Following the bullish reaction to Yellen's statement on Tuesday there was a rally in overseas markets and that boosted U.S. futures, giving us a gap-up start to the day. While nothing more was added to the gap-up start, it did give us another positive day. Thursday is the end of the quarter so we'll see if the bulls can hang on.

Today's Market Stats

The bullish reaction by the U.S. market to Yellen's comments on Tuesday was a bit strange if you try to analyze it logically (you know of course that a logical stock market is an oxymoron). The reaction told us that investors are happier about not having another 1/4-point rate increase than they are worried about a slowing economy and slowing corporate earnings. Apparently the fact that the Fed is recognizing the global economy is turning south, which will likely put negative pressure on the U.S. economy, is a good thing for stock prices.

The Dow rallied almost 300 points from midday Tuesday, just before Yellen spoke, to this morning's high. If ever you wondered about the disconnect between the stock market and reality, that 300-point rally should have caused you to wonder no more. The Fed's thoughts/actions drive this market more than any fundamental issues and that continues to be a little frustrating for those of us who remember the market before we had an activist Fed. But it is what we trade and we must trade what we see and not what we expect a "logical" market to do.

The one caution about a positive reaction to a Fed statement is that these reactions are having less and less of an effect on the market as the market begins to understand that the Fed and other central banks are simply trying to do more of the same that hasn't worked. If Keynesian economic policies are working the economists will tell you to do more of the same. If the policies are not working the same economists will tell you need to do more of the same to get it to work. Before this is all over those economic theories, which are practiced by nearly all of today's economists, will be completely debunked.

The one benefit of course from all these central bank policies has been asset inflation and that's been good for investors but most are beginning to recognize that the inflated prices will not be able to hold up in the face of a deteriorating economy that's coming off the slowest economic recovery in our history. This recognition is showing up in the shorter-term positive effects from Fed statements and policy changes. My sense is that smart money is trading the trend but they have one foot holding the exit door open so that they can be one of the first out the door when someone yells "SELL!"

It can of course only be speculated about how vulnerable the market is here but I was discussing this same thing at the previous high in December and worried about a disconnect to the downside as sell orders do not get matched up with buy orders. The withdrawal of bids can create a big hole into which many investors and traders fall when trying too late to get out of positions. Limit stop orders can be jumped over and many find out at the end of the day that their stop orders did not trigger. This is a very risky time, again, to be complacent about the long side. It's too late to buy and too early to short but I prefer nibbling short here than trying to hold long and this is especially true now that we've had the ramp up into the end of the quarter.

Last Wednesday I showed some sentiment measures that had moved into bullish extreme territory and while the bullish sentiment has backed off a little, that's actually the first sign of an impending reversal. Oftentimes tops are formed from simply a lack of buyers and other than the fund managers pushing the indexes higher in order to get their higher management fees (higher assets under management, AUM, gives them higher 2% fees), I wonder if the buying pressure will disappear after tomorrow (maybe after the first of April). So the backing off of bullish sentiment is an indication that many investors are no longer buying the rally.

In addition to the sentiment measures shown last week, the VIX option prices are also flashing a warning signal. VIX options are European-style, which means they can't be exercised prior to expiration and it's easier to see distortions between the call and put prices. This in turn provides clues which way traders are leaning. The VIX has dropped back down below 14, which is where it was last October, just before it rallied above 30 into January.

Currently, with the VIX closing at 13.56, the April 14 calls, which are $0.44 out of the money, cost $2.20 (all time premium and for only 20 days). In the meantime, the April 14 puts, which are $0.44 in the money, can be purchased for just $0.25. Traders are willing to pay nearly 10 times as much for an OTM call option than an ITM put option for a bet that the VIX will be higher by April opex. This is a similar pricing situation that we had at last October's low for VIX and it's another similarity between the patterns between last August-November and this January-March. Time, price and sentiment are telling us the bulls are pressing their luck here and bears should soon have a turn at the feeding trough.

I've mentioned in the recent past how close the patterns relate between the August 2015 low and November 2015 high. It was a 3-wave move up from August and the rally from September into the November high lasted 25 trading days. It's been a 3-wave move up from January and the rally from the February low into the March 22nd high lasted 27 trading days. Some of the indexes are now pressing to minor new highs and the next similar timeframe is this Friday, which is 50 trading days from the January low. That was the number of trading days off the August low into the November high. The market doesn't usually repeat exact patterns but if often rhymes, which means the patterns tend to be very close since they're a measure of human reactions and we tend to react the same way to the same stimuli.

With that let's jump into tonight's charts to identify some key levels to watch and where to watch for support and resistance.


Dow Industrials, INDU, Weekly chart

Yesterday's rally brought the Dow right up to its downtrend line from May-November 2015, near 17650, and this morning it gapped up over the line (the way this market likes to deal with resistance and support levels). That was a bullish break and while the Dow wasn't able to add to its initial rally it at least held above the line and that keeps it bullish. If the buying can continue and/or use the broken downtrend line as support on a pullback we could see the Dow challenge its 2015 highs (November - 17978, May 18351). But if the Dow drops back below the downtrend line it would leave a failed breakout attempt. A failed attempt usually leads to a fast reversal so be careful with long positions if the Dow closes back below 17650. Both the bullish and bearish wave patterns call for at least a deeper pullback and only after we see what kind of pattern develops (corrective vs. impulsive) will we have a better sense for which larger pattern is playing out.


Dow Industrials, INDU, Daily chart

The daily chart shows today's break above its downtrend line from May-November 2015 but the pullback from this morning's initial high left a candlestick that looks a little like a shooting star, which could turn into a reversal candlestick if Thursday finishes with a red candle and closes below 17650. It takes a drop below the March 24th low at 17399 before a top will be confirmed in place. In the meantime the bears need to respect the potential for additional upside. But the reverse is also true -- bulls need to be careful that an end-of-quarter run will simply stop because fund managers stop driving it higher (to get their higher AUM in order to maximize their management fees). This is what happened with the run into the end of the last quarter, where the December 29th high was followed by strong selling into January.

Key Levels for DOW:
- bullish above 17,670
- bearish below 17,399


S&P 500, SPX, Daily chart

SPX remains bullish above its March 22nd high, near 2057, but the rally could be in trouble if it drops back below its broken downtrend line from November-December 2015, near 2051. There's upside potential to about 2080-2092 to complete the leg up from March 24th, which in turn would very likely complete the leg up from February. That projection zone is based on the wave pattern for the rally, the December 29th high near 2082 and then a back-test of its broken uptrend line from February, near 2092 by the end of the day Thursday. Above 2092 would target the December 2nd high at 2104 and then the November high at 2116. But a drop back below its March 24th low near 2022 would confirm the leg up from February completed and then we'll have to see what kind of pattern develops for the larger pullback/decline.

Key Levels for SPX:
- bullish above 2057
- bearish below 2022


S&P 500, SPX, 60-min chart

On the 60-min chart below I'm showing an expectation for a leg up Thursday, potentially up to the 2090 area, before completing the rally from February. At that level, by midday on Thursday, the broken uptrend line from February 11 - March 10 crosses the trend line along the highs from March 4-18. It could instead fail from here, stop at the 2080 price projection mentioned above or even continue to rally above 2100 but the completion of a 5-wave move up from March 24th would be a nice completion pattern.


Nasdaq-100, NDX, Daily chart

NDX made a bullish jump over resistance this morning by gapping above its 200-dma and the trend line along the highs from March 4-22, both near 4863, and then above its broken uptrend line from February, near 4875. Following its gap up it completed its rally in the first 15 minutes of trading and then pulled back below its broken uptrend line from February. That leaves a possible back-test and bearish kiss goodbye and any further selling Thursday morning would be a bearish sign. But the bears need to drive NDX below its March 24th low near 4735 to prove the leg up from February has finished. Another push higher Thursday morning would be able to test its downtrend line from December, which crosses its broken uptrend line February near 4902 on Thursday. Above price-level S/R at 4920 would be more bullish.

Key Levels for NDX:
- bullish above 4920
- bearish below 4734


Russell-2000, RUT, Daily chart

The bullish break by the RUT is the rally above its H&S neckline, which is the uptrend line from October 2014 - September 2015 (bold purple line), currently near 1100. But the RUT was the weaker index today and today's candlestick is a potentially bearish gravestone doji and a red candle for Thursday, especially if it closes back below 1100, would indicate a high is probably in place. In the meantime there's bullish potential to its downtrend line from June-December 2015, currently near its 200-dma at 1141.

Key Levels for RUT:
- bullish above 1105
- bearish below 1065


Transportation Index, TRAN, Daily chart

The TRAN again tried to break its downtrend line from March-November 2015, currently near 7965 (log price scale), which is where it closed today. Today's candlestick is a bearish gravestone doji at this line of resistance so the bulls need to prevent a red candlestick on Thursday. The bears need to see a break below its 200-dma at 7823 and then follow that with a breakdown from its up-channel from January with a drop below 7795. Coinciding with a break of its up-channel, if it happens from here, would also be a break of its 20-dma, which has supported the rally since January. There's lots of bullish potential if the bulls can prevent selling this week.


U.S. Dollar contract, DX, Daily chart

Thanks to Yellen's dovish comments on Tuesday the US$ took a nose dive on Tuesday and dropped further today. If the dollar continues to drop to the bottom of its down-channel that it's been in since the December high, it will make it down to about 93 by the end of April where it would meet the top of its old up-channel off the May 2011 low. A closer support level is the top of a parallel up-channel for the rally off the April 2008 low, currently near 94 (bold blue line). The tops of both channels were broken in December 2014 and January 2015 with the big ramp up from May 2014 and you can see how the top of the channel from 2008 has held as support since the March 2015 high. A drop below 93 would be more bearish for the dollar but the corrective pullback since last December suggests the larger consolidation pattern off the March 2015 high will continue for several more months before heading higher, as depicted on my chart (bold green).


Gold continuous contract, GC, Weekly chart

After trying to get above its down-channel that gold has been in since August 2013, currently near 1250, the weekly oscillators for gold has it looking like it will at least pull back further before potentially heading higher. A typical pullback correction would be back to its 50-week MA, currently near 1150. You can see how this MA acted as resistance since gold broke below it back in February 2013. So a drop below the 50-wma would be a bearish signal but until that happens we can't know yet if we'll get just a pullback or a drop down to the bottom of its down-channel, which will be near 2008-2009 price-level S/R near 1000 by the end of July.


Oil continuous contract, CL, Weekly chart

Last week I had pointed out how oil reached the top of its down-channel that it's been in since the January 2015 low. It started a pullback from its March 22nd high and the weekly oscillators are starting to roll over. Similar to gold, it's still very early in its reversal, which could easily be just a small pullback before continuing higher. Above 42 would be more bullish for oil, in which case the next upside target would be its 50-week MA, currently at 44.62. But for now the bearish setup is for oil to drop back down to the bottom of its down-channel, which will be near 21 by the end of June, especially if support near 38 does not hold.


Economic reports

Thursday's economic reports include unemployment claims data and the Chicago PMI, which is expected to improve slightly from February's sub-50 of 47.6 with a climb up to 50.3. Considering all the other signs of a slowing economy I would not be surprised to see a reading below 50 again. But hey, that's good news right? It means the Fed will continue to back off on their threats to raise rates. What a bizarro world in which we trade. The big report will be Friday's pre-market NFP report and that could have Thursday either trading sideways as it consolidates and waits or it could cause some profit taking in front of a potentially risky report. After Friday's open we'll also get the ISM Index, Construction spending and the final number for Michigan Sentiment.


Conclusion

There's been an obvious push to get the indexes as high as possible for quarter-end in a pattern that has often repeated. Fund managers make a push to get end-of-month and especially end-of-quarter settlement numbers as high as possible so that they can maximize their management fees with high AUMs. Once the quarter ends there is less buying pressure supporting the market and in fact there's often liquidation of inventory as those same hedge fund managers hope to sell high and then buy back the stocks at a lower price later in the quarter to do the same thing. The end of last December was followed by a strong selloff into January which then led to a strong rally into March. So maybe selling into April-May and then a strong rally in June?

Yellen's assurance that the Fed is backing away from their plan to raise rates tells us they're more worried now about the economy than they let on in the past six months. I'm not sure how that's bullish and I suspect further indications of a slowing economy will not help the bull's cause. Fed statements are also having a shorter and shorter positive effect on the market. The positive reaction the past two days, with the end of the quarter on Thursday, might be all they'll get.

There's a lot of profit with the extended rally off the February low and at some point soon there's going to be a reason to take profits. Whether that will be in front of Friday's NFP report or if instead it will be the result of some other news can't be known. But in any case the market is vulnerable here to at least some stronger profit taking and with the potential for a more serious decline I think it continues to be a risky time to bet on the upside. The bears already know it's a risky time to bet on the short side (wink) but I think their turn is coming in the next few days if not next few hours.

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