The post-Bernanke bounce, on Monday, was given back with today's low but the bulls defended support and the ball remains in their court.

Market Stats

The stock market picked up where it left off yesterday afternoon and continued its decline. The indexes dropped down near last Friday's close, erasing the Bernanke Bounce, before getting a bounce off support into the close.

There was clearly interest in buying the dip as I watched the VIX crash back down from its afternoon high. There's been a lot of call buying going on in the past few days as it appears most believe we'll have at least a bullish week for the final week of the month/quarter. So when support held the buyers showed up quickly and the collapsing VIX shows there was a lot of interest in the buying opportunity. That could be a little worrisome since it's better if we see disbelief in the rally. From a contrarian perspective the buying was a little too eager. But as always we'll let price lead the way.

It was a relatively quiet day, starting off with a Durable Goods report that didn't surprise either way. It was less than expected but much better than January's number. The number for February was +2.2%, which was a big improvement over January's -3.6% but a little less than the expected +2.8%. Removing transportation goods the number was a little softer at +1.6% vs. January's -3.0% and better than the expected +1.0%. The futures had actually reacted a little negatively to the pre-market report.

Last week I started off with the tech indexes and showed monthly charts of NDX and COMPQ to show their a-b-c bounces off the 2002 lows. I'll update the Nasdaq's monthly chart later to show it might have achieved its target for the 10-year bounce. I'll start tonight's review with a look at the different time frames of the NYSE Composite since it shows a different picture than the techs but in synch for the next big move.

The NYA monthly chart below shows an idea for its wave count from the 2007 high, which unlike the tech indexes was considerably higher than the 2000 high. But now they both look in synch for the next leg down. Following the 2007-2009 decline there was an a-b-c bounce into the May 2011 high. I've got the 2007-2009 decline labeled as wave A and the a-b-c bounce to the May 2011 high as wave B. That means we're looking for a 5-wave move down from the May 2011 high and the decline into October fits as the 1st wave. The bounce into the current high is the 2nd wave correction (and note that it stopped at the downtrend line from 2007-2011). That sets it up for a strong decline in a 3rd wave, which I'm projecting down into 2013 and not quite reaching the 2009 low. That would then be followed by the 4th and 5th waves and I'm showing a bottom being made in 2017. This is clearly speculation but it's based on a typical wave count and wave relationships.

NYSE Composite, NYA, Monthly chart

The 5-wave decline from May 2011 followed by the a-b-c bounce into the current high is shown in more detail on the weekly chart below. The 5-down, 3-up pattern should be followed by at least one more 5-down, which should drop the NYA below the October low. Last week's high near 8328 stopped short of the projection near 8348 for two equal legs up from October as it struggled with its 2007-2011 downtrend line. That could be it for the rally but I'm showing the market hold up into next week for at least a minor new high. The uptrend line from October held today's decline but another break below 8160 could signal more trouble and could mean no more new highs.

NYSE Composite, NYA, Weekly chart

The wave pattern at the current high leaves some question as to whether a top is in place or if instead we'll see the market push higher at least into next week, if not into the 3rd week of April (opex week). I'm showing the potential for a choppy climb higher in a rising wedge pattern on the daily chart below, but that would be considerably weakened if NYA breaks below 8100. A drop below the March 6th low (near 7900) would confirm a high is in place. The first bearish signal would be a break of today's low at 8138 since it would be a confirmed break of its uptrend line from October and its 20-dma (8163), which would likely get the bulls on the run (but watch for support at the 50-dma near 8063).

NYSE Composite, NYA, Daily chart

One reason why I'm thinking the market could hold up for another week or two (or three) has to do with the time relationship between the 2002-2007 rally and the rally from 2009. Especially for the techs with their a-b-c bounce off the 2002 low, there is often a time relationship between the a-wave and c-wave. The c-wave for them is the rally from 2009 and it would be 62% of the a-wave (the 2002-2007 rally) on April 19th. Because the techs made a high in 2007 later than the other indexes the timing is different for the other indexes. The same Fib timing relationship between the rally legs for the others points to April 5th as a turn date (+/- a week on this time scale so we're within the turn window). I'm showing a high for NYA in between the two dates.

Since we're looking at monthly charts tonight I'll show one more, this one of SPX since it's a different pattern than the techs and NYA and yet still in synch with both for a significant decline as the next leg of the pattern. The 2000 high for SPX fits as THE high, which was followed by wave A down to the 2002/2003 low, wave B up to the 2007 high and then the 1st wave of wave C down into the 2009 low. The rally from 2009 fits as a correction and is the 2nd wave of wave C. That sets it up for the 3rd wave of C down and that's a setup similar to a 3rd of a 3rd wave, the strongest move of any that we'll see. It could result in a drop at least down to the 600 area some time in 2013. Note the significant bearish divergence on the rate-of-change indicator, especially with no bounce in the indicator from the 2009 low. It's not a timing tool (look at the divergence that ran from the 2004 high into the 2007 high) but it's clearly a warning sign -- this is Not a new bull market leg up.

S&P 500, SPX, Monthly chart

The monthly chart above looks like a long-term triple top and with price pushing up to the broken uptrend line from 1994 (the start of the parabolic run up into the 2000 high), which stopped the rally in May 2011, could be important. It also reached the top of a parallel down-channel for the correction from 2000 and is near price-level resistance at 1440. The pieces are in place for a reversal but the bulls are still holding on.

With the big triple top and a market that has gone nowhere for the past 12 years I guess we could look at it as a good thing -- considering the number of near disasters this market has had to absorb over the years it's quite an accomplishment to be near the highs rather than the lows. But at what cost? I came across this chart that I think was posted at zerohedge.com and comes from Strategas Research Partners. They made the chart when SPX was trading at 1409 and compared that to the 2007 high, along with the budget deficit, Fed balance sheet and government debt. As the numbers show, it's been one helluva price we've paid to keep the stock market up. I suspect we'll look back years from now and realize the Fed made a colossal and very expensive mistake with their monetary policies.

Cost of Avoiding Financial Armageddon, chart courtesy Strategas Research Partners

Zooming in on SPX's monthly chart, the daily chart below shows SPX held its uptrend line from March 6th, near 1399. Firmer support is its uptrend line from October, as well as its 20-dma, near 1388, and a break below that level would put the bulls back on their heels. A drop below the March 6th low, near 1383, would add more evidence to the idea that the top is in place. But there is still the potential for at least a choppy climb higher (if not something more bullish) into the first week of April. As mentioned above and noted on the chart, there is the Fib time relationship that would be satisfied on April 5th when the rally from 2009 would be 62% of the time for the 2002-2007 rally.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1420
- bearish below 1383

It's essentially the same picture for the DOW. Today's decline found support, again, at its uptrend line form October-November and its 20-dma. Friday's decline found support at the same line and MA. Multiple tests are going to weaken it and a break of today's low (13069) would be a bearish heads up. A break of Friday's low near 13K would be a stronger signal that THE high could be in place. It would be a time to play defense until we can see what kind of impulsive pattern (or not) develops to the downside.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 13,400
- bearish below 13,000

Last week I showed two monthly charts of the tech indexes to show they were closing in on potential upside targets. The Nasdaq had just achieved two equal legs up for its a-b-c bounce off the 2002 low (at 3018) but had a little further upside potential to 3120 to achieve a 50% retracement of its 2000-2002 decline. That was achieved on Monday and then pushed a little higher to 3134 yesterday. It has now tagged the top of its parallel up-channel for the a-b-c bounce off the 2002 low. If this high is indeed finishing an a-b-c bounce correction to the 2000-2002 decline then we're about to start a significant decline over the next couple of years.

Nasdaq Composite, COMPQ, Monthly chart

The 50% retracement for NDX is at 2805 and today's minor new high at 2794 is obviously close. If we see the market chop its way higher over the next week or two then we'll see NDX head higher as well. But at the moment the two tech indexes have a bearish setup on their monthly charts.

Looking at the daily chart of NDX below, it ran into some stiff resistance this week when it popped up on Monday to the broken uptrend line from 1990-2002. This is the trend line I've been referring to for many weeks and it was finally reached, near 2780 this week. In the same location are two other trend lines: one is the top of a parallel up-channel for the A-B-C bounce off the October low; and another is the trend line along the highs from February 15th. These three trend lines cross in the area of 2780-2800 and make for a very tough zone of resistance, especially being overbought and on such light volume. Today's selloff from this resistance area looks bearish but it takes a break below last Friday's low (March 23rd) near 2714 to indicate the rally has probably finished.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2800
- bearish below 2714

It's no different for the RUT -- it could chop its way higher into a high on or around April 5th to meet the Fib time relationship between the 2002-2007 rally and the rally from 2009. If the bulls come alive and drive the RUT above 860 and then 872 it would be a very bullish move, one worth climbing aboard and riding it to wherever it's going to go. I don't see it happening but never say never. The more likely path, if it's to proceed higher, is in an ending diagonal (rising wedge) for the final 5th wave. A drop below last Friday's low near 816 would suggest the rally has completed.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 839
- bearish below 816

I've shown lots of chart reasons for why I'm bearish for the next few years and I've backed up my charts with previous discussions of some fundamental reasons why the market has rallied on hope but no substance. We see it every day now -- the market rallies on hope that what Bernanke meant to say is that he will pump us full of drug money and float the stock market higher. First of all, why? Why would he do that here, at the top of a rally? He does that kind of thing when the market has sold off precipitously. He's not going to waste his ammo. But the market rallies on hope anyway.

Part of the fundamental problem with the economy is housing. It's a long way from being fixed and we're going to see many more foreclosed properties hit the market this year. For the next several years, whenever the banks think the market is improving they're going to try to offload more of their dead inventory that they've been carrying at full value when in fact everyone knows it's not even close. They can't afford to write it down so they carry it at full value with the full blessings of the Fed and FASB (Financial Accounting Standards Board). It's a house of cards and everyone wants to make believe it's not there.

The housing market will also be under the strain of homeowners who can't afford their mortgages and homes that are already in the process of being foreclosed or have been foreclosed. Many will decide they simply have to sell and take their lumps now rather than later. I've had many discussions with homeowners who are reaching this point. That will be more inventory on the market.

This week we received the January home price numbers (the Case-Shiller home index) and it's not pretty. Here's a chart of the 20 cities and the composite index that they track:

Case-Shiller Home index

The real pain in housing occurred from the peak in 2006 to the spike down in 2007-2008. The financial crash was largely due to what was happening in the housing market, which is important in light of what's happening in Europe, which I'll come back to. In the middle of the pack is the Composite index (black) and I've pulled out that index and placed it in the next chart below, with the SPX monthly prices along with it. As noted on the chart, the composite index has now dropped to the level last seen in 2003. Of significance is the disconnect between the stock market and housing problems since the lows in 2009.

Case-Shiller Composite index vs. SPX

Since 2009 we see the stock market head back up toward the highs of 2000 and 2007 while the housing composite index has now dropped BELOW the 2009 low. This is clearly a case of the stock market whistling past the graveyard, hoping upon hope that Bernanke is a true ghost buster and not just wearing a Halloween costume. What's he hiding behind that beard of his?

On top of the problems the U.S. is having with housing, it may be small potatoes compared to how it might affect Europe. We are all well aware of how the debt issues in Europe can roil the global markets and right after Greece's debt problem was "solved" we started hearing about Spain. Spain is a Much bigger problem to solve. The ECB, ESFS, IMF and a lot of other ABC bailout tools don't have enough money to bail out Spain. The ECB has been buying Spanish debt but they will soon be applying the same pressures to Spain as they did to Greece. Citi's top economist, Willem Buiter, issued another warning today in which he stated his belief that the risk of a Spanish debt restructuring is higher than it's ever been and that Spain will likely be forced to restructure this year. The rising rates on Spanish debt is forecasting trouble directly ahead.

And now Spain has a serious housing problem that will only worsen their debt situation. The public is in debt up to their eyeballs and cannot afford to be saddled with more government debt. Their home prices have dropped to "only" the 2004 levels with a drop of about -27% but the rate of decline is now accelerating. Many expect that to double (Ireland has lost 50%), which would clearly stress the banks further. As Mr. Buiter stated:

The decline in Spanish land and property prices appears far from complete (probably less than half complete). The General IMIE Index, an indicator created by Tinsa, increased its year-on-year decline in February, and fell by 9.5% – returning to the levels of 2004. The cumulative decline in the General IMIE Index from the top of the market in December 2007 was 27.1%. In addition to the hidden legacy losses carried by the Spanish banks, new property and real estate-related losses are likely to come their way as a result of further property price declines. The Spanish banks are unlikely to be able to absorb these losses. If these institutions are deemed too important to fail, these losses could migrate to the public sector, which could have severe problems carrying them."

In a footnote of the report Mr. Buiter says he expects a 60% decline in Spanish housing prices. The report included a chart of the rise and fall of home prices in Spain, which mimics what we've seen in the U.S. -- peaking in 2007 and dropping since then. All I can say is here we go again.

As expected last week, we've seen a bounce in bonds (TLT is up) and a drop in yields. TLT got back above its 200-dma and stopped at its 20-dma today, at 113.82. A climb back above its February 9th low at 114.62 would leave a confirmed 3-wave pullback from December and point the way higher. Long plays on TLT (recommended last week) should have their stops just below the March 19th low at 109.69, which can be raised once there's a pullback correction (38%-62% kind of correction) and then press higher -- use the pullback low for your stop on a long play from there. 20+ Year Treasury ETF, TLT, Weekly chart

After making a double top on March 19th with the February 3rd high the TRAN pulled back to its uptrend line from October through the March 6th low, leaving a bearish divergence with the double top. While the DOW has pushed to new highs since February the TRAN has not and that's of course bearish non-confirmation of the DOW's rally. It will matter when it matters. A break below Friday's low would be a confirmed bread of its 20 and 50-dma's and its uptrend line. That could be the fat lady singing if it happens.

Transportation Index, TRAN, Daily chart

Yesterday the dollar dropped down to its uptrend line from October-February and bounced. It remains stock below its 50-dma at 79.46 and then has its 20-dma at 79.76 to get through. If it drops a little lower it could find support at its August-October uptrend line, near 78.22 and then its 200-dma at 77.71. The pullback pattern continues to support the idea that once the pullback has completed, if it did not complete yesterday, we should get new highs into April.

U.S. Dollar contract, DX, Daily chart

If the dollar rallies we should see a decline in equities and commodities. That doesn't hold true all the time but they're still mostly inversely related that way. The dollar should rally and the metals should decline. So far gold has been held down by its grouping of moving averages in the 1677-1707 area. It's been using its broken downtrend line from August-November for support (mid March and on the 22nd) and could do so again. It takes a break below the line to tell us the sellers are overpowering the buyers.

Gold continuous contract, GC, Daily chart

Silver has the same kind of choppy pullback pattern from its February 29th high as gold, which makes it look corrective and something that should lead to another rally leg. But the patterns of the metals tend to be sloppy choppy and therefore I'm sticking with the larger pattern that calls for a continuation lower from here.

Silver continuous contract, SI, Daily chart

Oil's sideways consolidation since early March looks like a bullish continuation pattern and I could easily argue for a rally up to the 115 area to test the May 2011 high. But if it (WTI) breaks below 103 I'd have a hard time arguing the bull's case. I'd be looking instead for a drop lower, thinking we've seen the top for oil.

Oil continuous contract, CL, Daily chart

Since there could be an opportunity to try the long side on natural gas I'll keep its chart updated as we wait to see if it bottoms near the 2.13 level that I've been projecting. As you can see in this week's chart, price is now within pennies of hitting the bottom of its parallel down-channel from January 2010 and its price projection for two equal legs down from that January high, both at 2.13 and the low so far is 2.16. Bearish sentiment on natural gas is thick enough to cut with a knife, which makes a long play here a contrarian play (plus the fact that it's an attempt to pick a bottom) so caution is clearly warranted. A rally above the March 19th high at 2.39 would say the short-term pattern to the downside has completed and therefore the larger pattern as well. After the regular trading session closed I noticed a gap up in the price of NG, probably as a result of rolling out to the next month's contract. So the bottom may already be in place.

Natural Gas continuous contract, NG, Daily chart

Other than the usual unemployment numbers tomorrow the only thing that might move the market are the GDP numbers, which are not expected to move from the last estimate. We'll probably have to wait until Friday's reports to see if the personal income and spending, PCE prices, Chicago PMI and Michigan Sentiment numbers can get this market unstuck from where it's been for over a week.

Economic reports, summary and Key Trading Levels

As shown on the charts we could see price and time come together for a high of importance next week, possibly hanging on into the 3rd week of April (at least for the techs). But important levels have been reached and price patterns can be considered complete at any time. I continue to see limited upside vs. significant downside risk. If the market holds up through the end of the week/month/quarter it could be a rough week next week. But with a possible turn date of April 5th the bears need to respect the potential for the market to simply hang ten for a little longer before the next bear wave knocks the bull off its board.

If the choppy rising wedge patterns play out as depicted on the chart it's going to be a rough time for traders on both sides. Those patterns are good for your broker while they make you go broker. Don't trade the slop -- flat is a position until a strong direction gets establish from here. We have some upside and downside levels to watch for clues when to get long or short this market.

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

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