Today's FOMC announcement provided little new information but remains on track to raise rates before the end of the year. Or at least that's what they say but the date continues to get pushed out and the market is not sure how to react to the expectations.

Wednesday's Market Stats

The market started the day with a quick pop to the upside but then steadily sold off into the early afternoon before the FOMC announcement at 14:00. Some say it was because of worry about Yellen saying something about raising rates sooner rather than later. But it may have been nothing more than pulling the rubber band back to then launch another leg up as part of the opex shenanigans we've come to know and love so well.

There were no significant economic reports to move the market this morning and the initial pop up at the open had followed an effort to rescue the futures market from a pre-market selloff. A low near 8:00 AM was followed by a pre-market rally and a high in the first 5 minutes of trading. But SPX then dropped about 14 points into a low shortly before the FOMC announcement and the day was starting to look a little more bearish. Following the announcement there was a brief spike down that was then followed by a rally of almost 19 points to a new daily high in the next hour before settling back down to close 4 points in the green.

The initial downside reaction was due to wording in the Fed's statement about the economy being strong enough to withstand an interest rate hike by the end of this year. That's nothing new -- the Fed has been trying to prepare the market for a rate increase even if it doesn't come. The only change is that the market now expects the rate hike to come in December instead of October. Any bets that will get moved out further? The Fed is desperate to get rates back to a more normal level but the economy is not really cooperating. There have been many more signs of economic slowing than of growth and while the labor market has improved some, it likely will not be enough to give the Fed room to maneuver with higher rates. I continue to believe they'll be forced into more QE before they'll be raising rates.

While discussing a tightening labor market the Fed is also hinting that the magnitude of rate-hike expectations may be less than they had been hoping. This hemming and hawing is part of what caused some of the up-and-down movement in the indexes this afternoon. GDP expectations are for an improvement over the 1st quarter's decline but they downgraded their expectations for all of 2015, which is the second downgrade in their forecast this year. I strongly suspect it's not the last downgrade that will be coming from them this year.

The problem for the Fed is that using the labor market for signs of economic strength tends not to be a good predictor of the economy. The unemployment rate is usually at its lowest level following a stock market peak and we've already seen a peak in the economy. The opposite is true at market bottoms and this is likely a result of hiring practices tending to follow about 6 months behind (it takes about that long from approval to hire to actually hiring and also about as long to document reasons for laying off/firing people).

We've had very consistent reports this year that demonstrate we've got a slowing economy. The Fed's monthly index of industrial production is just one example of a slowing economy. The chart below shows the decline in industrial production since it peaked in July last year. For the past six months the number has been negative growth for four months and flat in the other two, which technically puts the manufacturing sector in a recession and the rest of the economy is following right behind. May's decline was -0.2%, which was on top of April's -0.5% and it's weaker than even the most pessimistic estimates of dozens of economists who were polled by Econoday. Not one economist predicted this negative data, which is typical. June's data is so far not promising and as Jim Rickards tweeted Monday morning, "Lots of bad data...we should probably blame it on the warm weather."

Industrial Production, June 2012 - May 2015, chart courtesy MarektWatch/agorafinancial.com

In the meantime the stock market keeps whistling past the graveyard, making believe ghosts (economic contraction) don't really exist. Investors remain so convinced of a continuing rally that they've margined themselves to the hilt. The chart below shows a negative spike in the total credit balance (sum of free cash and available margin minus margin debt) in April (data current through April), which means more margin has been used to buy stock. Most of the negative credit balance is associated with a bull market and is actually supportive of the market. But when it gets excessive it becomes dangerous because of the margin calls that can hit when the market declines. The spike in margin debt in April has not resulted in a continuing market rally and that could be a hint of trouble for investors who might soon regret using too much margin.

SPX vs. NYSE credit balance, chart courtesy dshort.com

We've got plenty of reasons to believe the stock market could soon be in trouble but the bottom line is that it only matters what the charts tell us. As long as there is more buying than selling, and the Fed's liquidity certainly helps in this regard, we will continue to have a bullish market. Only when some key support levels break, especially if with a strong impulsive decline, will we have some information that the bulls are losing it. There are plenty of warning signs that the bulls might soon be in trouble but so far they continue to hold on.

The SPX weekly chart below shows one key support level has broken (on June 4th), which is the uptrend line from March 2009 - October 2011, currently near 2125. There remains a chance for another rally to a new high but if it doesn't get back above 2125 in the next week I think its chances of making a new high become much slimmer. As will be seen more easily on the daily chart next, there's a parallel up-channel for price action since March, the bottom of which was tested with Monday's low at 2072, and I think that's an important level for the bulls to defend. From a weekly perspective it's the March low, near 2040, that's the key level for the bears to break. Its 50-week MA has now moved up to that level as well.

S&P 500, SPX, Weekly chart

The parallel up-channel from March is shown on the daily chart below and a break below it would likely mean a quick trip down to its 200-dma, climbing up to 2050. I suspect that level would only be a speed bump to much lower prices but before worrying about that we'd have to see SPX break below 2072. Today's rally was stopped by resistance near 2106, which includes the downtrend line form May and its 20- and 50-dma's. The bulls would be in better position above today's high at 2106.79 would still need to fight through several layers of resistance to make it up to an upside target near 2150 (potentially higher).

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2121
- bearish below 2072

The price action since the May 20th high, just shy of 2135,has been choppy and at first glance it looks like a corrective pullback that should lead to new highs. But there's a bearish wave count that is very bearish, which suggests a strong breakdown if SPX breaks below 2072. If that happens I would look at small bounce attempts as shorting opportunities and I would not look to buy the "dip" until the February low near 1980 is tested. In the meantime the bulls haven't done anything wrong yet and while I see real danger to the downside (calling for caution trading the long side) this afternoon's spike back up shows why it's dangerous to short this market until we get a clearer signal (with a break below 2072).

S&P 500, SPX, 60-min chart

The DOW has essentially the same pattern as SPX. Other than Monday's intraday break below the bottom of a parallel up-channel from March it is holding above support. Last week's rally and now today's rally both probed above its downtrend line from May and this afternoon's rally attempt failed short of its 20- and 50-dma's, currently near 18006 and 18032, resp. (the 20 crossed down below the 50 yesterday). A rally above price-level resistance near 18205 is needed to clear the way to new highs. The bears need to see a break of Monday's low at 17698 and then the 200-dma, currently near 17645, to prompt stronger selling.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,206
- bearish below 17,698

A parallel up-channel for price action since March is also common to the NDX and Monday's low came close to testing the bottom of the channel. If the bulls can get things going this summer there's upside potential to the top of the channel, currently near 4650. But so far the bulls could be in trouble if today's rally is the best they can do. Today's high is so far just a back-test of its broken uptrend line form March 2009 - June 2013, which was broken last Friday. Today is the 3rd close below the line and that's usually an indication the break is real (as opposed to the head-fake break on June 8-9) and if it's followed by a drop below Monday's low at 4396 it would mean the back-test was followed by a bearish kiss goodbye and likely lead to a stronger selloff. But if the bulls can get the NDX back above its 20-dma and trend lines near 4489 it will then stay bullish.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4540
- bearish below 4392

Today's rally in the RUT took it to the top of a rising wedge pattern off its May 6th low and only 4 points shy of its April 15th high at 1278.63. The tag of the top of the rising wedge after the FOMC announcement followed by the selloff might have been the last rally attempt on a news-related push, which is a common way these patterns finish. A drop below Monday's low near 1247 would indicate the high is in place but beware of the risk of a breakdown from here. I show the potential for a pullback and then one more push higher into early next week to finish the wedge and test the April high but that's not all certain here. It would be more bullish if it can rally above 1279 and hold above (not just an intraday break).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1279
- bearish below 1247

Treasury yields spiked lower following today's FOMC announcement, which tells us the bond market is thinking a rate increase has been moved out further (if at all). Yields had been rallying during the day but then completely reversed to new lows by the end of the day. Following last Wednesday's high, where TNX (10-year yield) achieved its price projection at 2.453%, it is now back down near its broken downtrend line form January-September 2014 and its 20-dma, both near 2.285%. If a back-test of this level is followed by a rally above last week's high at 2.489% it would keep yields bullish (prices bearish) and that would be supportive for the stock market. But a drop below 2.28% would be a bullish sign that the bounce pattern off the January low has completed.

10-year Yield, TNX, Daily chart

I like to keep an eye on the home builders index because it helps provide some information what investors think about the housing market, which in turn provides additional clues about the economy. The housing market is a huge component of the economy, which is one reason why the Fed has worked hard to keep interest rates low and why they've bought so many mortgage-backed securities over the years (in an attempt to free up money for the banks to lend to home owners). Yesterday's housing numbers were positive for the industry and as can be seen on the chart below, building permits saw a nice bump in May. So far the recovery off the 2009 low has retraced a Fibonacci 38.2% of the decline. Housing starts (bar chart at the bottom) have been running an average annual rate of about 1 million for more than a year and the data is supportive of a market that's at least holding its own, if not improving.

Housing Starts, May 2013 - May 2015, chart courtesy briefing.com

While the housing numbers above show the potential for higher numbers, the same thing can't be said with certainty about the home builders and it's a little concerning about what investors see with these companies. At the moment the home builders index is dancing on support and it's decision time for investors in this sector, which in turn will tell us whether or not they believe the home construction market will rise or fall from here. As can be seen on the weekly chart below, it has been supported by both its 50-week MA and uptrend line from October 2011 - October 2014, near 520 and 530, resp. To the upside, the bounces since the May 6th low have been blocked by its 50-day MA, currently near 551 and coming down (daily chart now shown). It also has price-level S/R near 553 (its May 2013 high). Price is getting pinched between support and resistance and will soon break in one direction or the other and give us a clue for what the next month or more should look like. At the moment the daily pattern suggests it will break down and a drop below its June 9th low near 528 would trigger a sell signal. From there the decline could be quick and a 100-point drop over the next month or two is something I would expect to see. Waiting now to see if the bulls can thwart the bearish setup.

DJ Home Construction index, DJUSHB, Weekly chart

Unless the U.S. dollar breaks out from its recent high and low at 100.78 (March) and 93.17 (April) I'll continue to look for the dollar to consolidate sideways this year.

U.S. Dollar contract, DX, Weekly chart

Last week I had mentioned that I thought gold would look better with another leg up to complete a larger a-b-c bounce off its June 5th low. If we get another leg up I'll be looking for a rally to the 1200 area before setting up the next decline, one which should take gold below 1140 and potentially below 1000 before the end of the year.

Gold continuous contract, GC, Daily chart

So far silver is confirming my bearish interpretation for gold. It has been chopping sideways/up since last week as it tests support at its uptrend line from March-April. The choppy consolidation looks like a bearish continuation pattern that should lead to a break lower. A drop below a neckline (uptrend line from November 2014 - March 2015), near 15.40, would likely lead to a strong selloff.

Silver continuous contract, SI, Daily chart

Oil has been consolidating in a tight range of about 57-61.75 and looks like a bullish continuation pattern following its March-May rally. If it pops higher it would first hit its declining 200-dma, which is dropping down toward 63. Above that level it would have clear sailing up to about 68-69 where it would run into its declining 50-week MA and broken uptrend line from 1998-2008, both shown on its weekly chart below. But a drop below its June 5th low would be a confirmed break of its 50-day MA, currently nearing its price-level S/R near 58.50, and that would likely lead to a drop back down.

Oil continuous contract, CL, Weekly chart

Thursday's economic reports will finish this week's reports as Friday will have no important ones. We'll get the unemployment numbers and then more importantly the CPI numbers before the open. The Philly Fed and Leading Indicators will be reported at 10:00 AM. The Fed has already made their statement and therefore the CPI numbers probably won't have much of an impact in the futures market. The Philly Fed number is expected to show improvement and if it doesn't then we'd have more evidence of economic contraction so the market could react to disappointment there. But then again it could react opposite to what would normally be expected since it's still more concerned about the Fed than the actual economy.

Economic reports and Summary

Conclusion

The price consolidation over the past four months has made it very difficult for traders to figure out where this market is headed next. Even day to day we constantly find reversals of reversals. Today was an example of intraday reversals mimicking all of the daily and weekly reversals. If you feel like you've been beating your head against the wall trying to figure out this market you're not alone. There's a reason why participation in the market has been drying up and why many are becoming increasingly worried about liquidity drying up and how that could negatively impact the market, especially in any kind of panic selling environment.

Compounding the problem is the excessive use of margin debt right now -- it's a dangerous combination that many participants are simply not aware of. The next flash crash, and there will be one, will have many recognizing the situation in hindsight.

Because the bulls are simply hanging on in a bullish market there is the potential for higher prices this month and possibly into next. But so far the bounces following May's high have led to a series of lower highs and by definition that puts us in a downtrend since May. The exception is the RUT but it has formed a bearish rising wedge for what looks like its final 5th wave in its rally. The breakdown from rising wedge patterns tends to lead to a fast retracement of the wedge.

The choppy pullback pattern for the other indexes can easily be interpreted as a bullish continuation pattern and that's what's leaving me guessing which direction the market will choose next. The one caution is that the series of lower highs in the pullback could be a very bearish pattern (a series of 1st and 2nd waves to the downside), which calls for a strong selloff to follow. That's why Monday's lows are important -- break those and it could be a flush to the downside. It's why I keep saying upside potential is dwarfed by downside risk. Trade carefully and know your downside risk (and of course upside risk if you're trying to get into a short position), since your stops might not trigger or you won't like the price you stopped out at.

Good luck and I'll be back with you in two weeks (traveling next week).

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