The indexes have made it back up near the highs of the 2-month trading range (the RUT has done better) and it's now decision time for the market. Only slightly higher would confirm all indexes should rally higher into May but the bears have one shot to make it work here (even if only back to the bottom of the trading range).

Wednesday's Market Stats

After European markets opened our equity futures rallied in the early-morning hours and we were looking for a gap up to start the trading day. Adding to that, in what has become a familiar pattern lately, the market was hit with some buy programs at the open and the market snapped higher in the first few minutes. These buy programs are then typically followed by a reversal back down or a flat market since there's been little follow through to the buy programs. That happened again this morning but following a midday pullback the buyers came back and pushed the indexes a little higher in the afternoon. Some profit taking in the final hour knocked the indexes back down some and it could be argued the market is now ready for a larger pullback, unless of course the bulls have something else in mind.

The market rallied despite the continuing stream of bad economic news (or perhaps I should be saying "because" of the bad economic news). This morning's reports showed the Empire Manufacturing index came in at -1.2 vs. the expected 5.0. The March reading was 6.9 and there's no other way to read this number as another indication of a slowing economy and I'm surprised we're not hearing more talk about a recession (we're likely already in one but it won't be recognized until in hindsight).

Industrial production also came in worse than expected -- for March it was -0.6% vs. expectations for -0.4%. The number was slightly positive, at +0.1%, for February. Capacity utilization also dropped to 78.4% from February's 79.0% (revised up from 78.9%). All signs continue to point to an economic slowdown and possible recession but the stock market cares about only one thing -- will the Fed raise rates 1/8 or 1/4 point in June or will it be later. Pretty silly reason to rally in spite of slowing earnings and a slowing economy but as long as money is being manufactured out of thin air it apparently doesn't matter if real manufacturing is in decline. Welcome to bubbleland in search of a pin.

The Fed's Beige Book was released this afternoon but the market didn't pay any attention to it. The little selloff in the final hour could be blamed on it but in fact there was hardly any reaction at 14:00 when it was released. The economists have been wrong in their forecasts (so what else is new) and the fact that they have failed to predict the current slowdown is what prompts many to blame it on the weather, even though studies have shown weather to have very little influence, especially when the first three months of this year experienced a milder winter than last year (well, except for Boston, wink). "Weather" was mentioned 71 times, according to Bloomberg, as the reason for the underperformance of the economy.

Other negative factors included the strong dollar and the decline in oil prices. Helping the economy was residential real estate, which showed some slow improvement (except for housing starts due to that nasty "weather"). The auto industry saw some strength in the Midwest but not in the Boston, Philly, Richmond and Dallas regions because of the "weather," but don't you think that's a stretch for Dallas to use that excuse? There's been some strength in the retail sector, which is attributed to people having a little more money in their pockets after cheaper gas. The labor market has been stable if not showing modest improvement with pockets of upward wage and price pressures and if this becomes stronger it could actually be negative for the market since it would embolden the Fed to raise rates. I think there's a snowball's chance in hell they'll raise rates before 2017 but if the market thinks they'll raise rates it could put downward pressure on stock prices.

OK, on to the stock market. This week SPX has added about 4 points so far to last week's but as you can see on its weekly chart it remains inside its 2-month trading range between 2040 and 2120. The sideways consolidation looks like a bullish continuation pattern as price works its way over to the uptrend line from March 2009 - October 2011, currently near 2060. We could see one more pullback before proceeding higher and as long as it stays above 2040 it continues to look good for a rally up to the 2175 area by mid-May.

S&P 500, SPX, Weekly chart

My best guess for what's playing out since the February 25th high is a bullish sideways triangle and it would look best with one more leg down to complete the pattern (triangles typically consist of a 5-wave move, labeled a-b-c-d-e, which I show with the green labels). Bulls need to be aware of the potential for another whipsaw move that could shake them out of their positions even if the intermediate pattern remains bullish (into mid-May). The bearish possibility is for the start of a 3rd wave decline following the 3-wave move up from March 12th so keep that in mind when evaluating where you want your stop in order to protect profits in long positions. If we do get a pullback/decline it will be the form of it that will tell us whether to expect further upside (if it pulls back in a corrective pattern) or instead a strong move down (if it starts down with a stronger impulsive pattern). A rally above the February 25th high near 2120 would negate the bearish wave count and confirm new highs are coming, even if we'll first see a stronger pullback before rallying higher.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2120
- bearish below 2045

The 60-min chart shows a fractal pattern between the March 12-23 rally and the one from April 1st. It's one reason why I think we'll see another leg down inside the sideways triangle. The March 12-23 rally is a 7-wave move, which is a corrective move (double zigzag w-x-y) and now the rally from April 1st is the same pattern. Triangle patterns consist of only corrective moves up and down (overlapping highs and lows within the move) and so far that's what we have. This market could surprise to the upside but right now I think the higher-odds probability is for another leg down before starting the rally to a new high into May.

S&P 500, SPX, 60-min chart

At the beginning I mentioned the market is at a fork in the road and as Yogi Berra would tell us, we need to take it. It's decision time and if the indexes head higher from here (above SPX 2120) it would immediately turn the market more bullish but the short-term bearish setup is for a reversal back down. If it does head back down it would leave us guessing whether it will start a more significant decline or just pull back before heading higher. Until I see bearish evidence that tells me otherwise, I think the bullish sideways triangle is the governing pattern at the moment. But the NYSE tells me to be cautious about my bullish expectation, as discussed below.

I mentioned triangle patterns typically have 5 waves to complete the pattern and rising/descending wedges are essentially triangles that have the same 5-wave moves inside them. The NYSE chart below shows a possible rising wedge for the move up from last October (similar to the other indexes) and it now has the requisite 5-wave move. Today's high was a slight throw-over above the top of the rising wedge, which is the trend line along the highs from November-February, and the drop back below the line, near 11188, at the close can be considered the completion of the move and that puts it on a sell signal. What many traders are watching is the horizontal line off the highs from last July and September, just above 11000. This can be interpreted as an inverse H&S continuation pattern (with BIG upside potential). Today's break above that line has many thinking "breakout!" We now wait to see if it will be a head-fake breakout or in fact something more bullish.

NYSE Composite index, NYA, Daily chart

From a bearish perspective, the significance of the rising wedge pattern is that it could be retraced quickly, which means a trip back down to the December low at 10360 (and the 2007 high at 10387) and it could happen in less than a month. A drop below the March 26th low near 10815 would be a bearish heads up and this pattern calls into question the bullish sideways triangle setup shown on the SPX charts. At the moment it's simply another reason why bulls should protect their long positions, especially if that neckline near 11100 doesn't hold on a back-test. If there's another drop back down toward the March 26th lows we'll have an opportunity to evaluate it to help determine if something more bearish can be expected.

A chart I've shown in the past looks at price highs, in this case for NYA, vs. how much support it's getting. As you can see with the declining highs on the 10-day moving averages of new 52-week highs and advance-decline line since last November, the new price highs are occurring on the backs of fewer stocks participating in the rally. This is Not a good sign for the bulls. As we know, this condition can extend much longer than we think possible but consider it a bearish warning sign. If it breaks down we could see the air come out of this balloon very quickly.

NYA vs. 52-week highs and Advancing-Declining Issues, Daily chart

The DOW has the same setup as SPX -- it would look best with a pullback within its slightly down-sloping sideways triangle off its March 2nd high, the bottom of which will be near 17500 early next week. It left a small throw-over above its downtrend line from March 2-23 and then closed on it. If it can continue above today's high at 18160 it could lead to a rally at least up to the trend line along the highs from December-March, which will be near 18450 next week. But if we get the pullback, as depicted on its chart, it would be a good setup for a better long play (assuming the bearish warning from the NYA chart can be held off a little longer).

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,289
- bearish below 17,450

The Nasdaq continues to put pressure on the 5000 level, closing marginally above it today after not being able to hold it on Monday. In addition to the psychologically important level, it's battling its trend line along the highs from January 2004 - October 2007. The Naz will be more bullish above its March 20th high at 5042 but unless it can negate the bearish divergence on its chart it's going to be hard to trust new highs from here. A pullback to its 50-dma and uptrend line from January-March, both near 4914, would be a better setup for a long play. With resistance right here I think it actually makes for a better short play setup.

Nasdaq Composite index, COMPQ, Daily chart

Key Levels for NDX:
- bullish above 5042
- bearish below 4900

The RUT powered higher again today, leading the other indexes to the upside. But I'm thinking further upside for the RUT could be a challenge. Within a rising wedge pattern off the January lows it has now formed a smaller rising wedge for the leg up from March 26th, which internally can be considered complete at any time, including right here following the small throw-over above the top of the small wedge. If it pulls back and uses the uptrend line from January as support it would be a setup for another rally leg but at the moment, like the other indexes, the short-term pattern is looking ready for at least a larger pullback.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1258
- bearish below 1220

Treasuries are looking like they should be ready for another rally leg soon, which would mean another leg down for yields. As shown on the TYX (30-year) chart below, it's likely almost finished with a bear flag pattern that should lead to another leg down at least equal to the March 6-25 decline. That would also be a test of the January 30th low at 2.226 and a rally in bonds could be a result of rotation out of stocks and into bonds.

30-year Yield, TYX, Daily chart

Last week I mentioned the TRAN was skating on thin ice and with the warmer weather the ice is getting thinner. It did bounce off support after leaving a small throw-under finish on April 6th and last week's rally had it following through on the buy signal from that throw-under and recovery back above 8580. But it has not been able to get back above its 20-dma, which was tested again today at 8780. This follows another test of 8580 support with yesterday's low at 8585. Keeping testing that thin ice and it's going to break! Needless to say, the TRAN needs some buyers to step in and do it now.

Transportation Index, TRAN, Daily chart

Last Thursday the U.S. dollar broke out of its sideways triangle consolidation pattern off its March 13th high, as well as climbing back above its 20-dma. It has now pulled back to its 20-dma, at 98.27, and could back-test the apex of its triangle where it crosses the bottom of its up-channel for its rally from October, near 97.65. As long as it doesn't drop below that level there should be a continuation of the dollar's rally and potentially up to about 105 by mid-May where it should then be ready for a larger pullback correction.

U.S. Dollar contract, DX, Daily chart

Gold is currently doing battle between its 20-dma, which are about to cross near 1197. Closing above that level keeps it short-term bullish and we could see another leg up for a test of its 200-dma near 1232. While a rally above that level would start to look more bullish, instead of just a bounce correction as it currently appears, the larger bearish pattern still suggests another leg down once the bounce off the March 17th low completes.

Gold continuous contract, GC, Daily chart

Today's strong rally in oil (+5%) was partly a result of the low crude inventory build number this morning (+1.3M barrels vs. last week's +10.9M barrels) but it might have been good enough to complete its bounce off its March 18th low. It could be in a different pattern than the rising wedge that I've got depicted on its daily chart below but at the moment it's looking vulnerable to a reversal back down. I've been anticipating a rally up to resistance at 58.13-58.50 but a turn back down from here would leave a little throw-over above the top of its rising wedge and put it on a sell signal. It takes a rally above 59 to turn oil more bullish.

Oil continuous contract, CL, Daily chart

Tomorrow's economic reports include the unemployment claims numbers and Housing Starts and Building Permits before the opening bell. After the bell we'll get the Philly Fed, which is expected to be flat from March but the way these economic reports go we'll see if it holds up or joins the others in disappointing the economists.

Economic reports and Summary

Conclusion

Opex week tends to be bullish and so far the bulls haven't been disappointed. But further gains this week could be difficult if the reversal setups on multiple indexes play out. We might see the market at least hold up, if not rally, into the end of the week but the short-term bearish patterns suggest we could start a stronger pullback/decline in the coming week. The intermediate bullish patterns, such as for SPX, suggests a pullback in the next week or two before starting the next rally leg that should take us to new highs (2150-2175) in mid-May, which is when we'll face a major turn window.

The risk for bulls, if the market does start back down, is that some of the more bearish patterns, such as for the NYA, suggest we could be putting in an important top here. Instead of a pullback and then onto new highs in May we could be looking at the start of a much more serious decline. Protection of long positions seems a prudent idea here and then if we get a deeper pullback we can evaluate it for evidence that it will likely be just a pullback or instead something more bearish. If you're itching to get short, this is actually a good place to try it since the March highs, such as SPX 2120 provide a relatively tight stop. If today's high was the completion of the rally then a tighter stop is today's high.

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