The stock market's indexes haven't been able to add many, if any, points to the board since peaking on December 13th but the choppy pullback/consolidation keeps things potentially bullish if the bulls step back in quickly. Otherwise we have some warning signs that tell us the seasonally bullish time ahead could run into trouble this year.

Today's Market Stats

Trading volume continues to wither as the week progresses and today's volume was near the level seen on previous slowest days of the year and it's now approaching what we saw during the week leading into the Christmas holiday last year. Volume will likely continue to slow but that often helps the bulls this time of year as the sellers leave and wait until after the holidays before they launch their attack. I think some short sellers are licking their chops in anticipation of a correction to the Trump rally, which has been built mostly on hope.

The stock market usually rallies in the final 5 days of the month, between Christmas and New Year's Day and then a couple of days into January, which has earned the nickname the "Santa Claus" rally. The risk this time is that we've had such a strong rally preceding this period and the market could suffer the problem of running out of buyers. But that's only conjecture and at the moment we have a seasonally bullish period in front of us and a bullish price pattern that hasn't turned bearish yet.

The past is never a guarantee how the future will unfold but according to Stock Trader's Almanac, the S&P 500 has averaged a gain of +1.4% during the Santa Claus rally since 1950. Going back further, the Dow has rallied during this 7-day period 75% of the time for an average gain of +1% since 1986. According to MarketWatch, the average 7-day gain in all other periods, going back 120 years, is +0.1% so the Santa Claus rally is a 10x improvement over the average of 7-day periods. For the Dow, a +1.0%-1.4% rally would kick it up to about 20200-20300. But the short-term price pattern since last week is starting to show some signs of trouble if the buyers don't step back in quickly. And as I'll show for the Dow, there is a possible short-term ending pattern since last week that could shoot Santa out of the sky (hopefully not before he unloads his sleigh).

One problem for the market is the extreme levels of bullishness that quickly climbed from extreme fear only 6 weeks ago. Too much too fast comes to mind. Last week I showed the Fear & Greed index and pointed out the sharp rise in bullish sentiment (the greed factor) since the November low. Since last week the index has backed off from a high at 88 to the current reading of 75 and the significance of this is that the market might have run out of buyers. The reason this indicator is used as a contrarian signal is because at the extremes the market trend is well recognized and most traders have joined the trend. That means buying in a rally and selling in a decline. Once the market runs out of buyers/sellers the trend completes and reverses. It doesn't always take an "event" to trigger a reversal but instead it could simply result from running out of traders to support the move.

CNN Fear & Greed index, 2014-December 20, 2016

While the price pattern for the index supports the idea for another rally leg, the falloff in bullish sentiment shows us there is the risk that the market could be in the early stages of a reversal. At the moment the Fear & Greed index is showing us a reason to be cautious about the upside while the price pattern and the bullish season says the rally is not done yet. That could change quickly if the indexes start to drop in a sharp move down.

S&P 500, SPX, Weekly chart

There are enough differences between the indexes to warn us that the interpretation of one is not necessarily correct. But typically trend lines do a good job showing us where to watch for support and resistance and the top of a rising wedge for the rally from February for SPX was tested with last week's high at 2277. If can press a little higher into next week, the top of the rising wedge will be near 2290. There are two price projections coinciding with that level, one for two equal legs up from February, at 2292.63, and the other for two equal legs up from June, at 2285.92. Between the price projections and the top of the rising wedge we have an upside target zone at roughly 2286-2293. But at the moment SPX has stalled at a potentially important target zone at 2271-2273, which is derived from the Gann Square of 9 chart (alignment with the March 2009 price low and date). SPX could certainly rally well above 2300 but at the moment it's looking like a risky bet.


S&P 500, SPX, Daily chart

The consolidation since December 13th has brought SPX over to its uptrend line from November 4 - December 2, which would be tested with a little lower Thursday morning at 2262. Near the same level is its previously broken, and then recovered (on December 7th), uptrend line from February-June (gray line on the daily chart below). Note the rising wedge pattern for the rally from November 4th, which fits well as the final wave in the larger rising wedge for the rally from last February. Keep in mind that rising wedges are typically retraced much faster than it took to build them. Hanging on complacently to a long position has the potential to be a very painful experience.

Key Levels for SPX:
- bullish above 2278
- bearish below 2243


S&P 500, SPX, 60-min chart

The 60-min chart below shows a sideways triangle for the consolidation off the December 13th high and this fits as a bullish continuation pattern. The expectation is for another rally leg and assuming we'll get it, the bigger question is then how high it will go. It should be the last leg of the rally from November 4th and potentially the last one for the rally from February. It could be that significant. I would say the minimum expectation is for a rally to the 2286-2293 area to meet the price projections discussed with the weekly chart. The next upside target would be a price projection at 2314, where the 5th wave of the rally from November would be 62% of the 3rd wave. That projection crosses the top of the rising wedge for the rally from November on Friday, which seems a little more than aggressive considering how much the trading volume has slowed down. Where's the buying pressure going to come from. But until proven otherwise, bears need to consider the upside potential. And now all the bulls need is to prevent a break below some important trend lines near 2261. A drop below 2260 would be a bearish heads up. Below 2243 would be even more bearish since that's the projection for two equal legs down from December 13th for a possible a-b-c pullback correction.


Dow Industrials, INDU, Daily chart

As for SPX, the Dow could have the same bullish sideways consolidation off last week's high and is now setting up for the next rally leg. It has steeper rising wedge off its November 4th low, the top of which will be near 20500 by the end of the month. That would be an impressive (+2.5%) rally and I'm having trouble seeing that potential but it remains a possibility. But there's also the possibility that it is forming a small rising wedge off the December 14th low, which calls for just one more minor new high, near 20030 by Friday. Because of this potentially bearish pattern (a small rising wedge to complete the rising wedge off the November low) I want to see the Dow above 20050 before believing we'll see the Santa Claus rally. If the Dow drops below Monday afternoon's low at 19870 it would point to the possibility of a drop to 19650 before maybe starting another rally leg. Below 19650 would tell us a top is very likely already in place.

Key Levels for DOW:
- bullish above 20,050
- bearish below 19,650


Nasdaq-100, NDX, Daily chart

NDX has a similar ending pattern as the Dow, if that's how it's to be interpreted. Only one more minor new high could finish off its rally but a move above 4975 would turn it more bullish and we'd likely see 5000 as the next stop.

Key Levels for NDX:
- bullish above 4975
- bearish below 4870


Russell-2000, RUT, Daily chart

The RUT is struggling with its uptrend lines from November 3rd -- one through the December 2nd low was broken December 13th, and the other through the December 14th low was broken on December 16th. The latter has been acting as resistance on multiple back-tests since Monday and is not acting bullishly. There's still upside potential to the trend line along the highs from 2007-2015, near 1403, but its price action has me wondering if the RUT is going to break down sooner rather than later. Below its December 14th low at 1354, as well as its 20-dma, would trigger a sell signal and then I'd be watching for 1346 (two equal legs down from December 9th) and then 1322 (2nd leg of its decline equal to 162% of the 1st leg down).

Key Levels for RUT:
- bullish above 1400
- bearish below 1300


30-year Yield, TYX, Weekly chart

Last week I showed a weekly chart of TLT, the 20+ year bond ETF, and how it was testing its uptrend line from February 2011 - December 2013. This week's bounce has it looking like support is going to hold, although I can't say I'm impressed with the bounce pattern and it remains possible we'll see at least a test of last week's low and maybe a little lower before setting up for a larger bounce. Moving over to the 30-year Bond, TYX, its weekly chart shows a little more upside potential to reach the same but opposite trend line. Its downtrend line from February 2011 - December 2013 is currently near 3.27% and its high so far is its December 12th high at 3.196%. Since that high it has pulled back slightly in a choppy consolidation pattern and supports the idea we'll at least a little higher before reversing back down (which keeps yields in alignment with the expectation for the stock market this month). A rally above the downtrend line, with a break above 3.28%, would obviously be more bullish, especially if the trend line acts as support on a pullback.


KBW Bank index, BKX, Weekly chart

The banks have been a significant driver behind the rally from November and so far it's looking like it's not over. The consolidation following the high on December 8th looks like a bullish continuation pattern, which might need just one more pullback within the consolidation range before starting another leg up. For the moment, assuming we'll see another rally leg, I like an upside target at 97.07, which is where the leg up from February would equal the first rally leg off the March 2009 low (into the April 2010 high). That projection crosses the top of a parallel up-channel from February around mid-January. The first sign of trouble for the bulls would be a decline below the trend line along the highs from April 2010 - July 2015, near 87.


Transportation Index, TRAN, Daily chart

On December 7th the TRAN popped above its November 2014 high at 9310 and then topped out at 9490 on December 9th. It then pulled back below 9310 two days later and has been struggling to get back above this important level. At the moment we have a failed breakout attempt and yesterday's close near 9310 followed by today's small pullback is not helping the bullish cause. The TRAN would be more bullish above a price projection near 9534 and at least short-term bearish below last Friday's low at 9159, which would also be break of its rising 20-dma.


U.S. Dollar contract, DX, Weekly chart

The US$ has reached an important level where we could soon find out if its rally will continue or if instead we'll see a sharp reversal into 2017 before starting the next rally leg later in 2017. Looking at the March 2015 - May 2016 pullback, a 127% extension of that move is at 103.20 (the red projection on the chart). The leg up from May 2016 is a 3-wave move and the 2nd leg of the rally is 162% of the 1st leg at 103.33 (the blue projection). Last Thursday's high was 103.56 and yesterday's high was 103.62, both of which are showing bearish divergence against the November highs. The close correlation of the two projections points to the potential for a reversal from here and the intermediate-term possibility is for a relatively sharp decline to its 200-week MA, near 90-91. But the dollar would remain bullish if it climbs above 103.50 and stays above that level.


Gold continuous contract, GC, Weekly chart

Gold has remained under pressure the past several weeks but it's looking like it could get at least a bounce. Last week's low at 1124.30 came within 3.30 of a price projection at 1121 for the 3rd wave of the decline from July. At the moment I'm calling the leg down from November 9th the 3rd wave of the decline because I'm expecting gold to continue lower following a 4th wave bounce/consolidation. But I also recognize the potential for a much stronger rally to kick off following what is so far a 3-wave pullback from July. It will be the form of the bounce/consolidation over the next few weeks that will provide the clues needed to help figure out the next move. Many gold analysts are calling this a "golden" buying opportunity but I think it's too early to make that call.


Silver continuous contract, SI, Weekly chart

Keeping an eye on silver to see if it's providing clues for gold, it's been trying to hold support near 16. A stronger break below it would not be a good sign but at the moment it's a setup for at least a bounce back up to its broken 50-week MA (which acted as resistance on a back-test the prior two weeks), near 17.25.


Oil continuous contract, CL, Weekly chart

The stronger dollar hasn't hurt oil but nor has oil been able to rally much more after the strong spike up at the end of November/early December. All of the price action since August looks corrective and continues to point lower but it would be at least short-term bullish if it can rally above 55, in which case we would likely see price-level S/R near 58.50 tested. Oil could continue to chop its way higher but at the moment it's looking vulnerable to breaking down instead.


Economic reports

The market is not paying much attention to economic reports but Thursday will see many reports that could move the market. We'll get the GDP 3rd estimate, unemployment claims data, Durable Goods Orders, Leading Indicators, Personal Income and Spending and the Core PCE Price index (a measure of inflation). These are all reports that will tell us how well the economy is doing and supply further information for the Fed and their rate-increase plan. Friday we'll get the final Michigan Sentiment numbers and New Home sales.


Conclusion

The seasonal Santa Claus rally looks like it could happen again this year (between Christmas and New Year's and first two days of January) but there are a few things that are warning us to not get complacent about that expectation. The falloff in bullish sentiment, as shown with the Fear & Greed index, is a warning sign that the market has run out of buyers. The strong rally since November might have already sucked in all the buyers (and spit out the shorts) that we're going to see.

Some indexes, as shown on the Dow's chart, are indicating a possible ending pattern (small rising wedge), while others, such as SPX, show a bullish sideways triangle bullish continuation pattern. There are mixed signals between the indexes and the message at this time is to be very careful about expecting further upside while at the same time there are no clear signals for bears to start getting short.

The VIX is dangerously low, having dropped to a low of 10.93 this morning before bounce back up for most the day. That had it dropping below the August 9th low at 11.02 and that was very near the top for the stock market prior to the current highs. The August high led to a decline into the November low. No fear with still relatively high bullish sentiment is a dangerous combination.

The bottom line is that we are heading into a bullish seasonal pattern but with weak trading volume (and therefore higher risk for some volatile moves) and potentially no more buyers after the strong rally, it could be a challenge getting much more of a rally out of this market. Some price patterns and sentiment are also telling us to be careful about expecting much, if any, further upside. Combining all of it together creates a potentially tough trading environment for both sides. Sitting tight and keeping your powder dry could be your best trade for the rest of the year. If long, tighten up your stops, and if you're itching to get short, wait for further evidence of a top since it remains possible, especially with low volume, that this blow-off rally could continue to go much higher than we think possible.

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


 

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