The stock market has traded sideways for almost a week while waiting to see if Fed would belly up to the bar and throw more money at the market (none yet) and for Greece's election at the end of the week. In the meantime we wait for a move.

Market Stats

The daily candles are starting to look like candy striping -- white, red, white, red... The market has been in a trading range following last Wednesday's strong rally as it waits for some good news to propel it higher (or not). The hope was that we'd hear some encouraging news from Bernanke (i.e., he was going to give us more drug money) but so far nothing. The market is reacting to bits of news and that has had the market jerking around with no follow through the next day. If you were long June options coming into this week you've watched them bleed dry.

The market tried to rally this morning even though this morning's economic reports were not so good. Following the EU's report on industrial production, which dropped -0.8% month-over-month, we found out retail sales dropped in the U.S. by -0.2% in May (-0.4% if autos are excluded), which had been expected and is the 2nd month in a row for a decline in sales.

A little worrisome for the Fed was the PPI number -- it dropped -1.0% in May, which was a little worse than expected and it's the steepest drop since July 2009. The core PPI number was -0.1% since it removes the volatile energy prices, which dropped in May (although I have yet to see much of a drop in gasoline prices).

With the slowing employment picture, deflation worries and a sinking stock market there's a lot of pressure on the Fed to do "something." I continue to believe the Fed will hold its final bullet for when the market really needs it and now is not it. All the Fed has left is a Hail Mary pass and the clock still has time on it before that play is needed. As we can see from the very short reaction to last weekend's news about Spain getting $125 billion euros to bail out the banks, each stimulus is getting less and less of a positive response from the market.

Part of the problem with the Spanish-bank bailout is that private investors are now more worried, not less worried. Private investors hold a subordinated position to the various EU lending mechanisms. They learned this by watching what happened to bond holders in Greek debt. The unintended consequence from the bailouts is that it's making it more difficult to get private investors interested in the weaker sovereign debt. In other words the bailouts are making it more difficult and more expensive for the governments to sell debt to help out their banks. The same thing will happen in the U.S. and around the world. That's why Sunday night's rally didn't hold. The markets are getting tired of programs that aren't working and the only thing that's happening is public debt is growing while more money is thrown into the bottomless pit. The market is close to saying "No Mas!"

While on the subject of bonds, last week I spent some time reviewing the 30-year U.S. Treasury bond and I showed some longer-term charts going back to 1981. This link will take you to that market wrap in case you want to look at it for a quick review: June 6 Market Wrap. The bond market has clearly been the market of "safety" as traders have abandoned the stock market and flooded into the bond market, especially over the past few years as the stock market has scared away a lot of investors. Investors have been flocking to the perceived safety of bonds but it has now become a very crowded trade. On the 1st of the month the DSI sentiment reading showed 97% bulls for bond futures traders. It's been above 90% for most of the past year so the bull run is getting long in the tooth.

Last week I showed longer-term charts to point out how the 30-year bond has rallied to the top of its up-channel from 1981, which is strongly suggesting at least a pullback in prices (and an increase in yields). The risk for bond holders, especially if holding longer-dated instruments (greater than 2-year notes), is that the value of their capital investment will decline. This is of course not what most bond holders expect to happen. They will have jumped out of the pan (stocks) and into the fire.

Over the years I've referred to longer-term market cycles and most have heard of the Kondratieff cycle, which is approximately a Fibonacci 55 years. Greenspan wanted to be known as the man who stopped the Kondratieff cycle (only slightly arrogant of him) and Bernanke has picked up where Greenspan left off. The chart below shows the cycle and T-Bond yields (AAA-rated bonds before T-Bonds were around) from 1792 to the present. It's easy to see how yields peaked in the middle of the K-cycles and bottomed at the start of the next cycle. This does not bode well for yields from here -- yields can be expected to rise steadily for the next 20+ years.

Kondratieff Cycle and T-Bond Yields, 1792-2012, chart courtesy elliottwave.com

Robert Prechter, at Elliott Wave International, has for years been advising clients to get out of stocks and into the safety of bonds. He was one of the early ones forecasting a decline in yields and a new bull market back in 1982 when most were still predicting new stock market lows. He was early in his call for a top to the bull market and because of that he is largely ignored by most when he says the stock market has another major leg down before the bear is finished with us. And now he's saying bond yields are getting ready to reverse higher and bonds are not a good place to invest either.

This is a time when bonds and stocks could get in synch to the downside so it's going to be a tough time to have your money invested in anything other than cash (healthy bank CDs, savings accounts, etc.). I've mentioned often that debt destruction is deflationary (money supply declines) and during a deflationary period almost all asset classes drop in value. Cash increases in value during deflation (it takes fewer dollars to purchase the same item), which makes cash under the mattress actually a good investment from here (plus the benefit of having cash in the house in we have any problems in the future with banks).

The Fed and local/state/Federal governments are deathly afraid of deflation because debt becomes more expensive over time to pay down. Inflation reduces the value of money over time, making it cheaper to pay down debt. It is of course the reason why the Fed and other central governments attempt to "engineer" a certain amount of inflation. While it destroys the purchasing power of the people over time it makes it easier for governments to pay down their debt, which governments always seem to get into.

While Treasuries are the safer bond vehicle, at the other end of the spectrum are high yield bonds (otherwise known as junk bonds) and they are outright dangerous to be in right now. Municipal bonds are also very dangerous to hold right now. I suggest you check your retirement plans and get out of your bond funds, especially the riskier longer-dated maturities, municipal, corporate and other government agency bonds. The only Treasuries that you might want to own are the shorter-dated ones, such as 1- and 2-year -- as they roll over into new bonds you'll get to participate in the higher yields over time.

There's a very good possibility over the next couple of decades that bond yields will test the 1981 high, if not exceed it. That would mean interest rates above 16%. Locked in your mortgage rate yet? Or better yet, can you pay off your mortgage? Remember, it's going to get more expensive to pay down debt in a deflationary period. Those with no debt will be the winners.

When yields start to rise we'll hear many proclaim it's a good sign. During inflation you'll see bond yields rise as investors worry about inflation and want a higher yield to compensate. A recovering economy typically sees rising yields as investors move out of bonds and into stocks and the decreasing demand for bonds lowers their prices and raises the yields. There's also an expectation that a recovering economy is associated with inflation.

But there's another time when yields climb -- when investors worry about the investment itself. Look at what's happening in Europe right now -- the fear of default is driving yields higher. Spain's yields have been steadily climbing since the low in February/March and the 10-year yield has now climbed above the high reached in late November, just before the Fed and ECB got together to announce all kinds of bailout assistance, including the Fed's increased swap line of credit and ECB's LTRO program. It's when our stock market took off to the upside. All that money thrown at the problem and it's still not enough, as shown by the Spanish rise in rates, now just shy of the dreaded 7%.

Spanish Government 10-year Note, 2011-2012

In the meantime our stock market is much closer to its high than to the low in October/November -- just a slight disconnect at the moment. And back to my previous discussion above, the rise in Spanish yields is NOT related to a growing economy that's expecting inflation. This is what's in store for the U.S. in the next several years as the bear market does its cleansing and the worries over defaults has investors demand higher yields.

The period of debt destruction (defaults) is a time when yields increase, which makes it more expensive for governments to borrow (if they can) and to pay down their debts. An effort to get more money to pay off their debts only exacerbates the problem and if this doesn't sound familiar by now then you haven't been paying attention. The U.S. and every other overly-indebted country is not far behind in this process.

While we're talking about bonds I'll follow up last week's bond charts with a chart of the 10-year yield since its pattern is a little cleaner at the moment. Yesterday it made a bullish break of its downtrend line from April 3rd but today's candle is a bearish engulfing candlestick so we could be looking at the start of another leg down to at least a minor new low to finish the decline from March. TNX finished at 1.6% today and downside targets are at 1.43%, where the 5th wave of the move down from March would equal the 1st wave, and about 1.36%, where it would hit the trend line along the lows from 2003. But at the moment TNX is holding at a back test of its broken downtrend line so it's possible it will leave a bullish kiss goodbye and rally from here. But keep in mind that the bigger picture is that there's very little downside potential for TNX (upside potential for bond prices) vs. big upside potential (downside potential for prices). This is why it makes sense to start the procedure now to get yourself out of bond funds.

10-year Yield, TNX, Weekly chart

U.S Treasuries are still considered safe and therefore they're paying historically low rates. But other countries are paying even lower: Singapore 1.37%, Taiwan and Germany 1.17%, Sweden 1.11%, Denmark 0.93%, Hong Kong 0.88%, Japan 0.80% and Switzerland 0.47%. Japan is hardly risk-free here but they still have the luxury of borrowing from their own citizens. That will change as soon as retirees start withdrawing more than they save and Japan will be forced to go outside to borrow. That's going to be a painful time for Japan.

Moving to the stock market, each day for the past week the market has been playing "she loves me, she love me not" as it waits for some encouraging words from the Fed (i.e., more stimulus), which it's not getting yet, and for word from Greece's elections this weekend (Sunday) and what that might mean for the EU and stock markets by extension. The chopping up and down could be a bullish consolidation or the market might have already topped out on hope that's quickly dissipating.

The weekly chart of SPX below shows my preferred wave count calling for much lower prices this year. The move down from April counts well as a 5-wave move and that means the trend is down. From the June 4th low I've been expecting a bounce correction to the decline and from a time and price perspective it would look better if we get a higher bounce into at least next week before setting up the next leg down. If the market drops from here we could get just a minor new low before setting up the bigger bounce correction. And if the bulls take charge and drive it above 1370 I think that would open the door to a new high this summer before worrying about the next bear market leg down.

S&P 500, SPX, Weekly chart

The choppy price action over the past week fits best as a consolidation following the leg up from June 4th. Another equal leg up, for an a-b-c bounce correction to the decline from April, would target just shy of 1370. There are some lower resistance levels to watch closely -- the top of a parallel down-channel, near Monday's high at 1335, price-level resistance near 1340, the 50-dma near 1351 and the previous lows in April near 1358 (the breakdown level so support-turned-resistance). A drop below 1290 (the 38% retracement of the October-April rally and the 200-dma) would be more immediately bearish but possibly only for a minor new low before starting a bigger bounce correction.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1370
- bearish below 1290

On the 60-min chart below I've drawn trend lines around the past week's price consolidation to show we might have a bullish descending triangle playing out. I would expect SPX to hold above 1305 and start the next rally leg in this case. Below 1300 would be the first sign of trouble for the bulls. In addition to the resistance levels mentioned above, a current projection for the next leg up shows the 2nd leg would achieve 62% of the 1st leg at 1345, which would also be a 50% retracement of the decline from April. And one other level of importance is 1347 on the Gann Square of Nine chart, which is 180 degrees on the radial connecting 1422 (April high) and 1275 (briefly broken on June 4th), which is one circle (360 degrees) around from 1422. The 50-dma might be down to 1347 by next week as well.

There are multiple resistance levels to be aware of and what I'll be doing is looking for a 5-wave move up (assuming we'll get it) and then I'll start to get a much better upside projection as it develops.

S&P 500, SPX, 60-min chart

On the daily and 60-min charts above you can see the inverse H&S pattern that more and more people are discussing. When it's mentioned on CNBC you can bet your bottom dollar the pattern will fail. With the neckline near 1336 the price objective out of it is to 1400. That will get a few bulls wanting to buy the breakout. Look for buying volume to confirm the break and then watch for possible failure near 1345-1350 where it would trap a lot of bulls.

The DOW's pattern is different from the others because of its new high in May (the only index to make a new high) and that makes its move down more difficult to label. But the same bounce potential exists -- two equal legs up targets near 12900 and there are multiple resistance levels between 12700 and 12900. For now, above 12690 is bullish and below 12400 is bearish (other than just head-fake breaks).

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,690
- bearish below 12,400

Different index, same pattern for NDX. Bullishly it broke out of its parallel down-channel and has used the top of the channel for support in its pullbacks, which is near 2500 on Thursday. Below that will have me looking for last Wednesday's gap to be closed at 2487.50. If it heads lower still, watch for a minor new low and possibly a test of its October high near 2412 to hold. If we get the higher a-b-c bounce out of NDX, two equal legs up would target 2637 from here but keep an eye on 2620 where it would test its 50-dma and 50% retracement of the decline from April. Known as the 50/50 resistance (or support in reverse), it can be a very good setup for a reversal.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2660
- bearish below 2500

The RUT's consolidation for the past week has been mostly above its broken downtrend line from May 1st, which keeps it bullish as long as the line holds, currently near 750. As with the other indexes, we should get an answer in the next couple of days as to whether or not we'll get the 2nd leg of the bounce off the June 4th low or a new low before setting up a bigger bounce into the end of the month. Two equal legs up would target 794 but lower resistance will be in the 785-790 area. If the market declines from here I'll be watching the 715 area for potential support.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 780 and more bullish above 803
- bearish below 714

The banking index, BKX, has very similar pattern but in my opinion it's a little cleaner. The 5-wave move down from March is clean and that sets the trend. The bounce off the June 4th low is therefore an opportunity to get short and the only thing we need to do is figure out when to get short (sounds so easy, no?). An a-b-c bounce with two equal legs would target 45.58, which is very close to the 50% retracement of the March-June decline. The 50-dma is coming down and could be there by the time price arrives -- another 50/50 setup. The November 2009 - September 2010 neckline is also located in the same area. If this bounce to 45.58 plays out as depicted I could be forgiven for selling my first born to get enough money for a large short position. Only kidding of course. I'd sell my 2nd born instead (wink).

KBW Bank index, BKX, Daily chart

Following the dollar's steep rise in May it has been pulling back in a choppy pattern from its June 1st high. It has remained inside a parallel down-channel and another leg down (to coincide with a rally leg in the stock market) would target the 81.16 area for two equal legs down. Could it be another 50/50 setup there? The 50% retracement of May's rally is at 81.16, which is also the March 15th high, and the 50-dma could be up there to meet price next week. Hmm, I'd short the banks and use the money to buy the dollar. And if it's a winning trade you'll next hear from me when I get my internet set up on some remote island of my own. What I can't be sure about yet is a possible larger sideways consolidation for the dollar (green dashed lines) before heading higher so we'll see how it looks in the next week.

U.S. Dollar contract, DX, Daily chart

Gold's bounce pattern off last Friday's low is now a completed 3-wave move. Whether it turns into a more bullish 5-wave move up or starts the next leg of its decline is the question right here. The bearish wave count calls for the resumption of selling and a break of its shelf of support near 1530. I see downside potential to about 1430 next month before bouncing and then heading lower again in the fall. The bounce off the May low has been choppy so it doesn't paint a bullish picture from here. But if it manages to chop its way higher into the end of the month there's upside potential to its 200-dma, near 1681, and then its downtrend line from last September, near 1700 by the end of the month (where it crosses the top of a parallel up-channel from May's low).

Gold continuous contract, GC, Daily chart

For silver I created a parallel down-channel off the trend line along the lows from March to the May 16th low and attached the parallel to the February 29th high. The choppy sideways/up correction from May 16th looks like a bear flag within the larger down-channel and it's a good setup right here to short it. Use a new high above last week's high at 29.86 for your stop (especially since that would also be a break above its 50-dma).

Silver continuous contract, SI, Daily chart

Using another parallel down-channel for oil I think there's more upside for oil's bounce although it could end up doing more of a sideways consolidation before heading lower again. While I see some bounce potential for oil I would not want to be long it right now. By the same token I don't want to be short it either. I want to see what kind of bounce pattern develops in order to relieve some of the oversold condition.

Oil continuous contract, CL, Daily chart

Tomorrow's economic reports will probably be largely ignored. If the CPI numbers come in negative (more deflation) it could spark a rally in anticipation that it will help the Fed make a decision to throw some more money at the market. Dream on. Japan's central bank will be announcing its targeted interest rate and might announce its version of Operation Twist. Japan is the perfect example of how long this central bank nonsense can go on before it all collapses around them.

Economic reports, summary and Key Trading Levels

I came across the below chart which I found interesting. It compares the Nikkei 225 from 1979, the S&P 500 from 1990 and Euro Stoxx 50 from 1990. The Nikkei's pattern is not very encouraging since it points to lower lows over the next several years. Notice how the Euro Stoxx 50 has already tipped over from its 2011 high and the disconnect between the U.S. and Europe. How long do you think that will continue? And do you think the S&P will follow the Stoxx lower or the other way around?

Nikkei 225, S&P 500 and Euro Stoxx 50 Comparison, chart courtesy Societe Generale

On the Business page of the June 8th The Week there was a good summary of what's happening in our economies:

"The US, Europe and China all appear to be slipping into an economic slowdown together, said Hilsenrath and Mitchell in The Wall Street Journal. Last week, new data showed that American businesses are scaling back planned orders for durable goods like computers, aircraft and machinery, while in Europe, concerns about the Continent's ongoing fiscal problems are sapping business confidence. China's factories registered their seventh straight month of declining activity, and emerging economies like India, South Africa and Brazil are reporting new signs of weakness. Economic activity appears to be slowing around the globe. Europe's troubles remain the biggest single threat in the global economy, said Don Lee and Henry Chu in the LA Times, but lackluster US growth and inflation concerns in developing economies also pose serious risks. As a result, economists expect global growth to slow sharply this year, with world trade rising at just half of last year's pace. Countries like Brazil and India won't be able to pick up the slack, since their economies are smarting from Europe's dwindling demand for goods. And analysts worry that China, now growing at its slowest rate in 13 years, could be heading for a hard landing 'that would ricochet around the world'."

Now look at that chart above again. What path do you think the markets are going to take?

I hope we'll see another leg up into next week and then use it to test the short side of the market. The next leg down should be a strong one. If the market heads lower directly from here I think it might only make a minor new low before starting a larger bounce so be careful chasing it lower (but look to short bounces if SPX breaks below 1290 and then manage closely. Continue to keep in mind that upside surprises will likely be short lived while downside surprises will likely be severe. Trade accordingly.

Keep in mind that the Greece elections on Sunday will very likely move the futures Sunday night and likely the market on Monday. Also next Monday there are rumors that the Supreme Court will announce its decision on Obamacare. Next Wednesday will be the FOMC announcement and the market is waiting anxiously for its drug money. No money, no rally. It could to be a volatile time before we get through another week.

Good luck through the rest of opex and I'll be back with you next Wednesday.

Keene H. Little, CMT

Technicians look ahead. Fundamentalists look backward. The true language of the market is technical. - Joe Granville