The typically bullish week for opex got a slow start this time but Tuesday's and Wednesday's rallies have pushed many of the indexes to new highs for the rally from February. There's still some upside potential but there are some reasons for caution about the long side.

Today's Market Stats

The stronger sectors today were the risk-on ones, such as the biotechs, while risk-off (defensive) sectors were down, such utilities and consumer staples. The financials were also strong, helped by JPMorgan's earnings report before the bell this morning. The RUT was also up strong, +2.2% for the day, and risk-on appears to be the trade du jour this week. As I'll get into later, we have some strong bullish indications for this market but we also have reasons to be cautious dead ahead. Stock indexes could soon struggle with significant lines of resistance but if they're pushed aside in the coming days we'll have all the evidence we need to get long and enjoy the ride.

Banks were up strong today (BKX +2.5%), which helped both the Dow and SPX. JPM was up +4.2% after announcing earnings in the pre-market session. Earnings and profits were down from a year ago but better than lowered expectations (it's all in how you manage expectations). Interestingly, JPM did not offer guidance for Q2. The result was shorts got scared out of their positions and helped the stock GS was not far behind, up +3.6% and after the banks were held down more than the broader indexes it's obvious that short covering helped lift the banking index back up, although BKX is still down considerably compared to the broader averages.

Helping the stock market today were the economic numbers, which included the PPI numbers. They came in lower than expected and were negative, meaning "disinflation." Retail sales were also negative for March and the combination keeps the Fed from being able to raise rates, which of course the market likes.

I did a lot of chart reviews tonight before starting to write so I got a little behind. Therefore I'm just going to jump right into the review of the charts.

I'll start tonight's chart review with the RUT because I see an interesting setup that should tell us whether or not we want to get more bullish or instead start looking for a reversal back down. It's looking like the RUT is either going to break out in a strong bull run or break down in a strong bear decline. I lean short here but above 1135 would have me backing off and above 1150 would have me much more bullish.


Russell-2000, RUT, Weekly chart

The RUT's weekly chart shows it has made it up to its downtrend line from June-December 2015, currently at 1131-1136 (depending on whether the chart is with the arithmetic or log price scale, resp.). As can be seen on the daily chart further below, the 200-dma is currently near 1133 but the 50-week MA is nearing 1152. There's a strong reason why the 1131-1136 area is going to be tough resistance, at least on the first attempt to break through, but above that range I would expect a run up to 1150. Above 1150 would be much more bullish but at the moment we need to watch carefully for possible trouble for the bulls. The RUT is one of our canaries in the coal mine so following this week's opex rally we'll get a clearer picture for what's next.


Russell-2000, RUT, Daily chart

The RUT's daily chart below shows how closely aligned the 200-dma is to the downtrend line from June-December 2015. Kudos to the bulls if they can break through both of those on the first attempt, especially since it's showing waning momentum. If price consolidates sideways while MACD "resets" with a pullback to (but stays above) the zero line we'd have a bullish setup. But the RUT has been chopping its way higher in what looks like a bearish rising wedge pattern since the March 7th high with bearish divergence supporting the bearish interpretation of this pattern. This in combination with price reaching potentially very strong resistance is what has me leaning bearish into resistance until (if) we see a strong break through resistance with a rally above 1136.

Key Levels for RUT:
- bullish above 1136
- bearish below 1088


Russell-2000, RUT, 60-min chart

Getting in closer to recent price action, the RUT's 60-min chart below shows the rising wedge pattern, the top of which was reached today with the close near 1129. A small pullback and then minor new high would do a nice job completing the pattern, potentially near 1132 where the downtrend line from June-December 2015 crosses the top of the rising wedge Friday morning. That would be a low-risk setup to try to short a reversal back down and use a stop no higher than just above 1136 (end-of-day stop instead of intraday is preferred since we see a lot of intraday stop runs, but obviously that increases your risk so trade size is important).


S&P 500 vs. NYSE stocks above 200-dma, chart courtesy Mark Ungewitter

Before I get into the SPX charts, which has it looking like SPX could top out below 2100, I want to show a reason to stay bullish. AT the bottom of the chart it shows the percentage of NYSE stocks above their 200-dmas vs. the SPX above. The idea here is to monitor when the percentage of stocks above their 200-dmas drops below 20%, indicating deeply oversold. The buy trigger occurs when the percentage of stocks above their 200-dma rises above 50%. This trading model, shown to me by a fellow trader, Mark Ungewitter, shows the buy signals with the little red dots on the SPX line and we just got another buy signal following the January-February drop below 20%. As noted on the chart, this has worked 7 out of 8 times in the past 30 years (the one failure was December 2001). Those are tough odds for a bear to fight against. Market breadth, using the cumulative advance-decline line has broken out to new highs before price and that's another reason for bears to be cautious -- there could be stronger buying than what appears by other technical indicators, such as waning momentum.


Gann Square of 9 chart

Countering the chart above, or at least a reason for caution about the upside, is an obscure tool called the Gann Square of Nine (Sof9) chart, something I haven't shown in a long time. A portion of the chart is shown below and for those who are not familiar with this, it's essentially a Fib spiral of numbers (that I built in Excel and therefore looks square-ish). It starts with '1' in the center and then the first "ring" around the center starts with '2' at the 9:00 position and spirals clockwise from there, finishing with '9' below '2' and then continues spiraling from there, hence the name Square of Nine. It's uncanny how levels (and time, which I won't discuss much at this time) relate to each other on this chart and highlighted on the chart are some examples and why we're approaching a potentially important level for SPX -- 2088-2089.

I squished the chart as much as I could and yet keep it readable so I apologize for the small numbers. Highlighted are some important lows -- on the red vector there's 768 (October 2002 low) and on the blue vector there's 666-667 (March 2009 low). The vectors through those two levels help identify important levels that "vibrate" off each other and on the red vector you can see 1422 (April 2012 high), 1576 (October 2007 high) and now 2088-2089 are related to each other. On the blue vector, through 666-667, the next important level above us is 2098-2099. As you'll see on my SPX charts below, the area between 2083 and 2100 is important and the Gann Square of Nine chart is one more reason why the current rally could finish at any time. But above 2100, as I'll point out on the charts, it would be much more bullish. I think it's particularly important to note that the October high at 1576 was 6 spirals around from the October 2002 low at 768. Each 360-degree move is important and 6 levels is particularly important. Half that is 3 spirals and that's the distance between the October 2007 high and 2088-2089.

Without getting too much into time relationships with this chart, I will add that today is "square," as in 90 degrees, to 2084-2085 and today's high was 2083 and therefore we're at a potentially important price/time point on the chart. Lastly, 2088 is square to 2134, which was the May 2015 high. All of this doesn't mean we're topping here or will top out near 2088-2089 (or 2098-2099) but these Gann relationships should be paid attention to until they're proven OBE (overcome by events).


S&P 500, SPX, Daily chart

The short-term pattern for SPX would look best with a small pullback/consolidation on Thursday and then another minor new high to complete a 5-wave move up from April 7th, which in turn would do a nice job completing the 5th wave of the leg up from February. The pattern for the rally from February is a bit sloppy so it's hard to hang my hat on a wave count but today's high, and then presumably higher into Friday, looks like it will leave a bearish divergence against the April 1st high, which is fitting for a 5th wave. There's a price projection for a corrective pattern (instead of an impulsive 5-wave move up from February) near 2092 and that overlaps the downtrend line from July-November 2015, which makes it a level of interest to watch carefully for a possible top to this move. But a rally that gets above 2100, and stays above (not just an intraday break), would be a stronger bullish statement and it would point to at least a test of the November high at 2116 and potentially the May 2015 high at 2134. This is where the daily chart and the Gann Sof9 chart above are in agreement.

Key Levels for SPX:
- bullish above 2100
- bearish below 2022


S&P 500, SPX, 30-min chart

A short-term perspective is shown with the 30-min chart below to point how it will ideally play out the rest of this week. I say ideally because I'd like to see a 5-wave move up from April 7th to give us a good ending pattern. A pullback/consolidation on Thursday would "reset" the overbought oscillators and then a new high, presumably up to the downtrend line from July-November 2015, near 2092 by next Monday, would likely leave a bearish divergence. But with price projections, including the 127% extension of the previous decline (April 1-7), coinciding at 2083-2087, as well as the Gann Sof9 2088-2089, it warrants caution by bulls here -- we could see a top form at any time (not a reason to short it here without appropriate risk management, but certainly a good time for bulls to be more cautious).


Dow Industrials, INDU, Daily chart

The Dow struggled with its downtrend line from May-November 2015 since first testing it on March 22nd and oscillated around it for nearly two weeks after climbing above it on March 30th. Today's rally gave it a clean break above the line and now the next level of resistance it will have to deal with is its November 2015 high at 17977. It remains inside a bullish up-channel for its rally from February but note how it used the midline of the channel for support following the initial rally off the February low. It broke below the midline while it struggled with its May-November downtrend line and now appears to be heading back up to the midline, which often acts as resistance in this scenario. By the end of the day Friday the midline will be near 18110 and for this reason I have a key level to the upside at 18150, above which would be more bullish and it would be a reason to look for at least a test of its May 2015 high, at 18351.

Key Levels for DOW:
- bullish above 18,150
- bearish below 17,484


Nasdaq-100, NDX, Daily chart

NDX is now within a few points of retracing 78.6% of its December 2015 - February 2016 decline, near 4557. This has been a common retracement in this market and oftentimes the end of a bounce correction. The minor new high above its April 1st and 6th highs is showing bearish divergence, which is not a rally killer but a reason for caution. It fits as the completion of the rally leg from February but I see at least a little more upside potential to test price-level S/R near 4600 and maybe up to the top of arising wedge, near 4625 by Friday, above which would be more bullish.

Key Levels for NDX:
- bullish above 4625
- bearish below 4435


10-year Yield, TNX, Daily chart

Treasury prices pulled back from their highs on April 7th and that gave yields a little bounce. But looking at TNX, it bounced in a 3-wave pattern, with two equal legs, up to its broken uptrend line from July 2012 - January 2015, near 1.79. Today's reversal back down from a small gap up fits as the start of the next leg down and a drop to price-level support at 1.65 could be next. That would give us a 5-wave move down from March 16th and set up a little larger bounce correction but it would keep the downtrend intact. Buying in Treasuries would put downward pressure on stocks so keep an eye on the bonds to see if this plays out.


KBW Bank index, BKX, Weekly chart

On March 21st BKX made it up to price-level resistance near 66.50 and then pulled back into the April 7th low. You can see on the weekly chart how important that support level was since breaking above it in November 2013. It's not surprising to see it act as resistance now and today's high at 66.57 is another test. On both the daily and weekly charts the oscillators certainly have room to run and a break above 66.50 that holds above that level would keep it bullish. Look for a run up to the 50-week MA, nearing 71, if the rally continues. The 200-dma is coming down towards 70 so 70-71 is an upside target. But if the banks are simply enjoying a bit of short covering it could flame out at any time. The relative weakness of the banks, as compared to the broader market, is reason for concern if you're feeling bullish about the market.


U.S. Dollar contract, DX, Daily chart

The US$'s strong bounce off support near 93.80 yesterday looks good for a reversal of its decline. I'm not looking for anything more than a return to the top of its trading range, near 100, and then back down to the bottom of the 94-100 trading range by the fall before it will be ready for the next leg of its longer-term rally off its April 2008 low. If it does drop a little lower it would not turn more bearish until it gets below 92.50.


Gold continuous contract, GC, Weekly chart

Gold has bounced back up to the top of its parallel down-channel that it's been in since 2013, currently near 1250. If it can hold above that level, which it was unable to do after poking back above it on Monday, we should see it reach for its January 2015 high near 1308. A rally up to that level would likely be followed by a deeper pullback correction but I think it would be bullish. As of right now I think we could see gold head back down to the bottom of its channel, which will be near 1000 in August. If the dollar is getting ready to rally it could put pressure on gold and other commodities.


Oil continuous contract, CL, Weekly chart

Oil is once again challenging the top of its down-channel that it's been in since the January 2015 low, currently near 41.40. A little higher, at 43.88, is its 50-week MA and that's an upside target if the buyers keep at it. It's looking like a rally into an expected announcement next week by Russia and Saudi Arabia that they plan to freeze production. That will probably happen when hell freezes over and this rally could come to a fast conclusion if the rally is based on the rumor (buy the rumor, sell the news).


Economic reports

Tomorrow's economic reports include the CPI numbers and unemployment claims. Friday will be more economic numbers and the Michigan Sentiment reading. No big changes are expected


Conclusion

When I look at the charts, using typical technical indicators such as trend lines/channels, oscillators and even EW counts, I'm seeing the market vulnerable to topping at any time. If it holds up through this week I wonder if the bears will exact some revenge next week. But as mentioned above with the percentage of stocks above their 200-dma and the strong cumulative advance-decline line, it's hard to be bearish. I think the bottom line is that bulls should be very cautious about the potential for at least a deeper pullback (and possibly something more bearish).

In the meantime, bears don't have anything yet to support a reason to get short here (no reversals). We have some potentially strong resistance levels that offer a reason to try shorting with relatively low risk but preferably after making it a little higher and maybe by Friday. That of course would subject bears to a rally on Monday after a Sunday night rally in the futures so risk management is very important. Have well-defined stop levels and honor them (on a closing basis since intraday stop runs are common). More conservative traders can simply follow the trend and keep trailing your stops higher. Once support levels are broken look for bounces to short and then trail stops lower to prevent a big spike back up putting you underwater.

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