The rubber band was pulled back into a low on Monday morning and then buy programs were unleashed, which sparked short covering and the result has been another bullish opex week. It's a pattern that has worked repeatedly, which is a strong money maker for the big institutions that participate in this game.

Today's Market Stats

There hasn't been any particular news or earnings that sparked this rally so it's been more or less just another few buy programs that ignited short covering in order to get another bullish opex week. Selling puts has been a very big money maker for the big institutions and I'm sure more than a few buy a boat load of call options just before the rally gets started. Buying cheap front-week/month calls, especially with an 60-point SPX rally as we've seen off Monday's low, can return a very handsome profit. It's a game that earns these institutions a lot of money more often than not.

Jamming the market higher during opex is also the reason why there's often a hangover the following Monday as the firms let go of the inventory and/or futures that they purchased for the sole purpose of pushing the indexes higher. We often see a lack of market internal strength, as we're seeing in this rally compared to previous strong rallies, because it's an effort to push the indexes higher, not necessarily all the other stocks. In fact the relative weakness in the RUT is an example of this. The advance-decline volume and a-d line often is lagging.

For example, if you look at a chart of the McClellan Summation index ($NYSI on stockcharts.com) you'll see it peaked at the November 3rd high and it's been in decline since then. It hasn't turned up this week and that tells us the indexes are rallying but the majority of stocks are not. That's a sign of weakness in a bull market rally and further evidence that this week's rally is more from the games these institutions play than real fundamental buying. It tells buyers to beware of what they're doing. It doesn't stop the rally from continuing but it does warn us that it's a weak rally despite how strong it appears from a price standpoint. Price is of course the final arbiter but the takeaway this week is that it's likely a manipulated rally instead of the real thing.

This morning's economic reports were largely ignored (again, it's opex week) but housing starts were weaker than expected, coming in at 1060K, which is 11% below October's 1191K, which was revised lower from 1206K. Building permits ticked higher, from 1105K to 1150K, so that's a good sign but it's hard to know how many permits will turn into building. The housing market has been relatively strong, despite consumers cutting back on their spending, but it's looking like housing might be taking a breather since the decline is more than would be expected from a seasonality perspective.

The stock market rally is into the headwinds of expectations for a Fed rate hike in December, although it's possible the market is expecting the rate hike to mean the economy is improving. There's now a lot of data, both industrial as well as retail, that says we're likely on the verge of the next recession (did you see the news that Japan is back into a recession?), if it hasn't already started, but the market is apparently ignoring the data and listening to economists' projections.

When it comes to rate projections, 88% of economists are now predicting the Fed will raise rates in December. You know my opinion of economists' predictions and I've often said that when they are in synch with a prediction it's usually a sure bet to go against them. We'll see how it goes in December. BTW, they were nearly unanimous as well in the past with about 80% predicting the Fed would raise rates in March, June and September. So the market is apparently pricing in a rate increase but why that's a good thing for the market is what's questionable. It would strengthen the dollar and that will hurt earnings for companies exposed to overseas markets. But alas I'm trying to use logic with the market and that's always an exercise in frustration.

But what happens if the Fed is forced to hold rates where they are? That would be a lot of egg on the faces of the Fed and economists so maybe they'll raise by 0.1% just to say they're doing something. Or they might stand pat and keep rates where they are but continue to talk tough about how they're really going to raise rates early in 2016. However, I think whatever they do will backfire on the market and any rally in anticipation of a rate increase could be a setup for disappointment.

Another bafflement is why the market is rallying in the face of deteriorating earnings now, as well as the downgrading we're seeing for future earnings. S&P has lowered their 2015 earnings estimates, which are now below earnings for 2013 and 2014. A year-over year drop in earnings should be of great concern since it has happened only three times since 1988 -- in 1990, 2001, and 2008. You'll recall 2001 and 2008 were not good years to be a bull. This data is almost a 100% guarantee that we will be in a recession in 2016. Meanwhile the stock market continues to whistle past the graveyard (I don't see no ghosts).

I'll start off tonight's chart review with the DOW, the most-watched index in the world. It's one of the better sentiment indicators and worth watching for that reason if no other. The weekly chart below shows last week's minor break of support at the trend line along the highs from 2000-2007 (the top of the big megaphone pattern I've shown before, which suggests a big move back down over the next two years once the market tops out). This week's bounce is a strong recovery and has so far retraced more than 78.6% of last week's decline, at 17679, with today's high at 17752, which suggests we'll see a new high above the November 3rd high near 17540. There is price-level S/R near 17700 and then its downtrend line from May-July near 17685, both of which were exceeded today. And it closed above its 50-dma at 17594, all of which is bullish. The bullish pattern calls for a new high above its May high at 18351, with a price projection at 18510 as the target price. That's where the 5th wave of the move up from August would equal the 1st wave.

Dow Industrials, INDU, Weekly chart

The daily chart shows the close above its May-July downtrend line, near 17685, as well as its 20- and 200-dmas, which clearly made it a bullish day. The bullish pattern calls for the rally to continue into the end of the month to the upside target at 18510, which will be modified if and when the rally continues and the short-term projection can be updated. The bearish pattern calls for a resumption of the decline that started off the November 3rd high. Because the price pattern for both last week's decline and this week's rally is not clear (impulsive vs. corrective), I can't be sure which way this is going to go next, hence follow a break of one of the key levels at either the November 3rd high or Monday's low -- whichever one breaks first is the direction the market should go. Especially this week (opex), it's possible we'll see some whippy moves but no clear direction.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,978
- bearish below 17,210

As shown on the 60-min chart, the DOW also made it up to its downtrend line from November 3rd, near where it closed today at 17735. It could certainly back down from here, which made holding a long position a little risky at the close. Of course a favorite tactic with this market is to park an index at resistance (or support) and then use overnight futures to gap over S/R to get both sides chasing the move. If the rally continues Thursday morning keep an eye on 17840 since a 3-wave move up from Monday, with two equal legs up at that level, could result in a reversal back down. By this measure it would look even more bullish above 17840.

Dow Industrials, INDU, 60-min chart

SPX is looking the same as the DOW as it too has rallied back up to resistance. It has price-level S/R near 2075 and its 20-dma near 2076 (near 2079 tomorrow). Today it closed the gap down on November 12th, at 2075, and oftentimes traders look for that as their avenue of escape after being trapped by the gap down and selloff. That's why they are often resistance. But if the buying continues then the next level of resistance will be its broken uptrend line from October 2011 - October 2014, near 2093. Assuming the market is ready for a pullback (unless it's in a blow-off move to a top of significance), it's not clear yet whether we should look for just a pullback before heading higher or instead look for a rollover into a stronger decline. As with the DOW and the other indexes, the key levels to break are the November 3rd highs or Monday's lows in order to give us a better sense of direction from here.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2117
- bearish below 2019

NDX has rallied back up to its broken uptrend line from 2012-2013-2014, near 4640, and closed slightly above it. It has been oscillating about this trend line since breaking below it in August. It is also closed back above its broken 20-dma, near 4637 today, so it was a bullish day for NDX as well. Now the bulls need to keep it going so as to avoid a bull trap here.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4738
- bearish below 4486

Of the four major indexes I cover here, the RUT looks the most bearish, which goes back to the price pattern since the August low. I don't see anything bullish about it and while it could certainly continue higher with the other indexes and make at least a minor new high above its November 6th high, it's not an index that yells at me to get long. Instead I look at resistance levels to short and right now it's back-testing its broken 20-dma near 1172. But again, there's no clear short-term direction and I'd wait until a break of either its November 6th high near 1200 or Monday's low near 1140 before taking a position (other than day trading).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1200
- bearish below 1140

It's no different with the granddaddy of the indexes, the Wilshire 5000. It closed above resistance near 21600 (price-level and 20-dma), at 21638, and has at least a little more upside potential to 21730-21760. That's where it would achieve two equal legs up from Monday and back-test its 200-dma. But if we're into the 5th wave of the move up from August then the upside projection for it is near 22300, which is where it would also back-test its broken uptrend line from December 2014 - February-July 2015. Like the other indexes, it's unclear which direction it will go and until it can get above 21760 I'd remain cautious about the upside (and obviously bears need to be cautious as every dip continues to get bought).

Wilshire 5000 index, W5000, Daily chart

Key Levels for W5000:
- bullish above 22000
- bearish below 21000

Unfortunately, the bond market is not providing any clearer short-term guidance at the moment. Like the stock market, I see the potential for another leg up for TNX (10-year yield) to complete a 5-wave move up from October 2nd. The 5th wave would equal the 1st wave at 2.475% if it continues higher from here (off Monday's low). But its bounce off Monday's low is not nearly as bullish as it appears for the stock indexes and it's not hard for me to argue it has already seen the high for the bounce, at 2.377% on November 9th. It was a good test of its downtrend line from June 2007 - December 2013.

10-year Yield, TNX, Daily chart

I thought the setup into the high for BKX on November 6th was a good one for a strong decline to follow. The decline into Monday's low broke its uptrend line from October 2nd and it broke back below the uptrend line from October 2011 - January 2015, its 200-dma and 20-dma and these multiple breaks had it looking bearish. But thanks to some help during opex week, this week's rally has had it recovering all those previous breaks except its uptrend line from October 2nd. In fact today's high is a back-test of its broken uptrend line and because of the previous setup into the November 6th high I think this is a good setup for a reversal back down. You can see RSI is also back-testing its broken uptrend line from the low in August. Obviously I'm fighting a bullish opex week and the other indexes that look potentially more bullish. But going with just BKX I don't feel so bullish here. If anything, the back-test is a good setup for the bears since you can use a tight stop.

KBW Bank index, BKX, Daily chart

Another index that supports a move at least a little higher is the TRAN, but it's also currently in a bearish continuation pattern that can only be negated with a sustained rally above its September and October highs near 8321. While the DOW has rallied strong off its August low, especially off the September 29th low, the TRAN has been a laggard and therefore a bearish non-confirmation so far. The pattern that it has formed since the August low is an ascending triangle, which in the position following its March-August decline is a bearish continuation pattern. I see upside potential to the top of the triangle, near 8321, but it doesn't have to get there and if it now drops below Monday's low near 7921 it would trigger the next sell signal. The next leg down, assuming we'll get it, will be much stronger than the March-August decline.

Transportation Index, TRAN, Daily chart

For most of this year I was thinking we'd see more or less a choppy pullback in a descending wedge kind of pattern but the stronger rally in the past two weeks put the kibosh on that pattern. Instead, now it looks like we'll get a test of the March high at 100.78 before dropping back down (I continue to believe the dollar is not ready to rally stronger than that yet). There's a price projection at 100.88 where the 2nd leg of the rally from August would be 162% of the 1st leg. That coincides nicely with the March high and it's another reason why I don't think the dollar will make it higher than that. The leg up from October 15th is into its 5th wave and it could complete at any time and therefore I see the upside for the dollar as riskier than the downside. Another drop down to, or likely below, the August low at 92.52, should be the next move. If true, it suggests the Fed will not be raising rates in December (I think the current rally is in anticipation of the Fed raising rates).

U.S. Dollar contract, DX, Daily chart

Gold hasn't started a bounce off support yet but I'm still thinking it will. It's actually broken support at its July low at 1072.30, with last night's low at 1062 but it might hold near its trend line along the lows from December 2013 - November 2014, near 1071. Today's close was at 1070.50. If we get a bounce, as depicted on the weekly chart below, I think it will only be a correction to the leg down from October's high, perhaps up to about 1130, and then continue lower. My downside target for a final low remains unchanged (price-level support near 1000, maybe down to 893 for a 62% retracement of its 2001-2011 rally). It's not showing much of a bullish divergence on the daily chart so it could continue lower but I am alert to the possibility that gold will soon put in a final low near this level. It is at the bottom of a descending wedge pattern since its December 2013 low and the bullish divergences on the weekly chart could be hinting of something more bullish sooner than I anticipate. A rally above its October 2015 high, near 1192, is needed to negate the bearish expectations for lower prices.

Gold continuous contract, GC, Weekly chart

The pattern for the pullback in oil, from its October 9th high, calls for a low at 40.02 for two equal legs down in an a-b-c pullback. Monday's low was 40.06 and today's midday low was 39.91, which was followed by a spike back up to close at 40.88. The $40 level looks like it might be defended but obviously it will be more bearish below that level, in which case I'd expect a full-on test of its August low at 37.75. But if the pullback from October 9th is only part of a larger 3-wave bounce off the August low we should now see a rally take oil up to the $53 area as part of a larger sideways consolidation pattern. I haven't given up on the idea for a larger consolidation into the first half of 2016 before letting go to the downside but that means oil should start a rally from here.

Oil continuous contract, CL, Daily chart

Tomorrow's economic reports will not likely move the markets so they'll be on their own to get manipulated into the end of opex week.

Economic reports and Summary

Conclusion

This opex week has been like so many others before it -- pull the indexes down into the Thursday-Monday leading into opex week and then let the rubber band go with a few good buy programs that ignites short covering. We've seen a straight-up rally follow the low on Monday (except for a relatively minor pullback Tuesday afternoon) and it's looking like the rally could continue at least a little higher on Thursday and maybe into Friday morning to get a high closing price for SPX. They could be going for a 2100 settlement price, which from 2020 Monday morning makes for a very nice weekly gain on call options bought on Monday. But stay cautious because moves can come out of nowhere and can be exaggerated as traders position solely because of their options positions and not because of what they believe for the market. And once a bullish opex week finishes there's often a hangover the following Monday. But for now the bulls are back in control until proven otherwise and the first sign of trouble for the bulls would be a drop below Tuesday afternoon's low since it would then leave a 3-wave bounce correction off Monday's low. Trade carefully, or watch from the sidelines, the rest of this week. There are just enough hints of danger (such as from the banking index as well as some weak market internals vs. the strength of the price move) to suggest bulls cannot afford to get complacent here. On the other hand, bears clearly need to respect the upside potential.

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