Groundhog Day was a very funny movie with Bill Murray. Groundhog day with the stock market is hardly funny and it's driving both sides crazy as stops are run and then the market reverses. Neither side can get any traction and traders need to continue exercising patience while we wait for direction.

Wednesday's Market Stats

The market was looking at a positive start this morning as equity futures rallied in the pre-market session. But the release of the ADP employment report at 8:30 caused some selling and futures were back to flat at the open. Buy programs then hit and indexes quickly made highs that broke above recent congestion highs and it was looking like the start of the next rally leg. Unfortunately for the bulls the sellers then came in and drove the indexes back down and it looked like we were going to stay inside the recent trading range. A little bounce in the afternoon continues to leave both sides guessing what the next big move will be.

The ADP employment report came in at 201K vs. expectations for 200K and an improvement from the 165K in April. The initial reaction in the futures was one of disappointment since it doesn't prevent the Fed from continuing on its rate-increase path. But the reversal at the open was either just a helping hand or it was with a belief that the number was not good enough to help the Fed's cause. Hitting the expected number for ADP it helps with expectations that Friday's NFP report will also come in near the expected 225K. But in reality we can't know how the market will react to any number since a strong number could be bad and a weak number could be good (to keep the Fed in accommodation mode). One of these days the market will care about what the number means for the economy and therefore the market.

The ISM Services number came out at 10:00 and that created a jolt higher in the market. The number dropped from 57.8 in April to 55.7 in May, which was weaker than the expected minor drop to 57.1. Once again, a weaker-than-expected number was considered good for the stock market because it helps the Fed's cause. What's really strange is how little the Fed can do at this point and yet the market seems to believe it can. It's probably because market participants have so little to hang their hat on as far as a reason for the market to rally so they desperately cling to the belief that the Fed can still help. Disappointment waits right around the corner...

The ECB's Mario Draghi offered support for the markets today by not mentioning anything about pulling back on their ambitious QE program, even if the European economy improves unexpectedly over the next 15 months. That's further evidence, in my opinion, that they're mostly interested in providing liquidity for the markets, including money for bailing out countries, rather than providing help for the economies. He didn't talk about Greece and any bailout plans (or threats) and the market was relieve by that as well (staying hopeful anyway).

The Fed's Beige Book at 14:00 caused a minor bullish response but the information was nothing new. The Fed expects minor improvements in the economy for the rest of the year. That of course means an economic contraction since the Fed can't get any economic forecast correct. Unfortunately for our economy, the signs of economic slowing are not showing any signs of abating and it probably won't be long before the market is unable to hide behind the Fed's assurances to the contrary.

As always, we defer to the charts to tell us what the market is thinking and which direction appears to have the least resistance. Unfortunately it would appear the market is very confused and has been for a long time. The 3+ months that the market has been chopping sideways doesn't look like it's going to break soon. As traders we just want a direction (unless you just like to sell credit spreads, in which case you're loving this choppy sideways market) and swing and position traders are getting very antsy about being able to trade something. Their request is simply -- just move! But the market is requiring a great deal of patience while waiting for the move. As traders we find patience a hard virtue to follow. In fact, as a fellow trader said to me, "Whoever said 'Patience is a virtue' just never experienced instant gratification." How true.

I'll start tonight's chart review with the weekly chart of the NYSE Composite index (NYA) to give us a little broader market review. It's a good representative of the market and is looks very similar to the other big indexes (W5000, SPX and DOW). As I'll show later, the techs are looking a little stronger and suggest the indexes could push a little higher. For NYA it looked like a good setup for an important high on May 21st but since that high it's unclear whether or not we've had a trend reversal (same with all the other indexes). The weekly chart shows a rising wedge pattern for the "rally" since last October. I use "rally" in quotes because the only thing it's been able to do is consolidate near its July and September 2014 highs near 11,100 and the bearish divergence, along with the rising wedge pattern, says don't trust the upside from here. But the market continues to get a helping hand from central bankers and government intervention so it remains bullish until it's not, and that means the bears need a breakdown below the 50-week MA near 10,900 to turn the table on the bulls.

NYSE Composite index, NYA, Weekly chart

The NYA daily chart focuses on the rising wedge pattern for the 5th wave (the leg up from the October 2014) of the rally from October 2011. A rising wedge (ending diagonal) is a typical pattern for the final 5th wave of a rally that has gone too far (as both sides start to duke it out for control, resulting in a market that chops its way marginally higher with slowing momentum (bearish divergence. As you can see on the weekly chart above and the daily chart below, that's exactly what we've been getting. The loss of momentum since last November's high helps confirm the bearish ending diagonal. It's just a matter of when it will actually break down. I see the potential for another push higher but these rising wedge patterns typically breakdown about 2/3 of the way to the apex, so about here.

NYSE Composite index, NYA, Daily chart

The choppiness of the price action this year has made it more difficult to "define" the shape of the rising wedge patterns, as evidenced by the multiple trend lines around NYA and SPX below. The leg up from March looks like the final 5th of the 5th wave and its May 20th high fit well as the completion of its rally. But as with the NYA, it's not at all clear whether the pullback from that high is part of a larger 3-wave move up from the May 6th low or just a choppy start to what will become a stronger decline. At the moment, price-level S/R near 2121 is holding as resistance (tested again today) and the 50-dma, near 2100, is holding as support (tested yesterday). A break of one of those levels should lead to at least a short-term tradeable move. The first upside target would be near 2145 while the downside target could be the 200-dma near 2045.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2145
- bearish below 2099

This morning's rally broke the short-term downtrend line from May 21st and even though this afternoon's pullback dropped back below the line it was able to close on the line near 2114. Another leg up, especially if it gets above 2121 would have me looking for a rally to the 2140 area (and then maybe higher). Today's close was also on its uptrend line from May 6-26, which is one more reason why the bulls need to rally the market right away on Thursday, which is what the setup is for them. If the bears thwart their setup and SPX drops below 2099 it's likely we would see strong selling from there.

S&P 500, SPX, 60-min chart

With this morning's rally the DOW was able to test the top of its previous sideways triangle with today's high at 18168. This is the triangle it had broken out of on May 14th but then dropped back inside on May 26th. Since then it's been consolidating between its uptrend line from February 2 - May 6 (tested on Tuesday) and the top of the sideways triangle. The bottom of the sideways triangle, which is the uptrend line from April 1 - May 6, is currently near 17875, a break of which would tell us the bears are in control. At the moment it could go either way and there are few clues as to which way it will be (other than the fact that it's bullish if only because it's not breaking down).

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,190
- bearish below 17,875

The rising wedge (ending diagonal) that I've been watching on the NDX chart is for the leg up from May 6th. It fits well as the 5th wave of the move up from February, which is the 5th wave of the move up from November 2012. So when this final 5th of the 5th wave completes we should then start a more serious decline. But for now, until the bears can break NDX below 4440 (where it would break its 50-dma and uptrend line from March 2009 - June 2013), there's further upside potential to the top of its small rising wedge, near 4585, if not up to the top of its larger rising wedge, near 4625.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4630
- bearish below 4440

The RUT's pattern supports the bulls with its stronger performance today. It broke its short-term downtrend line from April 27th and didn't even drop back down for a back-test. I'm depicting a rising wedge for its final 5th wave but at the moment that's just a guess based more on the other indexes. It's possible it will simply blast higher but we have a market that's difficult to trust since so many moves see little follow through and instead get reversed. But at least for now the RUT stays bullish above Monday's low at 1238 and it would turn bearish below 1233.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1276
- bearish below 1233

Bonds have made a huge move this week. TNX (10-year yield) has had a nearly 30% rally, from 1.845% on May 29th to today's high at 2.388% and it might not be finished yet. The rally from January 30th would have two equal legs up, to potentially complete an a-b-c bounce off that low, at 2.451%. Also near that level is its broken uptrend line from July 2012 - May 2013, so it might be setting up for a back-test of that trend line with an a-b-c bounce correction. The strong rally could be nothing more than a little bit of panicking by bond holders as they worry about inflation from the central bank policies. But I don't believe inflation is the problem and when worries over deflation return we should see another drop in yields. But we'll need to see more evidence in the price pattern, such as a corrective pullback in yields before heading higher again, to tell us whether or not we might have a longer-term bottom in place for yields.

10-year Yield, TNX, Weekly chart

The big rally in yields this week has helped the banks rally (with a higher yield spread they make more money) and BKX is back up against the top of its expanding triangle that I've been showing on its weekly chart. At the same time it's back up to its broken uptrend line from March 2009 - October 2011. We could see a breakout from here but at the moment, with it up against resistance, it's not a good time to initiate a new long play. If anything I'd have my stop pulled up tight, as in no lower than Monday's low at 75.

KBW Bank index, BKX, Weekly chart

For the TRAN there's a price range from about 8515 (July 22nd high) to about 8583 (the three lows last December, January and February) that had been acting as support until it was broken last week. This week's rally has brought it back up to this price-level S/R and now we wait to see if it's a back-test, to be followed by a bearish kiss goodbye, or the start of a stronger bounce/rally. Closing above 8583 would be bullish, especially since it would be above its 20-dma, which was tested with today's high near 8554 (but closed at 8510). It deserves close attention here since it's a sign of our economy.

Transportation Index, TRAN, Daily chart

There won't be much to add in the weeks ahead about the U.S. dollar if it just consolidates between its March high at 100.78 and May low at 93.15, as I'm currently expecting. What we can expect is choppy whippy price action in the dollar, which is what we have so far. Trading in the dollar could be hazardous to your health in the meantime.

U.S. Dollar contract, DX, Weekly chart

Gold has been holding price-level support near its June 2013 low, near 1180, since it climbed above that level on March 20th. Today's low at 1179.10 was just another test and I believe that support level will break but it's not clear yet when it will break. We could see volatility in gold for the next month before dropping sharply lower as depicted on its chart.

Gold continuous contract, GC, Daily chart

Oil spiked up this morning on the inventory report showing a drawdown but it didn't hold and it quickly dropped back down and into negative territory. That's a good signal that there could be a deeper pullback in the coming weeks. As with the dollar, we could see oil consolidate for the next few months before picking a direction. Short term I see the potential for at least a little higher for oil, perhaps up to its 200-dma, near 65, or maybe its 50-week MA, near 70, before turning back down. But at the moment it's a good setup for a stronger pullback and that's what I'm waiting to see if it happens.

Oil continuous contract, CL, Weekly chart

Tomorrow's economic reports will not be market movers but Friday's NFP report should cause at least a ripple. Maybe even a ripple with some follow through. After today's ADP report came in line with expectations there might not be much of a surprise with Friday's report. But anything less than 200K, vs. expectations for 225K, could set up a disappointing reaction. Of course if job growth doesn't show up that could be a good thing (keeps the Fed's finger off the raise-rates button). The market is still mostly concerned about central bank accommodation.

Economic reports and Summary

Conclusion

We continue to get signs of an economic contraction. The slowdown in retail sales, even among the well-do-do, is a sure sign the economy is slowing. Our economy is driven by consumer spending and the consumer is doing less consuming. The TRAN, even with this week's bounce, has been an economic canary that has fallen off its perch. The high altitude that the indexes have achieved has sucked the oxygen out of the poor canary and while the broader indexes have not followed the TRAN, I believe they will. But at the moment there are still many who believe accommodation by the Fed will continue to support the market. And who can argue with their logic? It has been working for years and Wall Street has been diverging from Main Street for a long time. Just keep in mind that trusting what mainstream economists tell us is not a good idea since they've been consistently wrong in their projections.

Unfortunately for the majority of people who invest in the stock market, and for people generally, the out-of-balance situation today is worse than it was in 2007. Stock valuations are higher today than they were in 2007. Banks are more vulnerable (they're larger and more highly leveraged) and the stock market is more disconnected from fundamental realities than they were in 2007. There's a good chance the coming breakdown is going to be worse than the 2007-2009 market crash and in fact the long-term EW (Elliott Wave) pattern suggests that's exactly what we should expect (the big expanding triangle since 2000). Today the U6 unemployment rate is already twice what it was back in 2007. The median net worth is down -40% from where it was prior to the last collapse. Individual and public debt levels are at record highs (as is trading margin debt) and the combination of all these facts makes the coming collapse likely to be even worse than last time.

So while the market continues to be propped up with expectations of further liquidity accommodations by central banks, it's unfortunately simply delaying the inevitable. In fact there's strong evidence that liquidity in the market has been drying up, which makes it more vulnerable to downside disconnect. Those in charge are simply hoping a collapse doesn't happen on their watch. But the further the disconnect continues and the higher the stock market goes (or the longer it's held up as the economy deteriorates) the harder the fall will be. Allowing the market to take its medicine years ago would have prevented a situation where no amount of medicine is going to help the disease. In fact the Fed has essentially run out of medicine.

If you're anywhere near retirement I cannot stress strongly enough that you must get out of equities that you're simply holding as an investment. There will of course always be good individual stocks to own but generally speaking a receding tide will lower all boats. There is no safe diversification program since the coming collapse will be a global event, especially in emerging markets. I think bonds will be safe through this year (assuming the recent selloff is soon reversed) but then when deflation really takes hold it's going to be cash and only cash that you'll want to be in.

In the meantime, we as traders should be able to take advantage of the coming "correction." Even if it's just a few put plays while your capital is in cash you'll make money in a decline. I worry about others who don't know how to protect what they've got or how to safely short the market (even if it's in inverse ETFs). But we traders will have an opportunity to make a boatload of money far faster than playing the long side over the past few years. Just don't brag to your friends that you made a killing in the market crash when he/she lost half of their money (wink). But seriously, if you're in good shape after the crash you'll be one of the few with capital to start buying and lift the market back up. It will be a generational buying opportunity that I'm looking forward to. But before that opportunity there's going to be some pain for most people and businesses. Keep those stops tight on long positions.

One last thing, if you're a day trader who catches small moves and then looks for another quick entry/exit you might be able to make money with the small moves we've been getting in the market. If you're a swing or position trader you're likely to be a frustrated group of traders. Selling options have their own unique risks (what doesn't?) but in a range-bound market like we've been in, selling credit spreads has been a good way to chip away at the market and make a little money each week (with the weekly options). But if you're an active day trader I thought you'd appreciate the common descriptions of what you do:

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