The market has been able to eke out new highs each day to keep the buyers interested but some afternoon selling, which some blame on selling in AAPL, put a minor crimp in the bull's plans. Just a warning shot?

Wednesday's Market Stats

Janet Yellen gave another speech to Congress today but said nothing new and did not retract anything she said yesterday. So the market treated it as a non-news event, which was part of a quiet news day overall and the result was some minor buying in the market (bonds, stocks and some commodities) but the stock market saw very low-volume trading. The rally produced new highs for the indexes but some sell programs hit at 14:00, some of it being blamed on selling AAPL, and the indexes lost some ground (the RUT and DOW held in the green, thanks to an end-of-day push back up).

Isn't it interesting that the stock market is one of the few places people love to buy at top prices. The higher the market goes the more investors want to buy and they'll borrow money to do it. Of course it's like an auction where the excitement grows as the price is auctioned higher. But some will say the emotions during an auction can lead to bad purchases that are later regretted.

But there are two things conspiring against those who want to continue buying the market at the top -- bullish sentiment and margin debt. The Investors Intelligence (II) bull-bear sentiment was released today and the ratio of bulls to bears has now tied the highest previous reading in the last 28 years. The bearish percentage is now below 15%, which follows the 50% reading in October 2011. With each rally off a sharp pullback more and more investors have been shedding their bear fur and growing horns and they're willing to pay top dollar with the expectation that they'll be able to sell even higher. The bullish sentiment is once again at a dangerous (for bulls) extreme.

And not only are more and more investors wanting to pay top dollar, without fear, they're doing it on record amounts of margin. Doug Short, at dshort.com, has some great charts showing margin levels vs. the stock market, two of which I've copied below. The first one below shows the NYSE Margin Debt vs. the S&P 500 since 1995. The red line is margin debt and you can see how it peaked higher in 2007 and 2014. Stock market peaks tend to follow peaks in margin debt.

NYSE Margin Debt vs. SPX, 1995-2014, chart courtesy Doug Short

What's important in the chart above is that margin debt peaks shortly before the stock market peaks, which indicates investors start to get nervous before the final stock prices peak. This results in higher stock prices that are not supported by as many people (this can also be seen in the falling number of new 52-week highs, advancing-declining stocks and several other market internals). The market simply runs out of buyers and the sellers soon become stronger than the buyers. Often a top is put in place for no other reason than that, which then gets the pundits wondering why the market is selling off even on good news.

Another way to look at this NYSE margin debt issue is with a measure of positive and negative credit balances in investors' accounts. Doug Short's chart below inverts the S&P 500 to show the correlation between large negative credit balances and stock market peaks (troughs when viewed inverted). As you can see on the chart, the negative credit balance far exceeds what we had in 2007 and has exceeded what we had during the dot.com period where everyone was a day trader on margin. One can only imagine what the coming "correction" will look like.

NYSE Investor Credit Balance vs. S&P 500, chart courtesy Doug Short

Other than the chart patterns, which I'll get into next, it's information like that presented above that keeps me on the cautious side of this market and playing contrarian. I think we'll soon see a major stock market top that will reward the bears after forcing them into hibernation for the past six years (the bull market will celebrate its 6-year anniversary on March 6th).

I want to take another look at the Nasdaq, starting off with its weekly chart, because it's presenting us a very interesting picture here. It also happens to be one of the better sentiment indexes at the moment because it's so close to the 5000 level that it struggled with in 2000 and not far from its all-time high at 5152, which investors are obviously hoping to exceed (break out your party hats if it happens).

There are two trend lines that the Naz has now run into -- one is along the highs from January 2004 - October 2007 and the other from April 2010. This latter trend line has been repeatedly tested since March 2014 and is obviously an important trend line to traders. The longer-term trend line makes it that much tougher resistance. There's a price projection near 4924 where the c-wave of a large A-B-C bounce pattern off the November 2008 low is 162% of the a-wave, which was achieved on February 29th. The 5th wave of wave-C, which is the rally from October 2011, would equal the 1st wave near 5035. Along with the millennial level at 5000, this is the reason I've been saying an upside target zone for the Naz is 4924-5035 and the high so far is 4984. I've also been thinking 5000 won't get hit because profit taking could overwhelm the buyers before it's reached, which is what this afternoon might have started.

Nasdaq Composite index, COMPQ, Weekly chart

The significance of the wave count, if it's correct, is that following the completion of the large A-B-C bounce off the November 2008 low it will mark the completion of the cyclical bull market and start us down in the final leg of the secular bear (bottoming 2016-2018). The daily chart below shows a closer view of the two trend lines along the highs. From a pattern perspective, the sideways triangle that formed off the November 28th high is very common for a 4th wave that leads to the final 5th wave. So the EW pattern fits very well with an expected completion to the rally and here is as good a place as any I've seen in quite a while.

Nasdaq Composite index, COMPQ, Daily chart

Key Levels for COMPQ:
- Stay bullish above 4900
- bearish below 4719

The final 5th wave is the rally from February 2nd and it's shown more closely with the 60-min chart below. It formed a rising wedge shape, which is an ending pattern and has the bearish divergence supporting the pattern interpretation. We don't have a clean break of the pattern since it kind of dribbled out of it yesterday and then tried to rally back up to the bottom of the wedge today but couldn't make it. There's still upside potential for a back-test of the bottom of the rising wedge, which could get price up to the 5035 projection by Friday (end of month) but this afternoon's quick little selloff might have been the warning shot that bulls need to heed.

Nasdaq Composite index, COMPQ, 60-min chart

As I had mentioned earlier, AAPL was blamed for this afternoon's little selloff. I'm not sure what prompted the selling in AAPL but it could have been nothing more than profit taking. Selling needs to be blamed on something so why not take a bite out of AAPL? Interestingly, option activity in AAPL yesterday and today has been much higher than normal so perhaps someone knew something or started something.

An interesting factoid about AAPL is that it would now qualify as the 14th largest country in the G-20. The table below lists the countries by market size and AAPL would slip in front of South Africa, Mexico, Italy, Indonesia, Saudi Arabia, Turkey and Argentina. Not bad AAPL. And many are predicting AAPL will become the first trillion-dollar market cap company. The only problem with that prediction is that those kinds of predictions often mark the top for the stock.

G-20 Economies Stock Market Caps, data from Stock Market Caps by Country

Along with the trillion dollar market cap prediction for AAPL, possibly killing the stock's rally, the chart says AAPL bulls might want to get defensive here. Suggesting a short on AAPL would be viewed as insanity, which is why it work nicely but it's a little too early to tell. What I like about the reversal setup, like the Nazdaq, is that it met some price projections and hit the top of its rising wedge pattern for the rally off the April 2013 low. A 162% extension of its previous decline (September 2012 - April 2013) is at 128.97 and the 5th wave of its rally from April 2013 equals the 1st wave at 131.78, both of which have now been achieved. So, is all the option activity and afternoon selling telling us something that the chart pointed to? Only time will tell.

Apple Inc., AAPL, Weekly chart

For SPX I've been watching the trend line along its highs from last July-December, which is currently near 2132. I've had that as an upside target for a while and it remains a good target if the buyers can keep the rally going this week. But to hold out for that little bit, considering the downside risk, is simply not a good trade in my book. And when you're holding a long position I think it's important to question each day whether it's a trade you would enter today and if not then suck your stop up close.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- stay bullish above 2085
- bearish below 2064

As with most of the indexes, SPX has formed a rising wedge pattern for its rally off the February 2nd low. An uptrend line from February 2nd through the February 20th pullback low was broken this afternoon but another uptrend line from February 9-20 held, as can be seen on the 30-min chart below. It's not hard for me to argue the February 9-20 uptrend line is the more important one and there the bulls want to defend this afternoon's low. There's still the upside potential to the upper trend lines (the trend line along the highs from July-December and the trend line along the highs from February 6-17), which cross near 2133 tomorrow. In my opinion, bulls are pushing their luck here.

S&P 500, SPX, 30-min chart

Like SPX, the DOW has a little more upside potential before running into its trend line along the highs from December 2013 - December 2014, which is currently near 18350. As long as a pullback can hold above price-level support near 18100 there remains the upside potential. The bears need to see a break below last Friday's low at 17878 in order to have better confirmation that a top is in place.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- stay bullish above 18,100
- bearish below 17,878

The RUT is getting squeezed in a rising wedge as it approaches its trend line along the highs from September-December 2014 (seeing a common theme here?), which is currently near 1239, as is the top of its rising wedge. Above 1240 would be more bullish (if it can hold above), in which case we could see a rally up to its broken uptrend line from March 2009 - October 2011 for a 3rd test following the back-tests in November and December. That could see the RUT up near 1265 by next week.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- stay bullish above 1218
- bearish below 1214

A closer view of the rising wedge pattern can be seen on the 30-min chart below. This afternoon's selloff was a break below the bottom of the wedge and the jam back up at the end of the day looks like a back-test (so far). That made it a good setup for a short at the close, with the anticipation of a bearish kiss goodbye first thing in the morning. But if the buyers hold on here, watch to see how the RUT does around the 1239-1240 area.

Russell-2000, RUT, 30-min chart

The home builders index (DJUSHB) was one of the weaker indexes today, down -1%, and this follows a good day yesterday following Toll Brothers (TOL) strong earnings report. Last week I showed a chart of housing starts and building permits to point out the corrective bounce pattern off the 2009 low that has retraced a little less than 38% of the 2006-2009 decline. I also showed a weekly chart of DJUSHB to point out why I thought the index could be topping, especially now that it achieved the upside price projection (583.76) with yesterday's rally. Yesterday's spike up on the TOL news would be a typical way for a rally to end (on news).

The daily chart below shows the 583.76 price projection as well as the top of its parallel up-channel for the rally from August 2013, near 578. Not shown on the daily chart is the top of the parallel up-channel for the bounce off the November 2008 low, which is also near 578. Yesterday's rally had the index poking above the trend line along the highs from November-January but today it dropped back below the line which creates a sell signal following a failed breakout attempt. This is a setup for a reversal to the downside and we'll only know in hindsight whether or not it will work for the bears. It continues to look like a good possibility for a very important long-term top.

DJ Home Construction index, DJUSHB, Daily chart

Another indication of trouble for the home construction market (and by extension, the economy) is the price of lumber. If the expectation is that fewer homes will be built, the traders in lumber contracts are going to see a drop in future demand and trade the price accordingly. The weekly chart of lumber prices below shows this week's break of the uptrend line from March 2009, which is obviously an important trend line. Some have speculated that the drop in price has to do with the slowdown in the shipping ports, which has caused a buildup in the supply of lumber, which in turn drives the price down. That's very possible but if the wave count on the chart is correct then the decline should start to accelerate lower in a 3rd of a 3rd wave down in the decline from March 2013.

Lumber continuous contract, LB, Weekly chart

For weeks I've been showing the dollar's weekly chart to point out the pattern and price projections that overlap at 97.33 and 97.35, not much higher than its January 26th high at 95.85 (the price projections are based on the wave pattern for the 3rd wave in the rally from 2011 and for the 5th wave in the rally from 2014). Since the January 26th high it has been consolidating in a sideways triangle, which fits well as the 4th wave in the leg up from October 2014. That leg is the 5th wave of the rally from May 2014 so I've been looking for the 5th of the 5th wave to complete the rally before it starts a larger pullback correction. Since a sideways triangle often leads to the final move of the trend (up in this case) the little sideways triangle since January 26th is a good setup for the final 5th wave.

The daily chart of the dollar shows the little sideways triangle and if it starts the 5th wave rally from here I have a price projection at 97.28, where it would equal 62% of the 1st wave (in the move up from October 2014). Nice correlation with the other two projections at 97.33 and 97.35. There's higher potential but for now the upside target zone is 97.28-97.35.

U.S. Dollar contract, DX, Daily chart

Along with the dollar consolidating in a relatively tight trading range, the metals haven't moved much either, although they've continued to drop slightly lower while the dollar has gone sideways. If the dollar does get one more pop higher it could drive the metals even lower but I'm seeing an ending pattern for the decline in gold from its January 22nd high and it looks like it's setting up for at least a bounce. What's not clear at the moment is whether we should expect another rally leg similar to the November-January rally or just a bounce before continuing lower. That won't become clearer until the bounce gets underway. As for as upside potential for another rally leg, two equal legs up from the November low points to 1367.40, which is shown on the chart. That would be good for another back-test of its broken uptrend line from 2001-2005 where it crosses the projection at the end of April. But the risk for gold is still lower prices.

Gold continuous contract, GC, Weekly chart

So far oil is doing what I suspected it would do following its January low. The larger pattern for its decline from September 2013 calls for a multi-month consolidation before heading lower and a 4th wave correction will likely be a lot of choppy price action that could stay under price-level S/R near 58.50. It broke this support level last December, did a quick back-test of it and then sold off into the January low. If the bounce gets another leg up, as depicted on the daily chart below, two equal legs up would see oil rally to 58.47, which is "coincidentally" the same as the price-level resistance. That could finish the first leg (wave-A) of a larger consolidation pattern but first we need to see if oil can continue the rally that started off this morning's spike low.

Oil continuous contract, CL, Daily chart

Tomorrow's important economic reports include CPI data and Durable Goods orders. The CPI is expected to show a continuing decline (Oh no, Mr. Bill, it's that dreaded deflation, oh noooo....(Mr. Bill) and the durable goods number is expected to continue to be negative. But not to worry, both mean the Fed will stay in full accommodation mode and help prop the market up so enjoy the bad economy, hold your nose and just buy stock on as much margin you can get your hands on. PLEASE DON'T DO THAT! I am of course saying that with tongue firmly implanted in my cheek since it seems the worse the economic news gets and the more the projected corporate earnings are ratcheted down the more investors want to buy. This will not end well for them.

Economic reports and Summary

Conclusion

I see at least a little more upside potential for the market but at this point I don't believe the risk/reward favors the bulls -- I see downside risk that swamps upside potential. SPX 2132, Nasdaq 5035, DOW 18350 and RUT 1240 -- those are the upside targets that I'm watching to see if they can be achieved. Higher than that and we could be in a much stronger move (blow-off top?) but the risk as I see it is that a stronger move down could start at any time. This afternoon's little selloff might have been the start of it, in which case we should see the market immediately decline Thursday morning. If there's no immediate decline then look for those upside targets. If you can watch the market during the day it could be a good trade on the long side. But if you're holding trades overnight here I think you might be asking for trouble.

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