An oversold bounce today did not prevent a negative month or a negative 3rd quarter. This makes three negative quarters in a row for the DOW, a relatively rare event, and that raises more questions about whether or not we've started a bear market cycle.

Today's Market Stats

The 3rd quarter came to an end today and the bulls tried to reduce the loss for both the month and quarter but it would have taken a rally of nearly 500 points for the DOW to just breakeven for the month. But with the loss for the 3rd quarter it makes it three in a row, which hasn't happened since the 1st quarter of 2009 (the market bottom). That doesn't necessarily indicate we've had a significant turn in the market this year, from bull to bear, but it's certainly another warning sign, which follows the break of the uptrend lines from 2009 back in July-August.

Three quarterly losses in a row is a big deal if only because it doesn't happen very often. In the DOW's 119-year history it's happened only 20 times, including the current 3-quarter stretch, and in the past 40 years it's happened only three times, including this year. The losses accelerated as the year progressed, starting with a loss of only -0.3% for Q1 and then -0.9% for Q2 before dropping harder with a loss of -7.6% for Q3. But this is hardly the longest streak -- the loss into March 2009 was 6 straight quarters, which matched the previous longest stretch into the second quarter of 1970 (early in the previous secular bear market, which we've been in since 2000).

Today started with a big gap up after rallies in the Asian markets lifted the futures market and then helping this morning's upbeat mood was the ADP employment report. It came in at +200K, which is the number that was expected and it was a slight improvement from the 186K in August (revised slightly lower from the originally reported 190K). This points to the probability that Friday's NFP report will at least be in line with expectations.

Today's bounce looks like a quick short-covering rally in a continuing downtrend. That could of course change if the bounce develops some legs but at the moment it looks like just another bounce that gave the bears another opportunity to get short. Resistance held and as long as that remains true we should continue to look for lower prices.

Countering this morning's ADP report was the Chicago PMI, which has now dropped into contraction territory with the reading for September at 48.7, dropping from 54.4 in August and much worse than the expected 52.9. The big drop in the Production Index, from 59.0 to 43.6, is the largest one-month decline since February and is now lower than any time since July 2009. New orders and the order backlogs continue to shrink, which points to even weaker numbers in the coming months.

With more evidence of a slowing economy it becomes harder and harder for the bulls to argue the market should be higher. The quick fade off this morning's spike up provided more evidence that the bears' argument for lower prices is scaring more investors out of the market. But there was clearly an effort to trim the losses for September and the indexes were able to close at/near their highs for the day. If there is any upside follow through Thursday morning it could start to scare the bears away.

The SPX weekly chart continues to look bearish because of the spike down from August followed by a choppy consolidation. But the current week is showing a bullish hammer candlestick at support (price-level support near 1885), which could of course change since we've still got two days of trading to see how it finishes. A test of the August low with a bullish hammer, if it holds, would embolden the bulls to do some buying but if support doesn't hold we'll probably see SPX drop down to its October 2014 low, near 1820, and potentially down to its February 2014 low, near 1738. The wave pattern for the decline from July is not clear enough to rely on but one possibility looks for two equal legs down, which points to 1755. So we've got some downside targets to watch for in case the market continues to head lower. But a rally above price-level S/R near 1985 would have me feeling less bearish and above price-level support near 2040 would have me looking for new highs.

S&P 500, SPX, Weekly chart

The daily chart below shows a bear flag pattern for the bounce off the August low. SPX dropped below the bottom of the flag pattern (uptrend line from August 24 - September 24) on Monday and today it made it back up to the broken line, near 1919. A rally much above 1920 would leave a head-fake breakdown, which would be bullish, whereas a decline from here would leave a back-test followed by a bearish kiss goodbye.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1981
- bearish below 1871

The 60-min chart below shows more clearly the uptrend line from August and how this morning's quick high was a back-test of the broken uptrend line. It pulled back and tried again into the close. The bulls need to see a gap up over resistance while the bears need to see an immediate selloff. I think following the initial move Thursday morning could see a tradeable move, even if for only a day trade. A rally above last Friday's high near 1953 would be a bullish move, which would point to a minimum upside target near 1998 (and potentially a back-test of the 50-dma next week) and possibly up to 2025 or higher.

S&P 500, SPX, 60-min chart

The DOW has a very similar setup as SPX but its bear flag pattern is slightly different. I've drawn the uptrend line from August 24th through Tuesday's low and a parallel line is attached to the August 28th high. A larger a-b-c bounce off the August low would be achieved with another leg up, potentially to the 17300 area, before heading back down. A rally above its downtrend line from July-August, currently near 16715, would be a bullish sign but for now the larger pattern continues to suggest lower prices.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,100
- bearish below 15,942

There are no strong technical clues for the tech indexes and I'm left scratching my head for some ideas as to where it's more likely to go from here. It's currently trading around price-level S/R near 4119, which is its September 2014 high and where it was finding support back in December 2014 through January 2015. But other than that I don't have a good feel for what will happen next.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4309
- bearish below 4053

The RUT has been weaker than the other indexes, being the first to break below its August low, but it's the one that has the best setup for a higher bounce. The bounce off price-level support near 1080 is a good setup for a bounce at least up to its downtrend line from July, currently near price-level S/R near 1152. The downtrend line drawn from its June high through the September 17th high is closer to the 50-dma near 1176. There is a way to consider the decline from June to yesterday's low to be the completion of a 5-wave move, which sets it up for a much higher bounce and therefore bears should be playing defense here. I'd like to see an impulsive rally off yesterday's low (it's just a 3-wave bounce correction so far) before turning bullish so we have no clear setup at the moment. Add in the uncertainty in front of Friday's NFP report and it's probably a good time to stay flat and watch for a bit longer.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1150
- bearish below 1080

The 30-year yield (TYX) is sitting on support and which way it goes from here should help us figure out the likely direction of the stock market. If TYX gives up price-level support near 2.85% (yesterday's close was 2.855 and today's was 2.88) it will likely break down much further. A bond rally could mean money is rotating from the stock market into the bond market.

30-year Yield, TYX, Daily chart

There's very little to add to the above commentary when I look at the other indexes for clues. The SOX looks like the tech indexes while the banks and trannies look like the blue chips. Several indexes rest on support and therefore it's important for the bulls to keep up the buying pressure over the next couple of days. Continued selling from here would leave just another oversold bounce correction before heading lower.

The U.S. dollar is working its way back up toward its downtrend line from March-August, currently near 97.54, where I'm expecting it to reverse back down for one more leg inside a descending wedge pattern off the March high. Once the pattern completes I'm expecting another rally in the dollar next year. If it rallies above its August 2nd high at 98.42 it would become more immediately bullish.

U.S. Dollar contract, DX, Weekly chart

Last week gold made it back up to its downtrend line from January-May and was again rejected, just as it was in August. The drop back below price-level S/R near 1142 is also bearish and I continue to look for lower prices for gold. It takes a rally above 1195 (two equal legs up from July) before I'd turn more bullish.

Gold continuous contract, GC, Weekly chart

The whole time gold was trying to bounce off its July low I was watching silver to see if it supported the idea that the metals would head higher. But silver was stuck below its price-level S/R near 15.25, as can be seen on its weekly chart below. It was also being held down by its downtrend line from October 2012 - July 2014, currently near 15.30. As long as silver remains below its September 13th high at 15.43 I'll stay bearish the poor man's gold. A rally above 16 and its 50-dma would have me less bearish.

Silver continuous contract, SI, Daily chart

Following the spike up off the low on August 24th into the high on August 31st oil has been consolidating in a contracting pattern, which fits best as a bullish continuation pattern. Another equal leg up points to 55.29 if it starts up from here and then I think it would turn back down from there in a larger contracting pattern (this one being a bearish continuation pattern in the larger pattern).

Oil continuous contract, CL, Daily chart

Thursday will be busy for economic reports but the potentially market-moving ones will be at 10:00 -- the ISM index will be important because of the concern that it too could show contraction with a drop below 50 (following today's Chicago PMI report). Construction spending is also expected to slow but the bulls will need to see it stay above contraction territory.

Economic reports and Summary

Conclusion

Today's bounce looks like an oversold bounce and nothing more bullish than that. But most rallies start this way and we'll have to see if the bulls can get some follow through on Thursday. The RUT is currently showing the most bullish setup and therefore if the RUT rallies it would be a good sign for the bulls. SPX rallied up to trendline resistance and therefore it needs to rally in order to prevent a bearish kiss goodbye following the bounce up to a back-test. Based on where the indexes are located I think the initial move Thursday morning will see follow through and therefore trading in that direction (even if for only a day trade) should work.

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