Today's FOMC meeting did not give the market anything to cheer about but it cheered anyway. Now we're left to wonder if the afternoon rally was real or just a head-fake break.

Wednesday's Market Stats

The market had been chopping higher off last week's low and especially for indexes like the DOW and SPX it looked like nice bear flag patterns. The setup was for a selloff following the FOMC announcement. The bulls had a different idea and blasted the shorts out of the water this afternoon. When technical patterns fail they tend to fail hard and that's what happened to the bear flags today.

The market was essentially on hold the past week while waiting for the gray-haired lady from the Fed to sprinkle some more pixie dust all over the market and make the bulls feel happy. It worked and even though the Fed is continuing their taper program (reducing their asset purchases by another $10B/month) and even though the FOMC statement was less optimistic than the market expected to hear, the market rallied anyway. Obviously there was an agenda to rally the market regardless of what the Fed said or didn't say. After all, this is opex week.

The Fed noted consumer spending is weaker than they would like to see and they're now thinking an economic growth rate of 2.1%-2.3%, down from the 2.8%-3.0% that it provided in March. If the Fed follows their normal course, that growth estimate will again be ratcheted lower in the fall.

In Yellen's press conference, she assured us that the stock market is not overvalued and that the economic slowdown that we've seen in the first half of the year is over. We can now expect better growth in the 2nd half. Excuse me when I say my BS meter pegged to the right on her statements. The Fed is wrong about 100% of their economic calls. 100%. At the top of the tech bubble Greenspan felt the market was fairly valued and didn't have a clue what was happening and how the Fed's easing (for Y2K concerns) was the last straw that helped the bubble burst. At the top of the housing market Bernanke said we weren't in a housing bubble and that prices were not overvalued. These people are worthless as predictors and yet the market eats their words up as if they came down from the Mount. I don't get it but the only important thing to remember is the mood of the market and whether it will ignore bad news and rally. When the market is selling on good news then you know the mood is souring.

Speaking of mood, in the beginning of June I saw a chart of the Investors Intelligence Sentiment, which is a measure of how many financial newsletters are bullish vs. bearish and two weeks ago the number was 45. As you can see on the chart below, whenever the measure got to 42 or above it was considered bearish from a contrarian perspective. The number is likely higher today than it was in early June and at or above the January high at 46. That high of course led to the sharp market decline into February and the two previous highs at 42, in October 2007 and May 2011, also led to significant market declines. Again, from a contrarian perspective this is not where you want to be bullish the stock market.

Investor's Intelligence Sentiment, 2006-present, chart courtesy Pension Partners

There's another interesting sentiment chart that can be found at CNN Money (cnn.com/data/fear-and-greed), which uses several different measurements to come up with the index value. It's currently at 94 on a scale of 1 to 100. The high reading matches previous highs since 2012, as can be seen at the bottom of the chart, and what's scary for bulls is how quickly sentiment shifted to Extreme Greed. It's not only high but it seems to have sucked everyone back into the bull camp remarkably quickly. There's simply no question by many that the market is heading higher.

Fear & Greed Index, chart courtesy CNN Money

If you go to the site and check this index out, you'll see you can open the individual measures and I've copied just two of them below. The top one on the chart below shows the spread between junk bonds and safer investment-grade corporate bonds. This essentially shows no fear by investors in junk bonds (trying to get higher yield and at the moment there's a lot of risk for very little return). This narrow spread has been seen at previous important market highs, such as in 2007. The put/call ratio at the bottom is not quite as low as it was at the end of December but again, when many are convinced the rally will continue they're buying call options to play it. The market rarely accommodates the majority for long.

Fear & Greed Index, Junk Bond Demand and P/C Ratio, chart courtesy CNN Money

Today we got a new multi-year low in the VIX and as a component of the Fear & Greed Index it has helped drive the index into the Extreme Greed zone. The chart below is what I'm tracking and just as the rapid rise to extreme greed is a dangerous sign, so too is the collapse in the VIX the past two days. There's simply no fear out there and most feel there is no need to buy put protection. Why bother? The market's going to the moon! Well, at least SPX is going to 2000. I mean everyone knows that's going to happen for sure. This can go on for a long time and SPX could head for 2200 before it's done rallying but when you combine all these sentiment indicators it's a risky bet on the long side. The VIX is now less than a point from where it bottomed in 2007.

Volatility Index, VIX, Daily chart

A chart I've shown before is another reason why it's hard to believe in the upside. While it could continue much higher, chasing it higher from here is akin to playing Russian roulette -- you could do just fine but I consider the reward potential not worth the larger risk. Since new 52-week highs peaked in March 2013 the 10-day moving average of this measure started to decline until a lower high was made in December as the market pressed to new price highs. Since December the measure of new 52-week highs has dropped even lower while the NYSE has continued to rally higher. This is a clear indication the indexes are making new highs on the backs of fewer and fewer participating stocks. This is why the average stock has not kept up with the indexes themselves. This is a strong indication the rally is in trouble and the longer the divergence continues the stronger will be the decline. This chart should have a sign on it "Danger Will Robinson."

NYSE vs. New 52-week highs, Weekly chart

So with that let's look at what the indexes are doing. The above information is good to know since it tells you whether you're trading with or against the prevailing winds. But price is king and all of our chart patterns are based on price so that's what we analyze.

Starting with the weekly chart of SPX it continues to push up against the top of its parallel up-channel from the October 2011 low, currently near 1954. It had pushed about 6 points above the line last week so another similar throw-over would be to about 1960, about 2 points above today's high. The top of its parallel up-channel from April is near 1970 so that gives us an upside target zone to watch for a possible final high. Between the over-the-top bullish sentiment and the bearish momentum and other market breadth indicators I think it's better to be looking for a top rather than participating in the rally (unless you're able to watch it during the day and get quickly if you have to).

S&P 500, SPX, Weekly chart

Shown on the daily chart below, there's another parallel up-channel from February, the top of which is currently near 2004 and that's the bullish potential if we get more of a blow-off top than currently expected. The top of the up-channel from April is near 1972. Above 1972 would be more bullish for the run up to 2000 that most traders are expecting to see. The wave pattern is messy and therefore projections based on the wave count can only be used to identify levels of interest to see how price behaves around them. One thought for the wave count, different from what I'm showing, calls for two equal legs up from February at 1960, which would be the 6-point throw-over above the top of its up-channel from 2011, making it a strong level of interest. With today's high at 1957.74 that's not much higher.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1972
- bearish below 1925

The 60-min chart below shows another potential upside target, at 1964, which is where the 5th wave of the leg up from May 15th would be 162% of the 1st wave. Between a few different wave count ideas, price projections and tops of up-channels I'm thinking SPX could top out in the 1960-1972 area. The risk in thinking about any more upside is that it's been common to see the day after FOMC reverse the post-FOMC afternoon move, which means down in this case. It's possible a decline could start out of the gate Thursday morning.

S&P 500, SPX, 60-min chart

At today's high at 16911.41 it came within about a point of the 78.6% retracement of last week's decline. I've mentioned this retracement level many times in the past, especially as it relates to the DOW's high retracements before turning back down. Whether it turns back down immediately this time or not is something we'll find out quickly Thursday morning. Just beware of that particular retracement level (16912.80). Other than that I see trendline resistance near 16970 and 17070. In between there's century and millennial resistance at 17K, another level that most traders will now be achieved.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,000
- bearish below 16,700

When the NDX was rallying into its high on June 9th I had an upside target near 3825 that I liked. It stopped short of that level, hitting a high at 3804, but now might have another shot at it. This is where the 127% extension of the previous decline is located (3826.51), a common reversal level, and it would be another back-test of its broken uptrend line from June 2013 - February 2014, which it tested into the June 9th high but was rejected. It's now trying again with bearish divergence (so far). As with the other indexes, it's now important for the bulls to defend last week's lows (NDX 3751) since a break of those lows would be a good indication the top is in place.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3827
- bearish below 3738

Today's high for the RUT, at 1183.38 is less than 2 points from its 78.6% retracement of its March-May decline, at 1184.94, so that level deserves to be watched carefully. I've been saying for a long time that the RUT's price pattern is a choppy mess and was the one supporting the idea we'd get a new high following the choppy decline from May. That potential still exists, especially if it gets above 1185 and holds above. A break below 1154 would be strong indication the bounce high is in place.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1185
- bearish below 1154

The 30-year yield, TYX, has been struggling around its downtrend line from December 31st, which is where it closed today and is now also battling its broken uptrend line from July 2012 - May 2013, which it hit yesterday but closed back down today. It's currently bouncing between its 20-dma, at 3.406, and its 50-dma, at 3.431. I suspect a break below Monday's low at 3.83 would lead to lower prices, in which case it could break to new lows. A rally above its June 5th high near 3.5 would be more bullish but at the moment I'm leaning to the downside on bond yields. I think they have a long way to drop this year.

30-year Yield, TYX, Daily chart

There's been very little movement in the U.S. Dollar over the past 3 weeks and it's in the middle of its 9-month trading range between 79 and 81.50. Still looking for higher, eventually.

U.S. Dollar contract, DX, Weekly chart

Monday's high for gold, at 1285.10, was a little shy of the apex of its previous sideways triangle, near 1292, that ran from April through May. The apex is typically strong S/R when back tested following the break of the triangle so in this case it's viewed as a resistance level. It poked above its downtrend line from March, near 1273 at the moment, but failed to get back above its 50-dma, at 1286 on Monday and currently at 1285. The 50-dma has held down every rally attempt since early May. Gold would be more bullish above 1292, although gold bulls would have a tough fight up until its downtrend line from October-November 2012, near 1322, but the larger pattern continues to support another leg down.

Gold continuous contract, GC, Daily chart

Last Thursday's rally in oil was a strong breakout from its ascending triangle that ran from March to the truncated low on June 5th. The minimum upside projection for the breakout is to the 110-112 area and any higher above 112 would be an even larger breakout since it would be above the top of the large sideways triangle running from May 2011, shown on its weekly chart below. If that happens (more than just a head-fake break above it) we could be looking for oil to rally up to 140-150 to challenge its July 2008 high near 147. While the stock market and oil tend to trade more in synch than out of synch, a strong rally in oil this time could put a major squeeze on a fragile global economy, which is already in trouble. At the moment I do not believe oil will rally above 112 but I'll be watching closely for evidence that it will.

Oil continuous contract, CL, Weekly chart

Thursday morning we'll get the usual unemployment claims data and then at 10:00 AM we'll get the Philly Fed and Leading Indicators, two reports that will provide a little more information about how our economy is doing. The Philly Fed is expected to show some slowing while the Leading Indicators is expected to remain flat.

Economic reports and Summary

The positive reaction to the FOMC announcement looks bullish, especially coming out of a corrective base following last week's low. The pullbacks are getting smaller and smaller and the new highs are occurring on weaker market breadth, a combination that typically is a sign of topping rather than accelerating higher. We could see opex week continue to push higher into the end of the week but with the sentiment picture so bullish and market breadth/momentum weakening I think it's ripe for a market top. Whether the top occurs becomes buying simply peters out or we get some outside event that scares the market, it's likely very close now.

Most market participants expect SPX to hit 2000 and the DOW to hit 17K. It could easily happen from here since neither level is far away. But when too many expect something to happen we often see the market disappoint the many. Will that happen this time? The pieces are in place for a top at any moment but bears need to stay aware of the upside potential.

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