The pattern for this week has been repetitive with overnight rallies to create a gap-up start for the stock market but then the rallies are sold into by those wanting to reduce their inventory and opex exposure. Today differed a little bit though by not rallying in the afternoon.

Today's Market Stats

The pattern of morning rallies that are then sold into was repeated again this morning. But on Monday and Tuesday we saw afternoon turnarounds to get the indexes back up to flat or in the green. That did not happen today as the selling continued this afternoon. There was a bounce attempt in the afternoon but it was again sold into and the indexes closed near their lows for the day. That looks bearish but there are now signs that we could soon put in a tradeable bottom (or at least stop the selling).

There's little question the market is oversold but we all know oversold can continue to get more oversold. We saw bullish divergences forming last week at the new price lows but that was negated with today's decline. There are no bullish divergences yet on the daily charts and the weekly oscillators are in full dive mode. Things are certainly looking a little ugly for the bulls and knowing market crashes come out of oversold we certainly have to acknowledge the possibility of another flash crash event. But that's a low-odds scenario and not a good bet if trading, except for perhaps holding a JIC position (Just in Case).

Investor sentiment is getting bearish enough to be a cause for concern for the bears (from a contrarian perspective). Investors Intelligence shows the bears are now 35.7%, which is a little more than we saw at the September 2015 low. However, like oversold conditions, it can always get more bearish -- at the 2009 low the percentage of bears was 55% and at the October 2011 low it was 47%. At the moment it's simply a warning sign.

The AAII (American Association of Individual Investors) survey showed 51.7% of investors were bullish at the beginning of the year but only 25.1% consider themselves bullish today. This is one reason why I wonder what Friday's Michigan Sentiment for January will look like. The market expects it to stay the same as November at 92. The AAII sentiment survey shows the bulk of investors (51.3%) are neutral, not quite ready to believe the bear has taken hold so that's actually a bearish sign -- there's lots of room to accommodate more bears. While 22.3% of investors considered themselves bearish at the beginning of the year, that number has jumped only marginally higher to 25.1% today. I wonder what it will take to turn more investors bearish, especially since there's still too much faith in "the market always comes back."

There were no important economic reports this morning and about the only thing the market seemed concerned about was whether or not the Chinese market was selling off. Another small gap up started the Chinese day and the morning rally helped lift our futures in overnight trading. But the Shanghai composite index then sold off in the afternoon and closed at new lows for January and is now near its August low at 2927 (today's close was 2949). Some of our indexes are also closing in on the August lows. The RUT is well below its August and September lows and the Wilshire 5000 closed below both lows today. SPX is close and I expect the Shanghai composite index to follow/lead lower as well.

There was very little news to move the market and the only thing a little surprising is the lack of even a decent bounce during opex week, which is typically a bullish week. But as I've often said, when opex is not bullish it tends to be very bearish as all those big financial firms are forced to buy back their short puts and sell their long calls, both of which put downward pressure on the market. I wouldn't be surprised that's what's causing the selling into rallies. Once this selling pressure is relieved, possibly tomorrow and certainly next week, we'll see a bigger bounce. So let's see what the charts are telling us.

I want to start with a top-down look at the Nasdaq-100 (NDX) in tonight's chart review to review where we've been and where we could be going. Going back in time, the first monthly chart below shows the period from 1985 through 2006 and I show a rising wedge pattern following the October 1987 high and the stock market crash that month (it looks so small now but it was a -40% crash). When I zoom in closer (not shown below) I can see a monthly bearish divergence on MACD at the March 1994 high compared to the previous high in January 1992 so it certainly looked at the time like an ending pattern to the upside.

But instead of turning into a bearish rising wedge we can see price broke out to the upside in June 1995. A failed pattern tends to fail hard and that's certainly what happened -- it led to a very strong 5-year rally. I note the start of the parabolic portion of the rally as the breakout above the wedge, using 500 as a close approximation. The start of the parabolic portion of the rally could be argued as starting in 1994, from the June 1994 low at 350, especially when the chart is viewed with the arithmetic price scale, but to stay conservative I'll use the 1995 break out from the rising wedge, near 500, as the starting point.

Nasdaq-100, NDX, Monthly chart, 1985-2006

The second monthly chart below takes us to the current time frame and a projection for what could happen in the future. This is when the start of the parabolic rally could be important since parabolic rallies typically retrace back to the start of the move, hence the potential for the NDX to return to 500 (350?). The 3-wave a-b-c bounce off the October 2002 low is very clear and while it could be a more bullish 1-2-3 in a new bull market, the secular cycle tells us we have another leg down for the bear and therefore the completion of the a-b-c bounce should now be followed by a decline at least equal to the 2000-2002 decline, probably more.

As noted on the chart below, the 2000-2002 decline was -83.5% and another equal decline in percentage terms would be a loss of 3955 points off the November high at 4737, for a downside target at 782 (the October 2002 low was at 795). A decline to 500 would be a loss of nearly -90%. As for the end of the 2009-2015 rally, the 2015 highs were up against a trend line along the highs from January 2004 - October 2007 and at the top of a parallel up-channel for the leg of the rally from 2010. Now it's close to testing the bottom of the up-channel, near 4145, and an uptrend line from March 2009 - August 2015, a little lower near 4100. Today's low was 4177 and I believe NDX will break below 4100 but possibly not until a couple of months from now.

Nasdaq-100, NDX, Monthly chart, 1999-2020

The uptrend line from 2009-2015 and the bottom of the parallel up-channel from 2010 are shown more clearly on the weekly chart below. A weekly close below 4100 would signify more bearish trouble for the market but a drop to support at 4100-4150 should hold and lead to a higher bounce in February in a correction to the decline from the December 2nd high. Following the February bounce the bearish pattern then calls for a stronger decline into March-April. From a weekly perspective the bulls don't get the ball back until they can get the NDX back above the December 29th high at 4702.

Nasdaq-100, NDX, Weekly chart

Following the completion of the leg down from this morning's high, either here or a little lower on Thursday, the pattern for the decline from December 2nd would then look best with a bounce correction into the end of the month and then another leg down to complete a 5-wave move down. That would then be a good setup for a larger bounce into February before setting up a larger decline in March. The first early sign of bullish strength would be a rally above this morning's high near 4360 but for now the short-term pattern remains bearish.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4475
- bearish below 4100

SPX dropped to support today at its uptrend line from August-September and price-level S/R from its March 2014 high and October 2014 closing low, both at 1885-1888, with today's low at 1886. A very small bounce off that support level late this afternoon got no traction and the decline back down into the close has it looking like it will press at least a little lower. The next support level is the August low at 1867. Following the completion of the leg down from this morning's high, which does a good job completing the leg down from December 2nd, we should see a bounce correction into early February before heading lower again. The bulls need to get SPX above 1965 before I'd start feeling a little more bullish, although an impulsive rally off the low would have me looking for at least a higher bounce.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1965
- bearish below 1885

The SPX 30-min chart below shows the leg down from December 29th shows why I think this leg down is close to completion. We could be in the middle of a much larger crash leg lower but that's a low-odds bet. The 5th wave of the move down from December 29th is the leg down from this morning's high and it has so far achieved 62% of the 1st wave, at 1893.55. Other than the August low at 1867 there is also a projection near 1858 where the 5th wave would equal the 1st wave. I think there's a good chance the 5th wave is either complete or will complete on Thursday and that makes a good setup to trade the long side (just keep in mind that it would be a counter-trend trade and it could be very choppy and whippy).

S&P 500, SPX, 30-min chart

To help keep all this in perspective, the SPX weekly chart below shows what I believe to be the two higher-odds probabilities for the coming year. The bearish wave pattern calls for price to stair-step lower into a low just below 1800 by April where it would test its uptrend line from March 2009 - October 2011 (arithmetic price scale) and its 200-week MA. That would lead to a larger (in time if not price) bounce correction into June/July before heading lower to 1576 (the 2007 high) by September. From there we could expect a very large bounce correction into early 2017 before the bottom falls out from under the market. The bullish potential is shown with the light green dashed line, which calls for a rally back up to the downtrend line from July - November 2015 highs as part of a large sideways triangle consolidation pattern, which would be expected to complete later this year and then start a strong rally. That would be a continuation of the choppy consolidation that we had in 2015. Ugh.

S&P 500, SPX, Weekly chart

We have the same pattern for the DOW -- it could start a bounce from here or drop a little lower to firmer support near 16K before starting a larger bounce into the end of the month. After the larger bounce I see the potential for the DOW to drop down to its August 25th closing low at 15666, if not its August 24th low at 15370 and its February 2014 low at 15340. The lower-probability scenario, like SPX, is for a larger sideways triangle and we could see the DOW start back up to the top of the triangle, which is the downtrend line from May-November, near 17800. The bulls have some short-term work to do before I'll look at that possibility more seriously.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,900
- bearish below 16,000

A downside target that I've been eyeing for the RUT, at 1005.10, was achieved today (almost, with a low at 1005.68), which is the 162% projection for the 3rd wave of the decline from December 2nd. There is another downside projection near 996, which is based on the pattern for the leg down from December 29th. And then, as shown on the daily chart below, two equal legs down from June points to 987.71. It would be more bearish below 987. In the meantime, assuming we'll get a 5-wave move down from June, we need to see a bounce/consolidation into the end of the month before starting another leg down in February.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1065
- bearish below 987

As the stock market sells off we're seeing money rotate in the relative safety of Treasuries and it's looking like the bonds are finally breaking out of the sideways consolidation that I've been showing for months. Using TLT, the weekly chart below shows this week's break of the downtrend line from January 2015, although better confirmation of the breakout will be when it climbs above its October high at 126.21. In case it's just an a-b-c bounce off the November 9th low, where it would have two equal legs up at 125.77, that's another level that bond bulls will need to break. But assuming the leg rally leg is underway, I show a rally up to the trend line along the highs from December 2008 - July 2012, by the end of June. There's a price projection there at 142.38, which is where the leg up from December 30th would be 162% of the June-August 2015 rally. This projection will of course be modified as price dictates.

20+ Year Treasury ETF, TLT, Weekly chart

We're getting plenty of warning signs about the 2009-2015 bull market having ended and one big warning sign is coming from the banks. As they say, follow the money and you'll find your answer. Last week BKX dropped to a longer-term price-level support near 66.50, which goes back to mid-2013 and held 5 previous pullbacks, the last being the September 2015 low. This week's break of support is significant and the only way to save this is a rally into Friday for a weekly close at/above 66.50. Now we watch to see if at least the 200-week MA, at 64.20 will hold as support for a bounce (today's low was 64.53).

KBW Bank index, BKX, Weekly chart

Another way to look at the banks is with a Relative Strength (RS) chart, comparing it to a broader index, such as SPX. The monthly chart below shows BKX first started breaking down in mid-2003 and dropped sharply into the low in 2009 (the banks led the way lower). The EW count for the decline is a clean 5-wave move and that's important -- a 5-wave move will not stand by itself. It will be followed by another leg down following a correction and that correction appears to be a nice b-wave sideways triangle off the 2009 low. The a-b-c-d-e count for the triangle looks complete at the July 2015 high and we should be at the beginning of the next leg down. Currently the RS value is at the bottom of its sideways triangle and we could see a bounce before breaking down (which would mean the banks could outperform in a February bounce) but I expect the banks will continue to lead to the downside in the next bear market leg down. The banks might not be bailed out in the same way during the next crisis and more bankruptcies/mergers will probably occur.

Relative Strength of BKX vs. SPX, Monthly chart

The TRAN has been in trouble for a while and this week's decline has it breaking its uptrend line from March 2009 - October 2011 (arithmetic price scale), which is where it was trying to hold support on Monday and Tuesday. Today's close was also below the trend line along the lows from December 2014 - August 2015, near 6795. I see the potential for at least a small bounce before continuing lower but in any case, watch 6500 for possible support if reached. That's where the decline from December 2014 would achieve two equal legs down.

Transportation Index, TRAN, Daily chart

The U.S. dollar has been mostly consolidating since December and there's not much in the way of bullishness that I see. My expectation continues to be for a pullback to the bottom of its trading range, near 94, and then another up-down sequence this year before rallying later this year and into 2017. Not much to see here folks, move along.

U.S. Dollar contract, DX, Weekly chart

The financial newsletters have been out strong recently about why we should own gold and why now is an excellent time. There is still too much interest in gold and from a contrarian perspective it's still too early to think about accumulating more gold (a monthly purchase plan is a great idea though -- add a little bit each month and if it gets cheaper you'll simply buy more with the same monthly allotment). The price pattern continues to suggest lower prices, maybe after a higher bounce to 1142 resistance but after a 3-wave bounce off the December 3rd low we could see gold head lower from here.

Gold continuous contract, GC, Daily chart

It's tough to call a bottom for oil but it's looking like it could form one here for at least a little larger bounce before heading lower. Ideally, the wave count for the move down from June 2015 will be a 5-wave move to complete the decline and right now it's a 3-wave move down. So a bounce correction and then new low would set it up for a longer-term bounce/rally. Tuesday's low, at 29.93, came close to the 29.80 projection shown on the weekly chart below, which is the 162% extension of the previous rally (March-June 2015). A choppy consolidation that stays below the January 2009 low (support-turned-resistance) could then lead to a drop to 26, which is price-level S/R since 1984 (last touched in 2003). As noted on the chart, a 77% decline from May 2011, to equal the 2008-2009 decline, points to 26.40 so there's good correlation at that level for a low around April.

Oil continuous contract, CL, Weekly chart

Thursday's economic reports will not be market moving but Friday morning will be a little busier and could jostle the market a little. There are some Fed-watched numbers in there, namely PPI and we'll get some more information about the economy with the Empire Manufacturing index (expected to slow further) and Industrial Production (expected to stay in negative territory). It will be interesting to see if the Michigan Sentiment report comes in as expected -- flat at 92.

Economic reports

Conclusion

The month of January has been a very painful one so far for bulls (-1600 DOW points so far). The first week was the worst start to a new year and the second week hasn't been much better, although not nearly as many points have been lost (yet). We could see some lower prices Thursday morning but it's starting to look like a good setup for at least a bounce, one that could take us into the end of the month and give us a bigger bounce than we've seen since December.

The trouble with the expected bounce is that it's likely to be choppy and whippy and that means traders could have a tough time making money. In the pattern for the decline from November a 2-week bounce/consolidation would be a 4th wave correction and I call these "feed your broker" corrections. Traders get stopped out in both directions and the only ones who tend to make money consistently during these corrections are the brokers with their commissions. So be careful with your trading the next couple of weeks since long plays are now considered counter-trend but short plays might not work any better. Small base hits will be the right way to trade it. Once the correction finishes, which could be around the end of the month, we should have another good shorting opportunity.

Pressing bets to the downside is now a risky bet. We could see the market crash lower but that's a low-odds bet. While I see a little more downside potential, such as SPX 1867 (maybe 1858), it's a risky time since a short-covering spike back up could nail shorts quickly. If anything, look for some opportunities to nibble on the long side but be quick about taking profits -- run out, grab your little piece of cheese and then scoot back into your hole before the cat sees you.

 

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Good luck in the coming week and I'll be back with you next Wednesday (Saturday for the Index Wrap).

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