The bounce off the January 20th lows fit as a correction to the decline from December. The bounce off this morning's low fits as a correction to the decline from Monday. Both point to a stronger move down but the bears will need to prove it with an early move on Thursday.

Today's Market Stats

The stock market has been its best to fight off the bears but the price pattern suggests it could be a losing battle. A 3-wave bounce off the January 20th lows into Monday's highs fits as an a-b-c correction to the decline from December 20th. The decline from Monday's high into this morning's low has been followed by an a-b-c bounce off into this afternoon's high and that's a bearish setup for an immediate decline on Thursday. But the bears can't waste any time taking advantage of this setup otherwise something more bullish, even if only short term, could follow.

What the stock market is fighting is more evidence of a slowing economy, and not just in the U.S. The global economy is slowing in unison (some faster than others) and this is the first time for this to occur since the 1930s. This of course fits the general thesis that says we've been in a secular bear market since 2000 (since 1998 by measures other than price) and that the next cyclical bear within the secular bear could be a very painful move for those who hold long positions.

Further evidence of a global slowdown in the economy is what we see happening in the currency markets. Everyone is in a race to devalue their currencies in hopes of making their products cheaper for other countries to import. But with everyone doing it the only thing that's been accomplished is a race to the bottom and a global devaluing of fiat currencies, which has created a deflationary cycle. That of course is what the central banks are trying to fight with their QE and ZIRP/NIRP policies but each is negating the efforts of the other. In the past, as in the 1930s, this currency war tends to lead to very bad things between countries.

The Chairman of the OECD's Review Committee, William White, wrote "We're seeing true currency wars and everybody is doing it, and I have no idea where this is going to end. The global elastic has been stretched even further than it was in 2008 on the eve of the Great Recession. The excesses have reached almost every corner of the globe, and combined public/private debt is 20% of GDP higher today. We are holding a tiger by the tail." We all know what happens when the tiger gets tired of us yanking on his tail.

The economic slowdown obviously affects businesses and we're seeing that show up in the slowdown in earnings, which is making it more difficult to service the massive debts that they've taken on. Some of the debt has been for the development of new energy sources, such as the fracking. Think that debt might be in trouble. Much of the debt has been from companies borrowing heavily to buy back stock in an effort to boost earnings per share and hide the fact that actual earnings have been slowing. Again, a slowdown is now making it more difficult for those companies to service their debt and the slowdown is going to cause a double whammy to earnings.

The Fed keeps pinning their hopes on the employment picture but that picture is a lot dimmer than their simple observations of how people are employed (it's part of their flawed economic models). The chart below is hard to read because I had to squish it to fit but basically it's showing the inflation-adjusted price of SPX (on top) vs. the ratio of nonfarm employment to part time employment. Each time the ratio has been in decline (meaning part time employment is becoming larger than nonfarm (full) employment) we've been in a secular bear market. The dates of the first secular bear (pink band) is 1966-1982 and the second secular bear (pink band on the right) is from 1999. You can clearly see how the employment ratio has declined from its 1999 peak and since the 2009 low it hasn't even recovered to the 2002 low. In other words, the employment picture remains weak but the Fed feels it was strong enough to warrant a rate increase in December.

Inflation-adjusted S&P 500 index vs. Nonfarm employment/Part time employment, chart courtesy Martin Pring

The chart above shows why it can't be used as a timing tool but it does support why we've been in a secular bear, regardless of the new (non-inflation adjusted) price highs for the stock market in both 2007 and 2015. And if we're still in the secular bear, as I've contended for many years, the new price highs into 2015 merely made the stock market more vulnerable to a market crash. Have we started that crash? It's too early to tell but yes, I do believe we've started the next (and should be final) leg of the secular bear. But for those who think it's a good idea to just sit tight and let the market recover after the decline, I think the recovery will be far slower than the one off the 2009 low. It could take a generation before prices recover back to the December highs.

Starting the review of tonight's charts, the SPX weekly chart below shows a wave count I think is the most probable at the moment. The relatively small bounce off the January 20th low, which was a test of the October 2014 low, is a small 4th wave correction is what should become a larger 5-wave move down from May. This bearish wave count suggests SPX will stair-step lower into the fall before setting a much larger bounce correction. The next move, if the decline continues as depicted, should drop SPX to support at its uptrend line from March 2009 - October 2011, which will be near 1760 next week. This would set us up for a bounce into February's opex week.

S&P 500, SPX, Weekly chart

The daily chart shows the 3-wave bounce off the January low and up to the bottom of a previous parallel down-channel, which is a very common resistance level. Monday's high tagged the line to the penny and then turned back down, which suggests the decline will continue from here. A rally above Monday's high, near 1945, would have me looking for a move up to 1992 (price-level resistance and the 50-dma).

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1945
- bearish below 1867

In addition to the bottom of its previously broken down-channel, SPX achieved a 50% retracement, at 1946.93, of the decline from December 29th. It's hard to see on the 60-min chart but the bounce off this morning's low is another 3-wave pattern that retraced 62% of the decline from Monday into this morning's low. This makes it a good setup for a reversal back down into a stronger selloff (for the 3rd wave of the move down from Monday). But this is also why the bears need to take advantage of the setup immediately Thursday morning otherwise the pattern could turn at least short-term bullish.

S&P 500, SPX, 60-min chart

The Dow was the stronger index today, closing up +183 (+1.1%), while the techs were weaker (NDX closed down -21 (-0.5%). As you can see in the table below, there were some star performers today, starting with XOM's +4.9% rally. There were seven stocks that did better than +2% while only one stock (MCD) declined more than 2%.

Dow Industrials component stocks

The Dow bounced off price-level S/R this morning, at 16K, and left a bullish candle at support. This certainly has the potential for follow through to the upside and the bottom of its previously broken down-channel is up near 16800. A nearly 600-point rally would obviously be painful if you're short and it's another reason why the bears need to step back in quickly on Thursday if the bearish pattern is correct, which calls for the Dow to drop down to at least retest its January 20th low at 15450 and likely down to price-level support at 15340-15370 (its February 2014 and August 2015 lows).

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,510
- bearish below 15,863

On the NDX daily chart below you can see how it has been struggling to hold onto its uptrend lines from June 2010 - November 2012 and March 2009 - August 2015, which are converging and currently near 4180 (where it closed today) and 4140, resp. This morning's low dropped slightly below the January 27th low, which strongly suggests the 3-wave bounce off the January 20th low has completed and we're looking for another leg down. The decline from Monday afternoon's high to this morning's low looked like a 1st wave down and the bounce into this afternoon's high looks like a completed correction to the decline from Monday, which suggests an immediate drop lower on Thursday. It's up to the bears to make it happen otherwise the bulls could take advantage of trendline support and launch another rally leg.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4302
- bearish below 4112

I've drawn an up-channel for the RUT's bounce off the January 20th low and it's certainly possible the bounce pattern is only half way through. Monday's high hit the 1036-1040 target zone I was looking for and the turn back down fits the larger bearish pattern that calls for a continuation lower to at least the trend line along the lows from February-October 2014, currently near 965. The 5th wave of the move down from December 2nd, which is the leg that started down from Monday's high, would equal the 1st wave at 941.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1040
- bearish below 996

The 10-year yield has continued lower and the projection at 1.729%, shown on the weekly chart below, is where the decline from June 2015 would achieve two equal legs down. This projection, or its uptrend line from July 2012 - January 2015, near 1.76%, are potential support levels if there will be one more leg up inside a sideways triangle pattern before dropping lower (to head for 1%). If it breaks below 1.72% I'd say it will head lower sooner rather than later. The bearish pattern would be negated with a rally (selling in bonds) above the November 2015 high near 2.38%.

10-year Yield, TNX, Weekly chart

The banks have been relatively weak as the talk increases the chances for the Fed to not raise rates any further this year. Moving closer to a NIRP policy would decrease banks' earnings and the concern by many is that the Fed, along with the other central banks, has run out of options in their need to do Something. But BKX could be ready for at least a consolidation before continuing lower. Today's low at 59.05 stopped a little short of price-level support at 58.83, which is its April 2010 low (pretty amazing that a 2-year rally has been retraced in six months and the meat of the expected decline hasn't hit yet). Assuming we'll see price bounce/consolidate for a few weeks we'd then have a setup for another drop lower to complete a 5-wave move down from its July 2015 high, which would target the 52.50 area. From there I would then expect a bigger bounce correction for a few months before heading more strongly lower.

KBW Bank index, BKX, Weekly chart

On January 13th the TRAN lost support at its uptrend line from March 2009 - October 2011, near 6950 at the time. Following its January 20th low it made a choppy bounce back up to the broken uptrend line, near 6985, with Monday's high at 7000, and then sold off. That was a nice back-test followed by a bearish kiss goodbye and that sell signal can only be negated with a rally above Monday's high. Until then, it's looking like a good setup for the 5th wave down in the decline from November 2015 and the 5th wave would equal the 1st wave at 6003, shown on its daily chart below.

Transportation Index, TRAN, Daily chart

The U.S. dollar snapped to the downside today, starting from the overnight session. Today's low was a test of its 200-dma, at 96.90, as well as its 50-week MA 97.10, as can be seen on its weekly chart below. Two equal legs down from its December 3rd high points to 96.56, not much below today's low at 96.88. That's also where it would test an uptrend line from August-October 2015 so I would expect a bounce if that level is reached. The dollar could then rally up to at least a minor new high before pulling back again but I'll stick with the larger pattern that calls for a continuation of the sideways consolidation into the summer before heading higher.

U.S. Dollar contract, DX, Weekly chart

Looking at just about any commodity you choose there's no question they've been beaten to a pulp over the last couple of years. The dollar's strength has had a negative impact on many commodities but it's primarily due to either excess supply or weakening demand and for many it's both (think oil). Whenever a sector gets pushed down into the mud and just when you think the poor bastard is going to suffocate in it there is often a very good buying opportunity. As Warren Buffet often said, when there's blood in the streets you want to be a buyer. Of course many have been thinking this for a while and they've joined the commodities in the mud as they too get pushed lower. Obviously the saying "don't try catching falling knives" is apropos here.

But we might in fact be looking at a good opportunity to be thinking long some of the commodities and while I don't study individual ones, other than gold, silver and oil, there are some that are worth watching closely. Some worthy stocks are listed below as the BARF stocks (listed below the table below), which is also apropos considering how many investors have puked their positions. I have not evaluated the listed stocks below but the fundamental comparison between the FANG and BARF groups is certainly compelling as far as why you want to sell FANG and buy BARF. I didn't make up those terms and this particular table came from extract.com

FANG vs. BARF, 2015

FANG stocks:(Facebook, Amazon, Netflix, and Alphabet - GOOG;
BARF stocks: BHP Billiton - BHP, Anglo American - LSE:AAL, Rio Tinto - (LSE:RIO), and Freeport-McMoran - FCX

As I mentioned above, I have not looked at the individual stocks but the chart of the commodities index shows the drop down to support at the February 1999 low at 74.24. It can of course continue lower but I like the setup for at least a larger bounce correction before heading lower (maybe). There's been a large separation between stock prices and commodity prices since commodities peaked in April 2011 and I've been saying for a long time that the huge gap will get closed someday. It's been my expectation that it will mean the stock market will join commodities by dropping. But commodities could rally while the stock market declines. This happened in 2000 when commodities were coming up from lows in early 1999 while stocks peaked in 2000 and didn't bottom until 2002. So the two have traded separately in the past and could do so again.

Bloomberg Commodity index, DJUBS, Weekly chart

Countering an expectation for at least a larger bounce in the commodities index, my view of gold and oil is that we have not seen their lows yet. Gold has made it up to price-level S/R at 1142 and its 50-week MA at the same level. The bearish pattern calls for another leg down and a downside target will be near 1000 if it starts back down from here. But it would obviously be more bullish if it can continue to rally through resistance and especially if it used 1142 as support on a pullback.

Gold continuous contract, GC, Weekly chart

Like gold, oil has been building a bullish divergence since its January 2015 low and it could be ready to at least bounce higher in a multi-month move. But the pattern for the decline from June 2015 would look best with one more new low, perhaps down to about 23, before starting a larger bounce.

Oil continuous contract, CL, Weekly chart

Today's ADP Employment report showed a stronger than expected employment gain, which suggests we might have an upside surprise from Friday's NFP report. But as mentioned at the beginning of tonight's report, the employment report is not that accurate as a predictor of the stock market, especially since it tends to peak with the stock market. Economic indicators, such as today's ISM Services report and tomorrow's Factory Orders, continue to point to a slowing economy, which is far more important for stock prices going forward. Only the Fed gets hung up on employment numbers and they've pretty much run out of options to help the market, I mean economy.

Economic reports

Conclusion

The stock market bounce off the January 20th lows appears to be over, or at least that's what the bearish price pattern suggests. That interpretation of the pattern says the leg down from Monday is the start of the next decline that should take the indexes below the January 20th lows. That means today's bounce off this morning's low should lead to a continuation lower, which means if the bulls can thwart that expectation it will mean the bounce off the January 20th lows could extend higher before turning back down.

I have not seen enough in the bounce pattern to suggest anything more bullish than just a bounce correction to the December-January decline, which has me looking at bounces as shorting opportunities. The immediate setup for the bears calls for a decline pretty much out of the gate Thursday morning. If the indexes do rally above Monday's highs I would be careful about chasing it higher since the choppy move up will mean it could fail at any time. Day trade the long side whereas a short trade should take us into next week and then maybe set up a bounce/rally into opex week.

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