The stock market is challenging all-time highs but now showing signs of tiring and too much bullish sentiment. The big question as we look at the longer-term charts is whether the market can bust through the highs or instead create a double top. It's an important time for traders on both sides of the market.

Today's Market Stats

Despite many signs of a slowing economy and deteriorating corporate earnings, plus a Fed that appears to be forced to sit back down and forget about further rate increases, the stock market has high hopes it can bust through last year's highs and make new ones. But the slowing momentum combined with high bullish sentiment is now working against the market so it could use at least a breather to bring on some new buyers before attempting to charge back up the hill. But today is the typical head-fake day in front of opex where they pull the market back in the morning, get the shorts in and then use short-covering to add to the rally into opex. Today's bounce left me wondering if that pattern will repeat this coming week because at the moment it's looking like it might not work.

The stock market indexes are overbought in all time frames now and at the same time they're showing bearish divergence (waning momentum) at the new highs vs. the highs earlier this year and even vs. the highs over the past three years. At the same time bullish sentiment has jumped back up to an extreme level, as can be seen with CNN's Fear & Greed index below. This combination makes it a risky time to be long the market and certainly too late to be thinking about entering new long positions (unless you're good at selectively choosing strong companies that will be able to fight a downturn). The index has reached a level (80) that has marked previous market reversals. It can go higher but it's a risky bet.

CNN Fear & Greed index, chart courtesy money.cnn.com/data/fear-and-greed/

Many are baffled why the stock market is rallying and not showing more concern about the deteriorating fundamentals (and I include the Fed in the funnymentals). The market started rallying when the Fed started saying more strongly that there would be a good chance for a rate increase in June because they felt the economy was doing well enough to continue their rate-increase campaign. The theory then was that a stronger economy would be good for the stock market.

But recent reports, especially last Friday's dismal NFP report, now has most everyone firmly believing the Fed doesn't have the needed room to raise rates in July, let alone in June. So what does the market do? It rallies. If ever there was a place that can have its cake and eat too it's the stock market. It's like oil prices -- depending on the mood of the market it will either rally or decline on an oil rally/decline and just make up a reason for the move. There's very little rhyme or reason for it. It's why I will always say news is noise and it's best to stick with the charts. That's hard enough (wink).

The employment data from the Bureau of Labor is so saddled with inaccuracies, especially the unemployment rate, that the Fed has developed its own data, which they track as the "Change in Labor Market Conditions Index," shown below. This chart runs from 1976 and as you can see, there have been several drops below the zero line that did not lead to recessions in the U.S. But that's the risk right now as the latest data shows the index dipping below zero, which could be an early indication that our economy is slipping into another recession. The plethora of other economic data, including declining tax receipts, supports the likelihood that a recession has already started and we're just waiting for the confirmation of it (usually six months after the fact). The stock market usually sniffs out a recession and tops about six months before the official declaration of a recession. I wonder if the stock market might peak around here, as it nears last year's highs, or if instead it will continue to defy fundamentals in hopes that the Fed will be able to continue to support the market, I mean economy.

FRED Change in Labor Market Conditions Index, 1976-June 2016, chart courtesy research.stlouisfed.org

While we continue to receive more evidence of a slowing economy we have a stock market that's challenging its all-time highs. There's a lot of hope in this market right now, not to mention greed as shown with the first chart, and that has it looking like it did in May 2008 when there was a big recovery off the January-March 2008 double-bottom lows following the 2007 highs. This year we have a recovery off the January-February double-bottom lows and we could be setting up another big fall just as people get the most bullish, buying near the top again.

From a timing perspective we are at an interesting point where it's been a Fibonacci 377 weeks since the March 2009 low and a Fibonacci 55 weeks from the May 2015 high. The 55-week period is also an important Gann cycle. So with an Elliott Wave pattern that can be considered complete at any time and a Gann/Fibonacci time cycle occurring at the same time we could have a very important time/price setup for a big market reversal. There's no price evidence yet that declares a top is likely in place but we have enough that has come together right here as a reason to be on the lookout for the possibility. I'll start off with the granddaddy of the indexes, the Wilshire 5000 index, to help us look for more clues.


Wilshire 5000 Total Market index, W5000, Weekly chart

The W5000 index has rallied back up to price-level resistance near 22000, which was last tested in November 2015. This level goes back to the high in December 2014 and became a shelf of support for the first half of 2015 until it broke in August 2015. The first back-test in November 2015 was followed by a strong breakdown into the January 2016 low and now here it is back again testing this S/R level. What it does from here will tell us plenty about the expected longer-term price pattern. It's a significant drop back down to price-level support near 21000 and that's the level the bears need to see broken, especially since it would also be back below its 50-dma, currently at 21042. It's a wide 1000-point range but keeping it simple, it's bullish above 22K and bearish below 21K, with the potential for it to be choppy and whippy in between.


Wilshire 5000 Total Market index, W5000, Daily chart

You can see on the daily chart below how the W5000 rallied right up to the 22000 S/R line on Tuesday and Wednesday (with a high at 21999.99) and today's decline could be the start of a larger move down, or maybe just a small pullback before continuing higher. If a pullback finds support at either its broken downtrend line from June 2015 - April 2016, near 21630, or its 50-dma, near 21490, and then rallies above 22000 I'd abandon all short positions and get long. But if we start to see a sharp impulsive move down and only choppy bounce corrections we'd then know to play the short side. It's too early to tell yet which it's going to be and therefore stay short-term oriented for now. We're heading into a normally bullish week, with opex and FOMC next week and it remains possible we'll see the market continue to melt up into the FOMC meeting (provide as big a cushion as possible before the FOMC rate decision and then the Brexit vote the following week).

Key Levels for W5000:
- bullish above 22000
- bearish below 21000


S&P 100, OEX, Weekly chart

Before looking at my regular updates to the S&P 500 charts I wanted to show the S&P 100 weekly chart to point out that it too is back up to important resistance and what happens from here should provide some good clues. The rally into the April high stopped at the downtrend line from July-November 2015, pulled back and is now again testing this downtrend line, currently near 936. It tried to get through the downtrend line on Tuesday and Wednesday and today's pullback could be the start of a kiss goodbye. But it's too early to tell for sure and OEX would obviously be more bullish above 936. But if the bears go on the attack here we could see resistance hold once again. And with a rolling top pattern this could be an important high for this index.


S&P 500, SPX, Daily chart

I figured SPX 2105-2118 was going to be a tough resistance zone based on some price projections off the wave pattern, trend lines and price-level S/R. Yesterday's high was near 2120 so it made it through that resistance zone but fell back inside it today. As we've seen repeatedly over the past two weeks, this morning's gap down was followed by a slow choppy move back up and it has it looking like there's "someone" very afraid of a selloff and supporting the market. But there's a lot of buying power going into just holding the market up (for the past two years, as seen on the OEX weekly chart above). There's upside potential to the May 2015 high near 2135 and then a price projection near 2160 but I'd be very careful chasing this market higher right now. There's the potential for a nasty surprise some morning.

Key Levels for SPX:
- bullish above 2118
- bearish below 2075


S&P 500, SPX, 60-min chart

Looking at the rally from May 19th into this week's high it looked good for the completion of a 5-wave move but today's price action leaves a question mark as to whether or not we should be looking for at least a minor new high before a larger pullback or if instead it will start from here.


Dow Industrials, INDU, Daily chart

There are two price projections that I'm watching for the Dow, the first being 17986, which is where the 5th wave of the rally from January is 62% of the 1st wave. This is a common projection when the rally simply gets too tired to make it up to the projection where the 5th wave (the leg up from May 19th) will equal the 1st wave, which is at 18391. In between is the top of a shallow parallel up-channel from August 2015, which is where the April rally stopped and is currently near 18120. Yesterday's high at 18016 has achieved the first upside target but it's still a little shy of the top of its up-channel. A rally above 18120 would have me thinking the May 2015 high at 18351 and the price projection at 18391 would be the next target zone. But with waning momentum it's looking like it could be a struggle to add more points to the board.

Key Levels for DOW:
- bullish above 18,120
- bearish below 17,664


Nasdaq-100, NDX, Daily chart

I'll give NDX bulls credit for not giving up. They've been facing tough resistance near 4525, which is the shelf of support back in mid-April for the little island between the gap up on April 13th and the gap down on April 22nd. It hasn't been able to close the April 22nd gap yet, at 4540.80 (Monday's high was close at 4536.55), but it keeps trying. For eight straight days now, since first hitting 4525 on May 31st, it has tried to climb above both its downtrend line from December 2015 - April 2016, currently near 4509, and price-level resistance at 4525. We have either a bullish consolidation at resistance or a small rolling top pattern and I suspect we'll soon find out which one it is. If it does rally from here I'd look for a test of the 4600 area before setting up a larger pullback/decline. But if it rolls over from here and drops below the May 11th high, near 4408, it would tell us a top of significance is likely in place.

Key Levels for NDX:
- bullish above 4525
- bearish below 4407


Russell-2000, RUT, Daily chart

The RUT has been the leader to the upside for the rally from May 19th and that's been a good sign for the bulls. But today's bounce attempt off the morning low was not as strong as the others and it looked more like a correction than the start of another rally. That was a warning flag by the end of the day so the bulls will want to see the indexes pushing to new highs with the RUT out in front. If it instead starts down stronger than the others and breaks back below support at 1158-1160 it would provide a bearish heads up and likely embolden the bears to get more aggressive. While opex week tends to be bullish it can also be strongly bearish if it starts to break down. Neither side can afford to make any assumptions heading into next week.

Key Levels for RUT:
- bullish above 1206
- bearish below 1130


10-year Yield, TNX, Daily chart

It's looking like the bond market is predicting no rate increase in June (or July) as TNX breaks down from its sideways triangle that it had been trading inside of since the March high. It's nearing yield-level support at 1.64% and the short-term pattern look like a setup for a bounce correction before heading lower. A break below 1.64 would be more immediately bearish and could lead to a strong decline in yields (with a bond market rally). But if we do see yields bounce back up I think we could see TNX back up to its 50-dma, currently near 1.79%, before starting a stronger decline. It now takes a rally in TNX above its May 31st high at 1.89 to turn it bullish. Typically the stock market trades in synch with yields (e.g., a bond market rally often sees money rotating out of stocks and into bonds, which has yields dropping with the stock market) but so far the stock market has been ignoring the bond market. That's oftentimes a dangerous time for the stock market since the bond market is recognized as the smarter market.


KBW Bank index, BKX, Daily chart

The banks have been weak since peaking on May 25th and like the bond market, they've been showing concern that the Fed will not be raising rates anytime soon, which has been my argument since before they inappropriately (imho) raised rates last time. Higher rates provide greater profitability for the banks, one of the reasons why the Fed wants desperately to raise rates (they're trying to take care of their own blood-sucking selves). But there's no clear pattern yet and I could argue the pullback since May 25th is a correction within an up-channel from February. That argues for new highs and a rally above 71.50 would be bullish (for the broader market as well). A drop below 68 would provide a bearish heads up.


U.S. Dollar contract, DX, Weekly chart

The US$ has had a sharp pullback from its June 1st high, especially with the negative reaction on June 3rd to the weak Payrolls report. This week's low has been a test of price-level support near 93.80 and the top of a parallel up-channel from May 2011 (which the dollar broke above in December 2014). The top of this channel was also tested in May and as long as the rally continues from here we should see a bullish break of its down-channel from December 2015, which was tested last week. If we see the dollar get a little bounce and then continue lower it would be a bearish breakdown, especially if it drops below its May low at 91.88.


Gold continuous contract, GC, Weekly chart

Following gold's pullback from its May 2nd high it has had a sharp rally back up from the low on May 31st. It appears gold traders were the only ones who abided by the "sell in May and go away" and then returned on June 1st. The two-week bounce had now retraced a little more than 62% of the pullback and it could continue higher but I think we'll see at least a larger pullback, potentially down to its 50-week MA, currently near 1162. A decline below 1160 is needed to tell us gold could drop to a new low rather than just give us a pullback. If it rallies above its May high at 1306 I'm not sure it will be able to do any better than its 200-week MA, currently at 1315 and coming down.


Silver continuous contract, SI, Weekly chart

Silver's two-week rally has brought it back up to the top of its parallel down-channel from 2013, near today's high at 17.34. There could be one more minor new high coming before it will be ready for at least a larger pullback but holding inside its down-channel keeps it in an established downtrend. Like gold, I think there's a good chance we'll see lower prices before setting up a longer-term rally. But a rally from here above 18 would be at least short-term bullish, which could mean a rally up to its 200-week MA, currently at 20.36 and coming down.


Oil continuous contract, CL, Daily chart

Yesterday oil made it up to a price projection at 50.95 where the A-B-C bounce off the January low achieved two equal legs up. It's also a test of the October 2015 high at 50.92. The c-wave, which is the leg up from April 5th, has formed a rising wedge, which is a common ending pattern for c-waves (and 5th waves). The bottom of the wedge is currently near today's low at 50.23 so a continuation lower would be a bearish heads up that the rally finished this week. Rising (and descending) wedges tend to get completely retraced faster than it takes to build them so that would mean back down to the April 5th low at 35.24 in less than two months. I think there's a good chance oil will drop below the January/February lows near 26 and the first sign of trouble for oil would be a drop below its June 1st low at 47.75.


Economic reports

Other than the Michigan Sentiment (preliminary) report tomorrow morning there's not much for the market to pay attention to. It's more likely to react to overseas reports and markets but in reality the market has its attention focused on what it thinks the Fed will do next week.


Conclusion

The stock market is in denial and is ignoring the messages from the economy, the bond market, the dollar and just about everything else. As it so often does at important tops, it's whistling past the graveyard, apparently confident that the Fed can protect it. The market doesn't realize that the Fed is behind it getting mauled by the zombies and is no longer in a position to help. I'm just waiting for the day the market turns around, screams like a little girl and runs away (sells).

There's been a lot of buying power going into just holding the market up and preventing a selloff and that smells like the work of the Fed/government. With indexes up against resistance there's a good chance the rally will fail but with us heading into opex week and FOMC next week I can certainly see the possibility for the market to continue being supported. I can't see a reason to go long here since the upside potential is again dwarfed by downside risk. Extreme bullish sentiment in a market that is showing waning momentum and deteriorating market breadth is typically a time when new buyers jump in and then get hurt.

If we start to see strong impulsive moves down followed by choppy bounce corrections and then lower again it would be a time to start playing the short side. We don't have any strong signs of a market top yet so it's risky jumping in front of this market that continues to press higher. At the moment I think the sidelines is a safe place to be until we start seeing confirmation that a high is in place, especially since next week could be volatile so trade carefully in the coming 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