The strong rally in the past week is showing signs of weakening as indexes hit some lines of resistance. The rally has been enough to open the door to new highs but it remains possible another hopium-induced rally will be followed by a reversal back down as disappointment once again sets in.

Wednesday's Market Stats

This morning started relatively flat with the blue chips flat, techs slightly positive and small caps slightly negative. The picture didn't change much from there although there was a small rally to minor new highs in the morning before pulling back in the afternoon. The RUT struggled in the red for most of the day and closed weaker, which is a warning sign for bulls. A final-hour rally rescued the other indexes from closing in the red as well, except for the S&P 500, which closed marginally in the red. The day essentially finished as a doji day near lines of resistance as traders tried to figure out whether or not there's additional buying power to move the market higher. Part of today's indecision is what's going to happen next with Greece.

The Greek Tragedy
The rally over the past week was brought to us courtesy of a "resolution" for the Greek debt drama. But it's more of another hope-filled rally rather than having something more concrete and the rally has been in the face of further deteriorating economic signs. Rallies on hopium are obviously risky to trade since hope can turn to despair quickly and typically it happens overnight while most U.S. traders are asleep. A bear market, which is not confirmed yet, is often called the "slope of hope" as declines to new lows are often interrupted with spikes to the upside on hope-filled news events.

Waking up to large gaps, up and down, is something we're seeing plenty of times. It seems to be a favored way of getting a lot of volume in the morning, something the HFTs love to trade, and in a decline one could be forgiven for thinking the overnight moves are manipulated but in fact are typically related to news events from overseas. Last Sunday night equity futures gapped down on the news that there was no agreement between Greece and the EU finance heads. Germany had executed their only remaining option, which was to require Greece give up its financial sovereignty in order to receive additional bailout money and this was at first completely rejected by Tsipras. After occupying Greece during WWII it's understandable that the Greeks are not at all comfortable with Germany now occupying their country again, this time financially.

But the EU held the winning cards and Tsipras knew it. He executed his only option, to threaten leaving the EU and declaring bankruptcy (in hopes of scaring the EU into accepting at least a write-down of Greek debt) and when the EU called him on his threat he was forced to back down and accept an early-Monday agreement. The Greek legislature is predicted to approve the agreement that Tsipras reluctantly signed (but does not approve) but the protests on the streets are ramping up. To say an agreement is locked in would be premature at this point and that's what makes the past week's rally dangerous to depend on.

Keep in mind that the agreement hammered out is for 86 billion euros over the next three years. This is primarily to keep the banks from failing but does not help Greece pay its bills (only some interest on their loans). The money loaned to Greece over the years has mostly (more than 90%) been to repay European banks and the Greeks feel the bailout money is mostly to help The EU banks rather than Greece. The early loans to Greece were of course pay used for their own overspending and shame on them for not being more financially responsible (easy cheap debt will do that, including what's been happening in the rest of the world). But lenders also have a responsibility to check the borrower's ability to repay and therefore they should share some of the burden that Greece is now facing. But so far the EU leaders, primarily Germany, have been unwilling to recognize their own culpability and therein lies much of the argument between Greece and the EU banks.

Greece's economy has already shrunk about 25% over the past five years and their economy is hardly strong enough to make much, if any, progress towards paying off their debt. The additional austerity measures being demanded of Greece will only make paying off their debt that much more difficult. That's one reason why Greece has been trying to get the EU banks to write down at least a portion of their debt. But Tsipras was forced to blink first in the showdown with the EU since the EU leaders are worried about contagion (whatever is done to help Greece will be demanded by other weak EU countries.

Germany is the real powerhouse behind the EU and while the Union was designed to ensure Germany and France, long-term enemies in the past 150 years, stay aligned but it is Germany that is running the show. It has now been forced to declare itself publicly as the power behind the EU, which is something it never wanted to do (at least not publicly). And this new "occupation" requirement for more money is what upsets Greece. They will be forced to sell off sovereign assets over the next few years to help pay down their debt. Greece will not have a choice in what assets are sold. They just also accept the following primary points of the agreement (and which the legislature needs to approve) in order to receive another 86 billion euros ($95B) over the next three years (the full text of the agreement can be read here: Eurozone Summit Statement):

-- VAT changes that include: a top rate of 23% for items such as processed food and restaurants; 13% for fresh food, energy, water and hotels (get the tourists to contribute); and 6% for medicines and books
-- The abolition of the VAT discount of 30% for Greek islands
-- An increase in the corporate tax rate from 26% to 29% for small companies
-- A luxury tax increase on big cars, boats and swimming pools
-- An end to early retirement by 2022 and a retirement age increase to 67 (this will really upset public unions and other vocal groups)

The whole agreement is considered by most Greeks to be a public humiliation and even if the Greek government signs off on the deal there will likely be many protests on the street and one can only guess how bad it could become. The Syriza party was voted in because of their anti-austerity position and if they capitulate there could be blood in the streets with demands for a new government. How that could affect the immediate future is one big guess.

What could make matters worse is that Tsipras is telling his people that even if the agreement is ratified the banks could still stay closed for another month before any EU money starts flowing into their country. A bad agreement, in the eyes of the Greek majority (who voted to flip the royal bird to the EU) and a continuation of closed banks probably won't sit well with the people. A month is a long time to see drastic changes made in Greece.

Further confusing matters is an IMF prediction that in two more years Greek debt will reach 200% of GDP. That's considered unrecoverable, especially with the inability to print their way out of debt (with the consequent hyperinflation so for all intents and purposes, 200% of GDP is simply not recoverable). The IMF is therefore recommending a "very dramatic extension" of the maturity dates of Greek debts, such as 30-year extensions. They're also recommending debt write-offs, something Greece has been demanding and EU (Germany) has been adamant about denying. The IMF report is very different from the deal hammered out on Sunday/Monday but while the IMF report deals with straight facts about the debt load and Greece's ability to pay, the EU-Greek deal is purely political. Care to guess which one is more likely to be an accurate assessment of the chances for success with the current agreement?

Well, with all that said, it was a long-winded way of saying the market's rally over the past week could be given up in an instant if the "agreement" suddenly fails. Another hopium-induced rally could turn to dust in a new slope-of-hope bear market decline. But the bears need to be cognizant of the effort being made by central banks around the world working to prevent a market decline. They're not more powerful than the markets but that won't stop them from trying to prop things up. We could still get new market highs for the indexes before a new bear market begins.

Complicating, or at least exacerbating, these issues is the fact that liquidity in the market has been drying up over the past couple of years. This is something that hasn't been reported by many because it's not a concern as long as the market is rallying. But in a selloff, liquidity provides an orderly decline as sellers continue to find buyers. Once the buyers disappear it becomes much more difficult to provide an orderly market and declines can quickly become crashes (we've had tastes of this with previous flash crashes).

Liquidity Issue
Bill Gross, who now manages the Janus Global Unconstrained Bond Fund, came out on Tuesday to warn investors about the vulnerability of the markets due to a pullback in liquidity. He stated the obvious when he said mutual funds, hedge funds and ETFs are most vulnerable when liquidity dries up. While the printing of trillions of dollars by central banks has kept the spigot turned on for the markets, there will be difficult times ahead when the spigot is turned off, or at least partially closed. His point about the funds mentioned above is that they're part of the "shadow banking system" and since they're not required to maintain reserves or even emergency cash they could be especially vulnerable to a market decline.

If a decline prompts selling by all these funds they'll likely find the Fed unable to handle the cash requirement needed to keep the banks liquefied. While the Dodd-Frank bill made banks less risky, that risk has been transferred to these "shadow banks" and the system is at greater risk, not less, than before Dodd-Frank, and we know how vulnerable the banking system was in the 2008 decline. A run on these shadow banks could be unstoppable for a while as the funds try to sell into a market that has insufficient buying power. As an aside, this is why it's extremely important to allow short selling since that group will be one of the few who has buying power.

Gross said trading in investment-grade bonds has declined 35% since 2005 and 55% in high-yield bonds. Since the Fed's ending of bond buying (but they continue to roll out expiring bonds) in 2014, combined with their desire to raise rates, it has made less cash available for the markets, which is only exacerbating a decline in market liquidity. This has resulted in magnified price moves in many bond markets, including "safe" ones such as U.S. Treasuries. What's happening in Greece and the possible ramifications for the EU and the other weak countries and their bonds is only making the situation worse. It's an intricate and tightly connected global financial system, one in which a butterfly flapping its wings in Africa really can make a disturbance half way around the world (chaos theory).

Markets
As always, we can't predict world events and it's even harder to predict the market's reaction to world events. We can only go with the charts and make our best guess based on what we're seeing. The rally from last week's low has been on weaker volume as the bounce has progressed

The SPX weekly chart below shows price stuck in the middle of a trading range since last December's high at 2093 and upside potential is the top of a parallel up-channel from the December high/February low, currently near 2160 and its broken uptrend line from March 2009 - October 2011. The bottom of the channel is near 2030 so about 50 points of upside potential vs. 80 points of downside potential, maybe less since price-level S/R is near 2040 and its 50-week MA, which supported the decline into the July 7th low, is near 2050. So we'll call it even odds for either the bottom or the top of the channel to be hit first. Combine all the choppy price action we've seen for over 6 months now and it's not hard to see the risk in trying for a position trade.

S&P 500, SPX, Weekly chart

It's easier to see the whippy choppy price action over the past many months on the daily chart below. Any solid idea which way it will go from here? I could just as easily argue for a continuation higher, for at least a test of the May high near 2135 before pulling back, as I could argue for a strong decline from here. The important point for short-term traders though is that at this point I believe upside potential is once again dwarfed by downside risk, especially right here. The bearish wave count suggests a strong 3rd of a 3rd wave down in the decline from May is about to start. This would be a move that would likely break down through multiple layers of support and in a hurry. We could see 1850-1900 in a matter of a few weeks, or sooner.

The bulls need to see just a consolidation off today's high, or a continuation higher from here, while the bears need to see a sharp decline below the July 7th high near 2083 in order to confirm the top of the bounce is in place. A double tap at its broken uptrend line from October 2014 - June 2015, yesterday and today, is another warning sign and today's doji at resistance could be the middle candle of a reversal pattern if Thursday's candle is a red one, especially a long red one. The first upside target for the bulls is the downtrend line from May-June (near 2125) followed by June's high (near 2130) and then May's high (near 2135).

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2125
- bearish below 2083

Because of all the choppy price action it's difficult to get a high-confidence wave count but at the moment the bounce off the June 7th low is a 3-wave move and that sets up a possible reversal back down from here. Below 2100 would be a bearish warning sign while below 2083 would leave a confirmed 3-wave (corrective) bounce and it would likely mean a continuation lower below 2040. Additional upside could be choppy from this point.

S&P 500, SPX, 60-min chart

Unlike SPX, the DOW hit its downtrend line from May-June today, near 18085, with a high at 18090. The DOW would be more bullish above 18100 but be careful about a test of its June high near 18189. The bullish wave count suggests a stair-step move higher into the end of the month, with a projected high in the 18400-18600 area. The bears want to see a drop back below the 50-dma at 17973 and especially the July 7th high near 17793. Like SPX, the bearish 1-2, 1-2 wave count to the downside from May suggests a very strong decline to follow this bounce and that's why I think downside potential is much more significant than upside potential. A short play here with a stop at today's high is a very low-risk play.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,100
- bearish below 17,793

The techs were relatively stronger today and the Nasdaq came close to its March 2000 high at 5132 again, with today's high at 5125, but couldn't muster enough buying to break back above that level, which it did briefly on June 22nd and held above it for two days. The highs in April, May and June are now being tested again and the bearish divergence continues. Will the 3rd test be the winner for the bulls? There's additional upside potential but I don't think it's enough to exceed the downside risk.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4562
- bearish below 4435

Yesterday the RUT back-tested its broken uptrend line from October 2014 - May 2015 and today's selloff has it looking like a bearish kiss goodbye, in which case it's the RUT once again leading the way in a reversal. I see the potential for a bounce higher to 1280-1282 and while a rally above 1282 would be more bullish I don't think it would even make it up to its June 23rd high near 1296 before at least pulling back in a larger correction.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1282
- bearish below 1249

Looking at the big index, the NYSE, the picture is no different -- the rally made it up to the broken uptrend line from December, which had been broken with the snap to the downside on Greek news (so what else is new) on June 29th. Back up for a back-test on a supposed Greek settlement would be fitting. Recovery back above the line, near 11000, would be bullish but the bulls would be in better shape above the June 29th gap closure at 11040. The bears of course want to see a bearish kiss goodbye following the back-test, which might have started with today's pullback.

NYSE Composite Index, NYA, Daily chart

Watching the bond market for some clues is not helping at the moment. As can be seen on the TYX (30-year yield) chart below, it's inside a rising wedge pattern but has additional upside potential to the top of the wedge and its downtrend line from February 2011, both of which cross near 3.55% at the end of August. But a 3-wave move up from the January low could be all we'll get before the resumption of the longer-term decline.

30-year Yield, TYX, Weekly chart

The banking index has had a strong bounce back up off last Wednesday's low. It is now back up against its broken uptrend line form March 2009 - October 2011 and the top of a parallel up-channel from October 2013. Additional upside potential is to the top of a parallel up-channel off the January low, which will be near 82 by the end of July. But the near test of June high is so far showing bearish divergence and there is the potential for a failure of the bounce at any time. The top will be in place once BKX drops below last week's low at 74.92.

KBW Bank index, BKX, Weekly chart

The bounce in the U.S. Dollar has continued this week and slightly higher, at 98.02, it would have two equal legs up from May 14th. The top of the sideways triangle that I have drawn on its weekly chart below, which is just a guess at the moment, is near 99.50 in early August. The dollar looks like it has a little more upside potential before pulling back and I continue to watch for signs as to whether or not the sideways triangle is the higher-odds probability.

U.S. Dollar contract, DX, Weekly chart

Gold is again nearing short-term price-level support near 1141 (previous lows since last November. It's also again back-testing its broken downtrend line from September 2012 but it's not showing enough bullish divergence to suggest support is going to hold. If it breaks down from here we should see a drop down to the next support level near 1090 and a break below that would lead to a drop to price-level support near 1000.

Gold continuous contract, GC, Weekly chart

The same shelf of support for silver, near 15.25, was broken last week and then it bounced off price-level support at 14.65 (from 2006-2010), with a low at 14.62. Today's close at 15.05 is another break below 15.25 and could lead to a stronger breakdown from here, in which case the downside target will be near 12.

Silver continuous contract, SI, Weekly chart

The pattern for oil suggests we'll get at least a test of the January-March lows near 42-43, maybe down to about 40, before starting a larger bounce correction. But if the dollar consolidates sideways in a triangle pattern, we could see the same for oil. But there's the potential for a higher bounce and if oil starts back up from here (a lower probability pattern but it can't be ignored) we could see it up to the 71 area for two equal legs up from March and a back-test of its broken uptrend line from 1998-2008.

Oil continuous contract, CL, Weekly chart

Today's economic reports included PPI numbers, which showed a bump up in inflation, as can be seen in the table below. In addition to the inflation numbers the Empire Manufacturing and Industrial Production numbers were better than expected and the numbers should have scared the market into thinking the Fed will be moved closer to raising rates. But has been true for a while, since the Greek tragedy, the market is ignoring economic news. Other than reactions in individual stocks the market is also ignoring earnings news. It's Greece that matters and the news cycle is not over yet for what happens there. Continue to expect gyrations around overseas news instead of what happens domestically.

Economic reports and Summary

Conclusion

Even while the market rallied a little this morning the advance-decline numbers were negative and they got more negative as the day wore on. It was a clear sign that the rally is tiring and it's on the backs of fewer stocks as it makes it higher. Bearish divergences are showing up and trading volume has been declining as the rally off last week's lows has pushed higher. It doesn't prevent the indexes from being pushed higher, especially since this is opex week, which is a week known for manipulation and bullishness. But considering the multiple lines of resistance that the indexes are hitting, on weakening momentum in a rally that might be too much too fast, it's a time for caution by the bulls and a time for the bears to look for a shorting opportunity. We are in a trading range full of choppy price action and therefore the trading opportunity is short term (days, not weeks).

But there is the potential for a strong decline that will last weeks and therefore I like the opportunity for a short trade at this time. A long trade is now the risker side and frankly not worth the risk. Trying to catch rising knives is of course dangerous, especially this week, but if the market holds up through this week I believe next week will not be kind to the bulls. The best case for the bulls will be a choppy consolidation that last a few days followed by a push higher. But a test of the May high at SPX 2135 is about the most I would expect whereas the downside potential is below 2000. Upside potential of about 20 points vs. downside of about 120+ is what we're probably looking at. You can decide which side you'd rather play.

Good luck and I'll be back with you next Monday as I fill in for Todd.

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