Further easing of geopolitical tensions helped the stock market extend its rally, giving SPX its 6th positive day in a row. Too bad AAPL spoiled the day for the techs though.

Market Stats

It's been a quiet week for economic reports and that's been good for the market. No sense being distracted by such things. Instead the market has been able to rejoice in what appears to be a peaceful outcome to the situation in Syria that had many worried about military action and what kind of retaliation we might see. It's a new world and military power is not the only weapon of choice any more. Cyber warfare has leveled the playing field somewhat. With some rejoicing of economic stagnation (to keep the Fed from tapering too much) and geopolitical solutions we've had a nice rally off the August 28th lows.

The rally has been good to the techs, which have risen to new annual highs but AAPL spoiled the party today. It gapped down this morning and dragged the tech indexes with it. But while AAPL stayed down there was buying in the rest of the techs and that brought the indexes almost back up to even for the day. But they and the RUT closed marginally in the red while the blue chips did better, especially the DOW thanks to a strong rally in IBM. It's amazing what just one stock can do to the indexes. The DOW had some catching up to do after hanging back last week and the strong 3-day rally this week has it all caught up. Now it's up against resistance like the other indexes and it's do-or-die time for the bulls.

AAPL's decline was a result of investors being disappointed with their latest iPhone offerings. Carl Icahn's "I bought AAPL" rally on August 13th was given up today with its big gap down. Icahn wasted no time trying to protect his investment by coming out today saying he bought more stock since it's a "no brainer." It didn't help the stock as it finished down -27 (-5.4%) at 468 and near its low of the day at 464.81.

On the other end, IBM gapped up after a deal was announced with Synnex (SNX) buying IBM's customer care business. The rally in IBM helped the DOW easily outperform the other indexes. IBM and SNX also signed a multi-year agreement that has SNX becoming IBM's strategic business partner. It was also very good for SNX stock today.

But as I'll review with the rest of the charts and the rally to resistance, IBM's rally has taken it up the bottom of its broken up-channel from July 2012. A failure to continue higher and a rollover instead will leave a bearish back test and kiss goodbye. The bulls and bears each know what they have to do here and we should find out soon who will win.

International Business Machines, IBM, Weekly chart

The DOW has had a strong 3-day rally this week and made up for lost time last week. While the other indexes were giving us high retracements of the August decline, if not new highs (the techs), the DOW was struggling to make it up to just a 38% retracement of its August decline. Today it came within 10 points of tagging its 62% retracement at 15315. Perhaps more importantly for what happens next, the DOW also back tested its broken uptrend line from November-June today, giving the bears a very nice reversal setup (just waiting for the slap and kiss goodbye). The sharp impulsive pattern of the August decline, followed by a choppy bounce back up, gives us a setup to be looking for at least one more leg down and today's setup could be the reversal that's waiting to happen.

Dow Industrials, INDU, Weekly chart

The DOW has made a habit in the past of nudging up underneath its broken uptrend lines and could do so again here. Only in hindsight will we know if today's back test will be followed by an immediate reversal but this is the kind of setup for a short play that traders should take every time -- it's a good reward:risk trade setup. As for a stop level, I see the potential for the DOW to push at least marginally higher to price-level S/R near 15340, which crosses its broken uptrend line tomorrow. A rally above 15350 would be more bullish and I would then abandon the short side since new highs into the end of the month would be the bullish potential.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 15,350
- bearish below 15,100

Today SPX was able to close its August 15th gap down, at 1685.40, and rally up to price-level resistance near 1687 (May's high and support in July and August). Thanks to a final little jam in the final 5 minutes of the trading day SPX picked up a quick 4 points and closed above its May high at 1687. That was either traders who had shorted today's rally and had to cover at the end of the day or it was purposely jammed higher to spike the shorts out. This is often what sets up an immediate reversal the next day so we'll see what happens. As with the DOW, this is a good setup for the bears to take advantage of but they need to step in now otherwise they might suffer yet another new high this month. It would be more bullish above 1692, which is the 78.6% retracement of the August decline, a retracement that has been common in this market and a good line in the sand for bears to respect.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1692
- bearish below 1650

The bounce pattern off the August 28th low looks corrective and the sharp spike up from last Friday's low looks like the c-wave to complete the bounce pattern. Holding support at 1685 is bullish and it will be more bullish above 1692. But because high retracements have been so common in this market, which don't lead to new highs, it's a mistake to think that we're heading to new highs from here just because we have a high bounce. Let the market prove it from here since we should find out either way very quickly. I had recommended shorting the rally this afternoon because it's a good setup for a reversal and the stop can b e kept tight. It will either work tomorrow or it won't but it's definitely worth a try. Assuming this bounce is the 2nd wave correction in the decline from August, the next wave down will be very strong and it's the one bears want to ride.

S&P 500, SPX, 60-min chart

Tuesday's candle for NDX was a bearish dragonfly doji at resistance and today's gap down had it looking like a confirmed reversal. AAPL got hit with a lot of selling in the pre-market session and that had NDX gapping down. But that turned into a buying opportunity for some and NDX made it back up and almost closed this morning's gap, which reduced the bearish picture from a candlestick perspective. However, a red day on Thursday would confirm the reversal setup after NDX tagged its trend line along the highs from May-August, which is arguably the top of a rising wedge pattern to complete its rally pattern off the 2009 low. Better confirmation for the bears would be a drop back below price-level S/R at 3150, which it used for support could launch another rally leg.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3200
- bearish below 3150

As a comparison to NDX, the same pattern for the Nasdaq shows more upside potential to the top of its rising wedge pattern from April-May, currently near 3780, about another 60 points higher. It crosses the top of its parallel up-channel from October 2011 on October 2nd near 3820, which is also the 62% projection for the c-wave of an a-b-c move up from June. In fact it would be interesting if the high occurs on October 4th since that would be the 2-year anniversary of the October 4, 2011 low. This chart supports the idea that we'll see the market hold up into the end of this month and top out in October, just like it did in 2007.

Nasdaq Composite index, COMPQ, Daily chart

As already mentioned, hurting the techs today was AAPL, which gapped down about 20 points and then declined another 10 before getting a little afternoon bounce. Following AAPL's 5-wave move up from the end of June into its August 19th high, which completed an a-b-c bounce off the April low, AAPL was due at least a pullback from its August 19th high before proceeding higher. But if the a-b-c bounce from April is all it's going to get before continuing its decline, which is the way I think it's pointed, then the August high was a good shorting opportunity and yesterday's decline was the starting gun for the bears.

At the end of August AAPL had broken below its uptrend line from July 23rd and then rode up underneath the line into Monday's high. Tuesday's big red candle confirmed the bearish back test with a kiss goodbye, signaling the next leg down had begun. Today's big gap down was confirmation. It found support at its crossing 50- and 200-dma's, near 463, as well as its H&S neckline from May-November 2012, near 468, where it closed. It could get a bounce back up from here but AAPL looks like a stock to short on bounces now. If Carl Icahn wants more stock you can sell him yours (I highly doubt he'll tell you when he sells his stock, at least not until he's done selling).

Apple Inc., AAPL, Daily chart

As I've been reviewing for the past few weeks, the RUT's pattern looks more like an a-b-c down from its August 5th high to its August 19th low and now an a-b-c bounce up from there. The c-wave is the leg up from September 3rd and ideally will achieve a 162% projection of the a-wave (the 1st leg up from August 19th), which points to 1059.85. That projection crosses the top of its parallel up-channel from October 2011 tomorrow and makes for a very nice time-and-price reversal setup for the bears to take advantage of. Today's high got within 2 points of the projection and reversed into the close. Was that close enough for government work? Time will tell if the bears will step in here.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1060
- bearish below 1035

A week ago I showed a chart of the 30-year bond (ZB, the e-mini) and a setup for a reversal off the bottom of its bullish descending wedge and a Fib projection for the decline at 128.774 (128'25). It did a little throw-under below the bottom of the wedge last Thursday and then bounced back up inside the wedge, creating a buy signal. So far it's having trouble getting up off the ground as the bears continue to pound on it but the setup remains a good one for a rally and it should get started any day now.

30-year Bond, ZB, Daily chart

There's a sentiment measure that is tracked by CarpenterAnalytix.com that shows bond and stock exposure and when either leans too much to one side or the other it tends to identify a point where the market reverses. The chart below shows the 5-year bond exposure by hedge funds and as mentioned in their report, "Managed Futures funds are a key segment of the hedge fund universe. They use long, short, and hedged strategies. They shift freely among asset classes. They are canny players, tactically agile and market sensitive, adapting quickly to emerging market trends. Tracking CTA asset exposures offers unique insight into active professional outlook and sentiment." The top graph on the chart below shows net long and net short positions (zero in the middle) and currently there's a large net short position, the largest net short position since 2008. Sentiment is ready for a shift and the above chart of ZB supports a coming rally.

Hedge fund bond exposure, chart courtesy CarpenterAnalyticx.com

The bounce for the banking index, BKX, has been very choppy and it continues to support the idea that it's just a correction to its August decline. It is close to retracing 50% of its decline, at 64.54, which is only 10 cents below its 50-dma at 64.64. Watch that level, if tested, for resistance. Once the bounce has finished we should get a strong decline than the August decline.

KBW Bank index, BKX, Daily chart

Not surprisingly, the TRAN's pattern looks very similar to the RUT's. Why these two are so similar I'm not sure but it's been true for a long time. Divergence between the two is a reason to take note. As with the RUT, the 3-wave move down into its August 15th low has been followed by a 3-wave bounce, which is called an expanded flat correction in EW terminology because the b-wave (the August 30th low) dropped below the August 15th low. I placed some Fibs on the chart to show how they're working. The new b-wave low should reverse near the 127% extension of the a-wave, which is at 6235 and the August 30th low was at 6237. The c-wave is typically 162% of the a-wave, which is shown at 6607. Today's high was 6592 so there's a little more upside potential but close enough to be called done. As with the others, the next wave down is a larger-degree wave-C, which should be a strong decline and one that should quickly make it down to its June low at 5952.

Transportation Index, TRAN, Daily chart

The U.S. dollar looks intent on testing its uptrend line from 2011-2013, again, as geopolitical worries melt away. It's been a stubborn index to call for a rally but I haven't given up on it yet. Below 81 would be worrisome for dollar bulls.

U.S. Dollar contract, DX, Daily chart

Over the years we've heard many reasons why gold will rally to new highs. The threat of economic collapse and runaway inflation are some of the biggest reasons cited. But many analysts have also been telling us the demand for gold has been increasing while the amount of gold being mined is not keeping up. However, the facts don't back that up.

As the chart below shows, the demand for gold has been dropping since at least 2010, as noted with the downtrend line along the highs in each of the 2nd quarters and currently sits at its lowest level for the past 4 years. So demand is not one of the driving forces for gold and if and when fear of global calamity subsides we will likely see gold prices continue downward, which is what it's been doing since the high of its bounce on August 28th.

Gold Demand, 2010-2013

The price pattern that I've been following for gold suggests we have not seen a low yet for its decline from 2011. The 3-wave bounce off the June low, so far, points to a continuation lower but what we don't know yet is whether the 3-wave bounce will turn into a 5-wave rally. As long as the current pullback holds above the July 23rd high at 1348 it could turn around and head back up to a new high and give us the 5-wave move. That would tell us the June low was an important low and once a pullback follows the 5-wave move up we'd have a good buying opportunity (shown with the green dashed line). A drop below 1348 would also be a break of its uptrend line from June and back below its broken downtrend line from February-April, neither of which would be bullish.

Gold continuous contract, GC, Daily chart

Silver has the same pattern as gold but its c-wave (or 3rd wave) extended further, which gives it a lot more room to pull back before overlapping its July 23rd high. Gold would give us an earlier heads up in that regard. But a drop below support at 22 would be a bearish heads up for silver.

Silver continuous contract, SI, Daily chart

Oil has been in a very choppy pattern since its strong move up in early July. It has been chopping its way marginally higher for more than two months and it has the look of an ending pattern. It has been unable to break above the top of its parallel up-channel from June 2012, currently near 110.65, as well as it 110.55 high on March 1, 2012, both of which stopped last Friday's rally. Other than twice popping above 110.55, on August 28th and September 6th, it has been unable to close above these lines of resistance. It's still a choppy mess and could continue to work its way a little higher but oil is looking vulnerable to the downside and could coincide with a decline in the stock market. The weekly chart below shows momentum waning as price has chopped marginally higher.

Oil continuous contract, CL, Weekly chart

It will be another relatively quiet day tomorrow for economic reports so the market will be left to fend for itself and overseas news.

Economic reports and Summary

Most of the indexes, as well as some key stocks, suggest tomorrow could be an important day for the market. I've had Wednesday, 9/11, as a potentially important turn date for a high for the bounce off the August 28th lows. The time for a 2nd wave bounce correction is typically 62% of the time for the 1st wave, which is today. Some cycle study work done by others also points to Wednesday/Thursday as a potentially important turn date. The form of the pattern for the bounce looks complete so time and price have come together as the indexes press up against strong resistance.

If the market rolls over from here, or after only a small pop up Thursday morning, my recommendation is to short the market for the next leg down. Use the day's high for your stops and manage your risk carefully. A more conservative entry is to wait until we get a sharp decline for a day (impulsive 5-wave move down) and then look to get short subsequent bounces, using each previous high for your stop. Legging into a larger position as the decline develops is a way to control your risk exposure. Trade carefully as we enter opex week next week and keep in mind that the Thursday prior to opex is known for its head-fake moves.

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