There are signs of waning momentum for the rally but all efforts to sell the market are met with renewed buying and the indexes continue to power higher. We have an overbought market that's showing some bearish divergences so it's a good time for bulls to be cautious while the bears chomp at the bit to get started.

Today's Market Stats

Oil powered higher today, up +3.8% for the day (and pushing higher in the after-hours session), and that helped the stock market power higher as well. There was a small but sharp giveback at the end of the day and that looked a little bearish but the buyers are not giving the sellers any play time and that could continue the rest of this week.

There was very little in the way of economic reports but with oil's rally and the selling in Treasuries it helped keep the spark alive in stock market bulls. The charts are showing signs of waning momentum and a slight deterioration in market internals so the rally probably doesn't have much more room to run on the upside. But that doesn't mean the rally will end now and therefore the bears need to continue exercising patience while the bears need to get a little more defensive and protect what they've made. Once the leg up from February completes we should see at least a sizeable pullback into May and potentially something more bearish.

Bullish sentiment has spiked up again, thanks to the strong market rally off the February low. At that low most thought there was no bottom and that we were in the middle of a crash lower. I had suggested at the time that the wave pattern suggested we should be looking for an end to the decline and a big bounce correction to the decline. I did not think we'd see prices recovering the full decline but here we are. Now sentiment has completely reversed and most are feeling there is no end to the current rally and that new all-time highs are coming. That might happen but it's a risky bet here.

Tom McClellan tracks the bullish minus bearish sentiment reported by the Investor's Intelligence report and graphs it with a moving average band around the 50-dma, shown on his chart below. You can see the spikes to the downside (few bulls, more bears) in August 2015 and February 2016, each of which dropped through the lower band and suggested sentiment was getting too bearish. The opposite occurred at the November 2015 high and now currently -- lots of bulls, few bears. The reading spiked above the upper band in November 2015 and led to a turn back down and the same spike up through the upper band is happening currently. The bull-bear spread is now more bullish than it was following the rally off the August decline and is a strong warning to bulls that the rally has produced too much froth.

Investors Intelligence Bull-Bear Spread, chart courtesy Tom McClellan

Another chart of sentiment comes from CNN Money (Fear&Greed) which uses several different sentiment measures and combines them into one reading, which is tracked in the chart below. This index peaked in late March and while price has been pressing higher the sentiment index has not made it to new highs. This could be thought of as bullish, as in there's more bullish sentiment to go. But the bearish interpretation of this is that there are just a few less bullishly inclined investors and as they become a little less sure about the rally they become less inclined to keep buying. Without their support, which is reflected in the weaker market internals shown further below, one could argue that the market is going to run out of buyers soon.

CNN Money Fear & Greed Index, chart courtesy CNN Money

While bullish sentiment, as measured by the two charts above, is begging for a correction we're seeing some market internals that suggest the rally is getting tired. Momentum can only last so long before it peters out and the kind of market we seem to have now is like a light switch -- it's either all bullish or all bearish and when it flips it can quickly reverse the prior move. Certainly the moves since last May's highs bear this out and this kind of volatility is typically seen at major highs. What we can't know is how long it will continue or even if it ended and we're into a new bull market. But even if that's true, nothing goes in a straight line and corrections to severely overbought and overbullish tend to happen quickly.

The series of charts below show SPX at the top, new 52-week highs in the middle and the Advance-Decline at the bottom. The 52-week highs and a-d line have a 10-dma (red) to smooth out the daily spikes and you can see the bearish divergence vs. the new price high off the April 7th low. It doesn't guarantee a reversal anytime soon but it does give us fair warning.

SPX vs. 52-week highs and Advance-Decline line, Daily chart


Dow Industrials, INDU, Weekly chart

The non-stop rally off the February low has the Dow popping above price-level S/R near 18100 (today's high was 18167) but it was unable to close above this level (it closed basically on it at 18096). Above 18100 there's not much resistance up to its May 2015 high at 18351 and it certainly looks like it's acting as a siren call to the bulls right now. But the sharp little selloff in the final hour looks a little ominous so it's going to be important for the bulls to turn it back up right away Thursday morning (for something more than just a bounce correction).

The Dow's rally has also achieved two equal legs for the bounce off the August low for what could be a large a-b-c correction/consolidation before heading back down. The bearish pattern says the a-b-c bounce pattern is a 2nd wave correction following the 1st wave down into the August low. There are a couple of bullish possibilities, the first being the completion of a correction in the longer-term rally at the February low. The current rally would be the 1st wave of what will become a much more bullish run this year. That calls for just a pullback correction into May before heading much higher into the summer. Both the bearish and bullish patterns call for at least a pullback and perhaps something more bearish so it's a good time to be ready for what should be at least a deeper pullback into May. The big question of course is where and when the pullback/decline will begin.


Dow Industrials, INDU, Daily chart

As mentioned above, today's rally achieved two equal legs up from the August low and at the same time hit the top of a parallel up-channel for the bounce off the August low. The rally could go higher but this achievement, and the little selloff in the final hour, says bulls should be careful here. It could press a little higher but I think that's a risky bet The bearish interpretation of the a-b-c bounce pattern off the August low is that the next big move will be a strong decline that takes the indexes well below the January-February lows. Whether the rally will stop here or continue up to the May high at 18351 can't be known yet but with overbought charts (intraday, daily and weekly) showing bearish divergences at recent highs and extreme bullish sentiment it's not a good time to be chasing this higher. If long, just trail your stops close.

I noted on the daily chart below two MA crosses of interest -- back in January and yesterday. When the 50-dma crosses above the 200-dma we have the Golden Cross and when the 50 crosses below the 200 we have the Death Cross. But I'm not sure why anyone actually uses this signal that way since it seems to do just the opposite and use it from a contrarian standpoint. The crosses usually happen near the end of the trend and as you can see on the chart, the Death Cross on January 13th was followed a week later by the January 20th low and now we have a Golden Cross as of yesterday. Will it mean the top of the rally will be within the week?

Key Levels for DOW:
- bullish above 18,120
- bearish below 17,8484


S&P 500, SPX, Daily chart

SPX made it up to within 5 points of its November 2015 high at 2116.48 and it could have its eyes on the prize at its all-time high at 2134 back in May 2015 (Dow 18351 equivalent). We obviously have a bullish market but we have to be very careful as the indexes approach what should be solid resistance with an overbought market that is showing waning momentum. It stays bullish above its uptrend line from February and its broken downtrend line from July-November 2015, which cross near 2092 tomorrow, while a drop below Monday's low near 2073 would indicate a top is likely in place.

Key Levels for SPX:
- bullish above 2117
- bearish below 2073


S&P 500, SPX, 60-min chart

There are a few trend lines/channels to watch closely as this rally extends higher and as mentioned above, an important level for the bulls to hold is the broken downtrend line from July-November, near 2092. Below that level would be a bearish heads up but not until it drops below Monday's low near 2073 would it indicate the deeper pullback/decline has likely started. A drop below 2073 would also be a confirmed break of the uptrend line from February 11 - April 12, currently near 2081. In the meantime I see the potential for this rally to extend higher into the end of the week and maybe the first part of next week before the sell-in-May crowd takes over. The November high at 2116, if not the May 2015 high at 2134, appear to be on the bull's radar screen. But is there enough gas in the tank to climb the last bit of the hill to reach those levels?


Nasdaq-100, NDX, Daily chart

For the past week NDX has been trying to break free of its downtrend line from December, currently near today's closing price at 4540. At today's low it tested its uptrend line from February, near 4524, so that's an important level to hold. A drop below 4524 would be a bearish heads up since that would likely be followed by a close of its April 13th gap up, at 4496, and at that point it would suggest the bigger pullback/decline has started. A trend line along the recent highs from April 1st is currently near price-level S/R at 4600 so that's still upside potential, maybe higher. Above 4600 would open the door to its December high near 4740.

Key Levels for NDX:
- bullish above 4600
- bearish below 4435


Russell-2000, RUT, Daily chart

The RUT made it within less than a point of achieving a price projection at 1148.13 (with today's high at 1147.72) for a 3-wave bounce off its February low where the 2nd leg up is 62% of the 1st leg. That's also on top of the 78.6% retracement of its December-February decline, at 1148.48. The pieces are in place to call a high at any time but obviously we'll need to price to confirm. A drop below Monday's low at 1125 would be the first bearish sign and then below 1100 would confirm the top is in place and we're into at least a larger pullback. If the pullback is choppy and corrective with overlapping highs and lows in the move down (such as a bull flag pattern) we'd then know to look at it as a buying opportunity. But if the decline becomes a sharp impulsive move down then we'd know it will likely drop to new lows and we'd want to short the bounces. It's too early to know and obviously the first thing we need to see is the start of a pullback, something the bulls have not let happen yet.

Key Levels for RUT:
- bullish above 1150
- bearish below 1100


10-year Yield, TNX, Daily chart

Bonds dropped sharply today and that had Treasury yields popping (10-year up +4.0%, 30-year +2.5%) and considering the big move I'm surprised the stock market didn't benefit more. Maybe money freed up from bonds today will flow into stocks tomorrow. TNX has bounced back above its 20- and 50-dma's, where it's been struggling for the past week and this could be part of what will become a larger rally in yields up to its downtrend line from June 2007 - December 2013, near 2.20% by the end of May. If the stock market does start a pullback any day now and pulls back into the end of May before heading higher we could see stocks and bonds in synch instead of counter-trend with each other. But the bearish pattern for TNX says the bounce off the April 7th low is only a correction to the March 16 - April 7 decline and at the moment it's just a 3-wave bounce. If the larger pattern is still bearish, which I believe it is, we'll see TNX continue lower once the current bounce completes (two equal legs up from April 7th is at 1.859 and today's high was 1.854).


KBW Bank index, BKX, Daily chart

After struggling a little with price-level S/R near 66.50 BKX has blasted higher in the past 3 days and now it's testing its 50% retracement of its 2007-2009 decline, at 69.45. A little higher than today's high, at 69.70, is its 200-dma at 70.22. If the bulls can do better than that we should see a rally up to 72.13 (two equal legs up from February) and maybe 72.43 (78.6% retracement of its December-February decline, which crosses its downtrend line from July-December 2015 in the first week of May).


Transportation Index, TRAN, Daily chart

The transports have been showing renewed strength following its pullback into the April 7th low and has now rallied marginally higher than its March 21st high. While the oscillators could catch up, at the moment they're showing bearish divergence so the bulls need to keep price from rolling over and leaving a little double top with bearish divergence. Yesterday's and today's highs challenged a downtrend line from the August and November 2015 highs and while the importance of that trend line is questionable, traders seem to be paying attention to it. The leg up from April 7th can be satisfactorily counted as complete and therefore there is the risk that it will turn back down from here.


U.S. Dollar contract, DX, Weekly chart

The US$ looks like it's either basing near 94 or has one more small drop to about 93 before it will be ready for the next leg up in its consolidation pattern. The decline from its December 2015 high is looking like a bullish descending wedge with bullish divergence since its February 11th low on its daily chart. It's oversold on its weekly chart and is looking like it could start its bounce at any time, either from here or after one more drop to 93.


Gold continuous contract, GC, Weekly chart

Gold has been holding up near the top of its down-channel from 2013, currently near 1250, and from a bearish perspective it's getting ready to roll back over. But I can view the consolidation since February as a bullish triangle, in which case it should continue to consolidate for another few weeks before pressing higher. Another leg up would very likely challenge its 200-week MA, currently at 1327, but then be ready for a larger pullback before continuing higher (or not). Many have jumped on the bullish gold bandwagon (and now silver since it's catching up) but I'm not convinced yet that the rally from December is anything more than an oversold rally in a continuing bear market.


Oil continuous contract, CL, Weekly chart

Oil has broken above the top of its down-channel that it's been in since the January 2015 low, currently near 41, and today it almost made it up to its 50-week MA at 43.59. The weekly chart below reflects tonight's after-hours high so far at 43.99 but since I use the continuous contract, which rolled over today I'm not sure I have the correct prices. In any case it's bullish above 43.60 and it could make a run up to its October 2015 high at 50.92. Two equal legs up from February points to 51.09 so that's an upside target as well. I would guess 50 would also be a psychological line of resistance if reached. As with commodities in general, especially if the dollar is getting ready to rally, this bounce might not hold and it's too early to tell if it's something bullish or just an oversold bounce before heading back down. As long as it holds above its April 5th low at 35.24 it will stay bullish.


Economic reports

Tomorrow's economic reports include unemployment claims and the Philly Fed index before the bell. Other than the Philly index there's not likely to be much of an impact from the reports.


Conclusion

The bulls don't seem to care about how overbought the market is but there are signs of waning momentum so it appears there are a few less believers in a continuation of the rally. This is also reflected in the pullback in bullish sentiment, although the bull-bear spread as reported by Investors Intelligence remains at a nosebleed level above where it was at the November 2015 high. Higher bullish sentiment with a lower price could be considered bearish divergence but it's too early to tell. The important thing to note is that the rubber band has been stretched to the upside just as it had been pulled back at the February low. Beware the snapback.

There is one other piece of information that has often worked as a market timing tool -- my highly proprietary Moon Phase Trading System (MPTS). We have a full moon on Friday and we're within the timing window for a high on a full moon. Be careful chasing this higher but bears need to know we're clearly in an uptrend and any short plays here are attempts to pick a top. Once we see an impulsive (not a 3-wave) decline and especially with a drop below Monday's lows we'll then have a green light for the bears to take their turn at the feeding trough. Only after seeing how the pullback/decline develops into May will we have the clues we'll need to help determine whether it will be a pullback to buy or instead start looking for bounces to short. Keep trades on a tight leash in the meantime.

SPX MPTS daily chart

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