The Santa Claus rally typically occurs between Christmas and New Year's and into the first couple of days in January but Santa's abductors did not release him and he was therefore a no-show. Now we're facing the rest of the statement "...Bears May Come To Broad and Wall." Today the bears pounced again after Tuesday's consolidation and now we're left to wonder about the January barometer.

Today's Market Stats

More weak economic data out of China and reports of another nuclear test by Korea (this time supposedly a hydrogen bomb) sent overnight traders packing and the selloff in the futures, like Sunday night, resulted in a gap down to start our trading day. A bounce recovery failed and an afternoon decline dropped the indexes below the morning lows. It looks bearish but we have some short-term bullish divergences and a price pattern suggesting a bounce into the end of the week could be next.

The Santa Claus rally was a complete no-show and that bodes ill for the market. The other thing that's not looking good at the moment is how the first week of January will go. The bulls have some work to do to erase the decline from the December 31st close. For SPX that means we need a rally above 2044 to get back into the green for the year before Friday's close. It could happen (54 points in the next two days) but at the moment it's not looking good. The first week of January typically sets the tone for the rest of the month and as goes January so goes the year, both of which are looking more favorable for the bears than the bulls at the moment. But the year is young and we all know how quickly things can change. Just look at the volatility since November's high.

Affecting the market this morning was more bad news out of Asia. Following Monday's report about China's weakening manufacturing sector (as the world buys less stuff from them) this morning's report on China's purchasing-manager's index showed a drop to a 17-month low in December, which only adds to the angst about how much China's economy is slowing (and all the debt involved that could affect the global financial system). It's getting harder and harder to avoid the fact that China's slowing is a reflection of a slowing global economy, which then makes it harder to justify why the U.S. will be able to avoid a slowdown as well. We are all inexorably linked together.

Factory orders in the U.S. were revised lower for October, from +1.5% to +1.3%, and declined -0.2% in November. The market expected this number so there was very little reaction in the pre-market futures. Durable goods orders were unchanged following October's +2.8% but removing defense-related orders it was down -1.0%. Nondurable goods shipments declined -0.4%, which continues a string of monthly declines this past year.

Economic forecasts for the U.S. continue to get ratcheted lower and about the only thing the Fed can hang its hat on is employment data. This morning's ADP report showed employers added 257K jobs in December, which was much stronger than the 215K expected by economists. November was revised slightly lower from 217K to 211K. The majority of the added jobs were in the service sector by a factor of 10-to-1 (234K in service sector vs. 23K in goods-producing sector). How much of those jobs were temporary holiday-related jobs can't be known but we'll find out next month.

The minutes for the last FOMC meeting were released this afternoon and they showed a nervous Fed. While the vote to raise rates +0.25% was unanimous, it was by no means without a lot of doubt. Some FOMC members said the vote was a close call for several because of their concern about inflation data. While they publicly say they're "reasonably confident" that inflation will rise towards the Fed's 2% target rate (although most want to see higher inflation), they are secretly worried about deflationary pressures knocking inflation down. Some are worried that tightening at this time could be a mistake since they believe risks that inflation could stay low "remained considerable."

The consensus view of Fed members is that the continuation of the decline in oil prices in the 4th quarter "was likely to exert some additional transitory downward pressure on inflation in the near term." Gotta love their language. And by "transitory" I guess we need to understand how long transitory is -- oil has been declining for more than two years but I guess it's still a "transitory" phenomenon. Some members are starting to question this by noting the persistent weakness in energy prices is "imposing important downside risks to the inflation outlook." Ya think? Bottom line is that an uncertain Fed makes for an uncertain market because it makes it harder to judge what the Fed will do in the future and the market hates uncertainty.

That uncertainty, whether it be Asia or Europe related, or simply worry about what the Fed will or won't do to help the market, I mean economy, has registered this week in the selling we're seeing. It's becoming more difficult to justify the high price valuations when we see so many signs of slowing in the economy and in corporate earnings. It's still arguable about whether or not we've seen THE top of the bull market from 2009 but certainly it's getting harder to justify why the market should start another rally leg to new highs this year. Never say never and we'll use the charts to tell us when "never" should be wiped off the mouths of the bears.

I'll continue to use the SPX weekly chart to show the bullish potential for a choppy rally higher into April/May of this year and potentially make it up the 2200 area. I don't have a lot of faith in this possibility since it's hard to justify why the market should be able to rally this year but from a pattern perspective I have to acknowledge the possibility. In other words, my opinion of the fundamental reasons why the market should or should not do something takes a back seat to what price action tells us. And the choppy pullback from November can easily be interpreted as a bull flag and as such we have to respect the upside potential out of this pattern. I believe a continuation of the rally would be inside a rising wedge pattern based on how the rally progressed off the August low but it's still too early to tell. For the bullish scenario the bulls need to do something here and break out of the bull flag. The bearish interpretation of the choppy decline off the November high is a very bearish wave count that calls for a strong decline (another flash crash kind of move). A drop much lower, such as below 1970, could usher in much stronger selling.

S&P 500, SPX, Weekly chart

The bull flag pattern is shown more clearly on the daily chart below, the bottom of which is currently near 1972. That remains a downside target for the current leg down from the December 29th high but a short-term pattern for the leg down suggests we could get at least a bounce correction at any time. I show a bounce back up to close Monday's gap down (at 2043.94), possibly completing by Monday, but that's a lot of points to cover in 3 days. However, we all know how fast a short-covering rally can move and until SPX breaks below 1970 I'd be careful about being short here.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2082
- bearish below 1970

The 60-min chart shows the expectation for a 3-wave bounce correction off this afternoon's low. It's possible we'll see a quick spike down to 1972 to tag the trend line along the lows from November-December but with the bullish divergence against Monday's low I think it's better to be thinking about buying support rather than chasing it lower here. Assuming we'll get a bigger bounce I'll then be looking for the potential to reach the 2040 area where it would test price-level S/R (2040), back-test its broken uptrend line from September-December (2037), retrace 62% of the decline from December 29th (2042) and close Monday's gap (near 2044). That's a lot of resistance and a good reason to short it there if reached. If it bounces up to that area and rolls over there's a good chance the next decline will be very powerful (and therefore a good ride for the bears). Just keep in mind the upside potential...

S&P 500, SPX, 60-min chart

The DOW has broken below its trend line along the lows from November-December, currently near 17070, but it's holding support at the bottom of a parallel down-channel for its pullback from November, as well as price-level S/R near 16900. Like SPX, it's a good setup for at least a bounce correction and a rally up to 17425 would close Monday's gap and back-test its broken uptrend line from August-December. Slightly lower, near 17394, is where it would retrace 62% of its decline from December 29th. Other than a brief poke below this afternoon's low we should not see much lower before a bounce correction but if this afternoon's low at 16817 is broken and not quickly recovered it could turn into a much stronger decline right from here. For the bulls, it takes a rally above the December 29th high at 17750 to turn things bullish (in which case I'd be looking for something similar to the rising wedge pattern shown on the SPX weekly chart above).

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,750
- bearish below 16,900

Yesterday I was looking at the Nasdaq and thinking bearish for today, which turned out to be correct. On Monday it gapped down below its uptrend line from October 2011 - November 2012 and on Tuesday it jumped up in the morning to back-test the line. The selling following the back-test looked like a bearish kiss goodbye and suggested more selling today. Now that we got a new low for the NAZ it's looking like a bullish setup if the buyers jump back in here. The pullback from December 2nd is a 3-wave move with two equal legs down at 4811.81, which was achieved today. It's possible we have an a-b-c pullback correction that will now be followed by a new rally, one which will take us to a new high. A rally above 5010, above Monday's gap close at 5007, would have me leaning more bullish but for now I think the downside risk is greater than upside potential. The triple top/H&S pattern formed since November's high has a downside objective near 4610, close to its uptrend line from April-October 2014.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 5010
- bearish below 4811

The RUT's pattern for the decline from December 29th is what had me thinking we'd get another leg down today and now it's looking like a completed 5-wave move (maybe with one more quick low Thursday morning). That sets it up for at least a bounce correction. It's been a weaker index so the first warning sign for bears would be if the RUT starts leading to the upside. But if the bounce (assuming we'll get one) remains weaker than the others I'll be looking for the 1120-1125 area for a reversal back down, which will hopefully set up by next Monday. A rally above 1140 would have it looking more bullish.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1161
- bearish below 1080

Bonds rallied strong today, which of course dropped yields and the 10-year yield declined -3.1% to 2.177%. Below 2% is when the market will realize the Fed has lost the battle over rates. But for that to happen we'll need to see TLT (20+ year Treasury bond ETF) rally out of its sideways triangle that it's been in since the June 2015 low and August high. Today it ran up to its downtrend line from January-August and if it can break that downtrend line and climb above its December 11th high at 124.10 it would be a bullish statement. But bond bulls have their work cut out for them to get through several layers of resistance, which shouldn't be hard if the stock market is declining and traders rush to the perceived safety of Treasury bonds.

20+ Year Treasury ETF, TLT, Daily chart

The BKX weekly chart below gives a big-picture view of its pattern since its October 2011 low. There's a trend line along the highs from April 2010 - March 2014 and it's where the rally into June-July highs was stopped (with just a minor poke above the line). A parallel line was then attached to the October 2013 low and you can see how it supported pullbacks since then (with a minor poke below the line in August and September. Today's decline has BKX back down to this uptrend line, near 70, and if it breaks on a weekly closing basis it would tell us THE top is in place. In the meantime we'll see if 70 holds as support for at least a bounce.

KBW Bank index, BKX, Weekly chart

The Transports have been providing a clear warning sign for the bulls since the index topped out in November 2014. Each minor new high in the first half of 2015 for the DOW was not matched by the TRAN, which was a reflection of the deteriorating economy. It was one of the first indexes to drop below its August low, a feat not yet accomplished by the other indexes. Care to wager a bet about whether or not the DOW will follow? But the TRAN could be nearing stronger support at its 200-week MA, near 7110 this week. A little lower, near 7000, is its uptrend line from March 2009 - October 2011. A break below 7000 would obviously be more bearish but watch for support if tested. This week's decline has it below the bottom of a parallel down-channel for last year's decline, near 7300 on Friday (today's close was 7217). The bottom of the down-channel supported the decline into the December 18th low so this week's break is potentially important.

Transportation Index, TRAN, Weekly chart

The U.S. dollar's bounce off the December 9th low would achieve two equal legs up at 99.97 and this morning's high at 99.75 is only 22 cents away from that projection. Above that is another price projection for its rally from August, at 101.32, but I'll be looking for that to be achieved only if the dollar can get above 100. The larger consolidation pattern following the high last March is still a big question mark but until I see evidence to the contrary I'll continue to look for a large sideways consolidation through the first half of 2016 before starting the next rally (102-105 target zone before completing the rally off the 2011 low and then start a more serious decline).

U.S. Dollar contract, DX, Weekly chart

I continue to see at least a little more upside for gold but it achieved a projection at 1089.70 for two equal legs up in a 3-wave bounce off the December 17th low and could turn back down from here. If the sellers stay away I see additional upside potential to 1116-1118 and then further upside potential to 1135-1142. Above 1142 would be more bullish but for now I'm only looking for a bounce correction before heading lower again.

Gold continuous contract, GC, Daily chart

Oil continues to struggle to get off the mat as each time it lifts its head it gets knocked down again. But with a bullish descending wedge pattern, and the bullish divergence helping confirm the likely bullish pattern, it's looking like we should expect a rally soon. The bottom of the wedge is currently near 33.80, which is only 60 cents above its January 2009 low at 33.20, and the COT (Commitment of Traders) report shows short interest down where we've seen previous tradeable lows for oil. I would expect to see a bottom soon and a rally at least back up to the top of the descending wedge, currently near 41.60, and obviously it would be more bullish with a breakout from the wedge. But as depicted on its weekly chart below, I think the higher-probability pattern is for it to get only a bounce in the descending wedge and then make one more new low later this spring before starting a more serious rally.

Oil continuous contract, CL, Weekly chart

There is nothing market moving in tomorrow's economic reports so we'll once again be reacting to whatever news comes in from overseas. If it's a relatively quiet overnight session we could see the market start at least a larger bounce.

Economic reports

Conclusion

The market has been weak since the December 29th high but the only thing that has happened is a move back down within a possible bullish continuation pattern (an a-b-c pullback for the techs and a bull flag for the blue chips). It's not a good time to get aggressive on the short side since the setup is looking good for at least a bounce into early next week. If we get the bounce it will then provide a good setup to get short for a stronger decline but we'll still need to acknowledge the potentially bullish setup for a new rally to get started and run higher over the next few months.

It doesn't matter whether we believe the fundamentals call for a market decline or rally since this market has ignored fundamentals for a long time. But worry over the Fed's lack of "care and nurturing" of this market has many concerned and it's likely part of the reason for some of the selling. The fundamentals do support the bears better than the bulls and without a super-accommodative Fed the bulls should be playing defense. While I don't recommend getting aggressively short yet I do prefer the short side over the long side. I'd get more aggressive on the downside with breaks below the key levels on the charts. But for the short term (into next week) I'm looking for a bounce to set up a better short play.

 

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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