The Thanksgiving holiday-shortened week is typically bullish and this one kept the "tradition" alive. The rally is now extended (and the bond market selloff is also extended), especially the small caps, which makes it a risky time to bet on the long side. But the bullish sentiment says investors are going to be looking for dips to buy and that could keep up the buying pressure.

Today's Market Stats

Not surprisingly, and in spite of the strong rally off the November 4th lows, this week has continued the "tradition" of a bullish Thanksgiving week. The bulls are certainly in a thanks-giving mood as the indexes continue to press higher. The market is now a wee bit overbought but we all know the market can remain overbought (or oversold) for much longer than most think possible. The ones rewarded in this market are the true believers in the idea that the rally is going to take us much higher into next year. In the meantime the bears stare in amazement that the market is even rallying at all after the Trump election.

Into the November 4th low SPX had dropped nearly two weeks and the decline appeared to be accelerating. Most market pundits turned bearish as the election approached and it appeared Clinton might be in trouble. On Monday, November 7th, the market gapped up after learning Clinton once again was going to escape further FBI scrutiny and rallied hard. There was a little bobble following the election of Trump but the bulls were not to be thwarted, regardless of the election results.

The decline into the November 4th low has now been completely reversed and we're getting new all-time highs this week. All the hand wringing and gnashing of teeth at the beginning of November has turned into unbridled bullish enthusiasm (as seen in the Investors Intelligence bull-bear numbers). Bulls have once again been convinced that buy-and-hold is the only way to go and for the past 7+ years there's been no denying that they're right. The risk of course is that those who are convinced of this "fact" are the ones who will be most hurt when it stops working.

That is of course the big question -- will the market suffer a decline worse than the 2007-2009 decline, which was worse than the 2000-2002 decline? I believe it will but certainly I'm in the minority with that belief. That actually makes me more comfortable in my belief since we know the market likes to fool the majority when the majority believe in something. Just look at the rally following the Trump election when more than 90% of the pundits believed the market would suffer at least a 5-10% correction (if not crash) following a Trump victory.

There appears to be a strong belief in inflation and higher rates, which has effectively killed the bond market (driving yields higher) and sent the U.S. dollar strongly higher. Both of these do NOT support a rising stock market and therefore the euphoria in the stock market deserves to be questioned. Is it just a relief rally, albeit a strong one, or is it something more bullish? Interest rates have spiked too much too fast and should be hurting the stock market. One or the other is going to correct and I'll show where those corrections could happen.

There were a slew of economic reports this morning since a lot were issued today instead of tomorrow (Thanksgiving holiday) but the market largely ignored them since it doesn't really matter. The market continues to ignore anything that doesn't fit the current bullish agenda. The one thing that was bullish was the Durable Goods orders, which came in stronger than expected. That will help the Fed's case for a rate increase next month. But with the bond market already showing higher rates it's now the Fed that has to play catch-up (which it usually does since it rarely leads the bond market).

The FOMC minutes released at 14:00 barely caused a ripple in the market since the market has already priced in the probability of a rate increase. Or I should say the bond market has priced it in; the stock market has likely not priced it in and has jumped way out ahead of itself.

I'm going to start tonight's chart review with the RUT since it's the one that's been on fire this month. When it's rallying it's hard for the bears to make any headway with any of the indexes (although the relative weakness in NDX has been one area for them to play). When the RUT turns back down from its current rally it will provide a heads up for at least a trader to play a pullback.


Russell-2000, RUT, Weekly chart

Back in February, March and April, especially when it climbed above 1080, I was wondering if the RUT might play out the last leg of a megaphone pattern off its March 2014 high but I thought at the time "nah, that would be too strong of a rally in a market that had already run too far to the upside." But it was the 3-wave pullback from the June 2015 high into February 2016 that had me thinking about the possibility. Following the September high and the rollover into the November low I thought it did a nice job completing a 3-wave bounce pattern and would start back down to a new low. Now just 3 weeks later and nearly 200 points here we are with the RUT about 4.4% away from the top of the pattern, near 1400. The top of a parallel up-channel for the rally from February is currently near 1360 and could be the immediate upside target but if the bulls hang on through December we could see the top of the megaphone tagged by early January. Not until the RUT drops back below its June 2015 high at 1296 would I turn at least a short-term bearish.


Russell-2000, RUT, Daily chart

There's a short-term projection for the RUT near 1250, which is only 8 points away and I see that possibility for Friday to cap off a strong Thanksgiving week. But today's rally made it up to the trend line along the highs since July and it's possible we'll see the start of at least a larger pullback from here. If the RUT drops below the November 15th low near 1290 it would confirm the leg up from November 3rd had completed. What form the next pullback/decline takes will provide the clues needed to help determine whether or not there will be another leg up into the new year.

Key Levels for RUT:
- bullish above 1350
- bearish below 1290


Russell-2000, RUT, 60-min chart

Diving in closer to the RUT's rally from November 3rd, it counts well as a 5-wave move and at this point I'm watching and waiting for the 5th wave (the leg up from November 15th) to complete. Confirmation of completion of the rally would be a drop below this morning's low at 1327, which would confirm a breakdown form the up-channel that it's been in since November 15th.


S&P 500, SPX, Monthly chart

There's an interesting fractal pattern that could be playing out and since these are often good predictors of market moves (the same pattern tends to repeat since they're reflections of sentiment swings). The first chart is a monthly chart for SPX and it shows a 3-wave pullback from 2000 into the 2009 low. That's been followed by a 5-wave move up into the current high. The trend lines on the charts are just something I'm watching and not germane to this discussion but it is interesting to see the trend line along the highs from March 2000 - May 2015 and how price has stalled at that line since July. Note that the March 2000 high is the 3rd wave in the longer-term rally for last century and the trend line goes from that 3rd wave through the 3rd wave of the rally from 2009 (the August 2015 high). The 5th wave of the rally from 2009 is showing significant bearish divergence against the 3rd wave, as expected. So we have a 3-wave pullback followed by a 5-wave rally up to the trend line through the 3rd wave highs. The weekly chart that follows shows the same pattern.


S&P 500, SPX, Weekly chart

As mentioned above, the May 2015 high fits as the 3rd wave of the rally from 2009 and that was followed by a 3-wave pullback into the February low (similar 3-wave pullback as 2000-2009 shown above). That's been followed by a 5-wave rally into the current high and note the trend line along the highs from 2000-2015 -- it's going across the 3rd wave of the rally from February and now the current rally has brought SPX up to the trend line and showing significant bearish divergence (as expected for the 5th wave). This fractal pattern is no guarantee that the rally is about to complete but it's a warning that it just might. Considering the daily chart is overbought I think it's a risky time to challenge the potential bearish meaning from this comparison.


S&P 500, SPX, Daily chart

Following the November 4th low SPX is now into the 5th wave of the rally from February and the daily chart shows at least a little more upside potential if the bulls can keep things going for the rest of the month. A broken uptrend line from February-June is currently near 2218 and will be near 2223-2224 at the end of the month. This 2223-2224 level could be important, if reached, because it's the 127% extension of its previous decline (the 4th wave pullback from August into November) and that's an important extension to watch for a possible reversal. SPX stays bullish above 2194 but a drop back below that level would be a bearish warning sign.

Key Levels for SPX:
- bullish above 2194
- bearish below 2151


Dow Industrials, INDU, Daily chart

Following the Dow's descending wedge into the November 4th low (with the typical small throw-under below the bottom of the wedge before reversing hard) the rally ran straight up into its broken uptrend line from February-June, consolidated sideways for more than a week and then started up again on Monday. It has climbed back above its broken uptrend line but is now approaching the trend line along the highs from April-August, currently near 19125. A rally above 19130 would be more bullish but watch to see if resistance at the trend line holds, especially since its overbought and showing bearish divergence against its November 15th high. Keep in mind that the rally from November 4th fits as the 5th wave of the rally from February and as such could lead to something much more bearish than just a pullback correction of the November rally (which is the reason I wanted to show the fractal pattern on SPX).

Key Levels for DOW:
- bullish above 19,130
- bearish below 18,853


Nasdaq-100, NDX, Daily chart

The techs were relatively weak again today while the Dow and RUT showed relative strength (an odd combination). Yesterday NDX left a small star doji near resistance -- its broken uptrend line from September-October (the bottom of a rising wedge) and a trend line along the highs from July-November 2015, which is the trend line where NDX struggled in September and October. Yesterday's gap up, star doji and then today's gap down created an evening star reversal pattern and the bulls need to rally NDX above yesterday's high at 4884.63 in order to negate the signal. It could hold on during Friday's half-day session but at the moment this one is a sell.

Key Levels for NDX:
- bullish above 4900
- bearish below 4780


Semiconductor index, SOX, Weekly chart

I like to see the SOX support a rally in the techs and it's been doing well, including today since it at least finished in the green. But this is one of the sectors that has me wondering how much upside potential is left to the current rally. The wave count for the rally from February looks to be in its 5th wave (the leg up from November 10th) and it is now again up against the top of a parallel up-channel for the rally from February. Today it left a little doji star with the high at the top of the channel, which puts it in the same position as NDX -- if it gaps down Friday morning it would create a sell signal. In the meantime I see a little more upside potential to 905-906 where it would achieve a 62% retracement of its 2000-2002 decline. But it's not something I'd bet my money on.


10-year Yield, TNX, Weekly chart

With the strong selloff in the bond market, with the assumption that the economy is going to heat up and inflation is going to increase, yields rallied strong. This drives up the cost of borrowing, including mortgages, and that in turn will put downward pressure on the economy and should put downward pressure on the stock market. Certainly the rate at which yields have increased is something that should be hurting stocks and I'm sure that disconnect will be corrected but that's another discussion. For now I'm watching to see where yields might stop and at the moment TNX might be there.

Last week I discussed my belief that we're in for a period of disinflation and a reader questioned me on that since it's a minority opinion. Certainly the selloff in bonds the past couple of weeks challenges my assertion. But higher rates will choke off economic growth and those with adjustable rate mortgages are going to find it harder to make payments. Auto loans will be at higher rates and a decline in auto sales would be another negative.

My assertion that we're heading for a period of "disinflation" has to do with debt destruction, which can be done by paying off debt or declaring bankruptcy. Both decrease the amount of debt and that's deflationary. Expanding the number of loans and increasing the velocity of money is what creates inflation (something the Fed has been trying for years to accomplish) but we've been in a period of declining velocity of money and if the debt overhead declines it's not inflation we'll have to worry about. It's my opinion that traders are looking in the wrong direction and are going to be surprised by the D-monster sneaking up on them.

But back to bonds, Deutsche Bank reported that they're seeing investors flee from bonds at the fastest pace since at least 2013. At the same time, as reported by the Wall Street Journal, traders have increased their bets to an all-time record that interest rates will rise, which is a very large swing from sentiment just a few months ago. You know what happens when too many bet the same way and it's likely those traders are going to be disappointed.

RSI on the TNX weekly chart below has risen above 70, which is a warning sign that the trend is in danger of reversing. TLT, the bond ETF, has dropped down to its 200-week MA and looks like it could find support there. TLT has declined about 8% below its 50-dma and it rarely strays more than 3% from that MA. That's obviously an extended move (more than has been seen before) and it's itching for a correction.

Yesterday TNX rallied up to its downtrend line from June 2007 - December 2013, tried to rally above it today but closed on the line. With the overbought condition I think it's more likely the downtrend line will hold. Whether it will pull back just a little and then head higher or instead start back down can't be known yet. It will be the form of the pullback/decline (assuming we'll get one from here) that will provide clues for what to expect next.


SPX vs. HYG, Weekly chart

While on the subject of bonds, the junk bond fund, HYG, is not keeping up with the stock market and that's simply another warning sign at the moment. The desire for the risk-on trade by getting into stocks, especially the riskier small caps, is not showing up strongly in the junk bonds. Yes, HYG has bounced off its November low with the stock market but it has retraced only about half of its October-November decline and is currently showing a large bearish divergence against the stock market. Meanwhile the bulls just keep whistling past the graveyard...


KBW Bank index, BKX, Daily chart

The banks have responded strongly to the expectations for a rate increase from the Fed in December and it certainly looks like it's now priced in. One can only imagine what would happen if the Fed makes a pass again but regardless, we could be seeing a buy the rumor, sell the news setting up. BKX is significantly overbought on the daily and weekly charts and at the same time it has run up into potentially significant resistance. A previous uptrend line from February-May, which was broken in June, which is parallel to the current uptrend line from June-September, is currently crossing the trend line along the highs from April 2010 - July 2015, near 86.80. Today's high was 86.82 and as overbought as it is there is a strong likelihood that resistance will hold. Assuming we'll see at least a pullback in the coming week (that's admittedly a questionable assumption in the current market) we'll then get some clues about whether to expect a stair-step move higher (bold green) or instead the start of a more serious pullback/decline (bold red).


Transportation Index, TRAN, Daily chart

The TRAN's rally now has both the daily and weekly charts overbought and now it has run up to the top a parallel up-channel from June. Only slightly higher, near 9020, is the top of a parallel up-channel for the rally from February. The tops of the two up-channels cross near 9050 in the first week of December. Betting on the long side from here (today's high was near 9004) is too risky in my opinion.


U.S. Dollar contract, DX, Weekly chart

The US$ is bullish above its previous highs near 100.60 but I remain unconvinced the rally will continue much higher before at least pulling back for a test of support-turned-resistance at 100.60. If that level holds as support and then the dollar rallies above its high it would be a stronger buy signal. At this point we could be seeing a megaphone pattern off the 2015 high so the risk for dollar bulls is a drop back down to the bottom of the megaphone, which will be near 91 by next spring.


Gold continuous contract, GC, Daily chart

Gold broke down further today and in doing so it dropped below the bottom of its parallel down-channel for the decline from July, currently near price-level support at 1199. It made it down to the next price-level support near 1180 and might start a bigger bounce off this support level. But it would obviously be more bearish if support at 1180 doesn't hold. The 62% retracement of its rally from November 2015, near 1172 is also a potential support level. If that doesn't hold then the next downside target would be 1116-1121 to meet a price projection for its decline and the 78.6% retracement. Breaking below the bottom of the down-channel puts it on a stronger sell signal which can only be negated with a rally above today's high near 1215. But with silver at strong price-level S/R near 16 I think there's a good chance for at least a bounce.


Oil continuous contract, CL, Weekly chart

At the beginning of August oil had pulled back to its 50-week MA and bounced back up to test its June high. The pullback into November was another test of its 50-week MA and that led to another bounce into this week's high at 49.20 (yesterday). I see the possibility for an ascending triangle pattern off the June high, which could mean we'll see oil consolidate into next spring before starting another rally. It could of course rally from here following a double-test of the 50-week MA but so far the bounce off the November 14th low is a 3-wave move up that achieved two equal legs up at 48.44 for a possible a-b-c bounce correction to the impulsive decline from October 19th. That's a bearish setup for the resumption of the decline from here. Oil and the stock market have rallied in synch and therefore a selloff in oil could put downward pressure on the stock market.


Economic reports

You can see the number of economic reports that were released today and how quiet it will be Friday morning. The market is ignoring these reports anyway and will start to focus more on what it thinks the Fed will do at its next FOMC meeting in December.


Conclusion

We've had the kind of rally that runs over anyone even thinking about shorting it. The BTFD crowd is pleased to see their buy-and-hold strategy working so well, especially after the worry following the decline into the beginning of the month. Now there's very little doubt by investors that the rally will continue much higher (BIG swing from bearish sentiment to bullish sentiment). Those who believe the market has much higher to go will be anxious buyers of the next dip after swearing to themselves that they're not going to let another rally get away from them. In my opinion that's a dangerous position to take since the longer-term pattern is setting up something more bearish than just a pullback.

But we'll have plenty of time to consider the bullish vs. bearish potential after seeing what kind of pullback comes next. If it's a choppy pullback/consolidation then I'll join the bulls and buy the dip. But if we see a sharp impulsive decline I'll then look for a bounce correction to get short. In the meantime trade carefully since the rally is extended and several indexes are up against potentially tough resistance. We might see the rally hold up during Friday's half-day session but even that is not a sure thing at this point. Next week could see a hangover following the rejoicing by the bulls.

Enjoy Thanksgiving and I hope you have great food with family and friends. It's my favorite holiday since there are no expectations of presents and the only intent is to see how much food your belly can hold, how much football you can watch and to share it all with the people you love. It doesn't get much better than that.

Have a great long weekend 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