There's a battle going on for control of the market and since the end of April we've seen multiple multi-hundred-point moves for the Dow Industrials and yet we're still near the price from 8 days ago. Today's tweezer-top for the Dow tells us the bears might win this round. But the battle for control could still go either way.

Today's Market Stats

Tuesday's rally in the stock market was credited to the rally in oil but today oil rallied even stronger and yet the stock market gave back yesterday's rally. I suppose the blame should still go to oil since higher oil prices will stifle the economy's growth. Yesterday's rally actually could not be attributed to much and looked like short covering could have been a large part of it. The lower volume in the rally was also a warning sign and sure enough, the rally was given back today. But trading volume was essentially the same and therefore we have to wonder if the market is simply getting whacked around without any true sense of direction. Both sides have been battling for control since the April high and you would not have a difficult time arguing your case for why the bulls or the bears should lead the market from here.

The blame for today's selloff goes to the retailers. We'll get some reported numbers for retail sales this Friday but we're already getting earnings reports from some retailers that tell us not all is well in consumer land. Macy's (M) reported earnings that missed analysts' expectations and the company said their profits going forward would be lower. Slow foot traffic in the malls is taking its toll on retailers and Macy's got hit with a -15.2% decline. Walmart (WMT) dropped -3.6% and Target (TGT) dropped -5.4%. The retail ETF, XRT, lost -4.4% today. The mighty consumer is not consuming and we know that GDP is dependent on consumer spending (accounting for about 70% of GDP).

Interestingly, Macy's is a higher-end store that caters to people that are middle class and above, people with good salaries and typically plenty of job opportunities. Yet they too are pulling back on spending and snapping their wallets shut. We're seeing reports of more retailers closing their doors or declaring bankruptcy in order to reorganize and settle their debts.

The debt overhang is an endemic problem and very likely we're going to hear more and more companies needing to "reorganize" so that they can work their debt levels down. Debt reduction, by paying it down or declaring bankruptcy, is deflationary. The past several years have seen companies taking on enormous debt loads for such "useful" purposes as buying back stock in order to inflate their stock prices. This has supported the stock market (some say almost the entire rally off the 2009 low can be attributed to stock buybacks, thanks especially to cheap money from the Fed) and once that support is gone and companies start struggling to use decreasing earnings to service their debt it's going to be a double whammy for the stock market.

Today's debt problem is far worse than it was in 2007-2008 and the market is more distorted than ever. The correction that is needed, and should have happened last time but was stopped by the Fed, will be painful but like horrible-tasting medicine, it's needed to make us healthy. The Fed will keep experimenting on us but they will ultimately fail miserably. I only hope they don't crash the entire financial system in the process.

Could the slowdown in retail sales be the canary in the coal mine? It's a lot easier to see what happened in hindsight but if the mighty consumer is pulling back into its shell I think it's going to be very hard for companies to turn around their earnings decline, which has already been in progress for a few quarters. When the stock market will reflect this is anyone's guess but with the Fed being discredited as time goes on, plus the fact that they are simply running out of ideas that work even temporarily, the "recognition phase" for the market might not be far off.

In addition to the retail sector taking a hit today, biotechs, homebuilders (retail related) and transportation stocks (economy related) were the underperformers. Holding up better, and in the green for the day, were gold/silver (alternate currency), energy and utilities (defensive). The broader market indexes continue to hold up reasonably well but the price volatility tells us there's a battle near the highs and oftentimes this leads to a reversal. Key levels to the upside and downside are fairly close on the shorter-term charts so we should know soon which side will likely be the winning side. But on the weekly chart we have to stay aware of the possibility for some wild swings that might not mean much in the bigger pattern. For example, for the Dow there's a 1000-point range (17140-18170) that it could swing around inside and until one of those levels breaks we can't know for sure what the longer-term direction will be. There will of course be shorter-term signals but the larger pattern is up for grabs.


Dow Industrials, INDU, Weekly chart

At the moment I'm leaning short the market for at least a larger pullback correction to the rally from February. If the pullback creates a choppy overlapping pattern it would point to higher prices, even if it first drops below the 17140 key level. So far the pullback from April is not clear enough to determine whether it's impulsive or corrective and that keeps options for both sides on the table. A typical correct to the February-April rally would be about a 50% retracement, which would see the Dow down to 16835 but that would have to be evaluated as the price pattern develops further. Higher support is its 50-week MA, currently at 17235, and then price-level S/R at 17140. If it rallies back above its April 20th high at 18167 it would obviously be bullish but not if we're seeing bearish divergences on the daily chart. Weekly MACD has just crossed down and any further selling would create a stronger sell signal by this indicator.


Dow Industrials, INDU, Daily chart

The price action around the top of the Dow's shallow up-channel off the August 2015 low can be seen on the daily chart below. The April 20th high was a test of the top of the channel, which was followed by a pullback and then a test of it again on April 27th (when the RUT made a new high above its April 20th high), which was also a back-test of its broken uptrend line from February through the April 12th low. The pullback from that test was a good signal to get short against the day's high. The bounce off last Friday's low finished with yesterday's spike up to its broken 20-dma, near 17890 (it closed above it at 17928 as the shorts ran for cover, leaving the market vulnerable to today's gap down). Today's red candle completely reversed yesterday's white candle, leaving a tweezer top and bearish engulfing candlestick. But it held its new uptrend line from February through last Friday's low, closing on the line, so the bulls have a chance to re-reverse today's reversal. For a trade position I like the short side against yesterday's high near 17935).

Key Levels for DOW:
- bullish above 18,120
- bearish below 17,580


Dow Industrials, INDU, 60-min chart

As can be seen on the Dow's 60-min chart, the pattern since the April 20th high can be viewed as either impulsive (leading diagonal 5-wave move down to the May 6th low) or as corrective (a-b-c down to April 29th, expanded flat a-b-c bounce up to yesterday). Both patterns are calling for a strong decline that will likely drop the Dow down to at least the 17400 area and the more bearish pattern calls for much lower than that. Once the pattern develops further I'll have a better idea whether to expect the bulls to step back in or if instead the bears have taken over. Below 17400 would more strongly support the bearish interpretation of the pattern. But a rally above yesterday's high would point to a rally at least up to the 18050 area, potentially much higher.


S&P 500, SPX, Daily chart

SPX is doing battle with two trend lines and two MAs at the moment. Yesterday it back-tested its downtrend line from July-November 2015, and today it was supported by its uptrend line from March 24 - April 7 (the bottom of a potential expanding triangle topping pattern), which it closed on today. Its 20-dma was tested yesterday while its 50-dma was support for last week's low, which is currently near 2054, about 10 points below the uptrend line. The expanding triangle suggests a high near 2180 later this month (hold onto your hats!) and if it can get above yesterday's high I'd entertain that idea as a real possibility. But another close below the uptrend line, meaning a close below today's, would suggest a further breakdown, in which case I would expect to see a drop down to at least the 2025 area quite possibly down to the 1992 support level in the coming week before consolidating and then dropping further. But this suggests a bearish opex week and I'm always a little gun shy on the short side with opex coming up.

Key Levels for SPX:
- bullish above 2112
- bearish below 2033


Nasdaq Composite, COMPQ, Daily chart

Yesterday's high for the Nasdaq was a back-test of its broken 50-dma, near 4814, and today's selloff leaves a bearish kiss goodbye. It has tough resistance with the three MAs (20-, 50- and 200-dma) coming together, currently at 4814-4844. If the bulls can power through that price range I'll tip my hat to them and join them. Of course then the bulls would have to deal with price-level S/R at 4920 and its downtrend line from December 2015 - April 2016, which is nearing the same 4920 level. Above 4970 I'd be a stronger believer in the upside but a drop below last Friday's low near 4684 would confirm the next leg down is in progress.

Key Levels for COMPQ:
- bullish above 4970
- bearish below 4684


Russell-2000, RUT, Daily chart

The RUT's pattern is not as clear as the others at the moment and I could argue either side comfortably. As long as it holds above its 50-dma, which was tested last Friday and is currently near 1109 (less than 6 points below today's close), it remains bullish inside a rising wedge pattern. The bottom of the pattern, which is the uptrend line from February through last Friday's low, is also on top of its 50-dma, which makes a break below 1109 even more important for the bears. But another rally leg up to the top of the wedge could see the 1190 area next week. So the question here is whether we're going to have a bullish or bearish opex week.

Key Levels for RUT:
- bullish above 1160
- bearish below 1101


10-year Yield, TNX, Daily chart

As I've mentioned many times before, I think it's important to watch the bond market even if you could care less about bonds. It's the bigger market, by far, and arguably much smarter than the stock market. It's much more in tune with global economic issues whereas the stock market is more interested in drug, I mean central bank money. Many loans are based on the 10-year yield (10-year + some added amount) and therefore watching the 10-year yield provides clues about the health of our economy. The better the economy is doing and the better the inflation picture (as long as it doesn't get too high), the higher the yields have to be in order to compete with other investments. The higher the yield the lower the bond price. While we won't always see an inverse correlation between bond prices and stock prices, it happens often enough to pay attention to. That means yields tend to trade directionally with stocks. But primarily, to me, the bond market gives us a picture of economic health, which is obviously one of the factors affecting stock prices (well, at least in normal times without the Fed holding its thumb on the "wealth effect" button).

TNX (10-year yield) has been consolidating sideways since the February low while the stock market rallied back up near its previous highs. Last week I showed the divergence between the Nikkei 224 index and SPX, pointing out the vulnerability for SPX based on their close correlation in the past and until the stock market rallied strong off the February low. We now have the same divergence between TNX and the stock market and TNX is at risk of breaking down from its sideways consolidation following the February low. The decline into the February low followed by a sideways consolidation should lead to another leg down. The only question is whether we'll see another leg up to complete a sideways triangle (light-red dashed line and labels) but at the moment it's threatening to break down sooner rather than later. It's another warning sign for the stock market if it breaks down from here. (My longer-term pattern continues to suggest TNX will drop below 1% before the bull market in bonds completes).


KBW Bank index, BKX, Daily chart

BKX had made it back up to its broken 200-dma at the end of April but the drop back down from it leaves a bearish kiss goodbye following the back-test. That was followed by a break back below its 20-dma a week ago and this morning's high was a back-test of it, which was then followed by this afternoon's selloff for another bearish kiss goodbye. There is still upside potential since BKX remains inside its up-channel for the rally from February, the bottom of which is currently near 65.50. There's also price-level S/R near 66.50 and its 50-dma near 66.10. The bearish pattern says we'll get a break of all those support levels but obviously the bears have a little work to do to make that happen.


Transportation Index, TRAN, Daily chart

Since March 18th, when the TRAN first broke its downtrend line from March - November 2015 it has struggled to hold above the line. It dropped back down below the line on March 23rd, leaving a failed breakout attempt in its wake, but then managed to break above it again on April 13th. That lasted until May 3rd when it again closed back below the line. Yesterday it bounced back up to the line, which is also where its 50-dma is located, currently near 7840, and that back-test was followed by today's little selloff, leaving a bearish kiss goodbye. Yesterday it also closed back above its 200-dma, near 7770, but was unable to hold above it. All of this is bearish price action and the expectation is for lower prices. The first bullish sign, maybe, would be a close above its 50-dma and downtrend line, as well as the 50% retracement, near 7856, of its decline from November 2014 into the January 2016 bottom. For now though, this looks ready to drop further. Note the oscillators as well -- the April high was a test of the March high with bearish divergence. Last week's low was a test of the April low but there was no bullish divergence. The combination suggests lower prices are coming.


U.S. Dollar contract, DX, Weekly chart

Last week's sharp selloff for the US$ and then the v-bottom reversal on May 3rd looks to have set a bottom for at least the moment. It looks like an impulsive move up into yesterday's high and now we could see a pullback correction. But the expectation is for a move back up to the top of its year-long consolidation range, near 100, before dropping back down one more time later this year to set up the next rally leg for the dollar. This has been my expectation since it topped out in March 2015 and until price tells me otherwise I'll stick with that expected pattern. The time to abandon the consolidation idea would be a drop below last week's low at 91.88.


Gold continuous contract, GC, Weekly chart

Following last week's high gold appears to be consolidating before pressing higher, in which case I would expect to see at least a test of its 200-week MA, near 1322. But the daily chart is showing bearish divergence since its February high and the weekly chart is showing bearish divergence against its March high. It could make it higher but if it does I think it will set up a shorting opportunity in the shiny metal. If today's bounce is followed by a drop below yesterdays, which was a test of its 20-dma, currently near 1261, we could see an acceleration in the selling, especially if it breaks trendline support near 1250 and then below the top of its down-channel, near 1240


Silver continuous contract, SI, Weekly chart

For the past 3 weeks silver has been flirting with the top of its down-channel from 2013, currently near 17.60. There were no bearish divergences at April 29th high and the short-term pattern supports the idea that we're going to get another rally leg. But with the top of the down-channel holding as resistance it's not a bet I'd be willing to make. It's overbought on the daily (but coming down) and weekly charts and that's a risky time to bet on the long side as long as resistance is holding. But if it can hold above 17.60 we could get another rally and maybe even up to its 200-week MA, currently at 20.58. I don't think we've seen the bottom for silver yet but the short-term pattern does support a little higher before at least a larger pullback.


Oil continuous contract, CL, Daily chart

Oil's short-term pattern suggests we're going to see it push a little higher and I like an upside target just shy of 51 (it would be more bullish above 51), where it would test its October 2015 high (50.92) and achieve two equal legs up from January (50.95). It would also reach the top of its rising wedge pattern if it gets up there before the end of May. But a drop below its April 13th high at 42.42 would suggest a deeper pullback/decline was underway.


Economic reports

Tomorrow's economic reports include unemployment claims data and import/export prices, followed by natural gas prices mid-morning. Nothing market moving there. Friday we'll get PPI numbers and retail sales, which could be market moving. The hard part, as always, is trying to interpret how the Fed might think about the numbers and therefore what the market might think about what the Fed thinks, in which case we'd all be thinking about why we even bother thinking, I think.


Conclusion

The price patterns for the stock indexes suggest we're going to see more selling in the coming week. The challenge for that projection is opex. It's been a common pattern to see the market pulled back into a low before opex, typically on Thursday but as early as Wednesday and as late as Monday, and then like letting a stretched rubber band go, the market shoots back up with the help of short covering as the buy programs hit. This has been such a reliable pattern you could almost do it blindly and just hang on through opex. It is for this reason I am very reluctant to make a prediction that the market will be lower a week from now.

However, ignoring the opex week pattern (ignore at your own risk though), the charts tell me we're heading lower into next week. I like the short side but I'm trailing stops to just above the lower highs, which makes my current stop just above yesterday's high (this morning's highs for the techs). There is potential for a larger decline than the one from April and that makes the risk:reward a good play on the short side. Just don't let it get away from you to the upside.

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