The price action since the November 3rd high has hardly been helpful in figuring out which direction this market wants to go. The choppy whippy up and down price action is more indicative of a market that doesn't know which way to go while waiting for the Fed to announce its rate decision next week. That could mean another week of this chop.

Today's Market Stats

There were no significant economic reports this morning to move the market and tomorrow is not much different. So the market is more or less on its own as it watches for overseas events and continues to worry about what the Fed will do next week (the Fed is currently picking the pedals off the daisy flower, with each one accompanied by "we will raise, we won't raise" and as soon as they pick the last pedal they'll let us know their answer).

The whippy price action since the November 3rd high is forming what could end up being a sideways contracting triangle, which fits well as a bullish continuation pattern, presumably waiting for the Fed to bless the next rally. Even if the initial reaction next week to the Fed's announcement is negative, as it was to the ECB's announcement, a continuation of the sideways chop into next week would be bullish. We have some price levels to watch to the downside to know when it turns more bearish but for the moment the nod goes to the bulls and we'll have to see how and when they can break out of the current log jam.

Working against the stock market is the fact that we're getting a continuous stream of data that tells us the economy has been slowing down and will likely continue to slow. Corporate earnings have been declining, pushing P/E ratios higher and companies are starting to cut dividends, all of which begs the question "how can the markets rally to new highs from here when so many signs point to a slowing economy and worsening earnings?" The answer to that question is simple -- the market only cares about what the central banks can do to continue pumping money directly into the veins of the market. But as we saw with the negative reaction to the ECB's "less than whatever it takes" announcement, it's taking a bigger and bigger drug injection to get the same market high.

It will be interesting to see how the market reacts to the Fed's announcement. No rate increase would be good for international businesses (a rate increase would rally the dollar, which would hurt export business) and for borrowers in general. But it would tell us the Fed believes the economy is strong enough to accommodate a rate increase and that would be considered market positive. I personally believe the Fed is completely out of touch with reality and has economic models that are outdated and proven wrong, but it only matters what the market believes. If the Fed holds rates where they are it would be normally bullish for the stock market but that would mean the Fed believes the slowing economy can't handle a rate increase (especially if they become afraid a rate increase now could be the same error made in the 1930s, prompting a worsening of the depression we're heading for). Therefore holding still on rates could prompt selling. As I've said many times in the past, it will be nice when the Fed is shoved aside as inconsequential to the economy and markets and we can get back to trading more reliable technical and fundamental signals. Hey, I can dream it will happen.

Compounding the difficult in figuring out what the Fed will do is trying to decipher many of the government economic reports. To say the reports are massaged with all kinds of formulas, which change based on the whims of whoever's in charge, would be an understatement. Take the most recent NFP report, which showed relatively strong employment gains. David Stockman pointed out in a recent article that the BLS (Bureau of Labor Statistics) has so many adjustments to the numbers they collect that it's hard to know what the true number is. But even going with their numbers, while they've been showing job growth (I think I saw something like 2 million since 2009), the actual number of hours worked is virtually the same as it was in 2007, which is only marginally higher than the number of total hours worked in 2000 (these numbers come directly from their site).

The increase in total hours since 2000 is +0.08%, which is about as close to zero as you can get. It's a rounding error. In other words, the larger number of jobs that have been created are simply dividing up the same number of total hours worked. Companies have had an incentive to hire more temporary workers and provide fewer hours per employee. Part of the reason is more flexibility for the company and part is because they're trying to avoid the requirements of ObamaCare (which is failing miserably).

A quick summary of what's happening to our economy and corporate profits, and a strong reason to remain very cautious about the upside, is summarized below. As I'll get into with the charts, I'm actually looking for another rally leg but while I see upside potential I think it's very important to understand that there's a lot more downside risk than upside potential from here. Caveat emptor could not be more appropriate here. Hat tip to John Williams for the following list of negatives for the market:

1. Global GDP growth has gone negative for the first time since 2009.
2. Corporate earnings growth has turned negative and has fallen for two consecutive quarters (and is expected to fall again in Q4).
3. S&P 500 net profit margins are steeply declining. According to Tony Sagami, "since 1973, there has been only one 60 bps decline in S&P 500 net profit margin that didn't lead to a recession."
[The current decline is 100 basis points]
4. In October, U.S. imports of goods declined by 6.6 percent on a year-over-year basis.
5. In October, U.S. exports of goods declined by 10.4 percent on a year-over-year basis.
6. U.S. manufacturing is contracting at the fastest pace that we have seen since the last recession.
7. Corporate debt defaults have risen to the highest level that we have seen since the last recession.
8. Credit card numbers that were recently released show that holiday sales have gone negative for the first time since the last recession.
9. The velocity of money in the United States has dropped to the lowest level ever recorded.
10. Of the 93 largest stock market indexes in the entire world, 47 of them (slightly more than half) have already plunged at least 10 percent year to date.
Just like in 2008, other global financial markets are imploding ahead of a U.S. collapse.

Referencing item 3 above, the chart below shows the decline in earnings growth since Q3 2014. The decline in earnings has been 4 quarters in a row and will very likely finish even lower for Q4 2015.

S&P 500 Earnings Growth, Q2 2011 - Q3 2015

The stock market, that has continued to whistle past the graveyard despite this negative trend has ignored the fact that 12-month P/E ratio of the S&P 500 has now climbed to almost 23, which is warning flag that the coming years will very likely be another correction. This is especially troubling since increasing P/E valuations generally occur during a period of rising corporate earnings. In this case earnings have been in decline for over a year but P/E valuations have continued to rise, which is a very dangerous condition (for bulls). This is not a timing tool and as I mentioned above, I'm actually looking for a bit more rally from the market, but the higher this thing goes I think the harder and faster it will fall.

And with that let's get to the charts. The SPX weekly chart shows the pullback from trendline resistance that I have pointing out the past several weeks. The broken uptrend line from 2011-2014 and the top of a previously broken parallel up-channel for the rally from 2009 intersected near 2095 at the end of November and the rollover from the back-test of this area is bearish. A drop below price-level S/R at 2020 and the November 16th low near 2019 would be more bearish. But at the moment the larger price pattern supports the potential for at least a choppy rise higher into the end of the month and possibly into January.

S&P 500, SPX, Weekly chart

The choppy price action since the November 3rd high is bullish following the September-November rally. The bears need to prove they're in control, starting with a decline below 2020. The pullback from December 2nd has been a choppy pattern and one thought as I watch this is that we could get a sideways triangle as price trades in a contracting range through next week. That would then set us up for a Santa Claus rally. So stay cautiously bullish here but don't get caught in a flush to the downside.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2110
- bearish below 2020

The 60-min chart below shows how choppy the price action has been since the November 3rd high, which again is a reason to suspect we're inside a triangle formation (triangles tend to be filled with whippy choppy price action). A sideways triangle would be a common pattern for a 4th wave correction in the rally from August, especially since 4th waves tend to be very choppy. A sideways triangle often leads to the final move of the trend (up in this case) and that's another reason it would be a good setup for the bears once the next rally leg completes (assuming we'll get another rally leg). Notice where this afternoon's rally stopped (highlighted in yellow) -- at its broken uptrend line from November 16 - December 3. A back-test followed by a kiss goodbye with a decline Thursday morning would be potentially bearish if not reversed back up right away.

S&P 500, SPX, 60-min chart

The DOW looks the same as SPX, including the rejection at its broken uptrend line from October 2011 last week. The choppy rally/pullback since the November 16th low could lead to a choppy rise into the end of the month, or into January, as part of an ending diagonal to the upside (to complete the 5th wave in the move up from August). Or it could chop sideways into next week before starting the next rally leg. Not until the bears can break the DOW below its November 16th low at 17210 will the bulls be in trouble. It might be a difficult rally to trade on the long side (whippy sharp reversals might spike traders out of their positions) but so far I'm not seeing enough to suck me on the short side.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,980
- bearish below 17,210

NDX also has the same pattern as the blue chips and unless the bears break it down below the November 16th low at 4486 I'm looking for a continuation of the rally. Whether it chops its way higher from here or goes sideways for another week and then higher, I could argue for either. As we head into opex next week, which is typically bullish, it's another reason not to turn bearish here.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4740
- bearish below 4486

The RUT has been one of the indexes that is not the same as the blue chips and techs. It's been weaker and has been a reason not to trust the upside. But today's decline had it testing a trend line along the lows from October 14th, as well as a price projection at 1146 for two equal legs down from November 6th (for a possible a-b-c sideways correction). Looking at the intraday pattern I also see a 5-wave move down from December 2nd, which suggests we should be looking for at least a bounce correction before heading lower. A break below 1140 would be more bearish but for the moment, considering the potential for a rally up to the 1215 area by the end of the month (if the rest of the market rallies), I like the setup for a bounce/rally since a stop can be kept close by.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1166
- bearish below 1140

In addition to the weakness in the RUT, it's the TRAN that has been one of the bigger bearish caution flags on the field. Following the nice setup into the November 20th high, with the little throw-over finish to the ascending triangle pattern, it's been a strong decline that retraced the triangle in a hurry, which is the typical move and why I like trading triangles. But now it's looking like it could be setting up at least a bounce correction following what appears to be a 5-wave move down from November 20th. We could see it drop a little lower, maybe even down to its August low at 7452, before setting up a bounce but with today's long-legged doji at price-level S/R near 7650 all it takes now is a positive day on Thursday to give us a buy signal. The bounce pattern, assuming we'll get it, will then provide clues as to whether it will likely be just a bounce correction or instead something more bullish.

Transportation Index, TRAN, Daily chart

Where the U.S. dollar will head after next week's Fed announcement is the big question but for now it's looking like the dollar will head lower. Last week it reached a price target zone near 100.50, with a high at 100.60, and the strong reversal back down this week is a good indication the leg up from October 15th has completed. It's possible we'll see the dollar bounce back up to at least a minor new high (to give us a 5-wave move up from August 24th) but that new high would then likely be followed by another pullback to the current area before heading higher again. Until I see something like that occur over the next several weeks I'm sticking with my expectation for another drop down to the bottom of its trading range near 94 before starting back up again in a large (in time) sideways consolidation before starting another rally to new highs next year.

U.S. Dollar contract, DX, Weekly chart

Following gold's low on December 3rd and the strong spike up to the high the next day we've seen a sharp pullback and choppy price action following that. It leaves the short-term pattern questionable but at the moment I continue to lean long the shiny metal. I don't think it will be any more bullish than just a correction to the decline from October, with an upside target zone near 1142, as shown on its weekly chart below. A break of its downtrend line from 2012, which will be near price-level S/R at 1142 around mid-January, would be a lot more bullish, in which case I'd then start thinking about a stronger rally up to the 1230 area, if not 1285. That potential would become more obvious if we see a strong impulsive move up from here. As long as gold stays above its December 3rd low near 1045 it remains bullish. And if it drops below Monday's low at 1065 it could lead to a test of that 1045 low.

Gold continuous contract, GC, Weekly chart

Oil's decline from October 9th has formed a descending wedge, which fits as an ending diagonal c-wave in an a-b-c decline from last May's high. Oil could drop further to the trend line along the lows from last January, currently near 34.40, or between here and there is a price projection at 35.57, which is where the c-wave of the move down from May would be 62% of the a-wave. But at the moment the ending diagonal can be considered complete at any time and therefore playing the short side is now the riskier play. I depict a rally that will break the downtrend line from June, currently near 44.20, because I think a larger consolidation pattern off the January low calls for another run up to at least the $60 area (if not $70) before dropping lower next year (perhaps timed with the dollar's rally next year). A decline below 34 would turn oil very bearish.

Oil continuous contract, CL, Daily chart

Other than some unemployment data and export/import pricing there will not be much in the way of economic reports tomorrow. Friday we'll get some PPI numbers, retail sales business inventories and then Michigan Sentiment. Unless there are some big unexpected swings in the numbers we probably won't see much of a reaction from the market.

Economic reports

Conclusion

This morning's failed rally has things looking bearish and the choppy bounce off today's low could lead to another leg down in the morning, like we saw following Tuesday's bear flag, which led to a quick move down this morning. But keep in mind another new low could be followed by a quick reversal back up, especially since we're in the period when strong pullbacks in front of opex week have typically led to strong rallies as big buy programs ignite short covering. That is of course not guaranteed -- there are plenty of reasons to suspect we're on the verge of a market breakdown, but the larger pattern continues to support the idea that we are due one more rally leg, one which could take at least some of the indexes to new highs (doubtful for the RUT, TRAN and some others).

If the market breaks down from here it will be a little bit of a surprise. I can certainly see the potential for it to happen and it's a strong reason to be very defensive about being long the market. While I lean long here I remain fully aware of how vulnerable this market is and when it lets go to the downside we're likely going to see a strong decline as many leveraged investors are forced to cover their positions. The way I see it, this market is now more vulnerable to a downside disconnect than where we were in May 2008, just before it let go with a bang to the downside. Keep one foot holding the exit door open if you're long and be ready to bail first. If you're one of many looking to exit you might not like your exit price or how long it takes to get your trade executed. Getting out too soon and into cash, even right here right now, is a strong recommendation. And then play the long side with only a small portion of your capital. But keep that capital safe, maybe a little hedging on the short side and keep your ear to the tracks and listen for that southbound train coming.

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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