The week of Thanksgiving holiday is typically a slow, but bullish, time for the stock market and this week has been no exception on both accounts. The blue chips have been on the weak side but the techs and small caps continue to show bullish behavior.

Wednesday's Market Stats

Tonight I'm putting the Economic reports at the top of my report instead of the bottom because today included the reports we'd normally get on Thursday and Friday so there are no more important economic reports for the rest of the week.

Economic reports and Summary

As you can see in the list above, this morning was busy with economic reports but they barely caused a ripple in the pre-market session -- a quick 3-point swing on the S&P futures and then quickly back to where it was before the 8:30 reports. The Durable Goods orders, ex-transportation, was a little bit of a disappointment, coming in at -0.9% vs. the +0.5% expected and below September's upwardly revised +0.2%. Personal income and spending were both less a little less than expected but a slight improvement over September's numbers.

After the opening bell we got more reports that were not that good overall. The Chicago PMI, which came in light at 60.8, was below expectations for only a drop to 63 from October's 66.2. Michigan Sentiment also came in lighter than expected, 88.8 vs 90 expected and below October's 89.4. Home sales were disappointing with both new home sales and pending home sales less than expected. Pending sales dropped -1.1% vs. expectations for only a slight decline to +0.5%. From all these reports it would appear the consumer's confidence and sentiment is in decline and it's showing up in their spending. This is just more evidence that the economy is not as rosy as many would like us to believe. There were more than a few economists lowering their estimates for Q4 GDP

The morning was quiet and the day became quieter as many traders left the market early to start their holiday weekend. The foul weather, including snow, had many New York traders getting out early to beat the traffic and weather. The result was trading volume was as light as the lightest days of the year, which made it easier to shove the market around (up). Despite the somewhat disappointing economic reports they were able to push the market a little higher with a message to bears: stay away.

The typically bullish Thanksgiving week is on track to be another bullish week, even if only marginally so as SPX is up about 9 points for the week. Keep in mind that the typical pattern calls for at least a pullback in early December before starting a year-end rally so this week's minor gains look like they could get retraced, and then some, next week.

Kicking off tonight's chart review I think it's important to first understand how vulnerable the stock market currently is. We've seen stretched markets before and bullish sentiment/low VIX continue for far longer than seems possible but this time the market has stretched even the stretched indicators. When the rubber band snaps this time it's likely to surprise many market participants, especially those who believe in the end-of-year rally scenario and/or in the all-powerful and benevolent Fed.

Tom McClellan showed a chart today of the bearish percent as reported by Investor's Intelligence (a measure of how many newsletter writers are currently bullish, bearish or looking for a correction). The percentage of bears is plotted upside down on McClellan's chart below to better visualize the coincidence of low bear percentage with previous market highs (the higher the blue line the lower the percent bears), which is again approaching a dangerously high (low) level, less than 15% bears at the moment. You can also see that previous low levels of percent bears has only resulted in a relatively small correction so from this it's not particularly scary except to warn of at least another pullback from the current high.

Investors Intelligence Percent Bears (plotted inversely), chart courtesy mcoscillator.com

Another measure of sentiment is shown with the Sentix Sentiment chart below. It has risen to the highest level of the year and matching December 2013. The December high in the stock market led to a -6% decline in January, which again shows it wasn't a rally killer but the excessive bullish sentiment first needed to be flushed away before the market could proceed higher.

Sentix Sentiment vs. SPX

The two charts above show us what the sentiment looks like but what does that mean for what investors are doing? The chart below shows the ratio of SPX bullish vs. bearish funds in Rydex. The ratio spiked higher following the October low, showing investors are putting their money where their sentiment is and if that doesn't look like a blow-off move then I don't know what qualifies. This is a vivid example of everyone jumping into the pool and as noted on the chart, it's the first time the ratio has achieved 2:1 in favor of bullish assets since February 2001. The high for SPX in February 2001 was actually a relatively small bounce in the stock market (but it had everyone convinced new market highs were coming) before rolling over and down into the 2002 low. It's the high bull:bear ratio and more importantly it's the rapidity at which the ratio has climbed in the last month that should have bulls quivering in their hooves right now.

Rydex Ratio of S&P 500 Bullish vs. Bearish Assets, chart courtesy my401kPro.com

Accompanying all this bullish fervor by investors is a market that is flat out running out of gas. The roller coaster that's been slowly clickety-clacking its way up the steep incline, especially with this month's shallow up-channels for price, has everyone giddy with joy for the expected fun (profitable ride). The problem is the gear pulling the train of cars up the incline is starting to lose some teeth and when it finally strips the gears it's going to be a run back down the incline going backwards and not something the riders expect to happen.

The charts below show the NYSE at the top and its potential triple-top formation as price again tests its July and September highs. At the same time it's back-testing its broken uptrend line from November 2012 (gray line), which was broken in late September. It's back up for a test of the previous highs and its broken uptrend line -- this is a setup only a bear could love, especially with the decaying market breadth. The middle chart shows the number of new 52-week highs, which has been declining rapidly since the October 26th high, and the bottom chart shows the advancing issues minus the declining issues, which is also showing fewer and fewer stocks are participating in the rally. In other words, the NYSE (and the other broader indexes) keeps pushing higher on the backs of fewer and fewer stocks. Sky-high bullish sentiment with deteriorating market breadth following a blow-off move to a new high is a recipe for disaster for late-to-the-party bulls.

NYSE vs. New 52-week highs and Advance-Decline Issues

We know price is king and the charts above don't mean a hill of beans (well, maybe one bean in the bear's pot) since we make or lose our money based solely on what price does. For that we go to the individual charts and use some technical indicators to help get a sense about what price is doing. I'll start with the RUT since it's been the stronger index off last Wednesday's low and it's approaching an important level. Starting with its weekly chart, this week's (yesterday's) high near 1192 is only about 4 points away from testing its broken uptrend line from March 2009 - October 2011, which will be near 1196 on Friday. This is a major uptrend line identifying the trend of the RUT's bull market since the 2009 low and breaking it in late September was a big deal. It's now back up for a potential back-test. At the same time it's also close to its previous highs in July and September for a possible triple top (3 drives to a high topping pattern).

Russell-2000, RUT, Weekly chart

Looking closer at the 3rd test of the broken uptrend line from March 2009, it's the 3rd attempt and now it's showing bearish divergence. In addition to the 3-drives-to-a-high topping pattern on the weekly chart we have the same pattern on the daily chart. This one is looking juicy for the bears, all 15% of them.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1202
- bearish below 1169

Moving in even closer, with the 60-min chart below, it's not a clean wave count but the best fit at the moment is to call the rally from November 19th the 5th wave. It would equal 62% of the 1st wave (a common relationship when the 3rd wave equals the 1st wave, which is what we have here) at 1199.38. This Friday's half-day session will see the top of a small rising wedge (ending diagonal 5th wave) intersecting the trend line along the highs from November 3-12 near 1203. So for Friday we've got an upside target/resistance zone at 1196-1203. A drop back below price-level support near 1184 would be a bearish heads up and below 1169 would tell us a high is in place.

Russell-2000, RUT, 60-min chart

Yesterday SPX made it up to the price projection at 2073.28, which is the 127% extension of its previous decline (September-October). It pulled back and then rallied back up to the projection just before the close before pulling back a little. I see upside potential to about 2082 (more bullish above that level) but the choppy move higher this month is a warning to bulls since it fits as an ending pattern (choppy moves up or down warn of a trend change).

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2082
- bearish below 2040

Looking closer at the move up from October, the 60-min chart below shows the slow choppy move up since the pullback on November 4th. It has been nuzzling up along its broken uptrend line from November 2012 and has been losing momentum in the past week. The small candles (and this is an intraday chart) since last Friday shows it's been just enough to keep the sellers away but hardly inspiring for the bulls to latch onto. It continues to look more like a rolling top pattern.

S&P 500, SPX, 60-min chart

There's a trader group that I belong to that includes Stan Harley, who writes a market timing newsletter, and his work has been recognized by Timer Digest. His work has been intriguing to say the least and the chart below is based on some of what he does, which is based on the formula 1/sq.rt.5 (1 over the square root of 5), which is .447. The number '5' is a Fibonacci number and it's common to see square root relationships between the various Fibonacci ratios. For example, the 78.6% retracement level that's been common in this market is the square root of 61.8%; the square root of 38.2% is 61.8%; 1 + sq.rt of 5 divided by 2 gives you 1.618, which is the golden ratio (phi). You get the idea. At any rate, the "opposite" of .447 is .553 (add them together to get 1) and it is this ratio that pops up repeatedly in the market's highs and lows.

I put together the SPX weekly chart below that shows this .447/.553 relationship in the highs and lows since March 2009. It also works before that date but this is to show the idea and why we're in an important turn window now. When you see a confluence of timing indicators, whether they are Fibonacci, astrological, Gann or cycles of days/weeks/months, it pays to watch closely for a market turn. The confluence of a few different .447/.553 ratios between previous market turns is now showing a confluence in the last half of November, which means it's a potentially important time period. Since we're rallying into it there is a high-odds likelihood that it will mark a high. This is a big reason why I'm looking for other technical indicators (EW pattern, trend lines, bearish divergence, overbought, etc.) to help confirm or negate the likelihood for an important market high here.

S&P 500, SPX, Weekly chart

It's hard to see on the chart above, since price is somewhat hidden by the vertical lines, but price is now up against the top of a parallel up-channel for the rally from October 2011. As I've shown in the past, the leg up from this past October fits well as the 5th wave of the rally from October 2011 and the fact that it's up to the top of its up-channel, with bearish divergence and at the turn window means bulls should be very careful here. It's a really nice reversal setup but of course we have no guarantee it will reverse.

Since last Friday the DOW has been poking at its trend line along the highs from May 2011 - December 2013, currently near 17873, but it's not clear yet whether or not it's going to be able to break through. The loss of momentum in its rally suggests anymore headway to the upside is going to be a tough battle.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,900
- bearish below 17,600

NDX was the stronger index today and it was able to break through trendline resistance near 4300. But it's now important for it to hold above 4300 otherwise it could be left as a head-fake break. As with the other indexes, the relatively shallow up-channel from November 4th is hard to figure out but a final 3-wave move for it would have two equal legs up at 4320.29, less than a point from today's high. A drop back below 4300 would be a bearish heads up and below 4200 would confirm the high is in place. In the meantime the bulls rule (but I don't trust them here).

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4300
- bearish below 4200

Helping NDX today, the semiconductor index (SOX) got a big pop up this morning and continued higher through the day, hitting a high near 684. That has it now close to a price projection at 688.71, shown on its weekly chart below, which is where the 5th wave (the leg up from October) in the move up from November 2012 would equal the 1st wave. The bullish development since last week is the climb back above its broken uptrend line from November 2012 and the climb above the trend line across the highs since July-September, currently near 668. But the bearish divergence at the new high, noted on the RSI, is another warning sign that this should be the 5th wave and the last hurrah for the bulls. From a timing perspective, this week would be a good turning point for the SOX since the time between its July-September-November highs is the same. A drop below 644 would be a strong indication that the rally is over but in the meantime there's still a little more upside potential.

Semiconductor index, SOX, Weekly chart

Over the past couple of months I've shown many charts indicating how much the stock market's broader indexes are way out of whack with so many other indexes. The ratio of consumer discretionary stocks vs. consumer staples has been showing how consumers have been getting defensive since the beginning of the year. As discussed at the beginning of this report, this morning's economic reports confirm the consumer is pulling in its horns. The comparison between commodity prices, which reflect global economic strength (and some due to strengthening in the U.S. dollar), and the stock market has been glaring for a long time (since 2011) but especially since the sharp decline in commodity prices since April. Another indicator is bond yields.

The stock market generally does better in an inflationary period because it's usually a good sign of economic strength -- companies' bottom lines tend to look better and that shows up in their higher stock prices. The opposite is also true -- in a "disinflationary" period stocks tend to suffer while bonds prices tend to rise. In an inflationary period bond yields climb because investors demand the higher yields to compensate for higher inflation. Higher yields mean lower bond prices but since the November 7th high for TNX its decline has created a widening spread between it and the stock indexes, as can be seen on the chart below.

SPX vs. TNX vs. DJUBS Commodity index

In the above chart you can see the both SPX and TNX spiked up off the October low but the rally for Treasury yields only lasted until November 7th. The dive lower in TNX since November 19th is widening the gap between the two as SPX just keeps pushing higher, oblivious to the message from the bond (smarter) market. I strongly suspect this is going to end in tears for those buying into the stock market rally here. The signal from the bond market suggests all the projections by economists for a growing economy are instead signs of a slowing one. Economists have a habit of making projections based on the past and are therefore consistently wrong at the turns.

The rally for the banking index, BKX, has not been as strong off the October low since it has not yet been able to exceed its September high. But it's close to a retest, which includes a retest of its March high. At the same time it has bounced back up to its broken uptrend line from October 2011 and the bearish divergence shown on the weekly chart below suggests the back-test could lead to a bearish kiss goodbye.

KBW Bank index, BKX, Weekly chart

For the past several weeks, whenever I showed the TRAN's chart, I was using the weekly chart to show the larger pattern and wave count. I'm looking for the completion of an a-b-c move up from October 2011 with the c-wave being the leg up from November 2012. It needs to be a 5-wave move and the leg up from October fits well as the 5th wave. Therefore once it completes it should be the completion of the entire rally from 2009. The daily chart below focuses where this 5th wave might finish.

Transportation Index, TRAN, Daily chart

The TRAN is currently pushing up against the trend line along the highs from March-May 2013 - May 2011, which was tested yesterday and today. This trend line is the top of a parallel up-channel for the rally since June 2013. There's higher potential to a longer-term trend line along the highs from April 2010 - May 2011, currently near 9360, and then a projection at 9430, where the 5th wave of the move up from October 2011 would equal the 1st wave. But the bearish divergence against the November 14th high suggests it could be in the final 5th of the 5th wave and might be stopped by the current trend line it's hitting. A drop below its November 19th low at 8961 would indicate the bull's party is over.

The U.S. dollar poked a little higher above its November 7th high and from a short-term perspective the move up from October 15th now looks like a completed 5-wave move that should be the completion of the 5th wave in the move up from May. A drop back below the downtrend line from March 2009 - June 2010, near 86.90, would be a good indication the dollar is into at least a larger pullback before continuing higher. There remains the potential for the dollar to pull all the back down to its uptrend line from April 2008 - May 2011 in a large sideways triangle pattern, perhaps down to about 75-76 by this time next year. But I think the dollar has much more bullish plans for its future (110-120).

U.S. Dollar contract, DX, Weekly chart

If the dollar is getting ready for at least a larger pullback into early 2015 that could help the commodities, including gold and oil. But gold's choppy bounce off the low on November 7th is a sign for gold bulls to be cautious. A "no" vote by the Swiss to require their central bank to buy more gold could spike gold back down, in which case I'll be watching for support near 1190. It takes a rally out of its down-channel that it's been in since 2011, the top of which is currently near 1250, to at least turn gold temporarily bullish but I continue to lean to the larger bearish pattern that calls for lower prices for gold into next year, regardless what the dollar does.

Gold continuous contract, GC, Weekly chart

Oil has remained weak and it's dropping lower in tonight's after-hours session (fighting to hold onto 73). I continue to look for the start of a larger bounce but it won't be clear for a while whether the bounce will develop into a 4th wave correction in the move down from 2013 or something more bullish. If oil continues to struggle I have a downside price projection, based on its pattern for the decline from June, at 66.90. The uptrend line from 1998-2008 will be near 65 by the end of December if the sellers keep up the pressure.

Oil continuous contract, CL, Weekly chart

As I look across the various sectors and indexes I get the distinct impression we're going to see trend reversals by next week. The stock market is peaky and fading. I've got a plethora of signals telling me the highs are very close to being put in place, perhaps during Friday's half session. Treasury yields have been pointing the way lower for about two weeks but the stock market has been ignoring the message. I doubt that will last much longer.

The commodity index looks like it could be bottoming although when I look at oil I wonder if there's a little more downside. Oil might be in a category of its own right now. The dollar looks ready for a reversal and a move back down into at least a larger pullback over the next few months. That should theoretically help commodities, including the metals. Since most of us focus our trading attention on the stock market, bears should get ready for their turn at the feeding trough while the bears go sleep it off.

Unfortunately for most of the bulls, they usually don't know when to exit and they get creamed in the melee when the bears start their attack runs. The huge influx of money into mutual funds and ETFs speaks volumes for what the retail traders have been up to and the bullish sentiment confirms their enthusiasm for more stock. That's usually a good sign for smart traders to quietly take their profits and their marbles and go home and let the others fight for the scraps. If you like playing the short side I think you'll like the month of December (certainly the first two weeks and then watch out for an end-of-year bounce).

Good luck and I'll be back with you on Monday as Tom and I switch next week. I hope everyone has a great Thanksgiving holiday and enjoys their friends and family (it's the best thing about this holiday -- no gifts, just lots of good food and company). Just be very careful if you have to drive on Thursday after a big dinner -- the sleepiness of drivers could literally kill you.

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