The first couple of days of a new month and the days in front of a holiday are typically bullish. So far we have a bullish week but nothing for the bulls to write home about.

Market Stats

Other than the Mideast wars burning like wildfires in the western U.S., a military coup in Egypt, and N. Africa melting from the turmoil, the world is a happy place and there are no worries affecting the market (wink). So the stock market has nothing to worry about and should easily continue higher (tongue firmly planted in cheek). We've had a bullish stock market since the June 24th low but it's starting to look a little tired already. But the bullish interpretation is that the past few days have been a bullish consolidation. It's very likely this consolidation is going to lead to a big move and it's possible Friday's Payrolls report will be the catalyst.

With the military overthrow of Egypt's government it's anyone's guess what this will do to the overseas markets and U.S. futures Thursday night into Friday morning. At this point it's simply an unknown potential influence.

Other than the price of oil crossing the psychologically important $100 level there certainly doesn't appear to be any great worries in other markets at the moment. Considering oil over $100 could start to fan the inflation fires and slow economies further, it might start to hurt the stock market. The U.S. dollar made a new high in last night's overnight session but then dropped sharply today, leaving a potentially bearish candlestick pattern. Bonds have been flat for the past several days but rallied some today. Was that a move into safety in front of the holiday and Friday's report and the anticipation of trouble in Egypt?

It was naturally a slow trading half-day session, which continued the slow week we've seen. The stock market gapped down this morning following the negative sessions seen in Asia and Europe. But a successful effort was made to get the indexes into the green before the 1:00 PM close. Before all indexes made it into the green we saw the DOW and NDX green while SPX and RUT were red, which made for strange bedfellows. The DOW was green while the TRAN finished in the red. Gold and silver, as well as commodities, and the miners were strong. The banks lagged while techs outperformed. All in all it wasn't the kind of bullish day that one would expect to see in front of the holiday.

This morning's ISM Services report was slightly negative, coming in at 52.2, down from 53.7 in May and worse than the expected 54.0. It's a 3-year low and obviously heading in the wrong direction and another sign of a weakening economy. That didn't help the initial mood of the market this morning.

The ADP report helped the mood a little, coming in at +188K vs. the +150K expected and better than the +135K for May. And initial unemployment claims came in a little lighter than expected, falling from 346K to 343K vs. the 348K expected. Both of these likely helped calm some worries about Friday's payrolls report. But keep in mind that a stronger than expected Payrolls report could see a negative reaction since market participants might worry anew that the Fed will use that information to justify why it needs to start considering tapering off its asset purchases. It's a crazy world we're trading.

Speaking of the Fed and its effort to spark inflation (to fight the dreaded 'D' word), the chart below shows one of the reasons why we're seeing deflation no matter how hard the Fed has been trying to stop it. Keep in mind that inflation/deflation has to do with money supply growth rate (e.g., velocity of money) and not prices paid. Prices are a reflection of inflation/deflation but not the definition of it. So the chart below shows how quickly household debt has declined since 2007, following the big increase from the 1990's. That's deflationary pressure. The government is of course doing its part to stoke inflation with its increased borrowing.

Household debt decline, 1980-March 2013, chart courtesy stansberryresearch.com

Demonstrating how two people can look at the same chart and see different things, I see the danger of deflation from the rapid decrease in debt (through defaults and payoffs), which points to further slowing in the U.S. economy and not something the stock market would like. But the folks at Stansberry Research, who put this chart together, sees it as bullish, as they not on the chart. They see the debt reduction as a good thing since it enables people to take on more debt again. Time will tell who's right and whether or not the consumer will step back in and start more buying on credit. Call me skeptical on that one.

It was only a half-day session and it's been a slow week so there's not much to cover. Besides, who wants to read a long report when a holiday is of more interest? We'll worry more after we get through Friday morning (smile).

The weekly chart of SPX is non-committal here -- it's holding above its broken uptrend line from 1991-1994-2002 and the trend line along the highs from 2000-2007 but it has not been able to get back above the mid line of its up-channel from October 2011 nor its broken uptrend line from November. Last week's candle is a bullish hammer but this week's (so far) is just a doji. Nothing here, move along folks.

S&P 500, SPX, Weekly chart

The broken uptrend line from November is currently near 1635 so I'd want to see it above that level on Friday before turning more bullish (which is the way I'm leaning). It's been consolidating below its 20- and 50-dma's (intraday pokes above its 20-dma but hammered back down by its 50-dma, currently near 1617 and 1625, resp. Its downtrend line from May 22nd is near 1632 on Friday. The bulls have some work to do to prove they're going to stay in control this month.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1635
- bearish below 1565

Price-level support for SPX is near 1597 but there's not much support below that level until it gets down to 1560, a break of which would confirm the bears are fully in control. I see the potential for a small pullback Friday morning, possibly as an initial negative reaction to the Payrolls report, followed by the start of a stronger rally (maybe a disappointing number and then talk of a Fed that will have to continue full-on asset purchases).

S&P 500, SPX, 60-min chart

Jason Geopfert at sentimentrader.com made not of the price action in SPY today -- for the first time in its trading history it closed in the bottom half of its intraday trading range for 4 days in a row. This indicates weakness where the morning rally can't hold and the bears drive it back down into the close, which is the day's more important price. Afternoon supply of stock overwhelms demand and that's a sign of distribution. It's one of the things that has me nervous about my expectation for a further rally this month. So I pass it along for you to consider as well.

Like SPX, the DOW has been consolidating since the June 27th high just below its 20- and 50-dma's, testing them repeatedly and pulling back, including today. Currently near 15011 and 15063, resp., and with Monday's high at 15083, the bulls need to break the DOW over 15100 to get a good start on the next leg of the rally. The sideways consolidation is either a bullish consolidation below resistance or topping for its bounce off he June 27th low. If the bulls can get through 15100 the next resistance level is its downtrend line from May 22nd, near 15200. If it can rally above that level I think there would be little doubt that we'll see a new high this month, potentially up to about 15780 by the 3rd week (opex).

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 15,200
- bearish below 14,550

The NDX continues to struggle with its 20- and 50-dma's although it at least closed above its 20-dma today, at 2932, and 7 points below its 50-dma at 2948. Its downtrend line from May 22nd is near 2968 on Friday.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2972
- bearish below 2825

A little closer view of NDX shows what to watch on Friday. On Friday it rallied up to its broken uptrend line from June 24th and pulled back into the close. That's a bearish back test and kiss goodbye so far and therefore any continuation lower on Friday could turn much more bearish. It almost closed its June 20th gap down, at 2959.80, but didn't make it. Then it has its downtrend line from May 22nd to get over. Getting through all that, with a rally above 2972, is the reason I think it would be bullish for new highs. But the current short-term setup is bearish. It might only mean a sharp leg down for a larger 3-wave pullback from Monday's high (to slightly below Tuesday's low at 2913.48) before turning around and heading higher again. Again, be careful about potential volatility during Friday's light-volume trading.

Nasdaq-100, NDX, 60-min chart

The RUT has been my bullish indicator since early June (based on the corrective pullback from May's high) and I don't see anything yet to negate the bullish potential for a new high this month. If new highs are coming we should see the RUT as the first index to break its downtrend line from May 22nd, near 998 on Friday.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 998
- bearish below 942

Bonds have been mostly flat for the past several days but the pullback in yields from the June 24th highs has the potential to be the start of the next leg down into the end of the year, making the June 24th high as THE high for the year. The larger price pattern suggests the 3-wave bounce off the July 2012 low has completed and the next big move will be back down to a final low later this year or early next year. As shown on the 30-year yield (TYX) weekly chart below, an a-b-c bounce off the July 2012 low achieved two equal legs at 3.642 (actually it missed it with a high of 3.63). However, the pullback so far has found support at price-level S/R near 3.47 (yesterday's low was 3.458) as well as the top of its parallel up-channel from July 2012, the top of which it broke through on June 20th and is currently near 3.485. A rally much above 3.65 would be a bullish move, especially if it can get above its 200-week MA at 3.67.

30-year Yield, TYX, Weekly chart

The price pattern of the 10-year Note is of course a mirror image of yield and it shows the same pattern. In this case, an a-b-c pullback from July 2012 has the c-wave equal to 162% of the a-wave at 124'290 (the low on June 24th was a few ticks above it at 125'005). It closed the week above its uptrend line from 2007-2011 and its 200-week MA, both currently at 126'065. Today's close at 126'080 is essentially holding the line so what it does from here should tell us whether or not support is going to hold. The bearish potential for prices from here is very bearish and it would mean a strong spike in yields. That in turn would convince most in the market that the Fed is losing control of rates. It would also crush any housing bounce.

10-year Bond contract, ZN, Weekly chart

The banking index is closest to achieving a new high for the year and is one of the indexes (along with the RUT) that has had me leaning long once we got the June 24th lows. Its May 30th high at 62.92 was close to being hit yesterday with its high at 62.80. I see upside potential to about 64.60. But the caution here is that the final wave in its pattern could finish at any time. There is no requirement, from a wave perspective, for BKX to rally any further.

KBW Bank index, BKX, Weekly chart

The Trannies look bearish here but it could clearly have the same pattern as the broader indexes. But with a rally up to its 50-dma and downtrend line from May, both near 6279, followed by a drop back down and back below its 20-dma, at 6223, it looks like the bears are taking over. The TRAN needs to get above 6285 to support any rally in the blue chips.

Transportation Index, TRAN, Daily chart

The dollar's whippy price action leaves both sides guessing the next short-term move but the longer-term pattern continues to support further upside this year, with an upside target near 87. The sharp rise back up from June 13th looks ready for a pullback to correct, starting with today's reversal off the overnight high. So maybe a pullback to about 82 and then the start of the next rally leg.

U.S. Dollar contract, DX, Weekly chart

Gold's bounce off last Friday's low looks like it could be the start of what I think will be a bounce/consolidation into August, and maybe up to about 1300, before the next leg down to complete the leg down from September 2012. There is the bullish possibility for the start of a major gold rally but I haven't seen any evidence yet in the small bounce so far.

Gold continuous contract, GC, Weekly chart

Looking a little closer at silver, its daily chart below shows the idea that it still needs to stair-step lower into October/November. The next leg down after a bounce/consolidation could see it drop down to near 15 and then another up-down sequence with an ultimate low near 12-13. But if it follows a path similar to that shown for gold above we should see silver find support between 15 and 16 (and possibly the low is already in).

Silver continuous contract, SI, Daily chart

This morning's report showing crude inventories dropping by -10.3M barrels only aggravated the price worries from the Mideast. Oil finished up about +1.6% at 101.23 after rallying above the psychologically important $100 level. Oil's rally this week has confirmed a break out of the smaller sideways triangle pattern I've been tracking since the high in September 2012 by breaking above that high at 100.42. The upside target is now the top of a larger sideways triangle, which is the downtrend line from May 2011, currently near 103.40.

Oil continuous contract, CL, Weekly chart

Oil would be more bullish above 104 and confirmed bullish if it gets above the March 2012 high at 110.55. The higher probability is for a decline back to at least the bottom of the larger triangle, near 81 by October, which says the risk premium (due to the Mideast and N. Africa problems) is going to come out of the price of oil. That would be good news for the world and the global economies. A rise above 104 would say the world and economies are not going to be in good shape.

The only report of interest on Friday morning is of course the Payrolls report. How the market will react is anyone's guess in this Bizarro Market (where up is down and vice versa). And even an initial reaction is likely to be reversed. Needless to say, trade carefully, especially since the light trading volume will likely exacerbate any movements.

Economic reports and Summary

The U.S. market is closed on Thursday but not overseas markets and that means anything could happen before our market opens Friday morning. Futures during Thursday night into Friday morning could set the tone for the day, possibly negating anything we get from the Payrolls report.

The EU GDP will be released on Thursday, as well as the BOE's (Bank of England) and ECB's announcements of their monetary policies. We'll have more developments from Egypt and a promise by the Muslim Brotherhood for protests and potential violence. Needless to say, anything can happen.

I continue to lean long the market, especially if we get only a pullback Friday morning followed by a reversal to new highs for the move up from June 24th. It's a long way back down but the bears are not in control until the break below the lows of June 24th so be careful about the potential for a head-fake break to the downside followed by a sharp reversal back up. Next week we should at least get back to "normal" summertime light volume.

I hope everyone enjoys a day away from the markets if you can and do a little recharging before we tackle Friday. 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