The rally to new all-time highs (for the blue chips) hasn't been on high volume nor has it seen strong follow through and that raises some questions about the breakout (fake-out?). The bulls need to see the consolidation in the past week followed by another push higher to hopefully drag the techs and small caps to follow.

Today's Market Stats

Wednesday's rally looked like it was the start of the next rally leg following the consolidation off the mid-month highs but today's pullback negated most of the rally and now we're left guessing whether the market is ready for at least a larger pullback or if instead the bulls are going to try again from here.

Today's economic reports included unemployment claims data, which were essentially the same as last week's so no big movement there. Existing home sales in June came in marginally better than May but because it's an old report and was basically flat there was no impact on the market. The FHFA Housing Price index for May was marginally lower than April (+0.2% vs. +0.3%, which had been revised higher from +0.2%) but again, old and not much of a change.

Leading Indicators for June showed a turnaround from May's -0.2% to June's +0.3%, which the market expected, but this too is an old report. The one recent report was the Philly Fed index for July, which was a disappointing -2.9 vs. 4.7 for June and not even close to the 5.0 that the market expected. More signs of a slowing economy and that might have had a depressing effect on the market today (although futures were already pointing lower before our day got started).

As we all know, the stock market has ignored signs of economic slowing for a long time. Corporate earnings have been in decline for almost two years and yet the market indexes are pushing to new all-time highs (at least the blue chips are). This has only increased bullish sentiment since most traders now believe the central banks are fully behind a continuing stock market rally because they are very much afraid of a stock market decline. I strongly suspect the bankers have moved away from wanting a higher stock market to stimulate the "wealth effect," to put people into a spending mood, to now wanting to prevent a stock market selloff so as to avoid wealth destruction.

The wealth effect is felt primarily by those who own more stocks as a percentage of their net worth than most everyone else and you can bet they put a lot of political pressure on the Fed to keep things going. Our representatives (and I use that term loosely) tend to get wealthy while in office and they too invest in the stock market so political pressure comes directly from them as well. To say the Fed is not politically motivated is I think somewhat naive, certainly since Paul Volcker back in the 1980s. Our market is clearly motivated by what kind of central banker support it thinks it can expect and the latest rally has been with central bank support out of fear of Brexit and some serious banking concerns, especially in Europe right now but the U.S. is right behind them.

The problem we face, again, is another credit bubble that the Fed has not only encouraged but in fact pushed and the banking system is in far worse shape today than it was back in 2007 before the last market collapse. The banks are heavily exposed to derivatives and have a very low asset/liability ratio, to the point that a 3% decline will wipe out many banks' asset values.

Not helping the banks are the efforts made by central bankers to employ ZIRP and NIRP, which are intended to entice people/businesses/governments to borrow more, which also encourages investors to seek out riskier assets in search of higher yields. When ZIRP wasn't working well enough (as measured by a distinct lack of performance by the economy) the bunch of Keynesian economists thought it simply needed to do more of the same that isn't working. Their theory is that if what they're doing isn't working it's because they're not doing enough of what they're doing and if it is working then they simply need to do more of what they're doing. Heads they win, tails you lose.

NIRP has been the next step by central bankers in Europe and Japan, and now discussed by the Fed, as a way to help "entice" bankers to loan their money instead of holding it. This is now pushing bankers into making the same silly loans that got them into trouble last time. And why not? The banksters made a pile of money off the taxpayer bailouts last time and not one went to jail. Easy money when you can get it. So whether it's the return of subprime mortgages (yes, they're baaaack) or subprime auto loans, all being packaged and sold off in tranches, the same bad behaviors are being fully supported and in fact pushed by central bankers.

While all of this will eventually bite us in that part of the anatomy upon which we sit, all of the money creation from the Fed and banks (lent money is simply created and then it becomes an asset on the banks' balance sheets) goes looking for the highest yields and that's certainly not in bonds. The stock market benefits and it could continue to benefit far longer than we think possible. But again, are we seeing the resumption of the uptrend following the April-June correction or could this be a blow-off top in the making? The answer to that question will be evident later and in the meantime I think we have to be ready for either scenario.

The RUT is showing an interesting setup at the moment and as a good sentiment index I thought it would be good to start with a top-down look at this one first, starting with the weekly chart.


Russell-2000, RUT, Weekly chart

There are a few reasons why 1205-1218 is an important price zone for the RUT and probably why it has been struggling at this level since reaching it on July 12th. On the weekly chart I show price-level S/R near 1215, which starts from the highs in March, July and December 2014 and then acted as support in March-May 2015. The December 2015 high at 1205 is the bottom of the resistance zone and 1217.50 is the 62% projection for the 2nd leg of a 3-wave bounce off the February low. Based on this resistance zone I think the RUT would be more bullish above 1218 and could make a run for 1298 for two equal legs up from February, which would also be a test of its June 2015 high at 1296.


Russell-2000, RUT, Daily chart

The RUT's daily chart shows a sideways consolidation since first reaching the 1205-1218 resistance zone on July 12th. This is bullish until proven otherwise since a consolidation following a trend normally results in the continuation of the trend (up in this case). While it's somewhat bearish with the break of the uptrend line from June 27th, which was broken on Tuesday, it hasn't been followed by a breakdown and therefore still remains potentially bullish. The first sign of trouble for the bulls would be a drop below 1191, which comes from a price projection for the correction pattern since the 12th, a break of which would tell us the pullback is likely more than just a correction. Upside potential is to a trend line along the highs from April-June, near 1228 and it would be more bullish above that level.

Key Levels for RUT:
- bullish above 1230
- bearish below 1191


Russell-2000, RUT, 60-min chart

Between multiple trend lines, price projections and the price pattern it's important for the bulls to power the RUT through it all and keep this rally going. The 60-min chart shows a closer view of the congestion and how today's decline has the RUT dropping out of a parallel up-channel for its rally from June 27th (this after breaking its uptrend line from June 27th on Tuesday) and a point below 1205. If it drops below Wednesday morning's low near 1198 it would give us a bearish heads up but it's possible the leg down from this morning's high is going to complete an a-b-c correction off the July 12th high. A drop below 1191 would suggest it's something more bearish than that and in the meantime it could go either way from here.


S&P 500, SPX, Daily chart

For SPX (and the Dow), there's an uptrend line from February-May that's been in play since it broke in mid-June (and then back-tested until breaking down on June 24th). It rallied back up to the line on July 12th and depending on whether I look at the line using the log or arithmetic price scale you can call it bullish or bearish. Using the log scale it looks like SPX has been struggling to get back above the line. The daily chart below is using the arithmetic scale and it looks bullish as price uses it as support on all small pullbacks, including today's. The intraday chart shows a slight break below the line and then a bounce back up to it at the close and therefore what it does tomorrow will tell us whether or not the line will continue to hold as bullish or instead turn bearish. The other thing I'm watching is the price projection at 2177.67, which is where the 2nd leg of a 3-wave bounce off the February low is 62% of the 1st leg up, for the possible completion of an a-b-c bounce within a larger corrective move down from May 2015. This interpretation says the new all-time high is not bullish but instead is just part of a larger corrective pattern. In other words it could turn into a fake-out instead of a breakout and something to be careful about.

Key Levels for SPX:
- bullish above 2178
- bearish below 2093


Dow Industrials, INDU, Daily chart

Whereas I show the SPX chart above with the arithmetic price scale, the Dow's chart below is using the log price scale. The Dow and SPX look the same relative to their uptrend lines from February-May and notice with the log scale how the uptrend line has been acting more as resistance than support. The Dow (and SPX) have been nuzzling up underneath the trend line (log scale), which has been a common ending pattern in the past. Today's red candle leaves a possible bearish kiss goodbye but a stronger bearish signal would be a drop back below the May 2015 high at 18351. In the meantime the bulls still control the tape.

Key Levels for DOW:
- stay bullish above 18,350
- bearish below 17,900


Nasdaq Composite index, COMPQ, Daily chart

It's looking like the Nasdaq has the March 2000 high, at 5132.52, once again in its sights. This morning's high was about 30 points shy of this level and if it can do better than that we'll probably see the December 2015 high at 5176.77 as the next target. Its all-time high was in July 2015 at 5231.94 so there's a lot of work to be done in order for the Naz (and NDX) to make a new high. So far the new highs have been for the blue chips, which are probably benefitting from a flight to (relative) quality from overseas.

Key Levels for NDX:
- bullish above 5177
- bearish below 4920


10-year Yield, TNX, Weekly chart

For a long time I've been thinking we'll see government bond yields down in the mud before the bull market in bonds completes. With all the talk of negative yields and the fact that the Fed is now considering the same, it's not hard to imagine the 10-year below 1% and the 30-year below 2%. My weekly chart of TNX has consistently show a downside projection to at least 1% and potentially lower (0.50%).

Bill Gross, the bond king, feels bond prices have peaked (yields have bottomed) and last week saw a large bounce back up in yields. His opinion obviously makes me nervous about my projection, especially when I look at the TLT chart, shown further below, but the first thing I'd want to see for TNX, to help confirm something more bearish for bond prices, is a rise above S/R near 1.65%. The next level of resistance would be the downtrend line from November 2015, currently near 1.73%. Above that is its broken uptrend line from July 2012, near 1.81%. So there are a few strong resistance levels to be taken out before the pattern would turn bullish (for yields) but certainly from a bullish perspective the bounce off the July 2012 low at 1.394% must be respected.


20+ Year Treasury ETF, TLT, Weekly chart

The longer-term TLT chart is what has me thinking a little more bearishly about bond prices (in support of Bill Gross's opinion). As can be seen on its weekly chart, squished to show price action since 2007, the July 8th high created a throw-over above a long-term rising wedge following the December 2008 high (with confirming bearish divergence) and a shorter-term rising wedge off the July 2015 low (without confirming bearish divergence). The collapse back down from that throw-over creates a sell signal and since we're looking at the possible completion of rising wedges we could see complete retracements of them in a faster time than it took to build them. The daily chart shows TLT is now oversold and the pattern looks like it should soon be followed by a large bounce correction and that would be a setup to short TLT with a stop at a new high above the July 8th high at 143.62. Assuming we'll get the bigger bounce and then another leg down we'd then have a larger 3-wave pullback in the longer-term bullish pattern or the start of what will become a more bearish 5-wave decline. Figuring that out would have to be done after the 3-wave move down (weeks from now).


KBW Bank index, BKX, Daily chart

Like the broader averages, BKX has been consolidating sideways since first jumping back above its 50-dma on July 14th. Since then it's been chopping between its 200-dma (not quite reaching it, currently at 67.96) and its 50-dma, currently at 67.09. It closed 2 cents above its 50-dma after dropping 4 cents below it this afternoon. As with the others, the sideways consolidation looks bullish and another rally leg would likely see a rally to its downtrend line from July-December 2015, near 70. However, if it breaks down instead it would leave a failed bullish pattern and since failed patterns tend to fail hard, we'd likely see a fast break back below price-level S/R near 66.50.


Transportation Index, TRAN, Weekly chart

The TRAN was relatively weak today (-1.3%) and that has it looking a little more bullish following a test of its downtrend line from August 2015. It had broken its downtrend line from February 2015, currently near 7920, but today it gapped down to it and then sold off some more, leaving a failed breakout into the July 14th high. It is now on a sell signal because of this failed test but it would turn bullish again with a rally above Wednesday's high near 8022, which in turn would be a bullish signal for the broader market as well so keep that level on your alert list.


U.S. Dollar contract, DX, Weekly chart

The dollar climbed back above its 50-week MA at 96.49 and yesterday it bumped into its downtrend line from December-January, currently near 97.40. It looks like it's ready for a pullback but I continue to expect to see the dollar works its way back up to the top of its consolidation range, near 100.


Gold continuous contract, GC, Weekly chart

Gold has not yet reached the upside projection that I thought it could reach, at 1417.50 (for two equal legs up from December 2015), so that remains upside potential if the current pullback gets turned around. Only slightly lower, near 1409, is its downtrend line from September 2011 - October 2012 so there's a relatively narrow target zone to watch if gold rallies a little further. The drop back down below 1347 (the July 2014 high) is a little bearish but so far it's holding its January 2015 high at 1308 (today's low was 1310.70). I think the important thing to keep in mind here is that the bounce off the December 2015 is a 3-wave move and as such it fits as just a correction to its longer-term decline. That could change with a continuation of the current rally but at the moment gold bulls should keep this in mind.


Oil continuous contract, CL, Weekly chart

Oil has pulled back further from its back-test of its broken uptrend line from 1998-2008 and that leaves a more bearish sell signal. But until oil drops back below its 50-week MA, near 41.47, there is still the potential for another rally that will take it above 51, which would be bullish. But for now the larger pattern supports the idea we'll see a drop back down to at least the February low, if not lower (for oil and stocks).


Economic reports

No major economic reports scheduled for Friday.


Conclusion

The stock market has been on a tear to the upside but it hasn't been due to any fundamental changes, which still do not support the current rally. Central bank policies and money supports the market or perhaps more importantly central bank promises support the continued bullish sentiment. But sentiment is a fickle thing and can reverse on a dime. Without fundamental support for the market it is at risk for a disconnect to the downside since we essentially now have a big vacuum underneath the market trying to suck it back down to reality. The one big unknown is how long and how much money will pour in from overseas as it seeks a relatively safer place to park their money. The relative strength in the blue chips reflects this money flow.

The bulls haven't done anything wrong yet and certainly the bears haven't gained any traction to the downside and that leaves things bullish until proven otherwise. Today's decline actually did some short-term damage to the pattern, as small as it was, and if the market continues lower on Friday I'd start to think a little more seriously about the possibility an important high is already in place. We have bullish consolidation patterns from the past week so if they fail we could see a strong spike back down as all the late-to-the-party bulls get stampeded back out of the market and the bears pile back in.

Respect the upside potential while staying wary of the downside risk -- this will remain true for as long as this market continues to push higher.

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