The ECB will announce their latest rate decision and hold a press conference on Thursday and then we'll get the non-farm Payrolls report Friday morning. Both have had the market on hold while we wait to get through these.

Market Stats

The market has been consolidating, on lower trading volume, for the past week while it waits for further evidence of what the ECB will do and then what the Friday Payrolls number will look like. We also have no idea how much the market is going to be held up, or pushed higher, as funds try to hold the market up into the end of their fiscal year (October 31st). The bears continue to struggle to be heard while the bulls maintain control, although there's some evidence that might be changing.

This morning's economic reports included the mortgage index and it showed a very positive growth in refinancing (+16.6%) as home owners took advantage of the very low mortgage rates to lock in lower rates for themselves. The index has now risen to the highest level since April 2009. The good news here is that the increase is a good sign about banks relaxing their lending standards to enable more home owners the opportunity to refinance. While rates have been very low for a long time now, the banks have been very stingy about their lending. One of Bernanke's efforts has been to make it so unpalatable for the banks to hold cash that they'd want to lend it out instead. Higher auto sales may be benefitting for the same reason.

This morning's ADP private payrolls report showed an increase of 162K, which is down from last month's 189K, which was revised lower from 201K. That was a little disappointing but the number was better than the 140K expected. The problem with using this report as a heads up for what the Friday non-farm payrolls report might look like is that the two often aren't even close. Last month's large increase in the ADP private payroll number was not even close when the subsequent Friday government report showed a much smaller payroll increase. A large part of the reason the market has been consolidating this week is very likely because traders are waiting until we get through Friday's report.

The other piece of good news, which is welcome after so many declining reports, was the ISM Service report which showed an increase to 55.1 from last month's 53.7 and better than the estimates for a slight decline to 53.4.

Trading volume had ticked higher during the selloff from the September 14th high and has been declining again since last week's low. This is bearish volume action but in reality we don't know if the market is simply consolidating while waiting for ECB's decision/press conference tomorrow or the Friday Payrolls numbers. While the price pattern and volume since last week suggest we're getting a bearish continuation pattern, clearly this market and its fixation on central banks instead of economic fundamentals requires more caution about technical patterns.

Not helping the bulls is the fact that while prices have been consolidating in a bearish pattern, along with the declining volume, the put/call ratio is showing excessive bullishness again, similar to what we saw heading into the September high. The bulls appear to be placing their bets to the long side during what appears to be a bearish consolidation. I suspect we'll know by Friday whether or not these bullish bets will pay off.

Not helping sentiment in the techs was the fact that Hewlett-Packard (HPQ) reported weakening sales and their forecast for the next year is not good. They're forecasting a -16% decline in earnings and a -11% to -13% decline for the full year. It's in the middle of a restructuring that they don't expect to be complete until the first quarter of 2014. They plan on buying back additional stock if the price continues to decline and today's -13% decline offered them a good opportunity. The stock closed at 14.91, down more than $40 from its April 2010 high. Looking at its long-term chart pattern I see the potential for a drop down near its 2002 low, perhaps down to about $12.50, to complete a 5-wave decline from 2010, which would then set up a very good buying opportunity for a longer-term trade. The tough part of that might be a broader market decline at the same time but for a trade I'd take a look at HPQ if it drops a little lower over the next few weeks since I think you could relatively easily get a double out of it if the broader market supports the move.

Sentiment is of course being affected by what's happening in Europe and Jim did an excellent job in last night's wrap summing up the situation with Spain, the country causing the most angst at the moment. Greece is a continuing problem but most people have sort of written them off and it's only a matter of time and how the details will be worked out. Spain on the other hand is the too-big-to-bail country that has most biting their nails, wondering how this will all play out. However, most traders still have placed their faith, and their money, on Bernanke and Draghi protecting us from harm. It's probably misplaced faith but how long it will take to break the faith is the big question. Right now, with lots of money printing and fear of inflation we've got a lot of traders believing stocks and precious metals are the place you need to be invested. It's certainly hard to argue against the success of that argument right now but we're getting some warning signs here.

Last week I had mentioned SPX had done a little throw-over above its trend line along the highs from May 2011 and that last week's decline below the line left a reversal signal, confirmed with the weekly close below the line at 1451. This week it poked back above the line on Monday but closed back down, tested it on Tuesday and closed back down and poked above it again today but closed back down (and closed only marginally below the line). How it finishes the week will go a long way toward identifying whether or not a more permanent high is in place. Traders are currently respecting the line (on a closing basis) so we know it's important.

S&P 500, SPX, Weekly chart

The daily chart shows the price action around both the trend line along the highs from May 2011 as well as its downtrend line from the high on September 14th, which was tested again at today's high near 1454. This is another trend line that's being respected by traders and therefore a break above both, confirmed with a rally above 1466, would be a bullish move. SPX has also been holding its uptrend line from July 24th and it's getting pinched between this uptrend line, near 1448 today, and the downtrend line. Is it going to consolidate further between the two while waiting for the Payrolls report Friday morning?

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1466
- bearish below 1415

Looking closer at the consolidation pattern since last week, the chart below shows the downtrend line from September 14th and the uptrend line from July 24th. There's another short-term uptrend line just below the one from July 24th that starts from the September 26th low and is currently near 1441. By Friday morning the uptrend line from July 24th, the downtrend line from September 14th and the trend line along the highs from May 2011 all cross near 1451 Friday morning. It makes for an interesting setup if price consolidates between 1441 and 1451 between now and then. The break of the top or bottom of the triangle pattern would be the direction to trade (being careful of first getting a head-fake break in the wrong direction).

S&P 500, SPX, 60-min chart

The short-term pattern suggests a breakdown while the larger pattern from September 14th suggests new highs are coming. With the strong potential for October to be a more volatile month than we've seen recently, I can see the potential for a strong selloff next week followed by a reversal that takes the market to a new, and likely final, high into the elections. Conversely, if the market rallies out of this mess on Friday and into next week I see the potential for a strong rally that then gets reversed and sells off equally hard. The bottom line is that whichever way the market heads next week might be one that you'll want to fade once the move completes. In any case, I suspect a break above 1466 or below 1439 would be a tradable move for at least a week or more.

Similar to SPX but slightly stronger, the DOW has been consolidating on top of its 20-dma, near 13467 today, and well above its uptrend line from July 24th. But it remains beneath resistance at its trend line across the highs from May 2011 (near 13555) and its downtrend line from September 21st (near 13585 tomorrow). A rally above 13600 would be bullish, potentially for a run up to 14K by the end of the month if there's a bullish agenda to push the market higher into the end of October. If the choppy pattern over the past week, which looks bearish, is followed by another leg down there will be support at its uptrend line from July 24th (13325), 50-dma (13245) and uptrend line from June-July (13210). There's a little air pocket below 13200 down to 12900-13000.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 13,600
- bearish below 13,200

Since its September 26th low and the break of its 20-dma NDX has been consolidating beneath it, currently near 2823, which was tested again today. As long as it remains resistance and NDX chops sideways as it's been doing it will be a bearish continuation pattern and should be followed by another leg down. Its 50-dma is not far below, near 2766 on Thursday, which could be good for a little bounce if tested but I think better support would be found at its uptrend line from June, down near 2700.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2874
- bearish below 2744

Driving the tech indexes, as well as the rest of the market, is AAPL so it's an important stock to watch over the coming week. Through last Friday AAPL was looking more bearish following its high on September 21st but at the moment it's looking like it has some bullish potential for another new high before completing a 5-wave move up from May. But first it needs to climb above 680. Last week it broke its 20-dma and then dropped away from it after back testing it, which was a heads up for AAPL bulls. With its 20-dma currently at 679.84 and rolling over, a rally up to it for another back test followed by a decline below 650 would be the final nail in the rally's coffin. But so far the pullback from September 21st can best be viewed as a 3-wave correction that calls for another move higher. A rally up to 715 would have it reaching the 162% extension of the previous decline, which is the April-May decline, and near that level is also where the 5th wave of the move up from May would be nearly equal to the 1st wave (with the 1st wave being admittedly questionable in form). But a drop below support just above 650, which would be a break of the uptrend line from December 2011, as well as the trend line along the highs from April 2010 and its 50-dma, would be confirmation that short is the place to be. Let price lead the way from here and we'll see which side will be the one to trade -- bullish above 680 and bearish below 650.

Apple Inc, AAPL, Daily chart

Since the low on September 26th the RUT has been consolidating beneath resistance -- both its 20-dma and broken uptrend line from August 2, which coincide near 847. The choppy pattern beneath this resistance looks like a classic bear flag waiting for a reason to let go, in which case I'd look for a move down to its 50-dma near 820, if not its 200-dma and uptrend line from June, currently near 800. If the choppy pattern over the past week leads to an upside surprise and gets above 860 I'll be looking for a rally into the end of October, potentially reaching at least 885-890. But so far the pattern favors the bears in the short term (that's not a guaranteed decline from here but instead I'm simply pointing out the higher odds).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 860
- bearish below 831

Last week I showed a daily chart of the 10-year yield (TNX) and the fact that it had dropped below support at its uptrend line from July and its 50-dma, both near 1.645%. Since then, like the stock market, it's been consolidating sideways beneath resistance and as shown on its 60-min chart below, the sideways move fits well as a 4th wave correction in the leg down from September 14th. It poked out of its down-channel from the 14th but a 5th wave down should keep it inside the channel and potentially drop down to the 1.5% area, if not a little lower, before setting up for a larger bounce correction as it works its way lower into the end of the year.

10-year Yield, TNX, 60-min chart

Following up on last week's update to the S&P Banks index (BIX), which is when it had dropped down to its uptrend line from June 4th, it has managed to stay above the uptrend line as well as its 20-dma, both coinciding at 164.70 today. Today's low for BIX was at 164.33 but it closed above this support at 166.37. But so far the bounce off last week's low is only a 3-wave move and a drop below yesterday's low at 163.16 would confirm the 3-wave correction and be a confirmed break of support. It's holding bullish so there's no reason to turn bearish on the banks yet, but the short-term pattern suggests trouble if the bears take over here. Bullishly, if MACD turns back up from the zero line, as it's looking to do, we should get a new high out of the BIX (but probably with a lower high on MACD).

S&P Banks index, BIX, Daily chart

Last week I showed an expectation for a little lower for the TRAN to complete a 5-wave move down from its high on September 14th to then set up a larger bounce correction up to its broken uptrend line from 2009. We got the minor new low into last Friday's low at 4870 and today added to the bounce, hitting a high near 4973. Perhaps a little higher, a pullback and then another high around 5050 would do a nice job of giving us a 3-wave correction with a 50% retracement of the decline from September 14th and a back test of its broken uptrend line by mid-month. That would be a good setup for a longer-term short play in this sector so we'll see how it sets up over the next week or two.

Transportation Index, TRAN, Daily chart

The dollar's bounce pattern off its September 14th low looks choppier than I would have expected to see if it's starting a new rally leg but it remains bullish as long as it holds above its new uptrend line and broken downtrend line from August 16th, which cross at 79.69 tomorrow currently. It would obviously be more bullish if it can break its downtrend line from July and then use it as support on a pullback, which is what I'm depicting for now. With evidence that the velocity of money growth is still declining, despite the Fed's efforts to grow the money supply, and worries that the ECB's program could suffer some road blocks, money could be coming back into the relative safety of the U.S. dollar.

U.S. Dollar contract, DX, Daily chart

Gold pressed to a new high on Monday, hitting a high of 1794.40, and its broken longer-term uptrend line from October 2008 is acting as resistance or is slightly higher, near 1800, depending on which lows are picked for the uptrend line back in 2010 and 2011. Monday's high is showing bearish divergence against its previous highs since September 14th so that's a warning to the bulls at the moment. But it remains bullish above its uptrend line from August 15th, currently near 1767, and would not be confirmed bearish until it dropped below its September 26th low at 1738.30. The longer-term pattern remains questionable and we could be looking for a high-level multi-month consolidation before heading higher again or we could be looking for a multi-month decline below its shelf of support near 1530. In either case I'm looking for at least a pullback from here or the 1800 area and then I'll get a better sense for what the longer-term pattern might be.

Gold continuous contract, GC, Daily chart

Oil got hit hard today, down -3.9%, and it broke below its September 26th low at 88.95, with a low at 87.70. If SPX were to do the same it would be below 1430 and since oil and the stock market tend to trade in synch the stock market bulls have now been warned by oil's move. The corrective pattern for the bounce off the June low points to a complete retracement of the bounce so a drop below 77 is my expectation.

Oil continuous contract, CL, Daily chart

We've got an interesting pattern on the commodity related stocks index, as shown on the weekly chart below. The downtrend line from April 2011 was tagged at the September 14th high (the daily candle was a bearish shooting star at resistance -- nice reversal signal) and it's currently trying to find support at its 50-week MA at 846.65 (it closed below it today). The pattern since April 2011 could be a bullish sideways triangle, which calls for just one more leg down to finish it and then rally strong next year. This would likely be a result of the dollar crashing lower. But the bearish price pattern is very bearish since it's a 1-2, 1-2 wave count to the downside from 2011 and is currently set up for a very strong decline in a 3rd of a 3rd wave down. This would suggest the dollar is getting ready for a strong rally. It might take a while before we'll know more about the longer-term possibilities but if you're long you need to consider the risk of a strong breakdown.

MS Commodity Related Equity index, CRX, Weekly chart

Tomorrow morning we'll get the Challenger Job Cuts report and unemployment claims before the bell, followed by the Factory Orders at 10:00 AM, which is expected to see a significant decline into negative territory. This follows the durable goods report, which showed a sharp decline to the worst level since 2009. Before the bell we'll also know what the ECB has decided (no rate change is expected) and what explanation they might have to help some of the EU members get over their angst about the bond-purchasing program. Draghi's will-do-whatever-it-takes approach could run into trouble with some EU members balking about "whatever" means to them and their own fiscal fitness. Draghi's explanation could calm the markets or make them more nervous. We'll know by what the futures are doing.

Economic reports and Summary

With the indexes looking like they're consolidating following the decline from the September 14th high, probably waiting for the ECB rate decision and press conference on Thursday and then the U.S. Payrolls report on Friday, it's looking like a setup for failure. The choppy price action over the past week could be building up for an explosive move higher and a break of the key levels to the upside would be a good indication that long is the place to be. A failure of the bearish consolidation patterns would likely lead to a fast move to the upside, frying bear butts all the way up. Be prepared for that possibility but at the moment that does not look like the higher-odds play and the consolidation looks like it's waiting for a piece of news to act as a catalyst to break open the dam to lower levels.

While the market could hold up into the end of the month for fiscal-year end, there is the risk that bullish complacency (Bernanke/Draghi will not let us down, literally) will turn around and bite the hand that feeds it. Regardless of what we're being told about all the fixes the central banks have in place, countries remain deeply in debt and government debt-spending continues to rob the private market of capital. Major economies are slowing down. Most developed countries are broke and going broker, despite inflation and cheap loans (if they can get the cheap loans). Respect the upside if you're a bear while worrying about the downside if you're a bull.

October could be very volatile the way the price patterns are setting up. I see the potential for a fling to the upside to finish wave counts and then sharp reversals back down, catching both sides off sides. By the same token, because of the corrective patterns in the pullback from September I see the potential for a quick hard decline to finish the pullback and have it followed by a v-bottom reversal into a snapback rally (flaming the shorts after flaming the longs). Be ready for anything this week and next and I think quicker trading (take profits early and of course honor your stops) will be better than holding and hoping for more.

Speaking of stops, keep in mind that most stops are visible on the trading systems that the HFTs are using and they typically run these stops but very often the move is not held into the close. This requires rethinking how you trade and use stops -- trade smaller sizes and think about no stops during the day but use a closing price violation of your stop as a reason to exit. It's the closing price that matters, not the intraday price.

Good luck and be careful. 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