Just when the bears thought they had this nailed the bulls come along and punch them in the face with a snapback rally that could turn into something very bullish. The bears are not toast yet but they better start some selling on Thursday otherwise they'll be forced back into hibernation.

Today's Market Stats

What was frightening last Friday and on Monday is now frighteningly OK now. Whether it's an end-of-month run or perhaps the Fed getting involved in propping things up, we've had quite the recovery following the Friday-Monday selloff. It's possible the 2-day rally is just a sharp dead-cat bounce or it could be the start of a new rally leg that will take us to new highs. As I'll show on tonight's charts, the answer to that question could come as early as Thursday.

Thursday is the end of the month and quarter and it's possible the big bounce is nothing more than an attempt to save both. The end-of-month push and then new-month (July 1st) money, plus the bullish influence heading into a holiday weekend, has been a powerful motivator for stock buyers. The market breadth has been strong the past two days and while I'm sure there's a fair share of short covering in there, there's no denying the buying has been strong. From a bullish perspective this could be the sign of a kickoff rally that will take the indexes to new all-time highs.

But we've seen plenty of strong rallies in bear markets and if we've entered a new bear market leg down then the past two days could be nothing more than just another bear market rally. These are often much stronger than rallies seen in bull markets so it's always important to keep your emotions in check and not assume a strong rally will continue. In a bear market they often reverse on a dime and sell off strongly. It's important to keep trading short term until the bigger picture becomes clearer and that could come as early as Thursday, especially if the bears don't step back in and immediately drive the indexes lower.

A strong rebound in European stocks helped drive our futures higher and that buying continued for most of the day as the bears were shooed away. Whether or not the European bounce was a dead cat bounce or something more can't be known yet, nor do we know if governments have stepped in to once again save the market from a worse selloff. Regardless we can only guess the next move based on what the charts are telling us so I'll jump right into them.

I'll start tonight's chart review with the RUT since it's a good representative index to show what to watch the rest of this week. It should provide some strong clues for next week and next month. I'll look at the weekly, daily and 60-minute charts.


Russell-2000, RUT, Weekly chart

My first impression when I look at the RUT's weekly chart is bullish. That big hammer candlestick this week, so far, is off support at its 200-week MA, its broken downtrend line from June-December 2015, its uptrend line from March 2009 - October 2011 and price-level support, all of which are at roughly 1077-1093 and Monday's low was near 1086. That kind of bullish candlestick can't be ignored. But the bounce into today's high is so far a back-test of its broken 50-week MA, near 1126 (today's close was marginally above it at 1132), and the bearish wave count calls for a continuation lower. But if the bearish wave count is correct it means today's high ideally needs to hold. If we get a consolidation Thursday morning near the high and then a continuation higher it's going to turn the pattern bullish. The bears need to break 1080 support to prove they're in control.


Russell-2000, RUT, Daily chart

In addition to its 50-week MA, the RUT rallied slightly above its broken downtrend line from June 2015 - April 2016, near 1128, which had supported the decline into the June 16th low and then broke on Friday. If the bearish pattern is the correct interpretation we'll see today's back-test followed by a bearish kiss goodbye, in which case it should lead to strong selling. But if the bulls have a different idea about where this market is going we'll see the rally continue, possibly up to the 1160 area before pulling back next week to set up a very good buying opportunity.

Key Levels for RUT:
- bullish above 1173
- bearish below 1080


Russell-2000, RUT, 60-min chart

If the rally off Monday's low turns into a 5-wave move up, depicted in green on the 60-min chart below, it would confirm the bullish reversal off Monday's low, leaving the pullback from June 8th as just an a-b-c pullback correction and not the start of something more bearish. Following a 5-wave move up we could then expect a pullback next week and that would be the buying opportunity for a stronger rally to follow. But if the sharp 3-wave bounce off Monday's low is followed by a drop below Tuesday's midday low, near 1101, it would confirm the bearish wave count. We could be looking at a 1-2, 1-2 wave count to the downside off the June 8th high and that calls for a very strong decline in a 3rd of a 3rd wave. We could get the answer to the question who's in charge as early as Thursday morning.


S&P 500, SPX, Daily chart

As with the RUT, the SPX daily chart below shows we have only a 3-wave pullback from the June 8th high into Monday's low, which from a bullish perspective is potentially very bullish. It calls for the resumption of the rally, one that will take us much higher (over 2300). But until SPX can climb above its pre-Brexit high at 2113 it remains possible that the bounce is just another correction to what will become a much stronger decline and therefore it's entirely possible the whipsaw moves we've seen since the June 8th high will lead to a violent move down. SPX would look at least a little more bullish if it can get back above its 20- and 50-dma's, near 2081 and 2076, resp., and then above price-level S/R at 2085. While it's looking more bullish than bearish at the moment, keep in mind that the whiplash moves could get worse.

Key Levels for SPX:
- bullish above 2013
- bearish below 1992


S&P 500, SPX, 30-min chart

The 2nd leg of the bounce off Monday's low achieved the 162% projection of the 1st leg, at 2073.24, with today's high (actually short by 11 cents), and that's a good setup for at least a consolidation before pressing higher tomorrow. In fact if we get just a small consolidation in the morning followed by another rally in the afternoon it would turn the pattern unquestionably bullish. At that point we'd have a 5-wave move up (depicted in green on the 30-min chart below) and that would set up a pullback correction into early next week. The pullback would be an outstanding opportunity to get long for what should be a strong rally to follow. But at the moment we have just a 3-wave bounce off Monday's low and as such it could be just another high bounce correction that will lead to a very strong selloff. If we start to get strong selling Thursday morning I'd look to short bounce attempts.


Dow Industrials, INDU, Daily chart

Most of the indexes have the same pattern at this point and the Dow is no different. It has the same setup that we're watching to see if it turns bullish or bearish and at this moment it could go either way. The Dow is approaching its broken 20- and 50-dma's, both of which should be near 17760 on Thursday, about 60 points above today's high. If it rallies higher than that we'll probably see it make it up to its downtrend line from April-June, near 17925, before starting a pullback into next week (the one we'll want to buy).

Key Levels for DOW:
- bullish above 18,011
- bearish below 17,140


Nasdaq-100, NDX, Daily chart

NDX has a little further rally than the others before running into potentially strong resistance, which are its 20-, 50- and 200-dma's, near 4415, 4408 and 4415, resp. If it manages to rally up to its broken uptrend line from February-May by the end of the day Friday it could make it up to about 4450 before starting a pullback into early next week. But today it stopped at price-level S/R near 4375 and a sharp turn back down from here would be potentially very bearish.

Key Levels for NDX:
- bullish above 4468
- bearish below 4179


Volatility index, VIX, Daily chart

We have an interesting setup on the VIX chart as it drops down once again to its broken downtrend line from January-February. This follows a 3-wave bounce off the June 7th low, with two equal legs up at 26.76 (the high on Monday was 26.72), and dropping back down from there is actually bearish for VIX and therefore bullish for stocks. But it's at support at its broken downtrend line and close to price-level support at 16 and could produce a bounce. That would mean at least a pullback for the stock market. A bullish setup for the stock market would be a little higher, to give us a 5-wave move up from Monday, which would likely drop the VIX down to the 16 area, and then a pullback in the stock market while VIX bounces off support. Those happening in conjunction with one another would support the bullish wave count for the stock indexes. But stay aware of the possibility that the VIX could rally hard off support, which would coincide with a strong selloff in the stock market.


10-year Yield, TNX, Daily chart

Treasury bonds and the stock market don't always trade counter to each other but it happens often enough to suggest that when they don't it's important to watch carefully. Oftentimes the bond market telegraphs in advance what the stock will do. After bonds rallied strongly following the Brexit vote, which dropped yields to below their June 16th lows, this week has seen bonds go flat and the small group of daily candles on the TNX chart below shows what can be considered a bearish consolidation. While SPX has retraced more than 62% of its decline, the bond market hasn't moved and in fact looks like it's consolidating before continuing its post-Brexit move. At the moment this is a warning to stock market bulls that the strong bounce in the market might be a bull trap. Watch carefully.

If TNX does continue lower I think we'll see the 1.38-1.39 area hold for at least a larger correction (in time if not price). The July 2012 low was 1.394% and I have two price projections based on the wave pattern near 1.39 and 1.38 so the close correlation with the previous low should be a good support level. And if bonds rally at least a little more that could put some negative pressure on the stock market.


KBW Bank index, BKX, Weekly chart

Following the drubbing the banks have taken the past four weeks it's hard to see this week's bounce as anything more than a version of the dead cat variety. Banks around the world, especially Europe, have been hit very hard as everyone starts worrying about currency crises, enormous debt loads and therefore questionable loan portfolios, and the general weakness in the banking industry. BKX dropped hard down to support at its uptrend line from March 2009 - October 2011, which held the last decline into the February low. That low produced a strong bounce as well and there was follow through to the upside for at least a larger bounce and that's certainly the potential here. But I see impulsive declines and corrective bounces since the July 2015 high and that keeps me bearish the banks. I show the potential for a breakout to the upside, which would obviously have to be respected if it rallies above its high at the end of May, near 71.50, but at the moment I think we're looking for only a higher bounce, if that, and then lower. Watch resistance near 66.50 if reached. The banks keep me from feeling too bullish about the broader market and right now there's a big difference between the two. The banks are still a warning to bulls to not get too comfortable on the long side.


U.S. Dollar contract, DX, Weekly chart

Friday's strong rally in the US$ had it breaking out of its down-channel that it was in since its December high and it then tagged its broken 50-week MA at 96.58, now at 96.53, which it tested again with Monday's slightly higher high. It has since pulled back and it could drop back down to the top of the down-channel, near 94.90, and perhaps to its 20- and 50-dma's near 94.60. For now I'm assuming its rally will continue into the summer as it heads back up to the top of its sideways consolidation since March 2015, which is near 100.


Gold continuous contract, GC, Weekly chart

Gold got a big boost last week as investors rushed for the safety of the shiny metal. They don't seem too anxious to give up the metal to get back into stocks even though the stock market has rallied strong the past two days. As mentioned above, bonds are not selling off either, which has the stock market climbing all by its lonesome. That's a warning sign for stock market bulls but for now only a warning. Gold rallied up to its longer-term downtrend line from September 2011 - October 2012 and with each new high since February it's leaving a bearish divergence, so gold bulls who want to accumulate more gold will probably do better to wait for a decent size pullback correction. That correction could turn into a decline to a new low but that will have to be figured out later once we get a deeper pullback. It would be more bullish above last week's high near 1363 but not if those bearish divergences continue.


Oil continuous contract, CL, Weekly chart

Oil continues to consolidate near its highs since initially reaching 50 in May. This can be viewed bullishly as it chops sideways under resistance at its October 2015 high at 50.92 and its broken uptrend line from 1998-2008, near 50. A break above 51 could lead to a rally to price-level S/R near 58.50 and possibly its May-June 2015 highs near 62. But it's equally possible it's in a topping pattern and will roll over for at least a larger pullback if not back down to its January-February lows near 26, especially if the dollar starts rallying a little stronger.


Economic reports

Other than the Chicago PMI report tomorrow morning it's going to be quiet for economic reports. Unless we see some strong signs of slowing I don't think we'll see much of a reaction to the reports tomorrow or Friday. Next Wednesday and Friday we'll get the ADP and NFP reports to see how the employment situation is looking (not great).


Conclusion

The indexes are close to breakout mode and we could find out tomorrow if the bulls are going to run with this. A morning consolidation followed by another rally into Friday would do a nice job completing a 5-wave move up from Monday and that in turn would tell us the 3-wave pullback from June 8th is complete and we're starting a new rally leg that will take us to new all-time highs. Why this would happen is not as important as the fact that it could very well happen. A 5-wave move up into Friday would be a setup for a pullback early next week and that would be a very good buying opportunity. Bears, just buy it and don't ask questions (wink).

The bearish potential remains very real though and if we get some strong selling on Thursday I would not be the least bit interested in the long side. The bounce off Monday's low can be considered just a sharp a-b-c correction to the decline, one that's setting up a very bearish wave pattern. If we get a sharp selloff Thursday morning I'd start looking for bounce corrections (they'll probably be small) to get short and enjoy the ride down.

We don't know which side is going to run with the ball from here but I think we'll have a very good idea by the end of the day tomorrow. Trade what price tells us, not what you think the market should do.

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

 

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