We have a little more trading volume following the Labor Day weekend with the return of more traders to their desks but it hasn't helped move the market much. Market internals favor the bulls this week so they get the nod but there are enough warning signs to suggest caution about the upside.

Today's Market Stats

Traders are a little more active than we saw in August, thanks to the end of summer vacations, but they haven't been able to move the indexes much. Money is rotating, such as out of biotechs and into semiconductors (although that has switched in the past three days), and small caps have been getting a little boost. But the big-cap blue chips have not been able to break out of their sideways consolidations since July. The tech indexes and RUT look relatively strong but now they're also looking vulnerable to rally completions at any time. It's a tough time to pick a direction to trade.

There was very little in the way of economic reports to move the market today and even the Fed's Beige Book report at 14:00 managed only a small positive reaction but not much in the way of follow through. This morning's little rally was reversed and the indexes dropped into the red. The midday low was then followed by renewed buying, which reversed most of the morning's losses. The end result was a relatively flat day and mixed results across the indexes. The RUT had a relatively strong day and finished up +0.6%. Yesterday was mixed as well but the past two days saw market internals favor the bulls and with opex around the corner we could see some additional support enter the market.

It's not a good time for the bears (yet) but neither is it a good time to even think about being complacent about the upside. With opex next week and then a possible rally into end-of-month/quarter it's not a good time to be thinking aggressively about the short side. But the rally from February is looking tired (bearish divergences) and that suggest caution by the bulls. Both sides have to watch carefully and think hard before entering new trades.

There have been plenty of warning signs about this bull market rally that has extended further than most imagined it would so the chart below is hardly a reason to run out and short the heck out of this market. But it does make you wonder when, if ever, the market will again pay attention to anything other than what the Fed and other central banks are doing.

Typically the stock market "sees" about six months down the road and leads what the economy does. But that has been broken since the Fed became an activist and insists on a stock market rally. Since 2015 the GDP expectations have dropped precipitously from about 2.8% to 1.5% this month. That's not good for corporate earnings and typically the stock market leads this kind of information with a decline but not this time. The stock market has continued to make new highs while GDP drops closer to zero (and soon negative) so there's clearly a disconnect here. That gap between GDP expectations and SPX is an air pocket that will likely get filled and I don't think it will be by GDP growth.

GDP Expectations vs. S&P 500

As far as the current market condition, the price consolidation since mid-July continues to support the bulls since the consolidation is following a rally. The flip side is a rolling top formation, which could lead to a fast breakdown. Since the consolidation is typically bullish, a failed bullish pattern would typically lead to a fast breakdown, which is what usually follows a rolling top. So I point to the bullish pattern as a typical one but continue to stay aware of the potential for a fast breakdown. I'll start tonight's chart review with a look at the SPX weekly pattern.


S&P 500, SPX, Weekly chart

At the moment it's looking like we could see a large rising wedge pattern complete with another leg up in the rally off the February low. But that might mean a choppy pullback/consolidation into mid-October (to meet a cycle low projection) where SPX would hit its uptrend line from February-June near price-level S/R at 2135 (its May 2015 high). From there we could see an end-of-year rally to about 2270-2290 to reach the top of its rising wedge. That's the bullish view for the rest of this year.

The bearish view calls the 3-wave move up from February as just a correction within a larger A-B-C move down from the May 2015 high. The 2223 projection on the chart is where the b-wave (the 3-wave move up from February) would achieve the 127% extension of the a-wave (the 3-wave move down from May 2015 to the February 2016 low), which is typical for this kind of corrective pattern (expanded flat correction). The c-wave would likely achieve 162% of the a-wave, which projects down to about 1670 if it drops from here. It would like be a fast and strong decline, possibly hitting it before the end of the year. It's too early to tell whether the bulls or the bears will come out ahead here but as long as price continues to chop sideways/down it will keep the bullish pattern as the preferred wave count.


S&P 500, SPX, Daily chart

The daily chart shows a sideways triangle idea for the consolidation since mid-July. It's a bullish pattern but only for one more leg up to complete the rising wedge shown on the weekly chart above. The triangle would be potentially complete with one more leg down to the bottom, near 2160 by mid-September, and then a rally into the end of the month, possibly into October. The top of the rising wedge will be near 2230 by the end of September. A drop below 2160 would be a bearish warning sign and below 2147 (the August 2nd low) would negate the triangle pattern and make it look even more bearish. The next support level would be the May 2015 high near 2135 and then the last line of defense for the bulls would be the uptrend line from February-June, which will be near the April high at 2111 by mid-September. How the pattern develops in the next week should provide enough clues for how the rest of the month will likely go. Next week is opex so that could provide a bullish undertone for the market.

Key Levels for SPX:
- bullish above 2194
- bearish below 2147


S&P 500, SPX, 60-min chart

The 60-min chart shows just how choppy and whippy it's been while consolidating sideways. I see upside potential to the top of an ascending triangle (if it's not a sideways triangle as shown on the daily chart above), which is near 2194. It would be a bullish break above that level. Watch for the potential for a turn back down to the bottom of the channel, either from here or from 2194. It wouldn't turn more bearish until it drops below the channel and confirmed with a drop below the September 1st low at 2157.


Dow Industrials, INDU, Daily chart

The Dow's pattern is the same as SPX and currently looks like it could be consolidating in a sideways triangle, which would look complete with one more leg down to the bottom of it, near 18300, before launching the final leg of the rally from February. The upside potential shown on the chart is near 19K by the end of the month. A drop below the August 2nd low at 18247 would negate the bullish triangle pattern, in which case I'd look for a drop to at least its uptrend line from February, which will be near 18090 by the end of next week.

Key Levels for DOW:
- bullish above 18,632
- bearish below 18,247


Nasdaq-100, NDX, Daily chart

For the 3rd time in as many weeks NDX is trying to get through resistance at its March 2000 high at 4816. The bearish divergence since July is not encouraging for bulls but at least for the short term, yesterday's rally above 4816 was followed by only a small pullback to that level before bouncing back up this afternoon. A 3rd day, tomorrow, closing above 4816 would leave a better confirmation that resistance has been broken. Otherwise this could be a triple top in the making. The problem for bulls though is that there might not be much more upside potential if the trend line along the highs from July-November 2015 stops the rally, which is currently near 4865. It would be more bullish above that level and bearish if it drops below its December 2015 high near 4740.

Key Levels for NDX:
- bullish above 4865
- bearish below 4740


Semiconductor index, SOX, Daily chart

Helping the tech indexes this year has been the semiconductor sector, as many investors have played the idea that self-driving cars and trucks and other innovative products will consume a larger number of computer chips. We've seen a rotation out of the hot biotech sector, where BTK is down about -12% this year, and into the semis, with the SOX being up about +21% this year. But the SOX rally could be coming to an end, at least short term, and that might mean a rotation back into the biotechs (or some other as yet identified tech sector). Last week I showed the SOX weekly chart and how it has pressed up against the top of a parallel up-channel for this year's rally and a price projection near 808. The highs for the past 3 weeks have been near 807, 811 and 809 and the weekly oscillators are curling over from overbought with the decline over the past 3 trading days. The daily chart shows bearish divergence since the July 27th high and the pattern for the leg up from June 27th counts complete. I think a long position in this sector is a risky position.


SOX relative strength to SPX, Monthly chart

Another way to judge sectors is by looking at its relative strength (RS) vs. the broader market. The chart below compares the SOX to SPX and as you can see it has "rallied" above horizontal resistance near 0.35 that has held back the RS of the SOX since 2007. It can certainly go higher, as it did in 1995 (1.01) and March 2000 (0.88) but those relative highs since 2000 continued to decline into 2008 and have been stalled at 0.35 on subsequent rallies in this sector. Are we seeing resurgence in the importance of semiconductor stocks? Again, that's quite possible, but with overbought conditions from monthly, weekly and daily chart and bearish divergence vs. the 2015 lower price high, this is a risky time for the semis. The short-term pattern for August shows a choppy move higher which has it looking like an ending pattern, which means the 3-day decline could be just the start of a larger correction and maybe something more bearish.


Biotechnology index, BTK, Daily chart

If money is getting ready to rotate out of the semis and back into the biotechs we should see a price pattern for BTK that supports that idea, along with the supporting pattern for the SOX that suggests it's ready for at least a pullback, and currently BTK's chart does support the idea that it will head higher. The daily chart of BTK shows a 3-wave pullback from August 1st that achieved two equal legs down and it held support at its 50- and 200-dma's. Yesterday it rallied back above its 20-dma and pushed higher today (SOX down, BTK up) and it's looking like we could see a rally at least up to the top of a parallel up-channel for its rally from February, currently near 3600. But the rally pattern from February looks corrective, which means the entire rally should be retraced and possibly after just one more new high for the bounce pattern. So I wouldn't get excited about this sector other than perhaps a short-term bullish move. Not shown on the daily chart, there is a broken uptrend line from November 2011 - April 2014 that is currently near 3550 when viewed with an arithmetic price scale, which puts it close to the top of the parallel up-channel for the bounce off the February low. That broken uptrend line is where the rally stopped on August 1st.


Russell-2000, RUT, Daily chart

The RUT had a pretty good day today, up +0.60% while the other indexes were basically flat. It is now again approaching the trend line along the highs since July 12th, currently near 1268. This line has repeatedly stopped rallies since July and with the bearish divergence since then it's hard to believe the current rally will have any better luck. A longer-term trend line along the highs since April-July is now only slightly higher, near 1270, so there's double resistance at 1268-1270. The choppy rally since August 3rd looks like an ending pattern and we could be near the final high for the rally from June. It would be more bullish above 1272 but at the moment I think that's a low-probability event (but we're only talking about probabilities).

Key Levels for RUT:
- bullish above 1272
- bearish below 1215


30-year Yield, TYX, Daily chart

Bonds have barely moved since July 21st when yields peaked following the July 8th lows (highs for bond prices). As can be seen on the chart of the 30-year yield, the consolidation off the July 21st high has created a sideways triangle and the tight coil should be ready to break soon. The typical move from here should be up (prices down) and another equal leg up from here targets 2.463%. It might make it up to resistance near 2.5% but once the 3-wave bounce off the July 8th low completes (assuming we'll get the 3-wave bounce pattern) it should then lead to another decline. It's possible it will simply collapse from here and a drop below the July 29th low at 2.18% would negate the short-term bullish triangle.


Transportation Index, TRAN, Daily chart

The transports got a good boost today and as you can see on its daily chart, it looks like a clean break of its downtrend line from August-November 2015. The upside target is the April high near 8150 and the 62% retracement of its November 2014 - January 2016 decline, near 8200. The only thing the bulls need here is for the oscillators to catch up since MACD is showing a significant bearish divergence against its July high.


U.S. Dollar contract, DX, Weekly chart

The US$ is struggling to get through its 50-week MA at 96.45 and last week's high was 96.25. It should proceed higher but the choppy price pattern makes it difficult to figure out the short-term pattern. Not much to say about it as long as it stays trapped inside its 92-100 trading range.


Gold continuous contract, GC, Weekly chart

The short-term pattern for gold continues to support the idea for another high and its downtrend line from September 2011 - October 2012, near 1400, and a price projection at 1417.50 remain good upside targets. Gold would be more bullish above 14718 but at this time I'm not expecting it to rally higher. A drop below the September 1st low at 1305.50 would signal the start of a larger pullback/decline sooner rather than later.


Oil continuous contract, CL, Weekly chart

Short term it's looking like oil could get another leg up to create a larger bounce pattern off its September 1st low. Two equal legs up points to 47.37 but it might find trouble at its downtrend line from June 2014 - June 2016, currently near 47. It poked above this downtrend line on August 18-19 but then dropped back down, leaving a failed breakout attempt. Obviously it would be more bullish if it can break the downtrend line and stay above it for at least 3 days. If that happens we can then look for another test of price-level resistance near 51 to see if oil really can break out to the upside. Otherwise the larger pattern supports the idea for lower lows in the coming year.


Economic reports

There's not much in the way of economic reports for the rest of the week to move the market. We should instead see the influence of opex week start to more of an effect.


Conclusion

The RUT is chopping its way higher, which looks like an ending pattern, and the tech indexes look like they could soon put in the final touches to their rallies. In the meantime the blue chips look like they could consolidate for another week or two before pressing higher into the end of the month so we have enough differences to suggest caution by both sides. Either the blue chips will end up dragging the techs and small caps higher or the sideways consolidation patterns for the blue chips are instead rolling tops, in which case we can expect a fast breakdown and it could start at any time.

At this time, unless the blue chips look to be holding their bullish continuation patterns, I don't feel confident enough about the upside vs. the downside risk. But if the consolidation patterns continue through next week I'll start to feel a little more bullish about the idea for an end-of-month/quarter rally to get the funds their closing highs (as they chase performance). We might see money rotate into the safety of the big caps, which is why we could see the blue chips drag the other indexes higher but with weaker relative strength.

The choppy pattern leaves us guessing what could follow and it's a risky time for both sides to trade. There are good times to trade and not so good times and I think this is the latter. Stay safe and wait for a good pitch before taking a swing.

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