With earnings season doing OK and Bernanke hinting there's still a possibility for more monetary easing, the bulls are feeling a little more confident and bears less so.

Market Stats

Earnings season has been decent so far (as long as you don't consider how low the bar is and how easy it is to hurdle it) and many traders continue to believe in the Bernanke put -- the belief is that the market will be saved by the Fed and that therefore there's very little to worry about. The market will either go up because things are improving (no word from Europe must mean everything is going well, right?) or it won't go down because Bernanke is ready to blast the market with another QE program. From a bull's perspective, what's not to like?

So the market has seen a nice rally since last Thursday's low and the S&P is even challenging its July 3rd high (marginally exceeded it today). Most see at least 1400 as a good upside target for now and I don't disagree with that. I've been pointing out for a few weeks a pattern that points to 1390-1406 for an upside target for the bounce off the June 4th low. I've also been saying it doesn't matter what the news is; it only matters how the market reacts to the news. And right now the market has been desperately trying to spin bad news into good (bad economic numbers means Bernanke is closer to QE3, European sovereign debt woes will force the EU financial heads to solve the problem, etc.). When the market turns back down we'll wonder why the same news is not driving the market higher.

Today's rally did a nice job adding points to the board but I suspect it had more to do with painting the tape for opex than much of anything else. When the indexes are pushed higher but market breadth is weak we know there's not a lot of internal strength supporting the rise in index prices, which means it's time to be cautious. For example, I was watching the up-volume minus down-volume indicator all day and it showed more up volume but it was much weaker than Friday and even weaker than Tuesday. It's not what the bulls want to see -- declining volume during a rally usually means it's a correction to the previous decline rather than something more bullish. The NYSE advance-decline line has been weak and even as the rally progressed today the a-d line deteriorated. Again, not bullish.

The market started with a gap down but at the open there was an immediate buy program that quickly closed the gaps and then drove the market higher. It was a pretty clear manipulation as we head toward options expiration. And once again, I'm sure there was an effort to keep the market from selling off this week, lest Bernanke be blamed for disappointing the market. The bears were given a clear signal this morning -- "back off because we're not going to let this market drop." And back off they did.

There weren't any startling economic reports this morning to move the market. The housing starts and permits came is as expected and with very little change. We got the Fed Beige book report this afternoon, which caused a little bit of a swoon in stock prices but they were lifted back up into the close. As I said, the bears were told to stay away.

There wasn't much in the Beige Book that Bernanke didn't already say in his discussion with Senators and Congressmen yesterday and today. As compared to the previous period the current period (early June into early July) grew at a "modest to moderate pace," a little less enthusiastic than the previous report's "moderate" pace. Slowing regions grew from one to three this latest period, concentrated in the east as New York, Philadelphia and Cleveland reported slowing economic activity. But hey, this is good news! It means Bernanke is one step closer to pulling the handle to release helicopter loads of more cash into the market. And perhaps that's part of the reason for this week's rally. (But then why was gold down?)

As I'll review in tonight's charts there are some upside price targets that could be achieved if we see the market push a little higher into the end of the month but as Jeff Cooper noted in his update today, tomorrow, July 19th, is the 5-year anniversary of the July 2007 high for the S&P. The 5-year, 60-month, cycle has called important turning points in the past. As Cooper noted, the parabolic rally in the 1990s started in the 1st quarter of 1995 and ended in the 1st quarter of 2000. Going back to the August 1982 low, 5 years later was the August 1987 high, followed by the market crash. A large decline started in 1937, 5 years after the 1932 low, where the stock market crashed again and lopped off 50% over the next eight months. So we've got that to consider.

A little shorter term, we've got a new moon on Thursday and the new and full moon phases continue to be remarkably close to turning points in the market. The last new and full moons marked the previous highs and here we are rallying into the next new moon. Purely coincidental I'm sure.

SPX MPTS daily chart

By the way, the chart above, without trend lines, EW labels, Fibs, etc. (that clutter my charts), notice the "3 drives to a high" pattern that is playing out for the bounce off the June 4th low. There is of course an EW pattern that supports this but many use the "3 drives" to watch for an important reversal. We'll soon find out.

Starting off with other SPX charts tonight, I'll start with a bigger view that shows the rally since the 2009 low. It has a clear corrective wave structure which means it's a correction to the previous decline (2007-2009) and is either part of a very large sideways triangle playing out since 2000 (which means a drop down to the 900 area next year but then back up to the top of the triangle) or the bounce off the 2009 low will be completely retraced. In either case we're looking for a loss of a lot of points between now and this time next year, potentially a LOT of points.

S&P 500, SPX, Weekly chart

The best wave count that fits for the 2009-2011 rally is a triple zigzag, which means three a-b-c (or more complex) moves separated by two x-waves, labeled as w-x-y-x-z on the chart above. The entire move up is a 2nd wave correction to the 1st wave down (2007-2009). As I'll show in more detail in a bit, the interesting thing is that the current bounce off the June 4th low is looking like a fractal pattern of this weekly pattern and is a smaller-degree 2nd wave correction than the larger 2nd wave shown above. This is one of the things that EW measures and it helps identify correct wave counts, which in turn helps identify where we are and where we're likely headed.

A little closer look at the weekly chart shows the longer-term trend lines that I'm watching. There is a downtrend line from the October 2002 low through the March 2003 low and a parallel line is attached to the 2007 high (not shown on the chart above). The top of this down-channel is where price stopped in April (it stopped just shy of hitting it) and it's currently near 1415. That's the upside potential if the bulls are able to push the market higher into the end of the month. But stay aware that the bounce off the June 4th low is corrective (choppy, overlapping highs and lows) and is therefore subject to a hard reversal (into a 3rd wave down) at any time.

S&P 500, SPX, Weekly chart

The choppy bounce pattern off the June 4th low is shown in more detail on the daily chart below. The EW labels show a double zigzag wave count (a-b-c-x-a-b-c) but as the 60-min chart that follows shows, a slightly deeper pullback before heading higher again could create a triple zigzag wave count, similar to the one shown on the first weekly chart above. These choppy sloppy wave patterns are very difficult to trade (how did you like that whipsaw Tuesday morning?) and very difficult to figure out in real time. But taking a step back and looking at the choppy pattern inside a rising wedge and it screams "SHORT ME!" All we need to do is figure out where a good short entry is. It could top out at any time but I'm hoping we'll see the bold green path for a move higher into the end of the month and into the 1390-1406 target zone. But with a turn window starting tomorrow (and the new moon), take any drop below 1345 as trouble for the bulls and certainly below 1334, which should indicate it's lights out for the bulls.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1375
- bearish below 1334

As can be seen more clearly on the 60-min chart below, the rally off the June 4th low shows the multitude of 3-wave moves, which is an indication of an ending pattern (which the rising wedge is also pointing to). For now it stays bullish as long as the uptrend line from June 4th holds, which is rising toward 1340 by the end of the week. If the parallel up-channel from July 17th holds, the bottom of which is near 1360 Thursday morning, look for a move up to at least the projection at 1377.36 (two equal legs up from July 12th) and more likely to the 1390 area. A deeper pullback (bold green), as long as it remains choppy and not impulsive to the downside, should lead to one more leg up into next week.

S&P 500, SPX, 60-min chart

The DOW's rising wedge shows some upside potential to just above 13K where it would achieve a 78.6% retracement (a popular retracement level in this market) of the May-June decline. For the 2nd a-b-c of its bounce (the move up from June 28th) it would achieve two equal legs up at 13045, which crosses the top of its wedge in one week, on July 25th. So that's the upside potential for now, which won't be negated until it drops below 12600 and then confirmed bearish with a drop below 12490.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,960
- bearish below 12,490

By a downtrend line from April through the May 1st high the NDX could run into trouble near 2640 on Thursday. Otherwise if it can push through that resistance level (perhaps after a pullback to consolidate and work off the short-term overbought condition) the two upside targets are 2661 (62% retracement of the April-June decline and double top with the July 5th high) and then 2700 where the two a-b-c's of the bounce off the June 4th low would achieve equality. Unlike SPX, which poked marginally above its July 3rd high, NDX could still fail short of its July high and a turn back down from here could start a 3rd of a 3rd wave decline (in other words a very strong decline). But with SPX negating the idea that the bounce off the July 17th low is a correction to the decline from the July high I'm less inclined to trust that more bearish wave count, even though I show it as the primary count on NDX (out of respect for the downside risk here).

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2660
- bearish below 2522

If the downtrend line from April-May-July, near 2640, acts as resistance and we get a choppy pullback over the next day or two, it could still lead to a push higher as depicted with the green dashed line on the 60-min chart below. There is the chance, as shown with the red dashed line, for NDX to stair-step its way higher into next week instead of pulling back first. Both scenarios point to the 2700 area and the only risk for bears is if they short a pullback, thinking a top is in place, and then get whipsawed again as the market turns around and heads higher. So be careful over the next week.

Nasdaq-100, NDX, 60-min chart

The RUT's climb from June 4th has more of a parallel up-channel but that's primarily due to the strong rally leg into the July 5th high. It then pulled back more sharply and is lagging the others in getting close to their July highs. I show another strong rally leg into the end of the month in order to reach a projection near 840 but I'm having my doubts about that potential. If the rest of the market is able to rally into the end of the month then maybe but at this point I'd be real careful about a downside disconnect at any time. Without a new high above July's, the next move down could be a 3rd of a 3rd wave and they're typically the strongest moves of the different waves. A break below Tuesday's low near 790 would be worrisome and below the July 12th low near 778 would knock the bulls down. Just as it led to the upside into the July high it will likely lead to the downside.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 815
- bearish below 778

The price pattern for bond yields is not very clear at the moment. I could argue for a move either way from right here but at the moment I'm leaning toward seeing at least a minor new low, maybe just a test of the May 1st low, before rallying. The up-down sequence shown is a bit of a guess and I would not turn bullish on yields (bearish on bond prices) until TYX got above 2.7%, which would negate the short-term bearish pattern shown. Also, as noted on the chart, the longer-term pattern points to the possibility we'll see just under 2% by this fall, which would coincide with a strong decline in the stock market into the fall (which I see happening). Somewhere between 2% and 2.5% I think we'll see a long-term low get put in and a big shorting opportunity in bonds (such as short TLT, long TBT). But not yet.

30-year Yield, TNX, Daily chart

The pattern for the banks is the same as the broader averages and at the moment I see only a little more upside potential for BKX to its downtrend line from March, near 46.80 tomorrow. That could finish its double zigzag wave count for its bounce off the July 4th low and then lead to the start of the 3rd wave down. If it pushes above 46.80 watch for resistance at the top of a rising wedge pattern, near 47.30 at the end of the week.

KBW Bank index, BKX, Daily chart

It's a bit of a guess right now since it's so early into the pattern but I'm thinking the dollar is going to consolidate in a sideways triangle pattern for the next month. If it holds at its 20-dma, near 83 on Thursday, it could start another leg up and head for resistance near 85.20 by the end of the month. This one needs more price action to help determine it's more probable path but for now I expect the high near 84 to hold. The currency market may go on hold for a month if the Fed and ECB stay quiet about their next plan of attack on the credit market.

U.S. Dollar contract, DX, Daily chart

Gold appears to forming another sideways triangle, following the one that formed in March-April. Ideally it will get one more leg up inside the triangle pattern (which would coincide with the dollar pulling back), near 1611 by the end of the month, and then be ready for the next leg down in the larger decline from February, with a downside target at 1350-1400.

Gold continuous contract, GC, Daily chart

Since the June low for oil I've been looking for a correction of the 5-wave move down from March. With the push above the July 5th high it's looking like we could get a quicker a-b-c bounce than I had expected. Two equal legs up targets 95.35, which is close to its 200-dma and about a dollar short of the 62% retracement of the March-June decline. It might not get that high (resistance is near 90.90 and 92.90) and the correction pattern could follow something like the dashed line if it starts a pullback now. But the bottom line for oil is that the 5-wave move down from March will be followed by another one once the current correction finishes and the downside target will be at least to 60.

Oil continuous contract, CL, Daily chart

We already got the Philly Fed picture from the Beige Book so tomorrow's report should not have any surprises. Existing home sales is not expected to change much, nor are unemployment claims. The market will be at the mercy of more opex twitching although most of the moves for opex are likely over. Thursday and Friday of opex week tend to get pinned and they're usually not good trading days. Throw in light summertime trading volume with a few buy and sell programs and moves can come out of nowhere.

Economic reports, summary and Key Trading Levels

The bounce off the June 4th low should be in its last leg and it could finish at any time now. Will Thursday's new moon tag the next high again? A trader friend who uses George Lindsay's timing model (3 Peaks and a Domed House for example) says Thursday is a reversal date. I had mentioned Jeff Cooper's timing signals pointing to tomorrow as a potential turn date (and potentially a very important one). So we've got a few things saying we could see the start of at least a pullback. The wave pattern also suggests a minor new high in the morning should be followed by a reversal and at least the start of a pullback. The downside risk is that the pullback will develop into a full blown 3rd wave down, not something you'll want to by "buying the dip."

The larger decline, if that's what's around the corner, will identify itself by this time next week and I'll then have some setups to look for and ideas for bounces to short. While I definitely see the potential for a pullback I'm not convinced the final high is in place yet. A choppy pullback into next week followed by another sharp rally leg to a new high, with bearish divergence, would be an outstanding setup to start looking to short the market for a swing/position trade. Until then, be careful since the market is already whippy and may get more so in a topping pattern.

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