The market has done very well ignoring signs of a global economic slowdown but some recent earnings disappointment has forced investors to question the high market valuation and that's causing some profit taking. But so far it's only profit taking and it's not hard to argue for the bullish case.

Wednesday's Market Stats

Earnings from the bigger companies continue to disappoint, including MMM, AXP and CAT, and that had the stock market selling off again. Each company missed on revenues and has lowered their forecast for the remainder of the year. The strength of the U.S. dollar is getting much of the blame but sales in general are slowing, another indication that the global economies are slowing. I think any discussion of an economic expansion for the U.S. is premature since even a short-term improvement in the U.S. (if it's improving) will not be able to stand by itself against a global slowing. The good news for tomorrow, if the after-hours reaction holds into tomorrow morning, is that we could see the selling get reversed.

While indexes are near their multi-year highs the earnings picture is not as bright as had been expected. Of the companies reporting so far, 75% beat expectations and that's better than the 63% beat rate since 1994. The trouble is earnings expectations have been ratcheted down and a beat rate is not necessarily a good metric. Meeting revenue forecasts is a better metric (but even those forecasts are usually understated so that they have a better chance at producing an upside surprise) and only 52% of the reporting companies have thus far beat their forecasts, which is below the 61% average beat rate since 2002. Earnings for the current quarter are expected to dip 1% and therefore the market's high prices doesn't appear to be factoring in, yet, this earnings decline.

Today was light on economic reports, with only the unemployment data as the highlight (non-market moving). The good news about unemployment claims is that the 255K initial claims was less than the 279K expected and more importantly is now at the lowest level in over 41 years (for you match challenged, that's back in 1974). Continuing claims came in at 2207K, which was also less than the 2213 expected. One of the reasons why these numbers are not market moving is because they lag the market so much. A trough in unemployment claims tends to follow a peak in the stock market. The drop in unemployment claims also has many thinking it will embolden the Fed to raise rates sooner rather than later so a September hike is getting more press time.

I'll jump right into the charts since they've quickly moved from resistance to potential support and what happens on Friday could tell us how next week will go. The DOW's weekly chart below shows it has dropped down near its uptrend line from October 2011 - October 2014, which was last tested July 7-9. On June 30th it also tested its 50-week MA and then again July 6-10. It's currently at 17646, about 60 points below today's low, and that coincides with the 2011-2014 uptrend line. Then below that is an uptrend line from the February low, near 17530, which could be the bottom of a bullish sideways triangle. Not until the DOW gets below the February low at 17037 would the pattern turn definitively bearish (telling us the top is in place) but in the meantime it's simply been way too choppy since February to get a good sense about the next big move.

Dow Industrials, INDU, Weekly chart

The choppy price action since February is much easier to see on the daily chart below and the important thing to remember in this kind of chop is that the price pattern tends to be 3-wave moves (or something a little more complex but "corrective"). It's the reason we've seen so little follow through to what appears at the time to be a sustainable move. Usually, just when one side feels we're getting started with a tradable move the sharp reversal catches both sides leaning the wrong way. We might not be out of that environment yet. Even though the DOW closed slightly below its 200-dma, near 17745, today, it could quickly recover with a morning rally. At the moment, with futures up, it's looking like that could happen.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,050
- bearish below 17,650

While the DOW is testing its 200-dma, having already broken its 50-dma on Tuesday, SPX is now testing its 50-dma, which is near 2102.50. It broke and closed below it today so the bulls need a quick recovery tomorrow to keep that support level alive. If it drops lower it would test its 20-dma and uptrend line from March-June, both near 2090. A close below 2090 would make it more bearish but at the moment the bulls could still pull a baby bull out of the hat and start another rally leg to new highs (potentially to the 2150 area). The bearish pattern calls for a choppy consolidation following today's decline and then another leg down before getting a larger bounce into the end of the month and then down hard in August. The jury is still out with their decision which it will be -- a rally to a new high in August or a test of the July low near 2044 instead (and probably lower).

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2115
- bearish below 2089

Yesterday SPX consolidated around price-level S/R near 2115 but lost the battle this morning to hold on. It dropped quickly to the next price-level S/R line near 2100 and at this point it's not hard to see the move down from Monday as a sharp 3-wave move down. A 3-wave move down to support is the reason bears need to be cautious here since it is possible the pullback from Monday is just a correction to the rally, which will continue from here. Until we get an impulsive 5-wave move down from Monday, which would indicate at least an intermediate-term trend change, neither side can claim any kind of ownership of this market.

S&P 500, SPX, 60-min chart

The Nasdaq looks bearish following its gap up last Friday and then the gap down on Wednesday, which leaves an island reversal at resistance (the top of a parallel up-channel from March). But it bounced off support at its March 2000 high at 5132 with today's low at 5137. There's a trend line along the highs since January 2004 - October 2007, near 5125, which the Naz has been cycling around since February and therefore a break below 5125 would be more bearish. But it has plenty of trendline support and its 20- and 50-dma's coinciding near 5070 and not until it gets below 5000 would it begin to look more strongly bearish. At the moment, as long as it holds above 5132, it remains bullish and that looks like no problem for tomorrow if the futures are any indication. NDX futures (NQ) have already retraced today's decline (thanks mostly to AMZN).

Nasdaq Composite Index, COMPQ, Daily chart

Key Levels for COMPQ:
- bullish above 5232
- bearish below 5132

While the RUT was showing some relative strength the past few days, which was indicating a possible bullish reversal, it sold off sharp midday with the rest of the market and finished weaker than the others. It's in a parallel down-channel for its decline from last week and hit the bottom of the channel with this afternoon's low. So it could be ready for a bounce within the down-channel, the top of which is currently near 1260 (about 3 points below this morning's high), but I don't see enough bullish divergence to suggest I should be switching to the long side. A rally above this morning's high near 1263 would however have been turning at least short-term bullish.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1263
- bearish below 1249

The banks have remained relatively strong the past few days (although not today) while the broader indexes stalled, which is a result of more talk about a coming rate hike since higher rates make it more profitable for banks. But I strongly suspect the bank rally is premature and with inflation running low, if not negative, and so many signs of global slowing, I don't think the Fed will have what they need to justify starting to raise rates. The last thing they'd need is to raise rates and then turn around and lower them again. That would panic the market big time. Also, the chart suggests there might not be much more to the upside before the BKX runs into resistance. Where it's currently trading should be a reason for caution by the bulls and a reason to tighten up their stops.

The BKX weekly chart below shows the rally has now reached the 61.8% retracement of the 2007-2009 decline, at 80.86, with this morning's high at 80.87. Today's selloff following the morning high MIGHT have been the start of its reversal back down. I'd want to see it above the trend line along the highs from March-June, currently near 81.60, before thinking it's got much higher to go. Bearish divergence against the lower June high suggests resistance is going to hold and the larger pattern suggests the reversal could lead to a much larger decline than we've seen over the past two years.

KBW Bank index, BKX, Weekly chart

The Trannies had a bad day, down a little more than -2% and the big red candle on its daily chart shows the sharp reversal following the test of its downtrend line from April. It snapped its 20-dma, near 8186, with its close at 8127. I show a projection down to the 7800 area before it will set up a larger bounce correction next month but a rally above this morning's high at 8325 would be more immediately bullish (the same as for BKX).

Transportation Index, TRAN, Daily chart

The U.S. dollar has pulled back a little this week and today's low at 96.95 tested its uptrend line from June 18th. As long as that level holds as support we could get one more minor new high, near 98.40, to test its downtrend line from March-April, which is the line that I'm thinking will hold as the top of a sideways triangle for the dollar's consolidation this year. Above 98.40 would suggest another rally leg might be in the works instead.

U.S. Dollar contract, DX, Weekly chart

Commodity prices in general have dropped to lows not see since 2002 and the high dollar is getting the blame. But even as the dollar has consolidation since the high in March we've seen commodity prices slipping lower. It's part of the deflationary cycle and a reason I don't believe the Fed will be raising rates this year or next year. They're stuck in the corner into which they've painted themselves.

Gold also dropped lower this week (it got slammed lower on Monday) but there is the potential for at least a higher bounce if support at 1089-1090 holds. This is the 50% retracement of the 2001-2011 rally (1090) and the trend line along the lows since December 2013 (1089). The bearish wave pattern calls for gold to consolidate near this level and then head lower, probably down to about 1000 as it stair-steps lower. But if gold gets back above the previous shelf of support near 1141 we could see a much larger bounce/rally.

Gold continuous contract, GC, Weekly chart

On July 7th silver broke price-level support near 15.25, which was a shelf of support since last November. Now it's trying to hold support near 14.65, which is price-level S/R from 2006-2010. There are hints of bullish divergence showing up and support could hold here. If you're interested in trying to buy support you can at least keep your stop fairly tight (perhaps no lower than 14). A loss of support here could mean a continuation down to the $12 area. Silver would turn short-term bullish above its 50-day MA, currently near 15.95, but if it stays trapped between 14.50 and 15.25 it will stay bearish.

Silver continuous contract, SI, Weekly chart

Oil has continued its decline for 4 weeks running now and a little lower, near 44.33 it would again test its projection where the 2nd leg of the decline from 2005 is 62% of the 1st leg down. It would be part of a large sideways triangle if support there holds. At most I don't expect to see oil much below 40 before setting up a larger bounce.

Oil continuous contract, CL, Weekly chart

We'll get New Home Sales tomorrow morning, which is expected to improve slightly, but that will be the only report. Reaction to earnings is the bigger driver at the moment.

Economic reports and Summary

Conclusion

Visa (V), Amazon (AMZN) and AT&T (T) reported after the bell and AMZN gets the gold star for after-hour trading -- it's up +85 (+17.6%) to 567. Visa got a nice reaction as well, up +4.33 (+5.9%) to 75.99, while T jumped +0.76 (+2.1%) to 34.66. The after-hours reports had equity futures jumping higher, especially NQ, following the late-day rally and that might be pointing to an immediate bounce Friday morning. But futures started a bit of a pullback later in the evening and ES (SPX futures) was approaching the flat line (at its post-16:00 higher close) and the initial morning start is not guaranteed to be to the upside.

The decline from Monday looks sharp and therefore bearish but it's not hard to argue it's just a sharp 3-wave move down and as such it could be reversed from here. It's what this market has been doing to traders -- just as a move gets started and traders feel like they have a direction to trade they get slapped silly with a spike reversal. The choppy whippy price action since February has been full of this kind of price action and we don't know yet if it has ended or will continue into next month. A new high still can't be ruled out. But at the moment, until we see evidence of a reversal back up, the setup looks good for lower prices, perhaps after a consolidation on Friday. I'd stick with the short side (short the bounces) until it's proven that buying the dips is back in style.

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