It turns out the stock market wasn't happy with the ECB's QE plan and then showed more disappointment this afternoon with the FOMC announcement. Are the central banks losing their mojo?

Wednesday's Market Stats

The euphoria that followed last Thursday's announcement by the ECB lasted that one day. The market sold off a little on Friday (more of a consolidation) and then sold off some more on Monday. The afternoon bounce on Monday was followed by a large gap down Tuesday morning. Thanks to AAPL's blowout earnings report after the bell on Tuesday the market got a lift this morning but that was immediately sold into. NDX was strong, thanks to AAPL, but it did a nearly 100 -point reversal off today's high by the time the market closed. The bulls have been having a tough time in the last few days but in reality the only thing we have is more of the same choppy whippy price action that has kept the indexes inside a tightening price range.

One of the reasons why the ECB-inspired rally last Thursday didn't last for more than a day is because investors began to realize how little it actually meant. The lack of response in the bond market (the smarter market) last Thursday was a strong hint that the stock market experienced a bullish emotional reaction that was not warranted. The ECB announced a plan to buy 60 billion Euros per month, which is of course a lot of newly-created money. But it was likely just more jawboning by the ECB since it might end up being only about a quarter (15B) of that amount. All of these games the central banks continue to play only makes the air pocket beneath the stock markets that much more vulnerable to collapse when the recognition phase hits.

The problem with the ECB plan to buy 60B euros each month is that the responsibility for most of the buying of sovereign debt will be with each individual country. In other words the ECB will very likely not be buying much of Spain's or Italy's or France's or anyone else's government bonds (and Greece was specifically excluded from this agreement). Each country will be provided money to buy their own bonds to fund their debt but they will be responsible for the debt, not the EU's central bank. This is primarily in deference to Germany, which does not want to be responsible for the debt of other nations that it sees as "lacking industriousness."

The reason for the ECB's approach is due to the way the Articles of the ECB were written. Referencing Article 16, John Hussman wrote recently:

"Under Article 16 of the Protocol that established the European System of Central Banks (ESCB), the ECB Governing Council has the exclusive right to authorize [emphasis mine] the creation of euros, but either the ECB or the individual national central banks can issue those euros. The ECB will authorize a large QE program this week, but my impression is that the details will leave the ECB itself responsible for executing only a fraction of the announced program, with the remaining majority of the program (perhaps 60-75%) being nothing more than the option for each national central bank to purchase its own country's government bonds, at its own discretion, and its own risk. Moreover, that option is likely to be limited to something on the order of 25% of the outstanding government debt of each respective country."

From George Friedman at Stratfor.com (before the ECB announcement):

"The European strategy is vitally different [from the U.S.], however. The Federal Reserve printed the money and bought the cash. The European Central Bank will also print the money, but each Eurozone country's individual national bank will do the purchasing, and each will be allowed only to buy the debt of its own government."

Friedman went on to explain that many Eurozone governments are unable to pay for more of their own debt and other European countries do not want the responsibility of another country's debts, either directly or by exposing the ECB to the debts. This is why Germany has resisted so hard any effort for the ECB to launch a QE program that could cripple the EU, and in turn Germany, if other countries are unable to pay off their debts. It would be as if the Fed were to purchase all the states' debts and saddling all states with the burden of the debt if it's not paid off. If California then went belly up do you think Texas would be OK with having to pay off California's debt?

Germany's incentive in this case is that it needs a strong Europe to take its exports. Fully 50% of Germany's production is exported and needless to say, its economy would crumble if the EU crumbles. So the compromise between Mario Draghi and Angela Merkel was to allow the ECB to authorize the creation of money but give the money to each country's national bank based on some agreed-upon formula and make each individual country responsible for purchasing their own debt and be individually responsible for paying it down. This sounds like another pushing-on-a-rope scheme that the Fed has tried for so long. "You can lead a horse to water but you can't make it drink." The end result is a program that sounds good in theory (print lots of money) but probably will fail as a stimulus tool.

In this afternoon's FOMC announcement the Fed upgraded its assessment of the economy because of the recent strength in the GDP reports and the improved employment picture. That likely spooked traders into believing the Fed could soon start talking about rate increases, which would further increase the value of the U.S. dollar and that would further hurt international companies and their export business. Some recent earnings warnings by big international companies, such as CAT, have already spooked the market.

But interestingly, for the first time the Fed announced part of their "formula" would include international financial developments in their policy decisions. This should have calmed fears of a rate increase since foreign developments have been getting weaker and that should help the Fed avoid talk of a rate increase for the rest of this year at least. But the market sold off anyway and now we wait to see if we'll get the typical reversal the day after the FOMC announcement.

The end result of all this is what we're currently seeing in the market -- a selloff following the ECB announcement and a further selloff following this afternoon's FOMC announcement. What the market is finally beginning to realize is the inability of the central banks to really do much more and than what they've done so far hasn't worked. We kept getting assurances from the central bankers but in reality it's been one grand experiment by people who don't know what they're doing and in the process they've created an enormous stock market bubble (that has surpassed the dot com bubble in the 1990s) and a huge debt bubble. It can always get bigger, such as it has in Japan, and it very likely will, but like Japan we could remain mired in a very long recession/depression as a result of all the debt.

Now, having said all that, I still see the potential for another rally into February to make a new high. No one ever accused the stock market of being the sharpest knife in the drawer and there's still a lot of hope out there. Even if it's just because this year ends in '5' and it's the 3rd year of a presidential term, which have been historically bullish, many are pinning their hopes and dreams on another successful year. I think this time will be different but many money managers are betting their portfolios on the expectation for a bullish year and dips continue to be bought. As I'll review with the charts, we have bullish continuation patterns that have not been negated and they point higher. Now all the bulls need to do is prevent those bullish patterns from being negated, which could be close to happening, especially for the DOW.

Kicking off a review of tonight's charts, the SPX weekly chart shows how price remains stuck in a tightening trading range (sideways triangle) since December. Typically a sideways triangle leads to one more leg in the direction that preceded it (up in this case) but I've been leaning toward the bearish side since the December high based on the longer-term pattern. Many previous important highs for the market have seen similar high-level consolidations which looked bullish at the time but failed to get follow through. If it does break down we'd then have a failed bullish pattern and that would likely lead to a hard failure. But bears need to see the upside potential here -- at least up to the trend line along the highs from April 2010 - May 2011, perhaps up to about 2130 by mid-February. If you're feeling bullish the market, we're very close to solid support and the upside potential is about 130 points.

S&P 500, SPX, Weekly chart

The daily chart below shows a closer view of the sideways triangle pattern but I'm also showing the bearish wave count (red) that's calling the decline from December a 1st and 2nd wave and we're into the 3rd wave down (or it will be an a-b-c). There are 3 support levels the bears need to break before they can claim victory over the bulls. There were 4 levels but the one at 2019 (price-level S/R starting from the September high) was broken today. The next is the bottom of the sideways triangle, near 1995, followed by the uptrend line from March 2009 - October 2011, near 1978, and then the 200-dma, near 1973, and finally a price projection for two equal legs down from December 29th, which is near 1963. Once below 1963 it would be more apparent that the decline is a 1-2-3 instead of an a-b-c.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2065
- bearish below 1963

If the bears can't get a stronger decline going and if the sideways triangle is a bullish continuation pattern we should be close to starting the next rally leg. It's been typical for this market to reverse the post-FOMC afternoon move, which would mean a rally tomorrow morning, so it's a bullish setup here. Whether it will lead to another rally leg can only be guessed here and after so many choppy and whippy reversals since the end of November we have to continue to be careful.

The 60-min chart below shows a downside price projection at 1998.42, which is where the move down from last Thursday would have two equal legs. A triangle pattern is filled with corrective price action and that's what we've had, including the decline from last Thursday. This is one of the reasons why I continue to respect the idea that we'll get a rally out of this pattern. A rally above Tuesday afternoon's high near 2043 would be a bullish heads up but the bulls need to see a break above last Thursday's high near 2065. A drop below 1998 would be a bearish heads up but the bears would be in much better shape below 1980 since it's hard to call the decline impulsive yet.

S&P 500, SPX, 60-min chart

As mentioned earlier, it's the DOW that needs an immediate reversal of today's selloff if the bulls are to have any hope of another rally from here. Following the December 5th high I can count the triangle as complete (5 waves, labeled a-b-c-d-e) and today's close can be viewed as a throw-under below the bottom of the triangle, which is a common finish to these patterns (head-fake break). But that requires an immediate reversal Thursday morning, in which case the bullish hopes would remain alive. A drop below the 200-dma near 17050 would confirm a bearish breakdown and it could get ugly (failed bullish pattern). If the bulls do get another rally leg started we could see the DOW up near 18700 in February. That would make it more than a bit painful for bears so if you're short don't get complacent here.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,840
- bearish below 17,050

NDX is stuck. Since its November 28th high it has created a wide descending triangle, similar to the others, and is more or less in the middle of the pattern but closing today closer to the bottom of it. The bottom of the descending triangle is the horizontal price support near 4090 while the top of the triangle is the downtrend line from November-December, currently near 4300. Near the bottom of the triangle is also its uptrend line from March 2009 - June 2013 so a drop below 4090 would be bearish while a rally above 4300 would be bullish. Mind the chop in between.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4300
- bearish below 4090

When you take a quick look at the RUT's daily chart below and then look away, what's your first impression (bullish or bearish)? That probably depends on your bias and right now it's really just a mess that could go either way. How about a bearish H&S top starting with the left shoulder in November? Or maybe it's an inverse H&S continuation pattern starting with the January 6th low? I see multiple trend lines causing price to act like a ping pong ball. This week's rally attempt was stopped by the broken uptrend line from October-December (followed by a selloff, creating a bearish kiss goodbye). Today it dropped back down to its broken downtrend line from December 31 - January 13. A successful back-test followed by a bullish kiss goodbye tomorrow could lead to another rally. Depending on how you're leaning you'll see what you want to see and trade accordingly but know where your stop should be and honor it because I think the next move out of this congestion could be a big one.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1217
- bearish below 1150

I've often discussed the idea that the risk-on vs. risk-off evaluation for the market can be derived from how well HYG is doing vs. TLT. HYG is the bond fund made up of high-yield (junk) bonds while TLT is the 20+ year Treasury bond fund. If HYG is outperforming TLT then you know investors are feeling bullish and will to take on the risk of being in the higher-yielding junk bonds. If investors are feeling nervous about the market they'll move into the safety of Treasuries instead. This often provides a heads up for where the stock market will head and like most of these "indicators" they're not a timing tool but instead a warning tool.

It's a little tough to see on the chart below but back in 2007 when the stock market (green line for SPX) made a higher high in October vs. July you can see the lower highs following the June high for HYG/TLT. HYG started weakening relative to TLT and the new stock market high in October was met with a lower high for HYG/TLT. And then at the March 2009 low for the stock market you can see the bullish divergence with the higher low in HYG/TLT vs. its December 2008 low. What's also obvious is how closely the HYG/TLT ratio tracks the stock market (at least back then).

HYG relative strength to TLT, Weekly chart, 2007 and 2009 divergences

Now look at the same chart up through today (below). The divergence between the two has been widening for a long time (since the end of 2013), which clearly shows why this is not a good timing tool. But I believe the widening divergence is something that's not going to end well for the stock market. While the HYG/TLT line could start turning up, it is instead accelerating lower, as evidenced by the breakdown out of the parallel down-channels, which are steepening. This is a classic waterfall decline that's likely to get steeper before finding a low. It's much more likely that the stock market will soon follow and it's very possible the December high will stand for a very long time. But if we do get a new high for the stock market in the next month I'd certainly want to see HYG/TLT pick up in response otherwise one more new high for the stock market could very well be its last.

HYG relative strength to TLT, Weekly chart, current divergences

A lot of today's decline in the HYG/TLT line had more to do with strong buying in TLT than selling in HYG. But that's another sign of risk-off as investors rush into the relative safety of Treasuries vs. the stock market. The heavy buying today knocked the 30-year yield down -4.5% today, to 2.294% (the 10-year dropped -5.5% to 1.724%) and it's looking like my expectation for 2% for the 30-year could happen sooner rather than later this year. The weekly chart of TYX shows two lower trend lines crossing near 2.09% next week so it would interesting to see what happens if that's reached by then.

30-year Yield, TYX, Weekly chart

Last week the U.S. dollar had stalled at the top of its parallel up-channel from 2008-2011 but then broke above it last Thursday. I had mentioned that a break much above 93.30 would open the door to two price projections at 97.33-97.35. As noted on the weekly chart below, the 2nd leg of the move up from April 2011 would be 162% of the 1st leg up at 97.35. The 2nd leg is the rally from May 2014 and it has an extended 5th wave, which oftentimes will reach a projection where it is 162% of the 1st through 3rd waves (especially for commodities and currencies). That level is at 97.33 and the tight Fib correlation makes it more important so if that level is reached there's a good chance that's where the rally will stop and we'll see a multi-month pullback/consolidation. But the rally can be considered complete at any time and therefore I think it's a risky time to be a dollar bull.

U.S. Dollar contract, DX, Weekly chart

After hitting Fib resistance near 1302 last week, gold has pulled back a little. The daily chart looks like it's ready to roll over and the thing to keep in mind about gold is that the bounce off the November low looks corrective. An a-b-c bounce from November to last week's high at important Fib resistance should now be followed by another decline that will take gold to a new low. That's what the larger pattern is telling me, which is supported by the corrective nature of the bounce. It has everyone feeling bullish about gold but I'm thinking it will turn into another head fake like it did back in August-September 2012. I circled that bounce to show how it had broken its downtrend line from August 2011 and it turned everyone bullish at the time. But it instead turned into a head-fake break and continued its decline. The current bounce has broken out of its down-channel from 2012, which clearly looks bullish, as well as a downtrend line March-July 2014. But if it now drops below its December 9th high at 1239 it would confirm a 3-wave bounce correction and likely new lows. In the meantime there's still the potential for a higher bounce to at least back-test its broken uptrend line from 2001-2005, currently near 1327.

Gold continuous contract, GC, Weekly chart

As expected, silver's rally stalled at price-level S/R near 18.60 (last week's high was 18.50) as well as its downtrend line from November 2012 - July 2014. If it drops below its December 10th high at 16.95 it will leave a 3-wave bounce correction off the December 1st low and likely point lower from there. There's higher potential to the downtrend line from 2011, near 20.70, but at the moment it looks ready to turn back down from here. It could be just one more new low we're looking for, maybe down to about $12, before setting up a longer-term buying opportunity (like gold).

Silver continuous contract, SI, Weekly chart

Oil has dropped back down to its January 13th low at 44.20, breaking it slightly with this afternoon's low at 44.08. It has bounced back up in the after-hours session, currently trading above 44.50, and at the moment it's looking like a retest. As you can see on the daily chart below, the bullish divergence at the lows is telling us the selling momentum is waning. It's probably a good retest to try the long side on oil, such as USO. The only warning is that oil could go into a choppy consolidation pattern and not make a lot of headway back to the upside. In that case buying calls might not work that well (time decay).

Oil continuous contract, CL, Daily chart

Other than this afternoon's FOMC announcement it was a quiet day for economic reports and that will continue on Thursday. Pending home sales might move the market a little but probably not. Friday's Chicago PMI and Michigan Sentiment are not expected to change much and will also probably not affect the market much. We're into month end and portfolio balancing will likely have more of an effect.

Economic reports and Summary

For the DOW in particular I mentioned the bulls need to see an immediate rally Thursday morning in order to keep the bullish triangle pattern alive. There are two things in favor of that happening, the first being a common pattern that sees a reversal of the post-FOMC afternoon move the next day. The afternoon sold off and the historical pattern says Thursday should rally. The second thing is that today saw some capitulatory kinds of market breadth readings. It's either the kickoff to a serious decline or the capitulation will lead to a strong reversal back up.

Closing TRIN today reached 3.47 which is the highest closing TRIN reading since the strong market decline into the August 2011 low. A high TRIN means lots of selling volume going into declining stocks. It's the highest TRIN reading since 3.58 on February 3, 2014, which ended the January decline with capitulation selling on that day. It was then followed by a new rally into early March and then higher after consolidating a bit. It's somewhat rare to see TRIN this high and it indicates extreme selling and extremely and is typically an indication of being oversold on a short-term basis. Combined with a +19% jump in the VIX it suggests we could be setting up for a strong rally, possibly as early as tomorrow.

As can be seen on the table at the top of tonight's report, new 52-week highs were double the new lows, 403 vs. 193 for a net of +210. Considering the strength of the selloff I would have expected the opposite. We also have a net new high for 2015 so the index prices might be looking worse than what we see under the hood and that's another warning sign that tells bears not to get cocky here -- the market might be setting a bear trap. In any case we should find out quickly Thursday morning since the bullish case, especially for the DOW, needs an immediate rally.

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