Tuesday and Wednesday saw a bit of a shift in which indexes were doing well and which were not and that has created some confusion about the market's direction. Opex week continues the tradition of being more bullish than bearish but the rally from November's lows is looking vulnerable to at least a larger correction.

Today's Market Stats

Depending on which index you look at you'll get a different picture about what's happening in the stock market. While the RUT was on fire last week and through Monday it has slowed down and struggled to hold onto its highs. The weaker indexes, such as NDX, have been stronger since Monday's lows but it's not clear if they're seeing a dead cat bounce or the start of something more bullish. The sloshing back and forth of money between sectors and indexes has been strong and this week we're seeing some of that money reverse course. This can be seen with the bonds as well.

Investors have been attempting to get in front of the stampede into stocks that are expected to do better under a Trump administration than the Obama administration. Just one example is in the coal sector, which Obama tried to snuff out. Arch Coal (ARCH) shot up almost $20 (+30%) after the election but has given back about a third of that since Monday's high. Some short covering in the stock and some real buying interest created the spike and now this week we're seeing some profit taking in those that rallied hard since it's recognized that the move might have been a little too much, too fast. From a bearish perspective, some of the indexes, such as the RUT, might be seeing its last hurrah before a much deeper market correction takes hold.

Last week the big-cap tech stocks (think FANG) were crushed as sellers in those high-flyer stocks took their profits and rolled the money over into previously struggling stocks. The small caps (RUT) benefited greatly by the rotation but as mentioned above, it too has slowed as investors decide not to chase those stocks higher right now. From a bigger-picture perspective, it's hard to discern whether the past week's moves have been simply realignment of investment positions prior to another leg up for the broader market or if instead it's part of the scrambling that's done just prior to a major peak for the market.

At previous major market tops, such as in 2000 and 2007, we saw the riskier stocks (techs and small caps) make new highs without the blue chips. It's as if the final buyers, typically retail investors, become convinced that they need to get into these stocks and typically do so at the top (the last of the buyers and then no more to follow). But this time the techs did not participate with the small caps and the Dow Industrials were right there with the RUT. Much of this had to do with specific sectors doing much better, such as the big banks, but the end result leaves a lot of confusion for those who study "normal" market patterns.

Just as this past election was anything but normal, we are finding the same thing in the stock market. Be sure to analyze specific stock/sector/index charts before making a trade since a general market direction is currently providing a mixed message. We have to look at individual charts to try to discern the answer to the question about direction and wait for more price action to see if we get a common answer out of the multiple charts to help us better guess the direction of the broader market (which has a significant impact over time for most stocks).

This morning's economic reports were largely ignored since there weren't any major surprises. The PPI came in less than expected, 0.0% vs. +0.3%, which was a drop from the +0.3% in September. The core PPI for October dropped -0.2% vs. expectations for it to stay at the same +0.2% that was reported for September. No inflation at the producer level helps the Fed in their desire to raise rates, which they've been communicating they want to do next month (and may be forced to do regardless of what happens since their credibility is increasingly on the line). At least for now it would appear they don't have to be worried about inflation.

The bigger worry, in my opinion, is deflation, which is something very few express concern about. But with debt at sky-high levels across the board (governments, corporations and personal) it will be the destruction of debt through bankruptcies and paying down the loans that will create a huge deflationary wave in the coming years. The Fed has to worry about crushing any hopes of an economic recovery with a rate hike but I don't think they have to worry about inflation. Not yet anyway.

With the large move between sectors and indexes in the past week I noticed the S&P 500 index tended to remain somewhat in the middle of it all and remains one of the better market proxies. I'll start off tonight's chart review with its weekly chart.


S&P 500, SPX, Weekly chart

There's a large parallel up-channel that SPX has been trading in since the October 2011 pullback low. The last time it got near the top of the channel was back in late 2014 and all this year it's been trading in the lower portion of the up-channel, which shows general weakness as compared to the early part of the rally from October 2011. This matches the idea that the rally from February is the 5th wave of the rally from 2009 (the October 2011 low would be the 2nd wave pullback correction).

I show the potential for SPX to rally up to the parallel line near the middle of the up-channel (where the April and August highs stopped), which could see SPX hit 2250-2300 by the end of the year. Another possible upside target is 2223, which is the 127% extension of its previous decline (2015-2016) since that's a common target/reversal level. But there is still the possibility that the August high near 2194 was the final high and a back-test of the broken uptrend line from February, near 2189 by the end of the week, will be followed by a bearish kiss goodbye and a strong selloff. I consider the upside from here as very risky while we wait to see if we get a reversal signal.


S&P 500, SPX, Daily chart

The daily chart is a little messy but two things I'd like to point out is last Thursday's back-test of the broken uptrend line from February-June and achievement of a price projection at 2182.28 (with the high at 2182.30). That price projection is where it's possible the rally off the November 4th low completed the c-wave of a large a-b-c bounce pattern off the September 12th low. This is an expanded flat correction in EW terminology since the b-wave (September 22 - November 4 decline) made a lower below the a-wave (August 15 - September 12). The c-wave in this pattern typically achieves 162% of the a-wave, which is the projection to 2182.28. The combination of that achievement and the back-test of the broken uptrend line is what has had me thinking the short side should work. But I'm watching to see if we get another back-test, including a possible test of the August high, before aggressively turning bearish. As shown on the 60-min chart further below, I'd back off on the short side if it rallies above 2190, and especially 2194, and wait to see how it does near 2223 (if reached). Will we more likely see 2175 or 2200 for Friday's settlement number? Who knows, maybe back down to 2150 for a settlement number.

Key Levels for SPX:
- bullish above 2183
- bearish below 2151


S&P 500, SPX, 60-min chart

If SPX pushes higher this week I'll be watching for the possibility it won't get above 2189, which is where it would back-test its broken uptrend line from February and its downtrend line from August 15-23 (not shown on the daily chart above since it's practically coincident with the horizontal line off the August 15th high near 2194). It's also looking like we're completing a 5-wave move up from November 4th (with bearish divergence on MACD helping confirm the wave count). The vulnerability for bulls, from an EW interpretation, is that the leg up from November 4th will complete the 5-wave move up from February, which in turn will complete the 5-wave move up from 2009 (to complete the 2009-2016 cyclical bull market). This is the reason why I'm looking for a MAJOR top for the stock market and it could be within hours/days. At least that's the bearish potential and why I don't like the upside potential vs. downside risk.


Dow Industrials, INDU, Daily chart

The Dow had a strong rally off its November 4th low, which resulted from a big move into stocks that are thought to do well with expected policy changes out of the Trump administration. Stocks like CAT did well since they'll sell more equipment with infrastructure spending. As the US dollar rallied it strengthens international companies like CAT, GE and IBM. The big banks, like GS and JPM, did well as people expect these banks to do better with an assumed rate increase by the Fed next month and since they'll participate in the new loans expected to fund construction projects and international business. Whatever the reasons, the Dow rallied +5.9% into Monday's high while SPX rallied +4.7%. Both are respectable rallies for sure but the Dow's outperformance like that is a little unusual. Too much, too fast? That should be a concern, especially since the VIX collapsed at the same time.

While the Dow currently sits 200 points above its August high at 18668, the same cannot be said about the NYSE advance-decline line. The a-d line is lagging badly, which shows the rally has not been broad-based and that should be very worrisome to bulls. It's the first time in a long time that new highs are not being supported by a new high for the a-d line and that's a strong warning about the possibility a top is being made around here. The higher prices go without a new high in the a-d line the more vulnerable it becomes. The last time a divergence of the same magnitude was seen was at the May 2015 high, which led to a -16% crash into the August 2015 low. The current divergence is also greater than what was seen at the 2007 top. Buyers beware here.

As for the Dow's chart, it has rallied up to a trend line along the highs from November 2015 - August 2016, near today's high at 18910. I see the potential for a rally up to at least the trend line along the highs from April-August 2016, near 19100, but it's not something I'd bet on (too risky). The pattern for the rally from November 4th suggests a drop below last Friday's low near 18737, would signal a top is likely in place. Back below the August high at 18668 would leave a failed breakout attempt and confirmation that either a large pullback is in progress or potentially something much more bearish.

Key Levels for DOW:
- bullish above 18,935
- bearish below 18,668


Nasdaq-100, NDX, Daily chart

As mentioned above, NDX was pummeled last week but has been relatively strong since Monday's low. The bounce into today's high made it up to its broken 20-dma, near 4789, and closed marginally above it. The broken 50-dma is a little higher, near 4811, and then price-level S/R near 4816. It would obviously turn more bullish above its November 10th high near 4856, but the bearish pattern calls the bounce just a correction and will be followed by strong selling.

Key Levels for NDX:
- bullish above 4860
- bearish below 4656


Russell-2000, RUT, Daily chart

The RUT's rally has it approaching the trend line along its highs from April-June-November, currently near 1319, and that's the upside potential I see for this week. It would be bullish above the line (watch for a head-fake break and then failure). But the RUT has stalled and the risk is for a small rolling top (intraday pattern) this week could lead to a strong reversal back down next week.

Key Levels for RUT:
- bullish above 1320
- bearish below 1257


Volatility index, VIX, Daily chart

With the stock market rally we've seen a collapse in the VIX and once again, it looks like a move that's gone too far, too fast. The setup on November 4th, with the tag of its downtrend line from January-June, was for a reversal back down, which had forecasted a stock market rally following the election. Now it's getting close to the uptrend line from August-September, currently near 12.80, and while there's no guarantee it will get there or turn there, the pattern for its decline suggests looking for a reversal back up soon, which makes the uptrend line a great spot to watch closely, especially if it's hit by the end of this opex week.


10-year Yield, TNX, Weekly chart

The other big mover in the past week has been bonds and in fact a much bigger move than has been seen in a long time. Bonds sold off hard, which has driven yields higher and many are claiming this is the kickoff to a longer-term selloff in bonds with the completion of the 30-year bond bull market. I remain unconvinced of that, with my belief that we're in a period of "disinflation" and which will become much more of a deflationary period. But it's hard to argue with the recent move and it's either the middle of what will become a stronger move or it's an overreaction to what many think will drive interest rates higher in the coming year (government spending, inflation, etc.).

The 10-year yield gapped up on Monday, following the strong rally last Wednesday and Thursday (the bond market was closed last Friday) and the week's candle, so far, is a spinning top doji just above the 200-week MA at 2.207%. Watch for the possibility that this week's candle is followed by a red candle next week, which would create a candlestick reversal pattern. That would be especially true if it gaps down next Monday and leaves behind an evening star doji. That's just speculation for now and if bonds continue to sell off this week and next we could see TNX head up to its downtrend line from June 2007 - December 2013 (log price scale).

The one caution we have with the bond market's strong move is that it's another too much, too fast kind of move. Gradually rising rates might not disturb the stock market's rally (one reason why the Fed has been so careful to introduce the idea of slowly raising rates) but a very fast rise in rates, as we've seen, leaves stocks very vulnerable to a more significant correction. The weekly RSI is now more overbought than it's been since its 2013 high, which doesn't mean it will reverse here and now but it's certainly vulnerable to that happening.


KBW Bank index, BKX, Weekly chart

With the big rally week for the banks BKX made it near the top of a broken uptrend line from February, which is a line that's parallel to the uptrend line from June. This shows the similarity between the rallies and with this week's test of the broken uptrend line, near 85.50, there's a good possibility it's topping out here. This week's candle, so far, is a shooting star after tagging resistance as well as achieving a price projection at 84.97 for two equal legs up from February. There's slightly higher potential to the trend line along the highs from April 2010 - July 2015, near 86.50. Monday's high was 85.92.


Transportation Index, TRAN, Weekly chart

The transportation stocks have rallied strong the past two weeks since investors must believe the economy is going to improve under a Trump administration and that that will then help the transportation industry. I have my doubts about that but the market is a little bigger than I am. However, the TRAN has reached a potentially important level for the bounce off its January low. Two equal legs up for a 3-wave bounce correction to the decline off its November 2014 points to 8775, which was achieved yesterday and again today (this morning) but it couldn't hold that level into today's close. The longer-term pattern suggests the TRAN is now ready to resume its decline that started off the November 2014 high. But if the buyers can keep up the pressure and the TRAN can stay above 8775 into next week we could see it head for a new all-time high. That makes it an important inflection point here and we should know over the next few days whether or not the current rally will get reversed.


U.S. Dollar contract, DX, Weekly chart

The US$ has rallied the past two weeks and finally made it up to the top of its sideways consolidation off the March 2015 high. The top of a shallow down-channel is near 100.30 and the dollar climbed above that level yesterday and again today but it's struggling to hold above that level. At this point it's not clear if the dollar is going to turn back down but that's my expectation. The pattern of the rally from May suggests it will remain inside the consolidation range and one more leg down into early next year would do a nice job setting it up for the next rally leg (above 105).


Gold continuous contract, GC, Daily chart

The dollar's rally has put some downward pressure on the commodities sector but more so for the metals. The metals have been in decline since topping back in July and gold's bounce off the October 7th low resulted in a back-test of failed support at 1308 in the beginning of the month. That was quickly followed by a bearish kiss goodbye and strong selloff into Monday's low and below its October 7th low. The back-test of support-turned resistance at 1308 was a classic setup for the bears. The bounce off Monday's low looks like a bear flag consolidation pattern and I expect gold to head lower to potentially stronger support at either its May 31st low at 1199 or price-level support near 1180, which goes back to lows in 2013 that acted as support until the breakdown and back-test in 2015. Gold then rallied back above 1180 in February so a drop back below that level would be more bearish for gold.


Oil continuous contract, CL, Daily chart

In last week's update on oil I had mentioned the leg down from October 19th looked close to completion and should set up a bounce correction before heading lower. The bounce off Monday's low looks to be that correction and while I'm showing a higher bounce into next week on my chart it's not required. At the moment it's struggling with its downtrend line from June-August, which it broke above at the end of September and then dropped back below on November 2nd. The back-test of that trend line could be followed by a bearish kiss goodbye from here. But a little higher it would back-test its broken 20- and 50-dma's, both near 47, which would also be a 50% retracement of its October-November decline. It could make it up to its broken uptrend line from August-September, near 47.80 by mid-week next week, or maybe even up to the 62% retracement of its decline at 48.21. But it has retraced 38%, at 45.92, and therefore the minimum expected bounce correction has now been met.


Economic reports

Thursday's economic numbers include the CPI numbers, which are expected to have ticked up from the September reading. Another zero or negative number might get some analysts mumbling something about "disinflation." Some housing numbers are not expected to change much but I noticed the home builders are struggling so the numbers could come in weaker than expected, which might cause the Fed to pause and at least think about whether or not it would be wise to raise rates. But then again I've never been accused of calling them the sharpest knives in the drawer.


Conclusion

For the past week, since the election results, we've seen a strong rotation out of some previously strong sectors into previously weak ones. But the quick rotation can actually be considered a sign of instability in the stock market and in the past week we had a few signs of trouble. I mentioned the deteriorating advance-decline line and in addition to that we had a cluster of Hindenburg Omen and Titanic Syndrome signals. As indexes test resistance we saw new highs and new lows last Friday each at 60-day peaks and the last time that happened was back in June 2008. The rest of that year was not kind to bulls who stubbornly held onto their long positions.

None of this says the rally will reverse here and now but they are additional warning signals and with some indicators pointing to the same conditions as we saw at previous important highs (2007, 2015) I think it's important to understand the risk here. Upside potential is once again dwarfed by downside risk and holding long positions overnight could be very risky. It goes without saying that holding short is risky, especially without any kind of confirmation that the market has topped. But the setups on several indexes have me nibbling on the short side (put options, risk it all, no stops) and I think we'll know by this time next week whether or not the market will turn down or possibly hold up into at least Thanksgiving next week (holiday-shortened weeks tend to be bullish). Trade carefully over the next several days.

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