The choppy trading range that we've been in continues and traders on both sides continue to get whipped out of their trades. Directional trades have been failing left and right but we might finally be at a point where a long trade could work (as long as significant downside risk is kept in mind).

Wednesday's Market Stats

Equity futures were pointing to a positive open this morning and the indexes gapped up. The DOW jumped up +92 to 18020 in the first minute and then spent the next 40 minutes getting hammered down nearly 240 points to 17781 (-147). A mid-morning bounce recovered 128 of those points and it almost made it back into the green. But before 11:00 the sellers returned and hammered the DOW back down 176 points to 17733 (down nearly 200) before the buyers shoved the sellers aside and recovered 113 of those points, finishing down -86. We've been seeing daily reversals of this magnitude but this was in just one day.

I'm not sure what drove the selling out of the gate this morning but it wasn't the economic reports, which were not great but they were out before the bell and the futures barely moved. I think it's just an example of how quickly the market can move in what is becoming more of an illiquid market as more and more traders head for the sidelines (it's been a tough market for most). We've been seeing initial morning moves in the market, as either buy or sell orders hit, and it could be some big firms just playing with the market (drive it in one direction quickly for some quick trading profits and then step aside). The fact that the market sold off some more after the morning bounce had it looking more bearish but I'm not yet convinced the bears are in the driver's seat yet.

As for this morning's economic reports, they were employment related and they weren't supportive of an improving economy. Unfortunately the numbers are confirming other signs of a slowdown in the economy, this despite years of Fed efforts to goose the market, I mean economy.

The ADP Employment report showed +169K new jobs but that was less than the +189K the market expected and slightly less than the downwardly revised +175K in March (revised down from +189K). But it wasn't far enough away from estimates to affect traders.

The preliminary Productivity report showed a decline of -1.9% for Q1, which was a slight improvement from the -2.1% for Q4, 2014 but roughly in line with expectations. It's the first time since the 1st and 2nd quarters in 2006 that we've had back-to-back declines. Compounding the problem of declining productivity are the large jumps in Unit Labor Costs -- up +5.0% for Q1, which follows a +4.2% in Q4. Declining productivity with an increase in labor costs is a double whammy for companies and it will affect their bottom lines (the 'E' in the P/E ratio gets smaller and the P/E therefore climbs higher, making it more difficult to argue the market is fairly valued).

Crude inventories dropped -3.9M barrels, the first drop in a long time, and this spiked the price of crude in the morning. But from a morning high at 62.58 it lost nearly $2 by the end of the day, signaling the report was likely already priced in and it became a sell-the-news event. As I'll cover with its chart later, this spike on news and then reversal gives us a good reversal pattern and oil should start to pull back from here.

For the past several weeks I've been short-term bullish the stock market and I've been expecting to see an important market top sometime in mid-May (maybe as late as the end of May). The big sideways consolidation since late February supports this but I remain wary of the fact that so many important tops in the past have been put in this way -- they consolidate in what looks like a bullish continuation pattern and then suddenly the market breaks down instead. A failed pattern tends to fail hard and that's one of the reasons why I've been saying upside potential is dwarfed by downside risk. I think the indexes (not sure about the RUT) will make new highs but betting on that is very risky at this point. Just be sure you know where you're exit point is and don't trust limit orders for your stops. You know, the usual warnings that go along with "don't eat yellow snow and don't spit into the wind."

As you'll see on my charts, I continue to show expectations for a little more rally (maybe just a high bounce for the RUT) but every day I look for chart signs that it might not happen. There are plenty of other warning signs that tell me upside is risky. A chart recently shared by Tom McClellan shows the spread between bullish and bearish sentiment, as measured by Investors Intelligence. As can be seen on his chart, there's good correlation between wide bull-bear spreads (above 40, which indicates many more bulls than bears) and market highs. Especially important is when the spread hits the top and bottom of the Bollinger Band around the 50-dma of this measure, as it's doing now. It can go higher (wider spread), as it did in February, but this is dangerous territory to be a bull.

Investors Intelligence Bulls-Bears, chart courtesy Tom McClellan

Another warning sign comes from China. China has become a big player in the global market and how it handles any future economic/currency crisis will definitely have an impact on the rest of us. We've heard about the froth in their stock market, especially with the number of new retail trading accounts that are opening. This is very reminiscent of all the day traders opening trading accounts in the latter 1990s as our stock market roared higher. The chart below is a graphic view of the number of new brokerage accounts that have been opened this year, the significant majority of which are retail accounts by people who have never traded before but hear of all the money their friends are making.

New Chinese brokerage account, chart courtesy stansberryresearch.com

That's a parabolic climb if I ever saw one. What could possibly go wrong as more than 3 million new accounts are opened each week? It's a faster rate of new account creations than the last stock market bubble in 2007. As I've mentioned before, the strong rally in the SSEC (China's stock market) in the past year+ fits well as the c-wave of a large a-b-c move up from 2009 and it looks ripe for a sharp drop back down into another bear market decline. All those new traders and all their new long positions will first get caught in a downdraft and then when they start panicking and bailing en masse it's not going to be a pretty sight. It's also going to produce a lot of angry Chinese. It's anyone's guess when the music will stop but parabolic rallies, which it now has (and new account creation as well), never end well.

I'm going to start tonight's chart review with a weekly chart of the Wilshire 5000 index. It's not that we trade this index but it's a good one to see what THE market is doing and help guide us forward. The big multi-year pattern is a 3-wave move up from 2009, which I look at as a large 3-wave a-b-c "bounce" correction in the secular bear market that started in 2000 (and the secular bear needs one more big leg down to finish the cycle). As noted on its chart, the c-wave would be 162% of the a-wave near 23540. It doesn't have to get there, or stop there, but it's been a good target price.

Wilshire 5000 index, W5000, Weekly chart

Based on the shorter-term move for the final 5th wave, which is the leg up from last October, I think a good upside target is a little below 23K. This is where it would run into the trend line along the highs since last July. The c-wave, which is the leg up from October 2011, started off with a series of 1st and 2nd waves to the upside, which has been followed by a series of 4th and 5th waves since December 2013. The long-term bearish divergence, noted on the chart with MACD and RSI, suggests the wave count is correct and should now be very close to completion, if not already complete. A drop below the February 2nd low near 20900 would signify the top is likely already in place.

The W5000 has a very similar setup as the others (even if short-term patterns are different, as they are between the techs, small caps and blue chips) and as can more easily be seen on its daily chart below, it's currently holding above support at its uptrend line from March 2009 - October 2011. It was nearly tested with today's low at 21843. It would have two equal legs down from April 27th at 21808 and that makes it important for the bulls to defend 21800 from breaking. Following a 3-wave pullback from April 27th we have a bullish setup at its uptrend line and now we wait to see if the buyers will step back in. Upside potential is to the top of its rising wedge pattern, which is the trend line along the highs from last July-November-December, near 22730 by mid-month.

Wilshire 5000 index, W5000, Daily chart

SPX was looking a little more bearish today than W5000 because it broke below its uptrend line from March 2009 - October 2009, but it closed on the line, currently near 2080. A rally on Thursday would leave today's intraday break as just another head-fake break of support that we see so many times in this market (which is why I suggest using closing prices for stops -- it's riskier but I've saved many plays by waiting to see if an intraday break of support/resistance is going to hold into the close). Today's candlestick is a long-legged doji which can be a reversal candlestick if it's followed by a positive day on Thursday. The short-term pattern has been a real challenge to figure out, as both sides get slapped about the heads and shoulders, but the best fit is for one more leg up to complete a 5-wave ending diagonal (rising wedge) from the March 11th low. Back up to the top of the wedge (the trend line along the highs from March 23 - April 27) by mid-month should see SPX reach up to about 2135. Higher than that would open the door to 2160-2185 into the end of the month.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2135
- bearish below 2045

Today's decline had SPX slightly exceeding a downside price projection at 2072.62, which is where an a-b-c pullback from April 27th has two equal legs down. It was an intraday break of that level, as well as its 2009-2011 uptrend line, but the recovery in the final hour sets it up for bullish follow through. We now wait to see if the buyers will show up Thursday morning.

S&P 500, SPX, 60-min chart

Similar to SPX, the DOW has a 3-wave pullback from April 27th and two equal legs down is at 17733.10. Today's low was 17733.12 (what's 2 cents among friends) and it was a very good setup for a reversal and an upside reversal now looks good for tomorrow. Today's low fits well as the completion of the big sideways (very choppy and whippy) consolidation since March 2nd and now we should get one more rally leg to a new high. I show a rally up to a price projection at 18554, which crosses a trend line across the highs from December 26 - March 2 later this month. An important turn window, centered on May 13th, looks doable if something lights a fire under the bulls (and scares the shorts). It's pretty much do or die time for the bulls here.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,289
- bearish below 17,585

NDX also held its uptrend line from 2009-2011 today (with only a minor intraday break), currently near 4370. The bullish setup is for a rally up to the 4600 area by mid-month and it's now waiting for buyers. The late-afternoon rally should have been the start if we're to see another rally leg. I wonder though if we'll get another quick drop in the morning to shake out a few more bulls and suck in some bears before doing a hard reversal. Not that we've seen anything like that happen before in this market...

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4511
- bearish below 4284

The RUT has clearly been the weak sister since April 27th and has broken all kinds of support, including its uptrend line from October 2014 - February 2015 and its 50-dma, both last week. But today's strength in the face of weakness in the other indexes was telling bears not to get aggressive on the short side. It only dropped marginally into the red and was looking anxious to get a rally started. The decline from April 27th looks like a completed 5-wave move and is therefore a setup for at least a bounce. If the April 27th high was THE high for the RUT we should get a high bounce, perhaps back up to price-level support near 1248, before turning back down. That could coincide with new highs for the other indexes and leave a bearish non-confirmation. It's just a guess at the moment about that possibility.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1262
- bearish below 1206

Bonds have been selling off strong over the past two weeks, which has yields climbing, and the 30-year yield (TYX) climbed above its March 6th high at 2.87%, as well as its 200-dma at the same level, yesterday and added to its rally today. The rally off the March 25th low has turned many traders bearish the bonds. But I'm not so sure that's wise yet. At the moment TYX is testing its downtrend line from December 2013 and only slightly higher, at 3.089% is where the bounce off the January low would have two equal legs for an a-b-c bounce correction to its longer-term decline. Above 3.09% would be more bullish (bearish for bond prices) but at the moment it could be just a trap. I continue to see the potential for the 30-year yield to drop to 2% by the end of this year. What could spark a big bond rally? Perhaps a crashing stock market.

30-year Yield, TYX, Weekly chart

As can be seen on the BKX weekly chart below, the banking index has been holding up well since pulling back and back-testing its 50-week MA at the end of March. Yesterday it tagged, again, the top of its expanding triangle (a bearish topping pattern), which is the trend line running along the highs since March 2014 (and notice the continuing bearish divergence since then). At the same location this week is a broken uptrend line from October 2013 - May 2014 (gray), which was back-tested in March and now again this week. Also at the same level is its broken uptrend line from March 2009 - October 2011 (green) so we've got three trend lines that the bulls are trying to battle through, so far unsuccessfully. This week's candle, so far, is a shooting star at resistance and that's a warning for bulls but we'll have to see how it finishes the week.

KBW Bank index, BKX, Weekly chart

How many times does it take the TRAN to hammer on support until it breaks? I'm sure more than a few bears are wondering the same thing. At the moment it's 8 times and counting and the latest test is showing bullish divergence. It looks like a bullish continuation pattern and it looks like it should rally out of this. But I also know looks can be deceiving and a firm break below support near 8580 could lead to a strong decline, in which case I'd get even more defensive with any long positions you currently have.

Transportation Index, TRAN, Daily chart

Since the March high for the dollar, which was the completion of a 5-wave move up from May 2014, I've been looking for a multi-month pullback/consolidation before proceeding higher. So far the wave pattern supports that view and at the moment it looks like it should be completing a 3-wave pullback. Today it dropped down to the bottom of a parallel down-channel (bull flag) and achieved two equal legs down at 94.25 (today's low was 93.96). In the 5-wave move down from April 13th, for the c-wave, the 5th wave would equal the 1st wave near 93 so there's a little more downside potential based on this. Not shown on the daily chart is the top of a longer-term shallow up-channel from 2008, which the dollar broke above in January. The top of this channel is currently near 93.50 and should act as support if tested. For these reasons I think the dollar would be more bearish below 93 but remains short-term bullish above that level (looking for a bounce before pulling back and/or running sideways for another few months.

U.S. Dollar contract, DX, Daily chart

I see the potential for gold to make a higher bounce before turning back down and if the gold buyers can keep the rally going from here it could make it up to a price projection at 1251.30 for two equal legs up for the bounce off its March 17th low. That would setup a larger a-b-c bounce correction to the January-March decline before heading lower but there remains the potential for gold to simply head lower from here. Continue to keep an eye on silver which is acting weaker than gold.

Gold continuous contract, GC, Daily chart

Oil might have finished its c-wave of an a-b-c bounce off its January low. Today's candle is a shooting start (actually a little more bearish gravestone doji) after poking through the top of a rising wedge pattern for the c-wave (the leg up from March 18th). For now I'm calling the 3-wave bounce off the January low as wave-A of what will become a larger multi-month corrective pattern before oil heads lower later this year. At the moment it's a setup for a reversal back down but proof of that starts with a drop back below 56.

Oil continuous contract, CL, Daily chart

Tomorrow's economic reports include the unemployment claims in the morning and Consumer Credit in the afternoon, neither of which are market movers. Friday will be the big day for more employment data, including the NFP report, so expect some volatility Friday morning.

Economic reports and Summary

Conclusion

The long choppy whippy sideways consolidation that we've been in should be coming to an end if we're to get another rally leg. It could be a choppy climb to minor new highs so that and the downside risk suggests traders should exercise great caution on the long side. But because of the bullish setup I think it's too early to be thinking aggressively about the short side. It won't take much more of a drop to turn things more bearish but at the moment we've got a setup for the buyers to take advantage of. They just need to do it quickly and they need to see follow through to today's final-hour buying. At most, if playing the long side, I would expect only a quick drop back down Thursday morning and then a reversal to catch both sides leaning the wrong way.

I continue to like the setup for one more push higher into mid-May (possibly as late as end of month), although I'm not sure the RUT will participate in making a new high. There's an important turn window (based on previous high-low cycles and Fib time ratios) on May 13th so for now that's our target date. There's a new moon on the 18th and these have correlated well with previous market highs. This has been a very difficult market to trade and that might continue for at least another week or two and downside risk swamps upside potential. It's a good time to protect your capital and only nibble if you feel the need to trade.

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