Repeated headlines of a "New All-Time High" for the S&P 500 index or Dow Industrials, which missed by only a point today, is good for pulling in more investors but the market is struggling to get these new highs and we're seeing some worrisome deterioration in the market's internals.

Wednesday's Market Stats

Between the Dow Industrials and S&P 500 we're getting new all-time highs this week and that's great for the headlines. If you're not watching the market as carefully as we are those headlines keep you thinking that everything is great with the economy (even if you personally don't feel that way). It is in this way that the Fed and government have been attempting to use the stock market to foster a "wealth effect" but it's apparent that it's starting to backfire as more and more consumers now understand how disconnected Wall Street is from Main Street. Instead of feeling the wealth effect they're now feeling poorer because they haven't participated in the "new highs." How much longer this can continue is anyone's guess but my guess is that there won't be a happy ending for the stock market.

There were no economic reports of significance this morning and the market was listless for most of the day. There was a sell program at the open but the selling was over by 10:00 and that was followed by some buy programs that lifted the indexes right back up to where they were at the open. The message was clear -- no bears allowed here and once the indexes were back to the flat line by 10:30 there was very little action that followed until the FOMC minutes were released at 14:00. Following the FOMC minutes there were some buy programs that finished by 14:30 (it seems these buy and sell programs have an expiration time of 30 minutes) and then sell programs kicked in and dropped the indexes back to the flat line (marginally red for the blue chips) and into the close. Day traders got a little activity today but for everyone else it was just a consolidation (doji) day.

The FOMC minutes highlighted the fact that most of the Fed heads believe the first-quarter slowdown was just an anomaly and that things would improve from there. "Transitory" is their favorite word for data they don't like and believe it will be reversed in the next quarter. While the economic slowing in Q1 keeps the Fed's finger off the button to raise rates at this time, they believe an improving economy will give them the leeway they need to start raising rates. What the market first liked is the fact that the Fed is unlikely to raise rates in June. We already knew that but for some reason the market reacted as though it was startlingly good news. And then by 14:30 the reaction seemed to recognize that in fact we learned nothing new from the minutes.

I continue to believe the Fed will not be "blessed" with good economic news this year to help them in their desire to start raising rates. Keep in mind that the Fed and most mainstream economists have a batting average of zero when it comes to economic forecasting. The number of correct predictions is zero, nada, zip, none. They are so wrong that you can reliably take the other side of their trade and win 100% of the time. Before rates are raised I believe they'll be forced to launch QE5, 6, 7, ... since they have no other tools left to use when the market again becomes unglued and banks start failing. They've tried just about everything and it's all been a miserable failure for the economy when you consider how much debt has been incurred to help the banks, I mean economy. And of course all the debt is exactly the problem -- the economy will remain sluggish as long as there's a debt overhang to deal with. We still haven't worked off the huge credit expansion of the previous decades.

Wall Street has benefitted mightily from the Fed's policies and money creation but the water landing on the backs of Wall Streeters hasn't rolled off onto the poorer people who also thirst for that water. Companies are buying back stock instead of investing in capital improvements to build their businesses, which would then create more jobs, etc. The failure to improve the situation for the 99% has only created more divisiveness in our country (helped by Obama's "us vs. them" mentality) and the spread between the rich and poor is now greater than even the 1920s leading up to the 1929 stock market crash and Great Depression that followed. That comparison is used for a reason.

Yesterday's marginal new high for SPX (1 point) was followed today by another marginal new high (another 1 point) and the choppy climb looks like an ending pattern to the upside. These can go on and on but the danger is that when the rally finishes it's usually followed by a decline that retraces the rally in far less time than it took to build it. In this case the rally from last December (a little more than 5 months), which tacked on 160 points, will probably be retraced in a matter of weeks instead of months. That's the risk for anyone still trying to buy recent highs -- unless they use good stop management I suspect there could soon be real pain felt by many traders/investors who have been buying the "improving economy" assurances.

SPX remains a good proxy index for the broader market, practically mirroring the much larger index, the Wilshire 5000. So I'll start off with the SPX charts to show how it has been slowly chopping its way higher, really since December and especially since the March 11th low. This is typically how rallies finish -- a choppy pattern to the upside is indicative of waning momentum from the buyers while the selling starts to get a little stronger and eventually takes over. These choppy ending patterns tend to be followed by a strong breakdown as all the late-to-the-party bulls are suddenly forced out of their positions while the bears become more aggressive.

The SPX weekly chart below shows weakening rally with the smaller weekly candles since the March low. The waning momentum can be seen on the MACD and RSI, which has clearly been just a warning but not a trade signal. But now the waning momentum combined with the smaller candles adds another reason to stay very cautious about the upside and start thinking how you'd like to play the downside. It's important to recognize how important this top could be since it fits very well (from an EW perspective) as the conclusion to the rally from 2009 and that calls for the start of the next cyclical bear market to finish the secular bear.

S&P 500, SPX, Weekly chart

The choppy rally off the March low is bound by the two bold blue lines on the daily chart below and this afternoon's high tagged the top trend line. We could see a breakout to the upside but at the moment I'm not seeing enough internal strength to suggest that's the higher-odds scenario. Instead, it's possible this afternoon's high put the final touch on the rally and from here we'll see the start of the next big decline.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2136
- bearish below 2085

The 60-min chart below shows the projection at 2135.33 for two equal legs up from May 6th, which I'm calling an a-b-c to complete the 5th wave of the move up from March, which completes the final leg of the rally from March 2009. It is for this reason that I believe looking for a shorting opportunity here could pay off handsomely down the road. But all big moves start off small and right now I'm attempting to identify the first signs of a reversal and today's high at 2134.72 might have been close enough for government work as relates to the 2135.33 target price. There could be another attempt to make a new high (and nab more stops above the trend line) but it's not something I'd be willing to bet on here. However, if the buyers keep this going and SPX closes above 2136, and hold above it, I see the potential for a rally up to 2150 and then up to 2170 if 2150 gives way.

S&P 500, SPX, 60-min chart

While the broader market indexes have been pushing to new highs (except for the laggard techs and small caps at the moment), we continue to see a deterioration in the market's condition. Looking at the car sitting in the lot, all nice and shiny, hides what's under the hood. The Fed and government policies/intervention have made the market nice and shiny but a look under the hood shows worn mechanical parts, leaking seals and frayed wiring. The group of charts below shows the SPX new highs but then below that chart you can see the decline in the 10-dma of the number of new 52-week highs, which is dropping even faster since March, and the steady decline in the 10-dma of the advance-decline line since last October. But don't worry and just pay attention to the top chart -- she's a beaut. Just remember that once you drive it off the lot it's yours and you might not find another sucker, I mean buyer, to pay you equal value should you decide to sell.

SPX vs. 52-week new highs and Advance-Decline line, Daily chart

The DOW has been pushing up against an internal broken uptrend line from October 2014 - February 2015 (gray line on the daily chart below) and still has a little more upside potential to 18397 where the rally off the May 6th low would have two equal legs up (equivalent to the 2135 projection for SPX). The DOW's high so far is yesterday's at 18351. There's higher bullish potential, such as to the top of its rising wedge that has contained the choppy price action since last December (bold blue lines), near 18550. And if the buyers keep going from there I'd look for a rally up to the trend line along the highs from December 2013 - December 2014, near 18800 by early June. The risk is that the choppy move higher could end at any time and with rising wedges on multiple timeframes I think the decline, when it comes, will be very fast. It's been consolidating this week on top of the March 2nd high at 18288 (it closed at 18285 today) so a firm break below that level would be a bearish sign. A stronger signal of a top in place would be a drop below its May 8th high at 18205, which was a test of its March 23rd high at 18206. If you trade the long side I'd keep one foot holding the exit door open so you can be one of the first ones out the door (with an acceptable exit price).

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,400
- bearish below 17,925

Typically at significant market tops we find the techs and small caps making final highs later than the blue chips as the last of the animal spirits in the bulls plays out in the riskier stocks. But since the May 6th lows we're seeing a reluctance to buy the higher-beta names and it's possible this is an early sign of risk-off behavior. At the moment NDX has a lower high below its April 27th high and it might finish that way with a truncated completion to its rally. This is not uncommon in a rising wedge pattern, which it's been in since its February 2nd low, but if it does manage to rally up to the top of the wedge we could see 4600 before the rally completes.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4600
- bearish below 4380

The RUT is in the same position as NDX by not making a new high above its April 27th high but in this case I have not been expecting a new high. The RUT's pattern has had me thinking it put in a top at the April 27th high since the decline into the May 6th looks impulsive, which suggests a trend change to the downside. The bounce off the May 6th low is a 3-wave (a-b-c) bounce correction and has so far retraced a little less than 78.6% of its decline, which is a high correction but that kind of retracement has been very common in the past couple of years. There's no confirming evidence yet that the bounce has completed and it too could continue higher into early June and make it up to the 1290-1300 area but at the moment I think the higher-odds scenario is for a turn back down and if it's to be a 3rd wave decline we should see a very strong move lower (one where the 200-dma near 1187 will be a mere speed bump on its way down to the January-February lows near 1150).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1250
- bearish below 1218

The banks have been relatively strong since January as the broader indexes traded mostly sideways. And now BKX is pressing up against the top of its expanding triangle (the trend line along the highs from March-December 2014) and it continues to push up against its broken uptrend line from March 2009 - October 2011, which so far is just a back-test. But there are hints of bullishness, such as the breaks of the downtrend lines on MACD and RSI, shown on the weekly chart below, so the upside potential needs to be respected here. If BKX can sustain a rally above 78 and pull back no lower than about 75 in the coming weeks I'll turn more bullish the banks and in turn the broader market. But at the moment, with ending patterns galore in other indexes and BKX up against strong resistance, I don't believe this is a good time to be betting on the long side. If the bearish expanding triangle is the correct pattern then we should soon see a strong move back down to the bottom of it, currently near 63.30, before attempting another bounce. This bearish pattern also fits well as the top of the 2009-2015 correction to its 2007-2009 decline (the "bounce" is between a 50% and 62% retracement of its decline).

KBW Bank index, BKX, Weekly chart

The home builders continue to look more bearish than bullish to me. Yesterday's morning spike up on better-than-expected housing starts and permits was quickly reversed after the home construction index (DJUSHB) tagged its broken 50-dma. From an EW perspective, the April-May decline looks impulsive to the downside and the bounce off the May 6th low is so far a 3-wave correction to the decline, retracing 50% with yesterday morning's spike up. It could turn into something more bullish if the April-May decline was the completion of a larger a-b-c pullback from the February 25th high, but at the moment the bearish interpretation of the pattern calls for a strong decline (3rd wave) as the next move.

DJ U.S. Home Construction index, DJUSHB, Daily chart

Is the Dow Theory dead? This is a question many are now asking since the TRAN and INDU are supposed to support one another. When they diverge it's always been a good reason to remain suspicious of the broader market's current trend. But because the TRAN has been divergent since last November's high it has many now saying that it's different this time. Very dangerous words to use for the market. It could be different this time but from a fundamental perspective I think it makes sense to see the Trannies in decline. The economy has been slowing and anyone who thinks otherwise is simply not paying attention to the warning signs. Demand for commodities has been in decline and transportation of commodities has been slowing (the Baltic Dry Index remains near its lows seen in 2008 and 2012).

We know the broader indexes have had a helping hand for a long time and with the plethora of ETFs it's easy to simply buy "the market" without picking individual stocks and that's been keeping the broader indexes rising. But we've also seen deterioration in the participation of stocks in this year's highs, as indicated with the chart of 52-week highs and the advance-decline, shown following the SPX charts above. Fewer stocks are above their 50-day moving averages than there were at February's highs. Fewer are above their 200-day MAs than there were at April's highs. To say the TRAN's bearish divergence should be ignored because it's different his time is pure hogwash. It's not different this time and those who believe it is will be the ones saying "no one could have predicted this decline" when the INDU follows the TRAN lower.

Today's decline in the TRAN, while the DOW was attempting to make another new high, is significant divergence at this time. The TRAN dropped below price-level support near 8580 and closed below it today. Not a good sign for the bulls. But, I can also see a way to look at this as a bullish setup -- I drew a trend line across the lows from December, showing the potential for an end to a choppy decline from March and an end to the large sideways/down consolidation off its November high. It's even showing bullish divergence since its April 6th low. Therefore I think the bears need to see the TRAN below its uptrend line from March 2009 - November 2012, near 8420 (about another 80 points lower) before this can be declared bearish. If the bullish consolidation pattern is correct then we're about to see a strong rally follow. I'm not quite ready to go there but bears need to see the potential.

Transportation Index, TRAN, Daily chart

Last week I had pointed out on the U.S. Dollar's weekly chart that it had pulled back to the top of a shallow parallel up-channel from 2008, near 93.50, and that it should act as support if the dollar is only going to consolidate before heading higher. Last Thursday and Friday it dropped marginally below 93.50 and it was looking like it might break down further but this week it has bounced strongly and support is holding. Until I see evidence to the contrary, I'm looking for a multi-month sideways consolidation between 93.50 and 100 before the dollar resumes its rally.

U.S. Dollar contract, DX, Weekly chart

When gold rallied strongly last week I thought it had a pretty good chance of rallying up to a 1251 projection for two equal legs up from March 17th but yesterday's strong decline now puts that upside projection in jeopardy. If we do get one more leg up I'm wondering if it will be able to reach 1244 for a 62% retracement of its January-March decline. It might pull back a little further and then give us one more rally to complete a rising wedge pattern off its March 17th low but at this point it's not clear what gold will likely do next. Once the bounce completes, and it might already be with Monday's high at 1232, we should see a resumption of selling in gold.

Gold continuous contract, GC, Daily chart

When I'm not sure what gold's next move is likely to be I check silver for some clues. Its bounce off the March 11th low did achieve two equal legs up by tagging 17.70 on Monday. That could be it for the bounce correction and now we'll see silver head lower from here. It's hard to see on the squished weekly chart below, but Monday's high at 17.77 also tagged its 50-week MA at 17.64. The sharp decline Tuesday morning followed by today's choppy bounce has it looking like it's going to head lower from here and if it drops below support near 15.25 it will likely be followed by a decline toward 12 where it could set up a longer-term buying opportunity (it would be the first time in a long time to evaluate that potential).

Silver continuous contract, SI, Weekly chart

Last week's chart of oil was a daily chart to show the rising wedge pattern for the leg up from March 18th and how it broke down from the wedge and then back-tested it last Wednesday. The decline since that back-test left a bearish kiss goodbye and the bearish potential is for oil to start back down. The 3-wave bounce off the January low could be the completion of the 4th wave correction in the move down from August 2013 (it even shows alternation with the relatively flat bounce correction from November 2013 to June 2014). If we do get a 5th wave down from here I think it will be basically a retest of the March low near 42 but would become more bearish below 40. The other possibility is that we'll see oil chop sideways for most of this year before heading back down. At this point oil would turn more bullish above last week's high at 62.58.

Oil continuous contract, CL, Weekly chart

Tomorrow's economic reports include unemployment data, existing home sales, Philly Fed and Leading Indicators, none of which will likely move the market much. The Philly Fed at 10:00 could cause a little reaction if it comes in much different than expectations for a slight improvement over April.

Economic reports and Summary

Conclusion

Last week through this week has been a target window for a top in the market and there's a good possibility this afternoon's highs completed the rally. For weeks I've been looking for a new high for SPX and specifically up to 2135, which was missed by less than a point today. It has a nice ending pattern but we don't have any evidence yet that a reversal is here. SPX back below price-level support near 2120 with an impulsive (sharp 5-wave) decline would strongly suggest a top of importance is in place but until then there remains additional upside potential. For SPX that would be up to 2150-2170 by early June.

The current risk, as I see it, is that upside potential is dwarfed by downside risk. The move higher has been very choppy on waning momentum and declining participation, which is a classic topping signal. It's also typically followed by a strong decline once it breaks. I would expect to see several mornings start with large gaps to the downside, forcing traders on both sides to chase the move lower (something the HFT players love to trade).

There's definitely upside potential and that's why bears need to be very disciplined in their approach to the short side. We all know the market has a helping hand and trying to short the market has generally been an exercise in frustration. But this has also created a sense of complacency among the bulls and when they wake up and smell the coffee with a DOW decline of -500 points it will catch their attention and panic will follow. Selling typically creates a much stronger move than a rally and it's one reason why it can be fun to catch a ride on the southbound bus. Catching that ride can be a challenge but done properly it can easily make up for several small stop-outs.

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