The trading volume has been picking up in the past week and the selling has been getting stronger. The market is either in the middle of a crash lower or is showing signs of a capitulation bottom. We'll know which by the end of the week.

Wednesday's Market Stats

The wild ride continues in the markets and it seems to be getting exacerbated by opex this week. Trading volume is spiking to highs we haven't seen for two years. And the price swings are getting wilder, especially when you include the overnight action in the futures, which accounts for some of the activity in overseas markets. SPX dropped 78 points between yesterday's high and today's low before recovering 48 of those points this afternoon (and before giving back 6 of those points into the close). We're getting moves that we haven't seen in the past 3 years so it's clearly a more volatile market than most participants are used to seeing (they certainly got lulled into believing the nice smooth rally would just continue forever, hence all the bullish upgrades at the September high).

Things were not looking good for the bulls by midday today. The DOW was down -460 points (more than 600 points from yesterday's high) and the decline looked like it was accelerating (waterfalling). But someone said "enough!" and started buying and the DOW erased 330 points of its loss just before the close and before dropping back down about 40 points in the final few minutes. With the high volume and v-bottom reversal we're now left to wonder if today marked a turning point.

At today's lows the broader averages, except NDX, were in the red for the year. The afternoon recovery leaves just the DOW Industrials, NYSE, W5000 and the RUT in the red for the year. Each had lost at least -10% by the afternoon lows and that might have helped trigger some buy programs that then started some short covering.

There was some serious trading volume today, as highlighted in the table above. I get my numbers out of yahoo's finance section and the total volume that I typically see is in the low 5000M range. It's been spiking up in the past week and it's indicative of either a market crash in progress or it could be part of a capitulation bottom. The market is certainly oversold but we have to keep in mind that market crashes come out of oversold conditions. So it's risky to go bottom fishing.

Interestingly though, take a look at the down volume vs. up volume and declining issues vs. advancing issues -- there was a little more down volume but a virtual tie between the advancing and declining issues. A lot of today's volume was going into buying, which looks like smart money might be buying inventory from the retail crowd that's puking up their stock in this selloff. I have no other evidence of that happening but I was surprised to see the numbers so close.

A visual perspective of volume is shown on the SPY daily chart below. When we've had volume spikes in the past it's usually been a good indication we had capitulation into a low that was then followed by the resumption of the rally. The caution here is that these capitulation (high-volume) days were in a bull market trend and if we're no longer in a bull market then the stronger selling could be just getting started. A lot of today's volume no doubt came from opex plays, specifically hedging long positions (such as shorting SPY to hedge short puts). These hedging plays are one reason why we often see a reversal of direction at least on the following Monday after opex week.

SPY daily chart with volume

Note on the daily chart of SPY above that price broke the uptrend line from March 2009 - October 2011. The bulls will see a close above price-level support at 185 and at support at its long-term uptrend line, near 186.40 (intraday breaks don't count). The bears will see a break of the uptrend line followed by a bounce back up to it for what is a back-test to be followed by a bearish kiss goodbye with more selling on Thursday. Is the market going to pick Door #1, Door #2 or Door #3 (consolidate and keep both sides guessing)?

I'm going to start tonight's chart review with the DOW's monthly chart because the decline from September has now reached an important level and what happens from here is going to provide us with some longer-term clues. I've shown the monthly chart before and as you can see below, the DOW has rolled over from the trend line along the highs from 2000-2007 and it has dropped out of its large rising wedge pattern for the 3-wave rally off the 2009 low. The break of the rising wedge is what is bearish since rising wedges tend to be completely retraced faster than it took to build them. I show a projection down to about 5600 by mid-2017 (there are other timing cycles that point to mid-2016 as the end of the bear, including retracing the rising wedge in half the time it took to build it).

Dow Industrials, INDU, Monthly chart

The DOW has now dropped back down to a long-term trend line along the highs from 1971-1972-1987, currently near 15860 (today's low was 15855), which is where the decline into the 2002 low found support. It was broken in 2008, became resistance at the April-May 2011 highs, was recovered in March 2013 and then became support when back-tested in August 2013. This is the first time since then that the DOW is back down to the line. From a bullish perspective this is another back-test that will lead to new market highs. I don't believe that will happen because of the breakdown from the rising wedge but it could certainly be good enough for a big bounce.

The weekly chart below shows a shorter-term rising wedge following the December 2013 high, with the bottom of the wedge being the uptrend line from October 2011 - November 2012. Last week's selloff was also a strong break back below the trend line along the highs from 2000-2007, near 16850. You can see the multiple bounces off the longer-term uptrend line from 1971-1972-1987 back in 2013 so it's a trend line that's getting attention, including at today's low.

Dow Industrials, INDU, Weekly chart

On the weekly chart above, which is using the log price scale (generally better to use on a longer-term chart, especially when using trend lines/channels), the uptrend line from October 2011 was broken last week. Switching to the arithmetic price scale on the daily chart below, switching places with the uptrend line from October 2011 is the one from November 2012 - February 2014 (both are near the same 17K level, depending on price scale used). Price oscillated around it (with violent price swings October 1 to October 9) but then let go with a bang on October 9th. It then sliced through price-level support lines and its 200-dma with minor speed bumps along the way. Today it dropped down to the uptrend line from October 2011 when viewed with the arithmetic scale, near 15993. It was broken intraday but the recovery back above it leaves a possible bullish reversal in progress.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,330
- bearish below 16,000

The little squiggles in the leg down from October 8th makes it a little difficult to figure out whether it's more likely we'll see lower prices immediately or after a slightly larger bounce/consolidation. It's possible we'll see price consolidate around its uptrend line from October 2011 before dropping lower. It's also possible this afternoon's bounce will be followed by more selling as it stair-steps lower toward the February low at 15340, another 800 points below today's close. This afternoon's rally got the DOW back above a trend line along the lows since September 24th so that's potentially bullish for the short term. If today's low was an important one we might see the start of another rally leg. But if the selling continues tomorrow I see the potential for the DOW to keep working its way lower into the end of the month.

Dow Industrials, INDU, 60-min chart

The daily chart for SPX shows the sharp reversal off today's low, which has left a bullish hammer near price-level support at 1813. But it broke below its uptrend line from March 2009 - October 2011, which clearly defines the bull market we've been in since the 2009 low. A break of that uptrend line is a break of the bull market. Currently near 1880, SPX tried to hold the line on Monday and Tuesday but snapped today. Unless the bulls can get SPX back above 1880 the uptrend line is now resistance. Watch for a back-test and kiss goodbye for a short play for another leg down. The short term pattern suggests a few days of consolidation before heading lower so be careful you don't get caught in the chop.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1906
- bearish below 1813

A slight modification of the wave count is shown with the 60-min chart below, which calls today's low the completion of the 3rd wave down in the decline from September 19th. It could be the completion of an a-b-c pullback as well, which would be a more bullish setup that calls for the resumption of the longer-term rally. While I have trouble believing in that bullish scenario, I also had the same belief at the February low. Fair warning. But if we've got a 1-2-3 down then we're due a 4th wave correction the rest of this week before finishing a 5-wave move down next week, depicted in red, and completing near 1785. Once a 5-wave move down completes, assuming it will, we'll be due a large 2nd wave correction and it could be a high bounce in November, one which would convince the majority that new highs are coming. We'll worry about how that might play out once we know a tradeable bottom is in place.

S&P 500, SPX, 60-min chart

Today NDX dropped below its 200-dma, near 3765, and its uptrend line from November 2012 - June 2013, near 3726, but recovered back above both this afternoon. As with the others, we potentially have the completion of a 3-wave pullback that sets it up for the start of a new rally or we'll get a bounce correction followed by a new low next week to complete a 5-wave move down before starting a larger bounce into November (not to a new high in this case).

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3935
- bearish below 3725

Netflix (NFLX) got body slammed after the close today after announcing its earnings, which were good but they added fewer subscribers than had been expected and lowered forward guidance. Growth? Oops. SELL MORTIMER, SELL! The stock is down about $170 (-38%) from today's high near 451. Wow. Not sure what that will do to NDX tomorrow but it's certainly not going to help. NQ dropped about 20 points after the close but is holding about the 50% retracement of this afternoon's rally so it's not too bad.

The semiconductor index, SOX, got crushed last week after Microchip (MCHP) announced they see an industry correction ahead. They were referring to the semiconductor market but as I've mentioned many times before that means the economy as well. Semiconductors are ubiquitous in manufactured products today and a slowdown in this industry means a slowdown in the economy. Before last week the SOX was hanging onto its uptrend line from November 2012 but when it let go of that it let go with a bang. This morning's low at 547.59 is now only 6 points away from a 38% retracement of the rally from November 2012 and at the moment it's looking like that could set up at least a bounce correction.

Semiconductor index, SOX, Weekly chart

Intel reported earnings after the bell yesterday and it didn't support the more cautious warning from MCHP. It got a positive response with a pop up in after-hours but it didn't help its stock today -- it spiked down with the rest of the market and by the end of the day it was down another -2.7%. At the end of August I was looking at its monthly chart, which I've updated below, to show traders why I thought INTC was a short back then. The monthly candle for September was a star doji at resistance and the big red candle, so far, for October confirms a reversal signal. The September 8th high was a slight poke above the trend line along the highs from April 2010 - May 2012 and at the top of a shallow down-channel off its 2002 low. The consolidation since 2002 looks to have completed at the September high and now another leg down to finish a large A-B-C pullback from 2000 should have started, one that should drop INTC below 10 by the time the bear is dead.

Intel Corp, INTC, Monthly chart

The RUT was again relatively strong today, continuing its relative strength that we've seen for the past few days. It did make a minor new low today as it dropped down to its uptrend line from October 2011 - November 2012, near 1040. It also tagged the bottom of its down-channel for its September-October decline and closed its October 9 2013 gap. It was a good setup for a bounce and it was the only index to close in the green today, by a wide margin, finishing up +1%. It would be more bearish below 1038 but for the moment I'm looking for a larger bounce to get started, especially if it can back above the bottom of its down-channel from July, which is where it closed today.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1080
- bearish below 1038

The weekly chart of the banking index, BKX, shows today's low was a test of price-level support, near 66, and its uptrend line from March 2009 - October 2011. This is a very important trend line since it defines the cyclical bull market it's been in since the 2009 low. It would be surprising to see this line break on the first test on a weekly basis so we'll see what kind of bounce the bulls can put together here. The double top (March and September) with bearish divergence at the price projection at 73.64 (for two equal legs up from 2009) is a very good indication the rally is over. A break of the uptrend line from 2009 is needed to confirm it.

KBW Bank index, BKX, Weekly chart

Last week the TRAN broke down through two uptrend lines, one from June 2013 and the other from March 2009 - October 2011, and following a completed wave count at its 8591 price projection it's looking like confirmation of THE high. As can be seen on its weekly chart below, it has dropped down to its 50-week MA, near 7779, with a short-term double-bottom test so far on Monday and again today near 7700. If the TRAN bounces back up to its broken uptrend line from 2009, near 8200, it would be an opportunity to see if we get a back-test and bearish kiss goodbye.

Transportation Index, TRAN, Weekly chart

I've been hearing more market pundits lately recommending diversifying your investment portfolio by investing in foreign countries. The emerging market is considered a better value by some and one of the recommendations that I've been hearing is to invest in the Emerging Market ETF, EEM. Probably not surprisingly, I have a different opinion about doing that. The weekly chart of EEM is shown below and back at the end of August I was suggesting it was a good setup for a short play as it rallied up to its downtrend line from 2007-2011 and completing a corrective wave count calling for another leg down. It seems to be on its way and should drop well below its October 2011 low at 33.42.

iShares Emerging Markets ETF, EEM, Weekly chart

In a bear market there are very few places to hide. Cash is the best place and then use some of your capital to play the short side when appropriate. There will of course be bounce opportunities to play the long side but we're very likely entering the next phase of the secular bear that requires trading, not buy and hold.

I thought I'd show a monthly view of the U.S. dollar and the euro to show what the big picture looks like for these currencies. So far the U.S. dollar ran into resistance at its downtrend line from March 2009, which from a bearish perspective is the top of a sideways triangle playing out since the April 2008 low. Without a bias about the dollar I could easily argue the dollar is heading for a breakdown. But I think the dollar is going to break out of this triangle pattern but not before pulling back a little. Dollar bulls need to see the dollar above 87 to confirm the more bullish pattern that calls for a rally up to at least 110, if not 120, which is where I think it's heading. In between these two diametrically opposed possibilities is for the sideways triangle to continue for another few years before it breaks down (light red dashed line).

U.S. Dollar contract, DX, Monthly chart

When the Euro topped out in March and May with a double top at its downtrend line from April 2008 it looked like a good setup for a reversal. The rising wedge pattern for the bounce off the July 2012 low broke in July and price has been "pouring" out of the rising wedge since then. The pattern suggests a return trip to the bottom of a down-channel that it's been in since 2008, which will be near 1.07 by the end of the year. This chart suggests the U.S. dollar is going to break out the top of the sideways triangle on its chart, perhaps after a multi-week pullback.

Euro Currency contract, EC, Monthly chart

For the past several weeks I've been showing the weekly chart of gold to keep the moves in perspective. My interpretation of its pattern is that the sideways consolidation since the June 2013 low is a bearish continuation pattern. But the sideways triangle needs one more pop up to the top of it to complete the wave count (a-b-c-d-e) and the bounce off the October 6th low looks like a good start to the expected leg up to the top of the triangle, which is the downtrend line from April 2013 - March 2014 and is currently near 1350. On the daily chart below I'm showing a projection for a 3-wave move up to the top of the triangle by December and assuming we'll get that rally it will then be a very good setup for a short position in gold, which should then drop below 1000 in early 2015.

Gold continuous contract, GC, Daily chart

Oil has now broken its uptrend line from October 2011 and looks to be in the 3rd wave of the decline from August 2013. This calls for a choppy bounce/consolidation for a few months before heading lower early next year. But if the decline from August 2013 is an a-b-c pullback inside a larger sideways consolidation since 2011 then we could see it head back up. A rally back above the broken uptrend line, near 85.25, would be a bullish heads up and then above 95 would point to a move back up to the 110 area. If the selling continues a little longer we could see oil drop to 74.60 where the 3rd wave down would be 162% of the 1st wave down.

Oil continuous contract, CL, Weekly chart

Thursday morning will be busy with economic reports but no big swings are expected that could move the market one way or the other. The Philly Fed report at 10:00 AM is expected to show a slowing economy in the region but that's been evident in other reports.

Economic reports and Summary

The selling has been more intense than we've seen since mid-2011 when the market dropped sharply in July-August. It took a QE announcement to rescue the market but this time around the Fed doesn't really have the ability to do that again. Even they must recognize that their programs haven't worked and the only thing they've accomplished is to acquire a huge balance sheet of debt. If they try another QE announcement the market would likely react positively at first (the Fed has our backs!) but then the realization of how bad things must be would likely cause more problems than it solves.

Recognizing that the Fed is powerless and in fact that they have only created more problems than they've solved is the recognition point I believe will cause the worst of the bear market. Loss of faith in government, in the Fed and finally financial institutions is going to take the props out from under the market. It's a necessary cleansing step so that we can get to the point where we'll have a generational buying opportunity, created from real growth opportunities, not Fed-sponsored credit expansion.

It will be painful to get through it for most people but for us traders there will be plenty of opportunities to make some lemonade out of the lemons thrown at us. But that will only be true if you have cash to use for trading. Don't stay locked up in buy-and-hold and ride the next wave down. It will be years (decades) before you'll see these prices again. All asset classes will suffer as we get into the heart of a deflationary cycle, one which the Fed is powerless to stop, and cash is the only asset to do well in times of deflation. Don't worry about earning so little in cash -- we're entering another period where preservation of capital will be so much more important than return on capital.

NFLX is still down in after-hours but futures have held after dropping right after the close. ES is down about 10 points from where the cash market closed but is holding near the 38% retracement of this afternoon's rally. It's a volatile time so 10-point moves look like peanuts but it just means we need to be careful about the volatility right now, which gets exacerbated during opex. Trade safe.

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