The morning economic reports have continued the drum beat of a weakening economy and the only question now is how long the market can continue to ignore the signals.

Market Stats

Equity futures had been holding up during the overnight session but then started to back off shortly before the ADP employment report came out at 8:15 AM. The disappointing number caused the futures to sell off and today's trading started with a gap down. But this time the morning selling was not followed by a rally back up in the afternoon. There was only a small bounce following the FOMC announcement but that was sold into and the market closed near its lows for the day. All in all, it was a bearish day but one day does not make a trend.

The ADP report came in with a disappointing +119K jobs added vs. an expected 155K. It was less than March's 158K, which was upwardly revised from 131K. It's the weakest number since September 2012 and it doesn't bode well for the Payrolls report on Friday.

At 10:00 we then got the ISM index report and it too was disappointing. The good news is that it is above 50 (50.7) but it came in a little weaker than expected and a decline from March. One could argue that it means we're not in a recession but at this point I think many would argue it's just semantics. Following Tuesday's Chicago PMI, which dropped below 50, it's pretty clear the direction we're heading and it's not to the upside. Since Chicago had been one of the stronger areas, its decline to 49 from 52.4 in March was a rude awakening to many. The market's rally in the face of that was strange but it turned out to be a bull trap heading into today.

At 10:00 AM we also got the Construction Spending report, which was another disappointment. Coming in at -1.7% vs. the expected +0.5%, and a complete reversal of the +1.5% in February (which was revised lower to +1.2%), there's not a good way to paint lipstick on that number. It's just more of the same when it comes to measurements of a slowing economy.

The FOMC announcement this afternoon held no surprises. The rate of course stayed the same at 0.25% and the wording of their statement had only minor changes. They changed "economic growth" to "economic activity" and said it is "expanding at a moderate pace." What indicators are they looking at? They also changed the wording about fiscal policy (what the politicians are responsible for) from "has become somewhat more restrictive" to "is restraining economic growth." That's pretty clear finger-pointing in my book. Why don't they just come out and say "Congress, get off your collective asses and do something to restrain your profligate spending!" You can see why I'd never make it in politics. Of course I could say the same thing about the Fed's monetary policy and their $85B/month balance sheet expansion. My guess is that there will be plenty of finger pointing in the next year or two, especially from our Finger-Pointer-in-Chief. I'm sure this problem is still Bush's fault.

In what was termed a "big" deal by one commentator on CNBC, the FOMC announcement included "The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes." Wow, I feel better knowing they're right on top of things and prepared do increase or decrease their accommodation as they see fit. What they should have included is that they could also keep things the same. Kind of like saying the market could go up or it could go down and if neither happens then it will probably go flat. And these guys are paid big money for statements like that.

The net result for the stock market was a slight hissy fit. The market didn't get what it wanted (a promise of more stimulus to counter the slowing economy) and threw a mini temper tantrum, continuing the selloff that began earlier in the day. But it remains possible today's decline was just a way to pull in the shorts so that there's some short-covering fuel available for the next rally. As I'll get into with the charts, we don't have a clear indication yet that the market has made a high, but we do have plenty of indications that it's not very far away (if not already in place).

Now we wait for the ECB's announcement tomorrow morning to see if they lower rates from slightly above zero percent to slightly less above zero percent (0.75% to maybe 0.5%?). It's really a joke that the market bothers to even listen or care anymore. It's a sign of desperation, knowing the rest of the economic numbers are not justifying the market highs. There's lots of nervousness out there and the market is subject to a nasty reaction to someone yelling "Boo!" from around the corner. Remember what happens when HFTs (High Frequency Traders) suddenly stop trading -- the sudden lack of liquidity from the trading computers switching into silent mode leaves a big empty hole below the market. Notice that we don't have flash rallies, only flash crashes.

Last week I had mentioned the Hindenburg Omen and Titanic Syndrome signals that we got in the 2nd week of April. We're still inside the crash window so it pays to listen to the market carefully here. Monday's volume was pathetically low for what was a fairly strong day in points gained. Tuesday finished with a hanging man doji at resistance. But today reversed most, if not all, of this week's gains. Any selloff from here now needs to be considered potentially dangerous. This is a bad time to be complacent and sit back thinking "it will come back." Maybe not.

There are a slew of warning signs for the bulls right now. Of course many past warning signs were simply pushed aside as new buying came into the market. So the current signs are not proof that the market is topping but tops do not occur without these warning signs. Caveat emptor until the signs are negated. Another sell signal came yesterday following another 13-count with DeMark's Sequential countdown method. Not every 13-count results in a selloff but it's a warning that the market is likely exhausted. We've got enough corroborating evidence to suggest the signal should be taken seriously.

In last week's update I showed the NYSE against a declining number of new 52-week highs minus new 52-week lows, pointing out the fact that the new index highs were coming on the backs of fewer and fewer stocks, which is never a good sign for a bull market. Some additional market breadth warnings come from the McClellan Summation Index, which is a running total of the McClellan Oscillator values. As with most oscillators, trading signals come from the direction of the movement, from divergences and when the indicator crosses through zero.

The chart below shows the NYSE Summation Index (NYSI), with the NYSE at the bottom. The market is considered overbought when the NYSI gets above 800 and is in nosebleed territory when it gets above 1000, which is where it recently was in late January. While the NYSE has made higher highs since late January, the NYSI has not and that's bearish divergence. Bearish divergence in overbought is never a good time to be thinking long the market.

NYSE Summation Index, NYSI, Daily chart

The moving average on the chart is the 100-dma and you can see it has been a good identifier for when to be long or short the market. In 2011 this would have given a lot of false signals, which coincides with the big choppy top that was put in at that time. The bounce back up to the 100-dma today could leave a head-fake break at last week's low or the back test will be followed with a kiss goodbye. We'll know for sure in a few more days.

When we look more closely at the NYSE chart today's selloff has an ominous look to it. The rally off the April 18th low brought price right up to its trend line across the highs from September 2012-February 2013 and its broken uptrend line from November-February, which crossed yesterday near its April 11th high at 9256. A final 30-minute rally into yesterday's close was a stop run to close it just above that line of resistance, which was then followed by a big gap down this morning, setting the bull trap. Today's red candle looks like the slap following the kiss goodbye after the back test.

NYSE Composite index, NYSE, Daily chart

The bullish percent (BP) chart also shows us bearish divergence. Anytime the index gets above 80 it's considered overbought and above 85 it's in nosebleed territory. The BP for SPX shows it almost got back above 85 again in March but not quite as high as February 2012 and definitely lower than its February 2011 high. So once again, when you see new price highs with lower BP reading it's an indication of underlying weakness in the market that is not yet reflected in price. What we can't know is whether the signal will result in just a pullback to a higher price low (and higher BP low) or if the next tip-over is going to lead to a much stronger decline.

Bullish Percent index for SPX, BPSPX, Daily chart

Just about every market breadth indicator you pull up will show similar bearish divergence against price. These are not trading signals but they make very good warning signs.

Warning sign to bulls speeding down the highway

With today's decline SPX dropped to where it opened the week. So Monday's big rally, on very low volume, followed by Tuesday's afternoon "save", has been retraced. No real surprise there but now the bigger question is whether we're simply going to consolidate further before pressing higher or if THE high is in place.

The SPX weekly chart shows price has been up against its trend line along the highs from 2000-2007, near 1593, for 3 weeks, as well as the trend line along the highs from May 2012 (which is the top of a parallel up-channel from June 2012). The declining highs on RSI is a clear sign of waning momentum as the market tries to hold onto its highs. SPX 1600 is oh-so-close and the 1607 projection (two equal a-b-c moves up from October 2011) remains upside potential but I'm starting to wonder if the bulls have even that much left in their gas tank.

S&P 500, SPX, Weekly chart

The 5th wave of the move up from November, which is the leg up from April 18th, would be 62% of the 1st wave and I thought for sure that level would be tagged but today's selloff has me thinking we've seen the top of its rally. A drop below last Friday's low, near 1577, would be confirmation that we've probably seen the final high, although confirmation of that would not come until it drops below the April 18th low at 1536. But at this point I see the bear standing on the side of the road, looking like he's interested in crossing it. Confirming the bearish divergences in the breadth indicators discussed above, the waning momentum can easily be seen on RSI and MACD on the daily chart below.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1604
- bearish below 1577

The short-term pattern is not clear enough to make a definitive EW call for a top, primarily because there are several ways to interpret the pattern. As shown on the 60-min chart below, there is a way to look at the price action since Monday's high as an a-b-c pullback, finishing with today's decline. This interpretation could lead to a strong rally so keep that in mind. For the life of me I don't know what could drive a strong rally (well above 1620) but I'll respect that possibility until the declining pattern shows me a top is in place (with an impulsive decline to support at 1574, a bounce and then lower (as depicted on bold red). If we get a sharp decline tomorrow morning that would tell me the bears have already started to cross the road, forcing the bulls into the woods.

S&P 500, SPX, 60-min chart

Starting with the DOW's rally on April 23rd it has been sliding up underneath its broken uptrend line from December-February, something it loves to do with broken uptrend lines. And then when it finally let's go it does so with a bang. Whether today's decline was the start of the bang we don't know yet, but that's the potential. At the moment it's finding support at its 20-dma near 14689, which is also where its uptrend line from October 2011-June 2012 is located. It broke back below this trend line into its April 19th low but quickly recovered. Another break might get the 2nd short mouse his cheese.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 14,865
- bearish below 14,450

Yesterday NDX made it to the top of a parallel up-channel from December and in so doing it also closed above its September 2012, the last index to do so. With that out of the way it closed back below that high today. The techs were relatively strong so any further rally for the market could see the techs in the lead. NDX 2900 could be the ultimate target if it tries for one more high.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2900
- bearish below 2828

The first day of the month is normally reallocation day and it was obvious fund managers wasted no time allocating funds from their small caps section into cash (no other sector, including bonds, seemed to counter the selloff in small caps). Fund managers might be raising cash levels, which have been at historic lows, in anticipation of needing cash for clients who want to cash out of their positions as we head into the summer.

In any case, the RUT was the hardest hit today, down 23 points to 924 (-2.5%). It finished the day back below its uptrend line from November through its April 5th low, as well as its 20- and 50-dma's. It's looking like a triple top after its March and April highs. Look out below if the bearish wave count is correct.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 952
- bearish below 900

The home builders were one of the weaker sectors today but before I review the index I thought it would be good to review what home prices are doing. The Case-Shiller report from yesterday was good news in that it showed a +9.3% year-over-year gain for February. This is a 3-month rolling average with a 2-month lag time. That was an improvement over January's +8.1% and resulted in the slight uptick on the chart below. But the chart below doesn't look as encouraging as the pundits would have us believe. In fact the choppy sideways move since getting slammed to the downside into the 2009 low looks more like a bearish consolidation pattern.

Case-Shiller Home Price Index, 1987-April 2013, chart courtesy MoneyGram

The bulls will look at the consolidation since 2009 and say it's a bullish basing pattern. I've contended for years that we'll see another leg down in the housing market and this chart supports my view. As noted on the chart, the only thing the "bounce" in home prices has done is retrace back to the 2010 level, which was a retracement back to the 2003 level for the 10- and 20-city indexes. The start of the parabolic rally was back in 1998 and the index is 75 at that level. If that's where this index is headed (parabolic rallies almost always return to their origin) then we're looking at another 50% haircut.

Don't shoot the messenger here -- I'm just as anxious as you to get this over with so that I can get back into a house and stop renting. I seem to be in a growing population of renters since the latest homeownership statistics show U.S. homeownership rates dropped another -0.4% in the first quarter of 2013 to 65%, the lowest rate in 18 years (1995). Even with the government's easing-lending policies (FHA is now doing what Fannie and Freddie were doing in the early 2000s -- "here, fog this mirror...yep, you're qualified and here's money for your down payment) homeownership continues to decline.

Now we can look at the home builders and put their rally into context. They've had a particularly strong rally off the October 2011 low based on the assumption that the housing market will fully recover. Home builders are currently building at a rate that is double home sales. But the rally from October 2011 is the c-wave of a big A-B-C bounce off the November 2008 low, which is just a correction to the 2005-2008 decline. In an even larger A-B-C pullback from 2005 the pattern needs another leg down (similar to the chart above) and that's what might be getting ready to kick off from here. On the weekly chart below I'm toying with the idea we'll see a diamond topping pattern but that's just a guess at the moment. A drop below 425 would tell us it's dropping sooner rather than later.

DJ U.S. Home Construction Index, DJUSHB, Weekly chart

Along with the RUT today the Trannies were one of the weaker sectors, down -2.3% (continuing the close relationship between these two indexes). As can be seen on its chart below, today's big red candle looks very bearish, especially since it's a reaction off the downtrend line from March. I've drawn in a sideways triangle pattern, with the uptrend line from April 5th, but that's just a guess right now. It would be considered a bullish consolidation pattern and could be complete with one more leg down inside the triangle. Keep this in mind so that you're aware of the bullish potential. A drop below 5900 would negate the bullish pattern and suggest strong selling to follow.

Transportation Index, TRAN, Daily chart

The idea that I showed last week for the dollar, looking for a big sideways triangle to play out into the summer was negated this week with the dollar's decline below its April 16th low. Two equal legs down from its April 4th high is at 81.44, which was reached today and it left a bullish hammer. At this point the dollar could be ready to resume its rally but I think it will consolidate and pull back further (depicted in bold green) before it will be ready for another rally leg. I've been expecting a choppy and whippy pattern since its April high and so far that's exactly what we're getting. It will turn more immediately bearish if it breaks below its 200-dma at 81.08.

U.S. Dollar contract, DX, Daily chart

At gold's high on April 26th it stopped just shy of a 62% retracement of the leg down from April 9th. It bumped into its downtrend line from September 2011-March 2012 and the bottom of its down-channel from September 2012, highlighted in yellow on its chart below. It's a high bounce but it should be fully retraced, and then some, as it stair-steps lower into the summer. There are some cycle studies pointing to a low for commodities before the end of May so maybe just one more leg down before a larger bounce, but we'll have plenty of time to evaluate a possible buying opportunity then.

Gold continuous contract, GC, Daily chart

Silver's bounce pattern, off its April 16th low, has formed a bear flag and today's decline had it testing the bottom of the flag, near 23.25. A drop below 23.25 would create a sell signal and I think there's a good chance for at least a test of its April low at 22, and potentially lower, before another bounce/consolidation in its stair-step lower pattern. Notice that its bounce off its April 16th low was also stopped at the bottom of its previous down-channel -- very common to see this. Ultimately I'm looking for silver to drop down to $18 area before setting up a larger bounce.

Silver continuous contract, SI, Daily chart

Oil bounced higher than I thought it would, making it back inside its broken triangle pattern. But following its high on Monday it's been all downhill and today it closed back below the bottom of the triangle (uptrend line from July 2012) as well as its 20-, 50- and 200-dma's. Unless it's a head-fake to the downside this time we should see oil drop to support near 80. But the build-up in crude stocks is one sign for why oil price is heading back down. Today's crude inventories report showed stocks rose 6.7 million barrels last week to their highest level on record (395.28 million barrels), which was a much larger increase than the 947K barrels expected. The combination of a slowing economy and a significant crude inventory build-up sent the price lower today, down -$2.53 (-2.7%).

Oil continuous contract, CL, Daily chart

Following today's busy economic reports we'll get some more tomorrow before Friday's big Payrolls number. Tomorrow's reports are not likely to be market moving but be careful heading into Friday morning before the bell and then Factory Orders and ISM Services shortly after the bell.

Economic reports and Summary

The market has most believing in the invincible Fed but there's also a rising level of nervousness that the Fed might not be able to stop a market decline from a coming recession. All the signs are there for a recession, including the latest numbers from the ECRI (Economic Cycle Research Institute), which has a much better success in calling recessions, and much earlier than the government's numbers. The stock market will not hold up in a U.S. recession and it looks like that's where we're heading.

GDP numbers are always revised lower after we've entered a recession and we can expect the current readings to also be revised lower. But even at the current readings the chart below shows we're in trouble. When GDP declines below 3.7%, which it has done the past two quarters, we've been in a recession. Will it be different this time? Or will the stock market completely ignore a recession and continue rallying? The answer to either question of course cannot be answered definitively but how do you want to bet your money from here?

The stock market has been swimming in the Nile River (in denial) for a long time and it could certainly continue that way for a while longer. Faith in the Fed is going to be hard to kill and as long as investors feel protected they're going to continue buying the dip. Only after a few hard spikes to the downside will they become more cautious.

The short-term pattern for the market is not clear enough yet to sound the sell alarm but today's decline was a pretty visible shot across the bow of the USS Bullship. New highs with continuing bearish divergences will be begging to be shorted. Any bounce from today's/tomorrow's decline that's then followed by new lows will be the strong selling signal that we don't have yet. Trade carefully until we get that signal but recognize the risk for a downside disconnect is rising.

Good luck, especially through Friday, 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