So far this week Santa has been a no-show for the Santa Claus rally. He perhaps had too much eggnog instead of milk and cookies and he's sleeping it off, leaving the bulls wondering where he is.

Market Stats

With Monday's half-day session being weak, with all indexes closing in the red, bulls were hoping for at least some signs of life today but even after starting with a small gap up this morning the market was unable to hold on and sold off in the morning. The afternoon bounce erased most of the losses before dropping back down into the close. Even Obama is not happy with what Santa has left for investors -- a lump of coal.

Maybe we'll get some "good" political news on Thursday when Congress and the President make it back to D.C to try one more time for a compromise in order to avoid driving over the fiscal cliff. I'm not holding my breath, especially since avoiding an agreement before January 1st works for both sides -- they'll then be able to work on a tax reduction plan and sound like heroes.

Not surprisingly, the day was fairly quiet and trading volume was extremely light (less than half the normal). There wasn't much in the news other than some worrisome reports about retail spending being lower than expected for this holiday season and lower than last year's. Retail stocks were weak today and a decline in consumer spending is of course worrying since it accounts for such a large portion of GDP. November and December sales rose +0.7% as compared to last year but last year's increase over the previous year was +2.0%.

The uncertainty around the fiscal cliff issues is getting the blame since many consumers are reluctant to pile on more debt since they don't know how much their take-home pay will change. All we're hearing is more taxes, especially when you include the Obamacare taxes that start on January 1st. Investor worry over all this can be seen in the climb in the VIX, especially in the past week. It was up another 9% today. There are a lot more investors/traders looking to add put protection for their portfolio as well as speculators betting on a decline in the market. Tomorrow's Consumer Confidence report is also expected to show deterioration in sentiment, another factor that could be troublesome for the market, although I do see bounce potential into next week (and then trouble after that).

There will be very few economic reports this week, adding to the quietness and low volume we can expect this week. Some good news came from this morning's report showing the Case-Shiller 20-city home prices index was up +4.3% for October, vs. the 3.9% expected and better than September's +3.0%. It's old news and it didn't help the home builders index today, which was one of the weaker sectors, but maybe they'll get some help if tomorrow's report on new-home sales improves as expected (but Friday's report on existing home sales is expected to shows a slowdown).

The price pattern for the home construction index looks like it could use another leg up to 500 area to complete a 5-wave move up from October 2011, as shown on the chart below. A 38% retracement of its 2005-2008 decline is near 508 and the c-wave of an a-b-c bounce off the 2008 low would be 162% of the a-wave near 495. For the 5-wave move up from October 2011 the 5th wave would 62% of the 1st wave near 504 (the 5th wave is expected to be short because the 3rd wave was shorter than the 1st wave). These Fibs and projections lining up near 500 makes for a good upside target for the index. But if the index drops below the November low, near 389, it will indicate the top is already in place (a drop below the December 6th low, near 412, would be a sign of trouble for the index).

DJ Home Construction index, DJUSHB, Weekly chart

Last week's high for SPX was another back test of the broken uptrend line from October 2011, as can be seen on the weekly chart below. It has been struggling near the price-level resistance at 1425 and closed below it today. On a weekly basis I could argue for a new high into January from here but the pattern of the bounce up from November 16th has me leaning with the bears here. If the bearish wave count is correct we're due a strong 3rd wave down into the end of January, one that could take SPX down for a test of its June low near 1266 before the next larger consolidation/bounce into February/March.

S&P 500, SPX, Weekly chart

Because of the overlapping highs and lows within the bounce pattern off the November 16th low it looks more like a correction to the October-November decline. So while there remains the potential for another leg up for its bounce I think that's the riskier trade from here. Today's break below the up-channel from November 28th is another bearish sign. A drop below 1412, even if followed by a bounce back up to the bottom of the up-channel, as shown on the daily chart below, would indicate the top is in place. The decline from December 18th now looks like a 5-wave move down, which tells us the trend has turned back down and to look for the next bounce correction of the leg down as another shorting opportunity.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1448
- bearish below 1412

The daily chart above is using the log price scale and you can see the broken uptrend line from October 2011 was resistance on the back test on December 18th. The closer view, with the 60-min chart below, is using the arithmetic price scale and the broken uptrend line from October 2011 is the green uptrend line, which price has been cycling around since November 23rd. The break below its up-channel from November 23rd is also a break back below the uptrend line, both of which cross near 1430 on December 31st. I show a bounce up to those two trend lines as well as its downtrend line from December 18th, all near 1433 on Wednesday, January 2nd, before turning back down into a stronger selloff in the first half of January.

S&P 500, SPX, 60-min chart

The interesting about the January 2nd timeframe is that it is an important date on the Gann Square of Nine chart -- it's 180 degrees from the vector through the October 2002 low (768) and the October 2007 high (1576) and April 2012 high (1422). I've recently mentioned the 1430 price level as important on the Sof9 chart because it's on the same vector as the March 2009 low (666). So we've got an interesting time/price relationship around 1430 and January 2nd.

Another reason why January 2nd could be important is because it's an important cycle turn date. A trading buddy subscribes to reports from Parallax Financial Research (pfr.com), a research firm that uses Chaos Theory and a bunch of mathematical analysis of the financial markets and has determined that the two key turn dates in 2013 are January 2-3 and August 29. The system that PFR uses is based on a cycle detection signal called 'Precision Turn' and it generates cycle turn dates for individual markets. For the stock market it identifies 'Turn Clusters' (many stocks giving the same turn date) and the last such cluster occurred on September 14th. The next Turn Cluster will be Jan 2-3. If the market is going up into that date then it will be a downside reversal and just the opposite if the market is dropping into the turn date. So if a bounce into January 2nd occurs, as depicted on my chart above, it will be a very good setup to short since the leg down in January should be a good money maker.

It's the same pattern for the DOW -- the rejection at its broken uptrend line from October 2011 left a bearish kiss goodbye from the December 18th high. We've got an impulsive decline from that high and that means the next bounce will be one you'll want to short. Today the DOW broke its 20-dma at 13139 but found support at its 50-dma at 13083. A little lower, at 13015, is its 200-dma. A drop below 13K would confirm that the top is in place but back above its December 18th high at 13365 would open the door for at least a retest of its October high at 13662.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 13,365
- bearish below 13,000

NDX has been chopping sideways since the end of November while the other indexes pressed higher. A test of its December 14th low at 2620 should lead to a bounce into next week and I'm showing a bounce back up into the January 2-3 turn date for a back test of its broken uptrend line from November, maybe up to about 2693 to close its December 21st gap down.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2714
- bearish below 2620

Along with NDX, the RUT was the weaker index today but it's simply a little more volatile than the rest. But if fund managers were piling into the small cap index in hopes of achieving outsized gains into the end of the year they could end up bailing in a hurry if there's no bounce. But at the moment I see bullish potential for the RUT since it broke above its uptrend line from October 2011 and today pulled back to it. A successful back test could lead to another push higher. Above 854 would be bullish (although I'd trail stops on long positions closely) and below 837 would be bearish (although we could see an intraday break and then a recovery for a bigger bounce into early next week).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 854
- bearish below 837

The big index, the Wilshire 5000, has dropped back below its broken uptrend line from October 2011, which it's been cycling around since November 23rd. This trend line, when viewed with the log price scale, is where the rally stopped on December 18th. The chart below shows the trend line when using the arithmetic prices scale. The index has also dropped out of its up-channel from November 28th. The bottom of the up-channel crossed the uptrend line from October 2011 today near 14980. The overlapping highs and lows in the climb from the end of November, along with the 3-drives-to-a-high pattern (December 3, 12 and 18), has it looking like a high was made and it has now started back down.

Wilshire 5000 index, W5000, Daily chart

I typically show the 10-year yield (TNX) since I can get a better read on the long-term pattern (from the 1980s) but we've got an interesting pattern on the futures contract for the 10-year Note (ZN is the emini contract) that gives us a clear setup for a bounce, and bearish if it fails to hold its December 18th low. That low is price-level support near 131'240 as well as its broken downtrend line from July, which it back tested successfully so far. The bond bulls have some work to do -- the 20-, 50- and 200-dmas are about to join near 133. If that resistance level is broken we'll see much higher and that would drive yields much lower (and probably scare the stock market).

10-year Treasury Note emini futures contract, ZN, Daily chart

The U.S. dollar bounced off support last week, near 79 and made it up to its broken uptrend line from October 2011. The dollar and stock indexes are messing with this trend line and it's likely they'll head separate ways once that direction is confirmed. If the dollar drops back below 79 it would be a bearish signal but if it consolidates near the uptrend line and then breaks up through it, currently approaching its 20-dma at 79.86, we'd have a bullish move confirmed.

U.S. Dollar contract, DX, Daily chart

I continue to lean long the dollar and short gold (and silver and other commodities). As shown on gold's chart below, we should get another leg down and it will likely find support in the 1600-1630 area to consolidate for a few weeks before heading lower again. I see gold working its way to 1525 support in February before setting a bigger bounce to correct the decline from October.

Gold continuous contract, GC, Daily chart

Silver's pattern is the same as gold's. Currently it's finding support at 29.63, which is where the move down from October has two equal legs and it's at the bottom of a parallel down-channel for the pullback. I'm watching the bounce carefully to see if it's going to consolidate sideways before dropping lower (which is what it appears to be doing since last week's low) or start something more impulsive to the upside. If it plays out as expected I see a drop to price-level support near 28, a multi-week consolidation and then lower into February.

Silver continuous contract, SI, Daily chart

Oil was strong today, up about +2.8%, which makes it a little surprising that the stock market wasn't stronger as well. Today's rally took oil up to the top of its shallow up-channel from early November, near 91.20, which looks like a bear flag because of the choppy price action within the up-channel. Today's high may have been the conclusion to the correction to its September-November decline but if the bulls can break oil above its 200-dma at 92.11 it would turn more bullish. Otherwise I see the potential for the start of the next leg of its decline.

Oil continuous contract, CL, Daily chart

The remainder of the week will be relatively quiet for economic reports. Unemployment claims, new home sales and consumer confidence are the one to watch the market reaction Thursday morning. And then Chicago PMI and pending home sales on Friday.

Economic reports and Summary

Santa only has a couple more days to get out of bed and replace the lump of coal in each investor's stocking with something a little nicer, like a rally. If we get a new low Thursday morning that is then reversed I think it would be a good signal for a higher bounce into next Tuesday/Wednesday, which should be a good trade although I'd keep it on a very tight leash and I wouldn't want to be long into Tuesday (because of the price pattern and turn-date combination). A bumpy bounce into early next week is one I'll be looking to short. But if the market continues to work its way lower into early next week then I'll be looking for a buying opportunity for another rally leg.

We'll see how it looks by next Wednesday when we should theoretically already have triggered a reversal trade. Trade carefully in the coming week as volumes are low and any sound bite from politicians could spike the market. Good luck and I'll be back with you next Wednesday. Have a Happy New Year's celebration and stay safe.

Keene H. Little, CMT

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