Title: Teaser: Today's rally was showing continuing weakness as the advance-decline line and volume showed another effort to rally on the backs of fewer stocks. With indexes pushing up against resistance and showing waning momentum it's looking like we should expect at least a larger pullback.

Wednesday's Market Stats

As can be seen in the table above, decliners finished 2:1 over advancers, the same as Friday, and even when the indexes were rallying (except for the RUT both days) it's another warning sign for bulls to heed. This is a strong warning sign that the rally is on its last legs as the rally is on the backs of fewer and fewer stocks following a rally that has gone too far too fast.

The next two days will be important to see if we have a repeating pattern in progress. In early December there was a sharp selloff and then large rally days with high volume. That was then followed by five more days to the upside but with waning momentum and volume. The same pattern calls for two consecutive down days, which would confirm a top is in place (for at least a larger pullback).

Another interesting timing aspect shows the market has topped between the 20th – 27th in each of the past five months without exception. We are of course now into that same timing window. With waning momentum, lousy market internals for what looks like a strong rally, the non-participation by the small caps and indexes at or approaching previous highs and trendline resistance, it would appear the bears may get their turn soon. Add in a low VIX reading and it makes sense to at least buy some downside protection (puts).

IBM reported after the bell and investors were not happy with the report (IBM missed on revenue). With its pre-earnings run there could be some disappointment tomorrow. The same thing typically happens to AAPL, which reports after the bell tomorrow. Following IBM's negative reaction the futures don't seem to be phased by it and that could be in anticipation for a stronger earnings report from AAPL.

Earnings so far have come in better than expectations but the expectations game is hardly an accurate picture. While 70% have reported earnings above analyst expectations, which is better than the average 63% beat rate since 1994, earnings are expected to show a decline of -2.1% for the quarter. This would be a minor improvement to the July 1st expectations of -3%. But on the flip side, typically we've seen 61% of earnings beat expectations since 2002 but so far that number is 55%. And expectations for sales by U.S. companies are expected to see their worst decline in nearly six years for Q2. The U.S. dollar is getting the blame, even though the dollar had been high since the end of 2014.

There was very little news from overseas (except for Iran balking at the nuclear agreement) and no major economic reports and futures were up marginally from Sunday night. The indexes started off positive but were unable to hold onto their small gains late in the day. The RUT was again relatively weak while the others closed only marginally in the green.

NDX has been stronger than the other indexes and I'll start tonight's review with a top-down look at its charts. The weekly chart below shows its rally since August-September 2014 has repeatedly seen highs along the top of a parallel up-channel for its rally from 2010. At the same time there is a long-term bearish divergence since the high in November 2014. The top of the channel is currently near 4760, not much below its March 2000 high at 4816. That's the upside potential if the bulls can keep this rally alive. But a trend line along the highs from November 2014 - April 2015, which can more easily be seen on the daily chart further below, is where NDX has now made it up to. There might be a little more upside potential but I don't think that little bit of potential is worth the downside risk.

Nasdaq-100, NDX, Weekly chart

The NDX rally has been mostly due to a couple of stocks, such as NFLX and GOOG last week. But at the moment it's looking a bit like a blow-off top following its July 7th low. Reaching its trend line along the highs from November 2014 – April 2015 in front of earnings reports this week will either gap NDX up and over resistance or it's forming a top here. RSI is now as overbought as it was at the end of February so it's an interesting setup for the bears. One could argue the rally has gone too far too fast and getting up and over resistance could be a challenge. But a rally above 4700 that stays above that level (such as using the trend line for support on a back-test) would be more bullish. For those who are interested in shorting the NDX (QQQ) you at least have a tight stop (one way to be sure an intraday high doesn't spike you out is to use an end-of-day stop, but that's obviously riskier, which can be controlled by position size.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4700
- bearish below 4560

The 60-min chart shows the steep climb since the July 9th low, rallying about 350 points in 8 trading days (about 44 points a day). It's obviously bullish until proven otherwise but a break of its uptrend line from July 9th, near 4660, would be the first sign of trouble for the bulls.

Nasdaq-100, NDX, 60-min chart

IBM's after-hours earnings report was not received well (they missed on revenue) and their price dropped about $9 (-5%) after the bell. The stock recovered some before it closed its after-hours session but it's going to be depressing for NDX (and the broader market) if IBM sells off tomorrow. AAPL will be reporting its earnings after the bell tomorrow and considering where price is currently I'd say bulls need to see nothing but a positive response. It obviously will also have a large impact on what NDX does. AAPL is currently back up to its February 23rd high at 133 (with today's high at 132.97), which was also tested in April and May. Only slightly higher, near 134.25, it would back-test its broken uptrend line from April 2014 - January 2015, which was broken in mid-June and back-tested on June 24th before selling off down near its 200-dma on July 9th. The strong rally since then has it back up to resistance and it could be tough to break through. Will the earnings be good enough and will that propel both it and NDX up over resistance? It will make for an interesting bet Tuesday before the close.

Apple Inc., AAPL, Daily chart

The daily chart of SPX shows Friday's doji at its downtrend line from May-June, near 2125, and today's spinning top doji just above the line. A decline on Tuesday would leave a reversal candlestick pattern but the bears need to see a drop below 2118 to confirm a likely top is in place. A pullback less than that could be just a correction to the rally, to be followed by another leg up to the 2150-2160 area before topping out.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2135
- bearish below 2118

The 60-min chart is showing bearish divergence on MACD since July 13th but if the broken downtrend line from May-June acts as support for a pullback it will remain bullish. A drop back below the line, near 2125, would be a bearish heads up (leaving a head-fake breakout attempt) but as mentioned above, the bears need a break below 2118 to more convincingly tell us a top of significance is likely in place.

S&P 500, SPX, 60-min chart

The DOW also poked above its downtrend line from May-June and is holding above the line after back-testing it today. That's bullish if it continues to hold. Bears need to see a firm break of its 50-dma and then below a price projection at 17975 (for a possible a-b-c pullback from last Thursday's high). As long as it holds above that level there remains the potential for a rally to price-level resistance near 18290, which includes its March and May highs.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,290
- bearish below 17,975

The RUT has been relatively weak for the past few days and that's been a bearish warning, especially since the RUT has been a leader in reversals. On Friday it held support at its 20-dma but broke it today. It held its 50-dma at today's low and therefore there's still the potential for another rally leg to at least test its April high near 1279 and close its June 29th gap down at 1279.79. Another run up to its broken uptrend line from October 2014 - May 2015, near 1290 by the end of the month, is the bullish potential. But a drop lower tomorrow would be back into its gap up on July 13th, which would be closed at 1251.81. Below its July 7th high near 1249 would be a strong indication that the July 7th low near 1226 will break.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1280
- bearish below 1249

The banking index, BKX, is not quite as stretched as NDX but it too has reached trendline resistance near 79.80 (today's high), which is the trend line along its highs from June-December 2014. Other than minor pokes above the line last month it has held as resistance and that's what bears want to see happen again. A blow-off move for BKX could take it up to the top of a parallel up-channel from January, which will be near 82 at the end of this month. But a test of the trend line, as well as its previous highs at 79.85 on June 23rd and last Thursday's high at 79.84, could be tough resistance after its strong rally from July 8th. It could be forming a double top, especially since it's showing bearish divergence against the June high.

KBW Bank index, BKX, Daily chart

On Friday the TRAN made it up to its downtrend line from April and the rejection from there looks bearish. If it makes a little higher we could see it make it up to the top of a parallel down-channel, near 8430, but it's not the way I'd trade the trannies (such as IYT) here. Another leg down, for a 5th wave in the move down from February, targets the 7800 area in early August.

Transportation Index, TRAN, Daily chart

The weekly pattern I've been tracking for gold has for a long time suggested it will drop below $1000. But the one bullish setup that I see is this morning's poke below the bottom of a shallow descending wedge pattern, the bottom of which is the trend line along the lows from December 2013 – November 2014 and is currently near 1090. This is also the 50% retracement of the 2001-2011 rally and should therefore be strong support. It's possible this morning's bounce off the 1080 low will lead to a much stronger rally back up to the 1400 area before starting back down later this year/next year (dashed lines on the weekly chart). But the bearish wave count suggests we'll see a continuation lower to at least 1000 (price-level support from 2008-2009) and likely down to the 890 area by the end of the year (62% retracement of the 2001-2011 rally).

Gold continuous contract, GC, Weekly chart

Commodities in general have been in decline for a long time but as suggested for gold, we could be nearing the point where we're going to see a big oversold bounce. Lining up with the chart pattern is a very bearish sentiment for commodities, as shown below. This chart by Sentix shows the CRY index vs. sentiment since 2004 with sentiment more bearish than it's been during the past 11+ years, including the commodities low in 2009, and that sets it up for a big reversal. So while I see lower lows for gold (and silver), I'd keep a tight stop on short positions in commodities in general.

Commodities Sentiment, 2004-July 2015, chart courtesy Sentix

Today there we no major economic reports and the same will be true tomorrow. On Wednesday we'll get some more housing data, but the breakdown in housing stocks (in spite of the broader market rally) and its longer-term pattern already tells us the futures is not bright). Now that Greece is behind us the market is paying more attention to earnings.

Economic reports and Summary

Conclusion

The market has been on a tear to the upside for the past two weeks, some of which was based on hope for improved earnings but mostly to relief over Greece not tearing the EU apart. The Iran agreement, which has not been signed off yet by Iran or U.S. Congress, might have been a contributing factor. At the very least it looks like the rally has gone too far too fast and looks to be a lot of short covering in there. The weakness of the rally, especially in the declining number of stocks participating in the rally, indicates strong resistance is likely to hold and that we should therefore be looking for a reversal soon. Playing the long side here seems far riskier than looking to play the short side. It might be good for just a multi-day pullback but we'll get a better sense of that once the pullback/decline begins.

Good luck and I'll be back with you on Thursday and hopefully a clearer idea for what we should expect into the end of the month.

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