It's at about this time that bears realize the market has outlawed any selling. All pullbacks, tiny as they are, get immediately bought and the market powers higher. Bullish sentiment, and especially the lack of bearish sentiment as bears throw in the towel, makes for a vulnerable market.

Wednesday's Market Stats

The market struggled a little bit today, more so for the blue chips than the techs and small caps. The relative strength in the higher-beta names was a bullish sign for the market since it was more of a risk-on than risk-off kind of day. But we're seeing more evidence behind the numbers that the rally could be in trouble soon and while there's no indication yet that the bears are about to have their turn in the sun, there are reasons for bulls to exercise more caution here.

Equity futures had sold off some last night as European markets declined. There was some disappointment after the Bank of England (BOE) gave a less-than-enthusiastic forecast for the coming year, downgrading both its economic and inflation forecast. They believe England will only see 1% inflation (I think they'll be struggling with deflation like most of Europe next year). It's likely we'll see continual downgrades in Europe for a while. The U.S. stock market gapped down but it was just another buying opportunity and the indexes were immediately pushed back up. Another morning selloff to a higher low was another buying opportunity. The end result of this back and forth is creating narrow-range days as the market is able to make only marginal new highs each day. But the new highs is good for the headlines.

The bears are far and few between right now as bearish sentiment, according to the latest AAII survey, has now dropped to its lowest level since 2005. The rally from October has just about everyone convinced in the end-of-year rally scenario and we're again hearing new predictions for much higher prices, like we were hearing into the September high. It doesn't mean they're wrong but when everyone gets on the same side of the boat it's generally better to don your life vest and crawl over the other side and try to stay away from the panicking crowd when they end up tipping the boat over. We have again reached that point and it's amazing how quickly the mood has completely shifted from the extreme bearishness in mid-October. Not only price volatility has increased; sentiment has become wildly volatile as well.

There was a recent article in Bloomberg (October Is Forgotten) in which the Credit Suisse Fear Barometer (CSFB), which compares put/call option prices three months OTM, is now at its lowest level in more than a year. Even the end-of-year rally into December 2013 did not produce bearish readings as low as today's. The previous low level that is being matched by today's low level was back in August 2013. One driving factor has been the expectation that Japan's, and soon Europe's, QE efforts will continue to push stock markets higher. It would appear everyone is now buying into this theory.

According to Peter Cecchini of Cantor Fitzgerald LP, investors might be placing too much faith in what the central banks will be able to do when it comes to helping the stock market. As I've said for years, the primary benefit or QE is psychological, not the actual money. As long as people feel bullish they'll continue to plow more money into stocks. As Cecchini notes, "The size of stimulus from Japan's central bank is minuscule compared to the $18.5 trillion market value of the S&P 500, while ECB bond buying 'will be a backstop, not a pitching machine.'" At the moment investors are feeling invincible, convinced the central banks of the world are working in concert to power stock markets higher.

The Lipper Weekly Fund Flows report for last week shows a continuation of net inflows into mutual funds but most of that went into taxable bond funds and only a minor amount into equity funds. Digging into the numbers for equity funds shows most of it went into non-domestic funds rather than U.S. funds. The net result was actually a net withdrawal from U.S. equity funds of about $1B and most of that came out of the large cap funds. That hasn't prevented broader market indexes from making new highs because a lot of money continues to pour into the ETFs, with SPY taking the biggest share. But as the rally has progressed it's again doing it on the backs of a smaller number of stocks. This is very visible on the NYSE advance-decline line chart below:

NYSE Advance-Decline Issues, Daily chart

The chart above shows the significant negative divergence that is showing up at recent price highs for the market, which doesn't mean the rally will fail here and now but it does mean that those who are chasing it higher (the retail investors) are very likely going to be the ones left holding the bag while in their canoe hoping to make it up the creek without a paddle and not able to find a chair when the music stops. The new highs since last week are not getting the kind of buying participation it needs to continue much further.

Another indication of potential trouble ahead is being telegraphed by the NYSE McClellan Oscillator, as shown in the chart below. As Tom McClellan writes in his newsletter, the initial thrust to a peak is typically not the price peak for the market. It simply shows the momentum behind the move. But when the oscillator starts back down, indicating a loss of momentum, while prices continue higher it's when investors should be very careful about chasing the market higher. At the moment it's merely a warning sign.

NYSE McClellan Oscillator, Daily chart

So while we've got some market breadth warning indicator lights going off, it doesn't mean the engine driving this thing is going to immediately seize up. Price is king and that's what we have to watch to see when price tells us the rally might be finished. In the meantime bears need to continue to be patient and bears need to be cautious. Stops on long positions should be tucked in tighter.

The SPX weekly chart below shows how close price now is to the trend line along the highs from April 2010 - May 2011, which is currently near 2053. Considering where we are in the rally pattern from October I don't believe the rally will extend beyond that trend line, and that's if it's even reached. What's not clear at this point is whether the October-November rally will complete all of the 5th wave in the move up from October 2011 or just the 1st wave of the 5th wave. The risk for those who want to hold on during a pullback, with the expectation that the rally will continue into next year, is that the pullback could turn into a more serious decline. Only after we get a pullback/decline will we have a better sense of what should follow. But in either case, we should be looking for at least a pullback very soon.

S&P 500, SPX, Weekly chart

The daily chart below also shows the trend line along the highs from July-September, which is currently near 2045. In between is the broken uptrend line from November 2012 - February 2014, near 2051. That gives us an upside target zone by these trend lines at 2045-2053.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2055
- bearish below 2001

The rally from the pullback on October 22nd had been contained in a parallel up-channel, as can be seen on the 60-min chart below. SPX then dropped out of the channel, did a little back-test and then ran out sideways. From an EW perspective, the 1st wave (up to the October 22nd high) is an extended wave and it's common in that case to see the 3rd through 5th waves achieve equality with the 1st wave, which is the projection shown at 2055. That opens the target zone slightly to 2045-2055. It doesn't mean SPX will get there, or stop there, but it's a potentially important area to watch for a top.

S&P 500, SPX, 60-min chart

With SPX rolling over and out of the parallel up-channel it's giving us the appearance of a rolling top following the November 3rd high. In addition to the 5th wave being a choppy ending pattern, the fact that it's creating a rolling top says the rally shouldn't have much more gas left in the tank. All the indexes have this rolling-top pattern and therefore bulls are being forewarned here.

The DOW has a little more upside potential if it's going to reach its trend line along the highs from May 2011 - May 2013, which is currently up near 17820, another 200 points higher. That would have SPX blowing through its resistance zone on its way to 2060-2070 so we'll see how SPX does if it reaches 2055. This morning the DOW found support at its broken trend line along the highs from December 2013 - July 2014 and its uptrend line from November 2012, both near 17520. It's possible to look at today's candle as a hanging man doji but it would not be confirmed bearish until the DOW drops back below support and this morning's low.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,500
- bearish below 17,278

Last week NDX had formed a sideways triangle continuation pattern, which typically leads to the final move (up in this case). From an EW perspective a 4th wave triangle is a common pattern and it leads to the 5th wave. A sideways triangle is filled with choppy moves, which it was, and if that choppy price action continues into a choppy rally it's usually a very good sign that the 5th wave is going to form an ending diagonal (rising wedge). It's an ending pattern and so far this week's price action supports that interpretation, which shouldn't gain many more points. In fact it's possible this afternoon's high was the completion of the pattern.

The small rising wedge for this week's choppy rally points to a possible top around the 4200 area (today's high was 4199) while the daily chart points to a little higher potential. The trend line along the highs from April 2010 - April 2012 is currently near 4215 and the 127% extension of its September-October decline is near 4233. Above 4235 would be a bullish move but at the moment the EW count and the ending pattern suggests this rally could top out at any time.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4235
- bearish below 4126

The ending diagonal 5th wave idea is shown on the 15-min chart below. It argues for a top sooner rather than later, potentially at this afternoon's high. The pattern for the 5th wave, up from November 6th, is hard to decipher and the wave count is my best guess at the moment. The matching wave labels on MACD support the count but it means it will need to turn back down right here right now. If it continues higher we'll then have at a minimum a larger rising wedge but it remains an ending pattern regardless and therefore not a good time to chase it higher from here. A drop below this afternoon's low near 4187 would be a bearish heads up and below yesterday's mid-morning low near 4174 would confirm the rally is likely done.

Nasdaq-100, NDX, 15-min chart

The RUT has reached an interesting level, which is an important level for the bulls to break through. The September high, at 1183.85, was slightly broke today with a high at 1187.20. Coinciding with that level is the broken uptrend line from March 2009 - October 2011, which stopped the rally into the previous high on November 3rd. Was today's push higher in the final hour just a stop run to be followed by a quick reversal tomorrow morning? It wouldn't be the first time. But if today's rally holds it will open the door to the March and July highs near 1213. At the moment we only have a test of the September high, potentially mirroring the double top in July when it tested the March high.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1185
- bearish below 1160

While it looks like the stock indexes are forming rounding topping patterns we've got the opposite for bond prices, represented by the 20-year Treasury Bond ETF, TLT. As can be seen on its 120-min chart below, the rounding bottom is following the sharp move back down after peaking on October 15th (the same day that the stock market did its v-bottom reversal). With bonds and stocks continuing to trade inversely, the rounding bottom supports the idea that we should be looking for a coming rally in the bond market (declining yields) and a decline in the stock market. The reversal for both is just taking its sweet old time.

20+ Year Treasury ETF, TLT, 120-min chart

Following this week's rally above the trend line across the highs from July-September, the TRAN headed for a longer-term trend line across the highs from May 2013 - July 2014, which it almost tagged with yesterday's high at 9104. For its rally from October 2011 the 5th wave, which is the ramp up from October, would equal the 1st wave 9430.80, shown on its daily chart below. That's the upside potential if it can get above the trend line, near 9135 on Thursday and 9142 on Friday.

Transportation Index, TRAN, Daily chart

Last week the U.S. dollar made it up to the projection near 88 were the 5th wave of its rally from May equals 162% of its 1st wave. That should be good enough for at least a larger pullback over the next couple of months to correct the May-November rally before starting back up again. If the dollar continues to hold above its downtrend line from May 2009 - June 201, near 86.94, that would keep it bullish. But at the moment it could be just a throw-over that will lead to a head-fake break.

U.S. Dollar contract, DX, Weekly chart

Following gold's strong rally last Friday it has struggled to hold onto those gains. The rally had taken gold right up to price-level resistance near 1180, which had been support since June 2013. Once that support level broke on October 31st it's natural for it to turn into resistance. It's hard to determine at this point whether the next higher-odds move will be down to the 1090 area (50% retracement of its 2001-2011 rally) or head up to the top of its down-channel from 2011-2012, currently near 1250. For now, it remains bearish below 1180.

Gold continuous contract, GC, Weekly chart

Oil's short-term pattern continues to support the idea we'll see a low near 75 before getting a bigger bounce. Much below 74.50 would point to a drop below 70 but bullish divergence on the daily chart suggest oil bears need to tighten their stops.

Oil continuous contract, CL, Weekly chart

There are no market-moving economic reports Thursday morning so it will be up to overseas markets to help define where our market will start.

Economic reports and Summary

We've reached the point in the rally, especially with what looks like rounding tops being put in place, where it's too risky to be long the market but too early to be short. A rounding top is difficult to play because it's a slow reversal and the dips keep pulling in the buyers while shorts keep getting stopped out and soon give up trying. As the market runs out of buyers it becomes more vulnerable to a stronger decline and I think that's where we are. The topping process can take weeks, sometimes months, and it's typically a good time for traders to exercise patience and not get sucked into every little squiggle. These are the times when traders send their brokers' kids to college since they're the only ones making money from your trade commissions.

The market sentiment says the central banks of the world are accomplishing what they need most -- to keep investors feeling bullish and buying. They continue to suck in the unsuspecting while smart money offloads inventory (it's what creates the rounding top). The strong inflows of money into equity funds in the past couple of weeks (although slowing in the past week, which is another reason why the market is slowly rolling over) tells us the retail investor has literally bought into the idea of an end-of-year rally. But keep in mind that what's obvious to many is obviously wrong. Don't go with the crowd, or at least recognize when you're with the crowd and be ready to be one of the first to jump out.

All in all, you have to figure the Fed has certainly accomplished their goal. This cartoon says it all:

Good luck, trade safe 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