The week before opex, typically in the latter half of the week, we often see a head-fake drop followed by a rally into opex week. Wednesday's decline followed by another sharp pullback today might have been the head-fake move. If not, look out below.

Thursday's Market Stats

The rally attempts this week keep getting rebuffed by the bears who have been enjoying selling into the rallies and knocking the bulls back on their kiesters. Wednesday's selling retraced Tuesday's strong reversal to the upside and that had many leaning short. As soon as Wednesday's trading session closed a rally in equity futures started and the buying remained steady during the overnight session. That created a large gap up this morning and it looked like yesterday's selling might have been an attempt to pull the rubber band back and help launch the next rally with short covering this morning.

This morning's gap up was immediately followed by a sharp pullback and once again most of the rally was given back by the end of the day. The failure to rally has many leaning into the bear camp but as I'll show, there might now be too many bears. One of the things the bulls need to do is get the indexes above this morning's highs and then Wednesday's highs. Until they can accomplish that there is the potential for the bears to do a lot more harm to bulls' accounts.

Today's economic reports were just the unemployment data, which showed another little uptick in claims. The initial claims jumped up to 297K from 282K and higher than the expected 276K. Continuing claims also jumped up to 2334K from 2265K and higher than the expected 2230K. The chart below shows how much initial unemployment claims have dropped over the past several years (after peaking in 2009) but is now down to a level where unemployment claims started back up. Over the past 5-6 weeks we've seen claims ticking higher but there's no break of the downtrend yet. The bearish descending wedge is another warning sign we could soon see a change in the downtrend.

Initial Claims, 1997-present, chart courtesy briefing.com

Yesterday's selling approached a 90% downside day (when 90% of the day's volume is in selling) in the NYSE and Nasdaq, which reminded me of a chart I saw recently that a trader in my trading group keeps updated for the Nasdaq. He marks 90% upside and downside days and his chart is shown below, which tracks these events since 2008. Since the rally off the 2009 low you can see the little red diamonds marking the 90% downside days and how well they coincided with the start of sharp reversals to the upside. The message here is that the 90% downside days were washout events followed by a renewed rally and that's a message that bears need to pay close attention to here.

Nasdaq 90% Days, chart courtesy Mark Ungewitter

It's possible this week's selling washed out the weak holders and sucked in a bunch of shorts, which could be the setup for another strong short-covering rally and renewed buying interest into next week. But, and this is a big but, if the market has truly topped out and we've entered a bear phase then the selling is just getting started. Occurrences of 90% down days could be an indication that the massive accumulation of stock over the past several years, on historic margin, is in the process of being liquidated. Look at the number of red diamonds during the 2008 decline -- trying to buy the market based on this signal would have been very painful. So while this chart is interesting and very useful, the bigger question is whether we're still in a bull market, in which case we should be looking for a new rally leg to new highs, or if instead we've turned the corner and started a new bear market.

When you combine the chart above with a look at the Fear & Greed index and the current Extreme Fear reading it should certainly strike fear into the hearts of the bears. An oversold market with extremely bearish sentiment is ripe for a strong reversal. While market crashes come out of oversold conditions I don't think the market is yet ready for a market crash. Instead, the present conditions support at least a decent bounce, which could be sharp and strong as we head into opex. The big players, who love to make money shoving the market around, usually try to catch too many retail traders leaning too hard the wrong way.

Fear & Greed index, chart courtesy cnn.com (Fear&Greed index)

Below the Fear & Greed index I show the SPX weekly chart and how well the rallies followed Extreme Fear readings. It has provided fair warning to the bears whenever it drops below about 15, which it did this week, since the following week was followed by the next rally leg to new highs. But keep in mind that this chart shows only from the latter half of 2012 and in a bear market we'll likely see Extreme Fear readings followed by only short-lived rally spikes before continuing lower. Where we are in the bull-bear cycle is obviously up for debate and while I think there's a very good chance we've entered the next bear cycle the above charts are reason enough for bears to be very cautious about pressing bets to the downside. And if you believe there are additional new highs ahead of us then you should be using this chart to help justify why you want to be a dip buyer here.

There is of course another dynamic at play in this market -- the Fed and government intervention. Japan's government has openly admitted to buying stocks to help support the market. The Fed has openly admitted it wants the stock market higher and commodity prices lower. The Fed and ECB admit to interventions in the bond market but they haven't admitted to any interventions in the stock or commodity markets (including gold). But the fact that the stock market has been in a relentless rally while commodities continue to sell off has many believing our governments are doing the same thing as Japan. Many believe the Fed and government interventions will prevent any serious market crash so while the Fear & Greed index shows Extreme Fear, most still believe there's a safety net below us.

This belief in the Fed and government is what helps sentiment and it's why the dipsters keep plying their trade. It's been a long while since the stock market has experienced even a 10% correction. For all you bears who have been frustrated by this market there is small comfort in the fact that you are not alone. Many professionals who have traded the market for decades lament the fact that the market doesn't work like it used to. In fact there was an article by Jared Dillian, who writes "The 10th Man" for MauldinEconomics.com, in which he discusses the problem for traders who like trading both directions. I thought you might enjoy his short article: The End of the Ends of the World.

And with that let's move to the charts since that's where we'll get our first clues about where this market could be headed next week and next month. I'll start with the DOW's weekly chart to show how it's trying to hold onto important support -- its 50-week MA at 17586 and its uptrend line from October 2011 - October 2014, near 17550. This week has seen some strong bounces off this support level but none of the bounces are sticking, which should be worrisome to bulls. The more it tests support the weaker it becomes. I show an expected bounce, at least, in the coming week but today's failure to rally following the gap up is having me doubt the ability of the market to rally.

Dow Industrials, INDU, Weekly chart

The daily chart shows the struggle to hold support after failing to make it back up to its 200-dma at 17695 (this morning's high was near 17765). Today's loss of more than 200 points from the morning high has it closing on its uptrend line from October 2011 - October 2014 and the bulls need a rally now, as in don't waste any time doing it Friday morning otherwise what looks like a head-fake pullback in front of opex week could turn uglier for the bulls next week. The H&S price objective is 17020 and that level could be reached sooner rather than later if 17500 gives way.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,000
- bearish below 17,500

There's been a lot of choppy price action since the low on June 30th and since Tuesday's low it's looking like it could be developing a sideways triangle as it consolidates. This fits as a bearish continuation pattern and it could break down at any time. If we see another bounce on Friday that is stopped near the top of the triangle, near 17725 by the end of the day, it will be a setup for a decline on Monday, presumably due to more bad news following another Sunday meeting about what to do about Greece. The only way to negate this bearish pattern is with a rally above 17800, even though a rally might only be good enough for a higher bounce before turning back down.

Dow Industrials, INDU, 60-min chart

SPX has dropped down to its 50-dma, near 2046 (Tuesday's low was at 2044, yesterday's was near 2045 and today's low was near 2050, for an average low for the week near 2046). If SPX breaks below the March low near 2040 it would be a strong bearish warning sign, especially after breaking below the uptrend line from March-June (a H&S neckline like that for the DOW) last week, near 2077. That neckline has been in play following the bounce off the June 29th low and the back-test at the end of last week and beginning of this week, followed by the selloff has it looking like a back-test and bearish kiss goodbye. Since then it's been struggling to hold onto its 200-dma at 2056 and just above price-level support at 2040. A loss of both levels by the bulls would be another reason to turn more immediately bearish. Currently, as long as support holds, I'm looking for a high bounce into next week (opex) and then a stronger decline. That's if THE high is now in place but bears need to remain aware of the potential for another rally to new highs (2150-2200 upside target zone).

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2100
- bearish below 2040

The strong afternoon rally on Tuesday had SPX breaking its downtrend line from June 24th but it was unable to hold above the line with Wednesday's selloff. This morning's rally (gap up) again broke above the downtrend line but was again unable to hold above it as most of the day's gain was given back. As with the DOW, there is the possibility for a sideways triangle consolidation pattern, which calls for a tightening of the trading range into tomorrow before letting go to the downside on Monday. The bulls need a break above this morning's high at 2074 in order to give us the potential for a rally at least up to the 2100-2110 area before setting up the next shorting opportunity.

S&P 500, SPX, 60-min chart

The Nasdaq Composite gapped down on June 29th and broke its short-term uptrend line from May 6th, which was a good indication its rally finished. It bounced back up on July 1st for a back-test followed by a bearish kiss goodbye and a new low this week. It gapped down Wednesday morning and closed below an uptrend line from March 26th and this morning it almost made it back up to the trend line, near 4988 (with a high at 4982), for another back-test. The selloff following this morning's gap up leaves another bearish kiss goodbye. So far it's all bearish and a drop below its May 6th low near 4888 (the low so far is yesterday's at 4901) would make it really hard to argue for a new high. Instead I'd be looking for a drop down to its 200-dma near 4813.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 5132
- bearish below 4888

The RUT has a similar picture to the Naz with its broken uptrend line frmm January-May, which the RUT tried valiantly to hold onto Monday and Tuesday but closed below it yesterday and today. If the buyers can get the RUT back above the line, near 1249, there's a good chance for at least a higher bounce into next week before heading lower (assuming THE high is in place). But if the RUT continues lower I see the potential for a decline to its 200-dma, near 1205, before trying a higher bounce.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1280
- bearish below 1205

Treasuries have been bouncing all over the place like stocks and this week's candlestick is a long-legged doji so far, which essentially means indecision on traders' part. Treasuries were rallying strong this week but reversed after the FOMC minutes yesterday. As can be seen on the weekly chart of TNX (10-year yield) below, the decline in yields into Tuesday's low was a test of both the 50- and 200-week MAs, at 2.201% and 2.184%, resp. The decline was also back below the broken downtrend line from January-September 2014, near 2.26%, but today's rally (selling in bonds) has it back above the trend line, which keeps the short-term bullish potential alive. Another rally in yields, which could coincide with a rally in the stock market, could see a move up to the downtrend line from June 2007 - December 2013, near 2.65%. But a break below Tuesday's low at 2.187% would be a bearish heads up, which would point to much lower lows sooner rather than later.

10-year Yield, TNX, Weekly chart

Looking at the weekly chart of BKX, there is a parallel up-channel for the price action since the October 2013 low and the top of the channel is where the rally into the June highs stopped. The rally was also another back-test of its broken uptrend line from March 2009 - October 2011, with a small pop above it before dropping back below it, leaving a failed attempt to get back above the line. The June 23rd high at 79.85 was about $1 short of a 62% retracement of its 2007-2009 decline. As I show on the chart, there is the potential for another stab higher to hit the 62% retracement, at 80.87, and give us a 3rd back-test of the broken uptrend line. That would then give us a 3-drives-to-a-high topping pattern with a 5-wave move up from January and a superb longer-term shorting opportunity, either later this month or in August. However, after breaking below its 50-dma on Tuesday, near 76.66, we could see a new low from here, perhaps down to price-level support near 74, and that would give us an impulsive move down from June. That would in turn confirm the trend has changed to the downside and a bounce correction following the new low would be a shorting opportunity. It takes a bounce from here and back above the June 30th low at 76.77 to keep things potentially bullish.

KBW Bank index, BKX, Weekly chart

The U.S. dollar got a nice bounce off the mid-June low and it's currently trading right in the middle of the recent trading range and keeps the sideways triangle in play.

U.S. Dollar contract, DX, Weekly chart

Gold's choppy shallow decline since June 2013, with bullish divergence at the minor new lows is potentially bullish since we could be looking at an ending pattern to the downside. But the repeated tests of price-level support near 1180, which was broken again toward the end of June, could lead to a further breakdown. At the moment the gold bulls are rooting for support at the broken downtrend line from October 2012, which has been back-tested repeatedly since gold broke back above it at the end of March. But the 50-week MA, currently at 1214 has been holding it down. So you can see there's plenty for each side to see supporting their view of gold. I think gold will break down but I see the potential for a bounce up to about 1290 before turning lower. The initial downside potential, if it breaks down, is 1090 (50% retracement of 2001-2011 rally and the bottom of shallow parallel down-channel from August 2013).

Gold continuous contract, GC, Weekly chart

On Tuesday silver lost support near 15.45 and sold off hard. It had been consolidating on top of a H&S neckline (uptrend line from November 2014 - March 2015) since June 26th but lost the battle on Tuesday and today it bounced back up to the line. So far it's just a back-test and a selloff from here would leave a bearish kiss goodbye. A downtrend line from May 18th, near 15.52, could be used as a stop level (closing basis) if you wanted to try a short play on silver here. A break below 14.54 (two equal legs down from January for a possible completion of an a-b-c pullback) would suggest new lows and longer-term (this year) I'm looking for a drop down to the $12 area. A rally above 15.75 (back above its 20-dma) would have me thinking a higher bounce and above 16.50 (200-dma) would have me feeling more bullish but for now I continue to believe the price of the metals will continue lower.

Silver continuous contract, SI, Daily chart

Just as the dollar has bounced back into the middle of its recent trading range, oil has pulled back into the middle of its range. This keeps alive the potential for a sideways triangle consolidation pattern into at least the fall before the next leg down. Until something happens to break this pattern, which means a trade outside of a 44-60 trading range, it remains my preferred wave pattern.

Oil continuous contract, CL, Weekly chart

The only economic report Friday morning is Wholesale Inventories so there will be nothing domestically that should move the market. What happens overseas has been far more important to the market.

Economic reports and Summary

Conclusion

Just as happened Wednesday after the closing bell, equity futures have again taken off to the upside in tonight's after-hours session. Someone is working hard to protect their short puts/long calls into opex. ES gapped up tonight after reopening at 18:00 and quickly rallied up to almost 2062 (better than 20 points from the RTH closing price). This morning's gap up didn't hold and who knows how futures will trade during the overnight session but if we get another gap up there will likely be some bears waiting to take a bite out of the bulls, similar to what the bears do to salmon swimming upstream. And that could be a good analogy here as the bulls, who are accustomed to buying the dip, can't understand why the bounces are failing. They keep trying and they keep getting swatted back down. The relentless selling is the opposite of not long ago when many were complaining about the relentless buying. And this change in character for the market could be a clue that we've got a trend change.

But we still have what is normally a bullish week in front of us and Wednesday's decline and today's decline could be the typical head fake in front of opex. Push the market down, suck in the shorts and get rid of the weak holders of stock and then hit the market with buy orders to get short covering and real buying coming in strong. It has been a favored tactic for a long time and there's still the potential for it. The pattern says the bulls need a rally above this morning's highs and even better, above Wednesday's highs, in order to negate the bearish continuation patterns we're seeing this week. A bounce to a lower low by tomorrow's close would be a potentially bearish setup for Monday and the catalyst for another leg down would presumably be more bad news about Greece following another meeting scheduled on Sunday.

If we do get a bounce to lower lows, especially if the lows are at or below the tops of the sideways triangles shown on the DOW and SPX 60-min charts (near 17720 and 2060, resp., by tomorrow's close) I would not want to be in long positions over the weekend. There is of course the potential for a gap up on Monday (gap up over resistance is another favored tactic) and anyone not long will be forced to chase the market higher. But because we have a sideways consolidation following a decline it makes the higher-odds pattern bearish until it's negated. This is a game of odds that we play and if you can't put the odds in your favor it's best to at least be flat.

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