Despite all the "right" reasons why the stock market should be declining it continues to rally instead. We all know a logical stock market is an oxymoron and I'm betting there are more than a few bears who are feeling moronic for fighting this market. Many are throwing in the towel.

Today's Market Stats

Whether the market is rallying more from short covering (by bears who can't believe their eyes but covering nevertheless) or because there are many who believe the market really does have much higher potential, the fact remains that the market is rallying in the face of a deteriorating economy and corporate earnings. It's literally climbing the wall of worry while the bear are simply climbing the walls. How long this will continue is anyone's guess but at least we have some charts to show potentially important levels to watch.

I'm filling in for Tom today since he and his wife have been blessed with the birth of their baby. Send him good wishes (for some sleep as well, wink).

There was very little news today and no major economic reports and basically the stock market gapped up following an overnight rally in the futures (they rallied with the European markets, pulled back a little and then bounced a little into the open. But there was no follow through to the gap open and the market immediately pulled back into the red, which was then followed by a sideways consolidation for most of the day. Trading volume was low and even though the major indexes closed marginally in the red the internals were actually slightly positive.

All in all I'd give today a more positive than negative grade, especially since a consolidation keeps the pattern bullish, but maybe not for long. I'll start tonight's review with a top-down look at NDX


Nasdaq-100, NDX, Weekly chart

There are a couple of different ways I can look at the weekly pattern of NDX from an EW perspective but regardless, there is the potential for bulls to run into trouble as it approaches the 4800-4865 area. There is the March 2000 high at 4816.35 that is clearly in the bull's sights and only about 16 points above last Friday's high at 4799.86. Just below the March 2000 high is a projection at 4799.20 (achieved on Friday) where a large 3-wave move up from 2009 has two equal legs up for a big A-B-C bounce within the secular bear market. The higher projection at 4865 is where the move up from February would achieve two equal legs up. Based on these projections a rally above 4865 would be much more bullish. But bulls should be careful in the 4800-4865 area since there's a good possibility we'll see a high in this zone.


Nasdaq-100, NDX, Daily chart

There's one other projection for NDX at 4818 -- the 162% extension of the previous decline (April-June) is at that level and the correlation with the other projections, and March 2000 high, make this a potentially very important level. The bulls are fine until NDX drops below the August 2nd low near 4689 since that would be a good indication the top is in place.

Key Levels for NDX:
- bullish above 4820
- bearish below 4689


Nasdaq-100, NDX, 30-min chart

A close-up view of NDX is shown on the 30-min chart below. It shows NDX has remained inside an up-channel since rallying up into on July 8th. Since then, other than the brief throw-over on August 1st and the brief throw-under on August 2nd (two head-fake moves), price has remained inside the channel. Last Friday's high stopped at the top of the channel and the bottom is currently near 4764 so it can be used as a short-term guide to see how well each side is doing.


S&P 500, SPX, Daily chart

SPX had been stalled since July 20th beneath a price projection near 2178, which is where the 2nd leg of a 3-wave move up from February is 62% of the 1st leg. Equality is up near 2293 so that's the upside potential that bears need to keep in mind. Friday's rally popped SPX above 2178 and today it held that level, keeping the pattern bullish. But there's another price projection not far above, near 2191, that's based on the pattern for the leg up from June 27th. That coincides with a trend line across the highs from April-July so watch that level carefully for the possibility of a top. A rally above 2192 would open the door to 2220, which is where the 5th wave of the rally from June 27th would be 62% of the 1st wave (a common projection when the 1st wave extends, as in this case). And then if the bulls are really feeling feisty, there's the 2293 projection. The first sign of trouble for the bulls would be a drop below the August 2nd low near 2147 since that should then lead to at least a large pullback and potentially something much more bearish.

Key Levels for SPX:
- bullish above 2192
- bearish below 2147


S&P 500, SPX, 30-min chart

The SPX 30-min chart shows the pattern for the rally from August 2nd and a 5-wave count that I'm watching. The pattern ideally only needs one more new high to complete the count and the 5th wave would equal the 1st wave near 2192, which "coincidentally" matches the other projection and trend line near 2191. That makes it an important level to watch if reached. Below that is a projection at 2186.55, which is where the 5th wave of the move up from August 2nd would be 62% of the 1st wave and that matches the 127% extension of the previous decline (August 1-2), which is a common reversal Fib to watch. Assuming we'll get another, and final, leg up from here, watch 2186-2187 and then 2191-2192 for the completion of this rally. Depending on the form of the pullback/decline (assuming that's still allowed) we'll then get an idea about whether to look at it as a buying opportunity or instead something to short.


Dow Industrials, INDU, Daily chart

Similar to SPX, the Dow has a trend line running along the highs from April-July that's currently near 18730 and that makes for a good upside target for now. A short-term price pattern suggests an upside target near 18653, which gives us a relatively wide zone to watch for a completion to the rally.

Key Levels for DOW:
- bullish above 18,800
- bearish below 18,247


Russell-2000, RUT, Daily chart

The RUT is slightly different from the Dow and SPX in that it has two trend lines along the highs since April to watch (April-June and June-July). The June-July trend line stopped the rally a few times at the end of July and August 1st but last Friday's rally popped the RUT above the line, which was followed by today's pullback to a close barely below the line. Another bounce on Tuesday would leave today looking like a successful back-test of resistance-turned-support, which would then have us looking for a test of its higher April-June trend line, currently near 1242. The 5th wave of the rally from June 27th would achieve 62% of the 1st wave at 1245 so 1242-1245 is a good upside target zone if the rally continues. Above 1245 would be more bullish.

Key Levels for RUT:
- bullish above 1245
- bearish below 1198


20+ Year Treasury ETF, TLT, Daily chart

After pulling back from its high on July 8th we've seen the bond market trade more or less sideways and it's not clear at the moment if we'll see lower prices before heading higher or just head higher from here. Until TLT drops below 134 I'll continue to look at the pullback from July 8th as a correction within a larger rally pattern but below 134 would be a break below the bottom of its down-channel from July 8th as well as its uptrend line from June-November 2015. Two equal legs down from July 8th, if it's going to pull back further, points to 135, which is close to its February high at 135.25 and therefore I would expect this area to be support if tested. But a rally from here that makes it above the July 29th high at 141.68 would suggest the bond rally will continue (which would drive yields lower).


KBW Bank index, BKX, Weekly chart

The banks have also had a strong rally off the June 27th lows and BKX has now made it up to its downtrend line from July-December 2015, currently near 70 (today's high was 70.45 but it closed at 69.99). This should (in a normal market) be tough resistance on the first test. Time will tell.


Transportation Index, TRAN, Weekly chart

As can be seen on the TRAN's weekly chart below, it continues to struggle with two downtrend lines, one from February 2015 - April 2016, currently near 7980, a downtrend line from August-November 2015, currently near 7880. This morning's high was 7937 but the selloff from there left a shooting star on its daily chart after trying to break through its broken 20-dma and downtrend line (both at 7880). On the weekly chart you can see how little MACD has bounced off its June 27th low while price spiked back up near its mid-July high. The same thing can be seen on its daily chart for the spike back up from August 2nd -- MACD is still stuck at the zero line and therefore neither the weekly nor the daily charts support its rally (although it's important to remember price is king). These indicators suggest most of the rally is likely to be short covering and not strong buying.


U.S. Dollar contract, DX, Daily chart

I normally show the US$'s weekly chart because I don't think there's a lot to pay attention to while it chops around in a $92-$100 trading range since the May 2015 high, which I think will run through the rest of this year. It's not clear yet whether the dollar will head higher from here or if it will first get a larger 3-wave pullback from July 25th but regardless, it would not turn bearish (maybe) until it drops below the bottom of its shallow down-channel from May 2015, near 92.80. But at the moment it's facing potentially strong resistance at its broken 20- and 200-dma's, at 96.43 and 96.63, respectively (it closed today at 96.27 after making a high at 96.42).


Gold continuous contract, GC, Daily chart

For a while I've been showing an upside projection for gold near 1415 for the completion of two equal legs up from December 2015. But after yesterday's sharp spike back down and today's consolidation I'm beginning to wonder if we've seen the high for now. The top of a rising wedge pattern (trend line along the highs from February-July) crosses the 1415 projection the end of next week and therefore it remains a possibility. But the weakening momentum, as shown on the daily chart's MACD, as well as RSI, is not looking so good for gold bulls. It's trying to hold onto its 20-dma, at 1339.20 (today's close was 1341), but if that doesn't hold then it will likely test its 50-dma next, currently at 1310 and rising. A drop below the bottom of the rising wedge (uptrend line from December 2015), currently near 1275, would be more bearish but as long as it holds inside the rising wedge there is the potential for another leg up.


Gold COT report, 2007-July 2016, chart courtesy tradingster.com

A big strike against gold bulls is the COT report, which shows commercial positions vs. non-commercial. Another name for these two would be "smart" money vs. "dumb" money. The message from these two does not necessarily make a good market timing tool but it's always best to keep an eye on this information so as to be aware of risky times to bet against the commercials who are currently in a larger net short position than any time in the last 10 years (as far back as this chart covers). At the same time the non-commercials (you and me, mutual funds, ETFs, etc.) are in their largest net long position in the past 10 years. This is not a good time to betting on the long side for gold.


Oil continuous contract, CL, Daily chart

If a draw a parallel down-channel for the oil's pullback from June's high, the bounce off the August 3rd low made it up to the top of the channel today, as well as the broken 20-dma, both near 43.24. This could be a back-test that will lead to a continuation lower but obviously it would be at least a little more bullish above 43.24 (today's high was 43.39 but closed at 42.87). There is no bullish divergence at the August 3rd low and therefore there's a good chance that low will at least be tested.


Economic reports

There were no economic reports today and there will only be a few Tuesday morning but nothing market moving. Friday will probably be the only morning when there might be some market-moving economic news.


Conclusion

I'm seeing plenty of resistance for the stock market indexes just overhead and that in combination with price projections tells me we could be looking for just one more new high to complete the leg up from June 27th. That in turn could complete the larger rally pattern from February and set us up for a much more significant decline. But a larger bullish pattern cannot be ruled out yet, which calls for just a pullback to correct the rally from June 27th and then continue strongly higher. I have trouble believing in the more bullish scenario but then again I didn't think we'd still be rallying now. Price is king and we'll have to let it lead rather than follow our bias. Just be careful chasing a new high from here since I think there's a very good chance it will be followed by a strong reversal back down, possibly before the week is over.

Good luck and I'll be back with you on Wednesday to see how that "top" is developing (or not).

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