Efforts to identify a high for the bounce have proved to be just short-term highs before pressing higher again, which the market (at least most of the indexes) did again on Tuesday. But each new high is weaker than the previous one and while it remains possible we'll see the market hold up into the end of the week or even early next week (end of month is next Wednesday), it's clearly running on fumes. The rubber band has been stretched to the limit and I wouldn't stand behind it if I were you.

Sentiment is clearly bullish but waning and that's a problem -- everyone who has been bullish has already bought into the rally. If bullish sentiment wanes, as it did in the past week, there will be fewer buyers to push the pile higher. That's how rallies end -- they simply run out of buyers. Market breadth is getting thinner and thinner at the new highs, which are coming on the backs of fewer and fewer stocks. It's anyone's guess where the top will be but my guess is not far from current levels. And if the market drops lower tomorrow it could mean Tuesday's high will be the final one (at least for now).

We're still in an uptrend with the major indexes holding their uptrend lines so continue to respect the upside but I think stops on long positions can be pulled up tight and no further away than last week's lows. As for playing the short side, watch for a break of uptrend lines and then a failed back test for a short entry (might not get the back test if the decline happens largely in the overnight sessions). Good luck and I'll be back with you next Wednesday when I think we will have finally seen the market high.

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