Anyone who has served in the military knows how to hurry up and wait, which is what the market has done. We had a strong rally last week in anticipation of a resolution to both the Greek and Ukraine issues, which have yet to be resolved and now we're waiting for something to happen this week.

Wednesday's Market Stats

The market's anticipatory rally last week was in expectation (hope) there would be a resolution to the Greek debt issue and the confrontation that's building between Russian and its western neighbors. The Greek tragedy has not yet been resolved, although there's now hope that the can will be successfully kicked six months down the road, and hard fighting continues in Ukraine. While our Nobel peace prize-winning president decides how much to arm the Kiev government (who the U.S. helped to install), other European nations, namely Germany and France, are trying to defuse the situation. Perhaps the stock market is not worried about a wider war breaking out because of the European efforts. The end result has been a strong rally into this week and now we're sitting here marking time while we wait for whatever it was we rallied for.

There hasn't been much else in the news, earnings or economic reports to move the market and consequently both sides are not quite sure what will happen next. Today's economic reports didn't even cause a ripple in the market, primarily because it was breathlessly waiting for this afternoon's FOMC minutes (a non-event also). This morning we received the Housing Starts and Permits numbers for January, both of which dropped marginally from December. As you can see in the chart below, the housing "recovery" since 2009 has only managed to retrace a little less than 38% of its 2006-2009 decline. Following a 5-wave move down we've had a correction to the decline, which will be followed by another leg down before the housing bear is captured and released somewhere (Russia?).

Housing Starts and Permits, January 1999 - January 2015, chart courtesy briefing.com

Before the bell we also received the PPI numbers. As Jim mentioned yesterday, in his discussion about the NY Empire Manufacturing Survey, the prices received component experienced a sharp decline to 3.4 from 12.6 in January, which indicates reduced pricing pressure for manufactured goods. Today's PPI numbers show a similar decline in the prices for goods vs. flat prices for services and this was primarily due to the significant drop in energy-related prices. PPI saw a decline of -0.8% in January vs. -0.2% in December while the core PPI, which excludes food and energy, was relatively flat but still down -0.1% and up only slightly from December's -0.3%. The charts below show the significant drop in Goods vs. Services in the past month.

Producer Price Index, PPI, January 2012-January 2015

With the PPI numbers down there's certainly less worry on the Fed's part about problems with inflation and in fact it's quite the opposite. In order to qualify for service with the Fed you must first submit to a genetic reprogramming that makes you deathly afraid of deflation. You must admit that you'd kill your mother if that was what it required to prevent the country suffering through another bout of deflation. The Fed is hell bent on creating inflation and the only reason they haven't succeeded yet is because we're in a deflationary cycle.

Relating inflation/deflation to a credit cycle we have been in a credit contraction cycle since 2000 (at least for consumers and businesses but the same thing can't be said yet for the government) and it hasn't run its course yet. The central banks around the world have been working hard to create inflation and yet the chart above shows they have not been successful. This, by the way, is one reason why gold has struggled, much to the dismay of gold bulls who believe the global QE efforts should be sparking a massive inflation problem and higher gold prices (it will but not yet).

While on the subject of inflation, I recently read an article by Martin Pring, which can be read here: What Happened to the Secular Bear Market?, in which he discusses why the Bear is likely not done with us yet. In the article Pring discusses the labor market, debt-to-GDP, valuations and several other factors that investors need to consider when deciding how bullish you want to be right now. More importantly, investor's need to decide where their stops belong.

Pring's conclusion to his article gives you a sense of what he's thinking:

"The secular bear case has reached a critical juncture in that inflation-adjusted equity prices have moved back to their 2000 peak. Previous highs and lows often serve as important resistance points, which means that the secular bear case is about to be tested. Valuation/sentiment measures are currently at bullish extremes more typically associated with a secular high than low. Since they failed to move to the levels of extreme pessimism associated with previous secular lows, these indicators represent a missing piece of evidence in the secular bull case. Moreover, several indicators that have consistently identified primary trend turning points in the past are flagging danger and that means that our next Stock Barometer sell signal is likely to be a prescient one. We are paying close attention but until then, enjoy the ride but definitely buckle up tighter than usual!"

Pring's discussion about inflation-adjusted stock prices reminded me of the work I've done keeping track of the long-term parallel up-channel since the 1929 high and 1932 low. I've shown that chart in the past and used it to explain one of the reasons why I think SPX will see 550-600 before the bear is dead. Pring used a similar chart to show the inflation-adjusted prices for SPX since 1900, which is the bottom line in the chart below (the chart is hard to read because it's been squeezed to fit so I added larger-text dates at the bottom).

Inflation-Adjusted S&P Composite, chart courtesy Martin Pring

As Pring pointed out with the above chart, the horizontal dotted lines off the peaks of previous bull markets then become S/R when retested (in inflation-adjusted prices). This can be seen in the 1950s and 1960's following the 1929 peak and then in the 1980s and 1990s following the 1966 peak. Now here we are testing the 2000 peak (again, in inflation-adjusted prices). Actually it's not quite there yet -- a dollar in 2000 is currently equal to 72.2 cents and that makes yesterday's 2101 high for SPX equal to 1517.68. The March 2000 high near 1553 in inflation-adjusted dollars would be about 2150 today, about another 50 points (2.4%).

The other economic data today, which included Industrial Production and Capacity Utilization, were also disappointments, coming in less than had been expected. We've had plenty of signs the economy is slowing and that earnings expectations for companies are declining. So why is the stock market rallying? Because all of that bad economic news means the central banks will continue to create new money, with much (most?) of it making its way into the stock market.

The reason the market was flat for most of today was because it was waiting for the FOMC minutes and there remains hope that all these signs of economic trouble will keep the Fed's finger off the "Raise Rates" button. The minutes gave no hint about raising rates and that was met with a muted but positive response from the market. With weak economic numbers (despite what the Fed calls them) and "disinflation" problems, it will be a while before the Fed feels the need to raise rates. In fact they're probably very concerned about the recent spike in Treasury yields (which is yet another example of how the market determines rates, not the Fed).

I'll start off tonight's chart review with NDX since it shows one of the clearer breakout patterns on its daily chart. The weekly chart shows upside potential to the top of a parallel up-channel, currently near 4580, that has contained price since November 2012. That's another 190 points (+4.3%) higher so the bulls still have a reason to hang on for more. But there's also reason for caution by those who are long and hoping for more. Even though NDX has made a new high above its late-November high, it's within the "retest" zone and it's another test of the projection near 4354, shown on the chart, which is where the rally from November 2008 has two equal legs up (for a large A-B-C bounce correction to the 2000-2008 decline). You can also see the significant bearish divergence at the current high vs the November high, which is what I would expect to see accompany the final 5th wave of the pattern.

Nasdaq-100, NDX, Weekly chart

Not shown on the weekly chart above is a projection for the 5th wave of the move up from November 2012. It would be 62% of the 1st wave at 4440, which is a projection that I would like to see as a minimum (and is only 50 points higher). The 5th wave would equal the 1st wave near 4654, which crosses the top of the parallel up-channel about a month from now. Keep those numbers in mind if the rally continues.

The daily chart below shows the descending triangle off the late-November high and the clear breakout last Wednesday. It never even came back for a back-test to let wannabe bulls aboard, which has had both sides chasing the move higher. The vertical blue lines show the price objective out of the triangle pattern, which is near 4525. A trend line along the highs from March-November 2014 is slightly lower than the top of the parallel up-channel noted on the weekly chart and is currently near 4550. NDX stays bullish above the top of its triangle, near 4275,

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- Stay bullish above 4270
- bearish below 4270

Referencing the trend line along the highs from July-December 2014, SPX doesn't have quite as much upside potential as NDX. As can be seen on its daily chart below, the line is currently only about 25 points (+1.2%), near 2125. I had mentioned earlier, with the inflation-adjusted price discussion, the March 2000 high would be tested with a price near 2150, which gives us a 25-point window for a possible important top to the market.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- stay bullish above 2070
- bearish below 2070

It could be the market is simply resting before continuing higher but at the moment the rally is looking like it's running out of steam. An uptrend line from February 2nd was broken today, although admittedly it isn't much of a break when price simply runs sideways through it. Bulls beware though. In the meantime I see at least the potential for the market to work its way higher to the 2130 area next week. A drop below 2072 would be below the 1st wave in the rally from February 2nd and that would violate the EW rule that states a 4th wave correction cannot overlap the end of the 1st wave. An overlap would leave a 3-wave move up from February 2nd and that in turn could mean we're in a large corrective pullback pattern from December, which would mean a possible sharp decline to below the December 16th low near 1972. Bullish above 1972, bearish below.

S&P 500, SPX, 60-min chart

Ideally the rally from February 2nd will finish with a clean 5-wave move and maybe even up against trendline resistance, maybe even something like what I've depicted on the DOW's daily chart below. A 5-wave move would do a nice job completing what could be the final 5th wave of its rally and it should show bearish divergence against its December high, which so far it is. A 5-wave move would also be a good setup for a reversal to play, regardless of the longer-term wave count. At the moment it's a little risky for bulls as the DOW struggles at its December 26th high at 1810, with yesterday's high at 18052. Double top with bearish divergence? The bulls need to step back in before the bears become braver.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- stay bullish above 17,950
- bearish below 17,685

There's another trend line that the DOW is fighting right now, which is shown on its weekly chart below. The daily chart above is using the arithmetic price scale and you can see the uptrend line from October 2011 - November 2012 (bold green) is well below the current price (it's where the October decline found support). But when that line is viewed with the log price scale (arguably the better way to look at longer-term trend lines), it's currently where the DOW is struggling. This shows the potential for a back-test here and any selling that follows from here would leave a bearish kiss goodbye.

Dow Industrials, INDU, Weekly chart

The RUT has joined the other indexes (other than the DOW) at new all-time highs and out of its sideways triangle pattern there is an upside price objective near 1275 (+3.8%), shown with the bold blue lines on its daily chart below. A clean 5-wave move up to that level would be a good setup for a reversal but at the moment I'm a little leery about the possibility for a head-fake breakout here. Back below 1217 would be trouble for the bulls but it stays bullish above that level. As with the other indexes, a drop below its February 10th low, near 1190, would be bearish since it could lead to a quick drop below the December 16th low near 1134.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- stay bullish above 1217
- bearish below 1190

The small caps index like the RUT is a good "sentiment" index since it tells us how bullish investors are feeling. Many tech stocks fit in the same category and right now AAPL is a good sentiment stock. Practically everyone is looking for higher prices for AAPL and each time analysts get like this I usually see a reason for at least a temporary high, which has been proven to be true many times in the past. And we're there again with AAPL. As can be seen on its weekly chart below, keep an eye on 131.78 if it's reached in the next week or so. That's the level where the 5th wave in the rally from April 2013 would equal the 1st wave. It doesn't have to get there or stop there but it is a level of interest if reached and the longer-term wave count says that could be a longer-term top for AAPL. At 128.97 it's also about to test the 162% extension of its previous decline (September 2012 - April 2013), a level where reversals commonly occur. With a high so far at 128.88 I'm watching closely to see if it finds a top in the 128.97-131.78 area.

Apple Inc., AAPL, Weekly chart

Bond yields have been on a tear since their lows on January 30th (a day before the stock market its current rally). Rising yields of course means selling in the bond market. But yields look ready for at least a pullback after completing a 5-wave move, which had TNX (10-year) testing its downtrend line from September-December 2014. Today's strong decline in yields (rally in bond prices) looks like the start of the pullback/decline and considering it led the stock market rally by a day it's possible the stock market will follow yields lower from here (a rally in bond prices could result from money rotating back out of stocks into bonds). I don't think we've seen THE low for bond yields yet but the shorter-term pattern is not clear enough for me to predict lower yields from here or not until we see a larger 3-wave bounce off the January 30th low.

10-year Yield, TNX, Daily chart

Earlier I had mentioned housing starts and showed a chart to point out the recovery is only a little less than 38% of its decline. Looking at the home builders index I see the recovery as only marginally better. The 38% retracement of its 2005-2008 decline is near 508 and the high for the home builders index is currently near 579, made yesterday. It could be a case where the stocks of the home builders is doing better than actual housing starts (another case of stock prices perhaps inflated more than is warranted, thanks to all the central bank money). But at the moment I see a potential top in the making for the index, as shown on its weekly chart below. It has made it up to the top of two parallel up-channels, one longer-term one for the bounce off its November 2008 low and the other a shorter-term one for the rally off August 2013 low. The tops of these two channels cross here near 575 and only slightly below the projection near 584 for two equal legs up from August 2013. The pieces are in place for a top and it could be a significant one since another leg down in the bear market (to below the November 2008 low at 130) is what should be the next major move in the coming years.

DJ Home Construction index, DJUSHB, Weekly chart

There's been no change in my outlook for the U.S. dollar. The pullback from the January 26th high continues to look choppy and corrective and is pointing to another push higher, in which case the projections to 97.35 could play out. That expectation could be in trouble if the dollar drops back below the top of its parallel up-channel from 2008-2011, currently near 93.25.

U.S. Dollar contract, DX, Weekly chart

No change to the big picture for gold either. There is the potential for another leg up for a larger 3-wave bounce off its November 7th low (it's currently a smaller 3-wave bounce), in which case we could see gold rally up to 1375 for two equal legs up. But a drop below price-level support near 1180 would be a stronger sell signal and point to lower prices from here.

Gold continuous contract, GC, Weekly chart

Oil's bounce off the January 29th low stalled following its February 3rd high and it could be building energy for another leg up, which should happen in the next day or two if it's going to happen. In that case we could see a rally up to 58-60 but at the moment I'm not seeing anything more bullish than that. I continue to believe oil will bounce/consolidate near its low for several months before heading lower.

Oil continuous contract, CL, Weekly chart

Tomorrow's economic reports (not that the market cares) includes unemployment claims, the Philly Fed index and the LEI (Leading Economic Indicators). A continuation of signs of economic slowing are expected. There will be no major economic reports on Friday.

Economic reports and Summary

The bond market pulled a reversal today with a fairly strong decline in yields (buying in bonds) and that could be a warning shot across the bow for bulls to pay attention to. The stock market rally off the February 2nd low was led by the bond market's reversal the day before on January 30th. The buying in bonds could pull money out of the stock market, which is why we're tending to see the stock market and bond yields trade more in synch than not.

The pattern for the stock market supports higher prices and as long as the February 6th highs are not violated in a pullback I'd look for higher prices (but keep a close eye on the bond market). Below the February 6th highs would be trouble for the bulls but the bears would not be in better shape until the indexes drop below the February 9th lows. It might be a continuation of a choppy whippy market from there but at the very least I would not want to be long if those lows are taken out.

Continue to keep in mind that we have a headline-driven market at the moment and while there's additional upside potential for the indexes, the downside risk is greater than upside potential. This market is propped up on hope, a commodity that can be (and usually is) quickly snuffed out.

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