Coming into this week we had a setup for minor new highs to finish the rally off the September lows. Off Tuesday's highs we might have the start to something more bearish but at the moment the bulls are fighting to keep it from happening and they could be successful for another new high.

Today's Market Stats

Today was a relatively quiet day and many indexes finished with a doji, which indicates indecision. As I'll get into with the charts, the patterns for the indexes are not clear which way this week's consolidation will lead to and today's dojis reflects that. I suspect we'll get an answer to the question "what's next?" on Friday, but at the moment both sides are staring at each other waiting for the first one to blink.

The morning started off relatively flat and other than the techs being a little weaker than the others, the market finished flat. It was basically a day of waiting to get through tomorrow morning's pre-market NFP report before either side is willing to take new positions. As you can see in the table above, most were interested in taking positions off the table, which had the advance-decline line and volume both finishing negative for the day. We had another good setup for a reversal off Tuesday's highs but so far the pattern for the pullback is inconclusive. It's a coin toss as to which way the market is likely to head the next few days and assuming the market will react to the NFP report tomorrow morning I suspect we'll get our answer right away.

Expectations for tomorrow's NFP report are for an improvement over August and September, which saw job growth at 136K and 142K, resp. That was a significant slowdown from an average of 243K in the period May-July and now economists are predicting 180K for October. That would help bolster the Fed's desire to raise rates in December.

Part of the reason for higher job growth expectations in October is because of the low unemployment rate and the low initial unemployment claims. That has economists thinking August and September were artificially low and we'll see a rebound in November-December. The trouble with these two metrics is that it's very different this time -- these are not normal times and using the past to predict what will happen this time could get economists in trouble. Nearly 16 million people say they want a job but can't find one, which is a very high number considering we're six years into an economic recovery. On top of that the labor participation rate is now at 62.4%, a number last seen nearly 40 years ago in 1977. Using the past to predict how the economy will perform this time is what has the Fed flummoxed in trying to figure out why their "incentive" programs haven't worked.

It was a quiet day for the markets so I'll jump right into a review of the charts, starting with the granddaddy index, the Wilshire 5000, which the SPX closely aligns with. The weekly chart below shows the rally from the August/September lows and back up to its broken uptrend line from October 2011 - October 2014, currently near price-level S/R near 22000, which is where it rallied up to on Tuesday. A back-test here is a setup for the bears if a bearish kiss goodbye is left behind.

Wilshire 5000 index, W5000, Weekly chart

The daily chart below shows this week's price action with the test of its broken uptrend line and price-level resistance. Wednesday's red candle was the bearish kiss goodbye but today's low was a test of its recovered 200-dma near 21760. The bulls need to defend this morning's low from breaking since that would tilt things in favor of the bears. But if the buyers step back in and drive the index to a new high for this rally, the next upside target would be its broken uptrend line from December 2014, near 22200 next week. Just be careful of a quick new high on news (NFP report), if it happens, since it could spin around and sell off, leaving a bull trap and frustrated bears in its wake.

Wilshire 5000 index, W5000, Daily chart

Key Levels for W5000:
- bullish above 22000
- bearish below 21013

The SPX daily chart below shows the same pattern as the W5000 and on Wednesday it broke below its uptrend line from September 29th, the first warning sign that a top could be in place. But the pullback into this morning's low is not enough to give us a good idea whether or not the top is in place, one that will lead to at least a larger pullback. If could instead press a little higher before starting a larger pullback/decline. There's a projection near 2121 for an a-b-c bounce pattern off the August low, where the c-wave would be 162% of the a-wave, and there's the July 20th high near 2133 so keep an eye on price action at either of those levels if reached.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2121
- bearish below 2075

A trend line along the highs from August 28 - September 17 (not shown on the daily chart above but is shown on the 60-min chart below) acted as support at this morning's low. This followed this morning's back-test of its broken uptrend line from September 29th, so we've got the battle of the trend lines at the moment. A drop below this morning's low at 2090 would be a stronger indication the rally from September has finished and then we'll need to see how the pullback/decline develops in order to help determine whether we should expect a multi-week choppy consolidation or the start of a much stronger decline (to break the August low) into December. That determination will help manage a short position (manage it tightly or let it run).

S&P 500, SPX, 60-min chart

This week's rally for the DOW got it back above its broken uptrend line from October 2011 - October 2014 (green bold line on its daily chart below) and that's a bullish move. This morning's pullback was a test of that trend line and it held, which keeps it bullish. Short-term bearish divergences (for all the indexes) suggests any new highs from here could be short-lived but further upside still needs to be respected. But yesterday's decline had the DOW breaking its uptrend line from September 29th and this morning's quick high was a back-test of the broken line. Again, we have a battle of the trend lines and we wait to see who will win the battle. Back above this morning's high at 17929 would be at least short-term bullish while a break below this morning's low at 17779 would likely kick off at least a multi-week pullback correction, if not something more bearish.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,978
- bearish below 17,555

This week the Nasdaq once again pushed above its March 2000 high at 5132.52, which it last did in June and July (and one last stab on August 5th before collapsing into the August 24th low. Tuesday's high was just above 5163 but it's been struggling to hold onto 5132. Today's low was 5098 but then the afternoon rally pushed it back up to 5132.54, where it was stopped and it closed at 5127.54. At the moment it's obviously tough resistance, again, and the bulls need to see a weekly close above that level to at least keep things bullish for a little longer. The Nasdaq also accomplished two equal legs up for its bounce off the August low by hitting 5155.79 so the pieces are in place for the resumption of the decline off the July high. All the bears need is some proof of a reversal, which we do not have yet.

Two equal legs up for NDX's bounce off its August low is near 4717, which was also achieved with this week's high at 4737 on Wednesday, and then it closed near 4717. It also made it up to its trend line along the highs from August 28 - September 17. It hit the line on Tuesday, pulled back a little, and then hit it again on Wednesday. It's now struggling to hold onto support at its July high near 4694. I can't argue against another push higher but the oscillators on all time frames suggest bulls need to be very careful here.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4732
- bearish below 4600

The RUT is one of the indexes I've been watching closely for clues that the rally is not over yet but could instead get one more leg up to complete it. But the first thing the bulls need to do is break resistance at its broken uptrend line from October 2011 - October 2014, currently near 1193, and where it's been stalled this week. A back-test followed by a bearish kiss goodbye could prompt some stronger selling. The last back-test looked like a bullish breakout at its September 17th high but it immediately collapsed back down the following day. We could see something similar if an effort is made to rally up to the 200-dma, about 15 points higher at 1215.83, and then a collapse back down, especially if the rally was news related, such as Friday morning's NFP report. The first sign of trouble would be a decline below the October 28th high near 1179 and then confirmed bearish below the October 30th low near 1160.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1198
- bearish below 1159

One reason why I'm wondering about the RUT is because of a rising wedge pattern for the leg up from October 27th, which ideally needs another leg up to complete the pattern. I show this depiction on its 60-min chart below and a rally above Tuesday's high near 1196 would point to a move up to 1215, possibly by next Monday. But a drop below its October 28th high would negate the rising wedge pattern and suggest the high is already in place. We could get an early answer in the morning following the NFP report.

Russell-2000, RUT, 60-min chart

Looking to the bond market for clues for tomorrow, I see a similar setup as the stock market -- it's at an important inflection point and tomorrow's NFP report could kick it into either direction. The TNX daily chart below shows the 10-year yield has rallied up to a projection at 2.241%, which is where the bounce off the October 2nd low has two equal legs up for what counts as another a-b-c bounce correction to its decline. But that will hold true only if bond yields start back down on Friday, otherwise we could see TNX rally up to its downtrend line from 2007-2013, near 2.38%. A rally in yields (selloff in bond prices) would be supportive of a stock market rally. But a turn back down from here could start the next larger decline in yields, which would suggest the Fed will be forced to sit tight and not raise rates. That's the way I'm leaning (I think the Fed has effectively boxed itself in) but we'll get another clue early tomorrow morning.

10-year Yield, TNX, Daily chart

The banks were relatively strong today, possibly in anticipation that the NFP report will support the Fed's desire to raise rates in December, which helps the banks' profitability. But today's rally once again was stopped by its broken uptrend line from October 2011 - January 2015. You can see how many times this trend line has been back-tested since breaking in August. It's obviously resistance but we could still get another leg up to the projection shown on its chart at 75.74. That was the 2nd leg of a 3-wave bounce correction off the August low and it would be 162% of the 1st leg up. That projection lines up with the 62% retracement of its July-August decline, at 75.87, so it would make an interesting setup for a reversal if it makes it up to that area. In the meantime, the broken up-trend line is resistance until proven otherwise (with a weekly close above the line, near 74.55.

KBW Bank index, BKX, Daily chart

Last week the U.S. dollar broke its downtrend line from March, near 97.10, back-tested it this week and rallied higher yesterday, giving us the impression the dollar is in breakout mode. Some of this might be in anticipation of the Fed raising rates in December but the dollar's rally is at risk of failing here. Last week I had pointed out the potential for the dollar to rally to 98.19, which is the projection for where it would have two equal legs for an a-b-c bounce off its August 24th low (sound familiar?). Yesterday's high was 98.15 and today's high is 98.24 and it has hit its price projection at the top of a parallel up-channel for its bounce. The pieces are in place for a reversal back down and I'm wondering if the NFP report will be the catalyst. If so then it would mean a disappointing NFP report, which would have many traders thinking the Fed will not be able to raise rates. I don't think the dollar is ready for a stronger rally yet (in 2016, yes, but not yet) but we'll know more tomorrow.

U.S. Dollar contract, DX, Daily chart

Gold had turned traders bullish again as it rallied off its July low but it turned into just another 3-wave bounce correction that topped out on October 15th at its downtrend line from October 2012 - January 2015. The past three weeks have seen a strong decline and this week's break of price-level S/R near 1142 is bearish. The next support level is near 1090, the 50% retracement of the 2001-2011 rally but I don't think it will hold. MACD rolling over from the zero line is typically a strong sell signal that indicates the downtrend will continue. I think we'll see gold down to 1000, if not lower, before we can start thinking about a longer-term position in gold ownership. From a short-term perspective, gold looks ready for a bounce correction, perhaps back up to the 1142 area, before continuing lower.

Gold continuous contract, GC, Weekly chart

Silver's rally ran into trouble last week at its 50-week MA and its downtrend line from July 2014 - May 2015, both near 16. This week it has dropped back down below price-level S/R near 15.25 and will likely test 2006-2010 price-level S/R near 14.65 next. Assuming silver breaks down, which I think it will, I'll be looking for it to drop to the $12 area.

Silver continuous contract, SI, Weekly chart

Oil has been struggling to get off support at 44.33, which is a downside Fib projection for the 2nd leg of its decline from 2005, where it equals 62% of the 1st leg down (2008-2009). It's still just a guess on my part but I've been expecting to see oil consolidate around this level ever since its low last January. That means another leg up for its bounce off the August low, ideally up to 55.75 where it would have two equal legs up from July, and then back down in a continuing sideways consolidation pattern. I'll change the pattern to reflect expectations as price dictates. It should be noted that the commodity index has already broken below its 2009 low and is now down to its 2001 low, which for oil would mean down to $17. I have no idea if oil will ever see that price again but I do expect oil to drop lower next year.

Oil continuous contract, CL, Daily chart

The big report coming out before the bell tomorrow is the Nonfarm Payroll report and it's expected to show improvement over September's numbers. Wednesday's ADP report was in line with expectations and a little less than September's so with higher expectations for the NFP there could be a disappointing reaction if the number comes in much less than expected. Or would that be a good thing since it would help keep the Fed at bay? With the Fed's direct involvement in the markets for the past many years it's become more difficult trying to figure out how the market will react to economic numbers, especially during a time when the market is waiting for the Fed to make a move.

Economic reports and Summary

Conclusion

The CNN Fear & Greed indicator (Fear & Greed) has moved back toward Extreme Greed and is now higher than it's been since February. That's when a high for the market led to stagnation until the sharp drop in August. So a high greed reading is not necessarily bearish but it's a time for bulls to be more cautious than usual. The indicator can clearly go higher, as it did in 2013 and 2014 but again, it's a warning sign. Based on the price pattern and the strong likelihood we'll get at least a multi-week pullback correction, if not a much stronger decline back down to the August lows, the high greed reading is that much more of a warning sign. If the indexes do push a little higher tomorrow and Monday I suspect this indictor will also push higher, maybe up to 80.

CNN Fear & Greed indicator

We know the market is overbought and overloved but that's not stopping the bulls from continuing to buy, even if it's with less strength than earlier in the rally. We know the market can remain overbought with extreme bullish sentiment for much longer than seems possible so we have to keep that in mind. I expect the market to at least give us a multi-week choppy pullback into the end of the year and the bearish interpretation of the pattern calls for a strong decline (below the August lows) into the end of the year. I think upside is limited and riskier than looking for a shorting opportunity. Topping processes can be very frustrating when looking to get short and this one is no different, especially considering how bearish it was looking in August.

But bulls can't get complacent here and bears need to exercise patience. A rally following tomorrow morning's NFP report would likely mean another new high and very likely the final one (on news). But a selloff would start to strengthen the bearish pattern that calls for a decline to kick into gear at any time. Only after we see how the pullback/decline develops will we get a better idea about whether to expect a choppy consolidation/pullback or to instead expect a stronger sharp decline back down to the August lows. I suspect by this time next week, probably sooner, we'll have a good idea about what to expect.

Good luck and I'll be back with you next Wednesday. And remember, the coming year is likely to be a volatile one, which will present us traders with some very good trading opportunities in both directions. Having another set of eyeballs watching the market with you, offering trading ideas and things to look for and watch out for, is a resource that you should take advantage of, especially since the offer below more easily gives you the opportunity to make back your subscription cost with just one good trade.

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In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying