The stock market's rally looks tired and the bears are licking their chops while eyeing the bulls as just slabs of beef. But the bulls keep going and keep frustrating the bears by aborting any selling attempts. This could continue into next week.

Today's Market Stats

The market continued its choppy and whipsaw ways today as the indexes cycled in and out of red and green. Each time the bears look like they might be able to get some stronger selling started, like today's late-morning selling into the midday low, it got reversed. The sellers then gave up after another attempt to drive the market lower and a late-afternoon rally drove the indexes to their daily highs. Follow-through is now the key -- if the market can continue this afternoon's rally we might see the log jam break and take the indexes to new all-time highs again.

Part of the explanation for today's whipsaws comes from the Donald. Trump held is first formal press conference and disappointed many by talking less about his fiscal and tax policies and more about how he's going to beat up on China and Mexico. This created some turmoil in the markets -- stocks, bonds and currencies -- as the market tried to figure out what he might do. This confusion might get more significant the closer we get to the inauguration next week.

The challenge for the market at the moment is that the strength of the rallies has been declining. The momentum, as measured by such indicators as RSI and MACD, has been waning (leaving bearish divergences at the tests of previous highs) and trading volume is drying up. The rally from November seems to have pulled in most of the buyers and now it appears the market is struggling to attract new buyers.

Greg Schnell, who writes some very good technical analysis over at StockCharts.com, mentioned trading volume between Christmas and into this week is the lowest he's seen since 2009. The chart below shows this 3-week trading period for each new year and how this year it's running significantly below previous years, especially in January this year. Last year saw a significant price decline from December 29th into January 20th. This year we're having a rally from December 30th, so the opposite of last year. But the volume is much lower than it was in January 2016 and that should be worrisome for bulls. Volume is the power behind a move and right now we appear to have a 6-cylinder engine running on maybe 4 cylinders.

We're heading into opex week next week, which is typically a bullish week, and the rally since November has been largely with the assumption that a Trump administration and Republican Congress will be able to get some things done and spend more money that we don't have. We could see a continuation of the rally, even if slowly and in a choppy fashion, into the President's inauguration, which is Friday, January 20. Opex Friday and inauguration could be a good date for the completion of the rally (buy the rumor, sell the news). I can only speculate about that possibility but so far it appears doable. The charts will hopefully tell the story and show us what to watch for in the coming week.

The tech indexes have been the stronger indexes this January and I want to start a review of the charts with the weekly view of the Nasdaq. While it appears to have at least a little more upside potential I think there are some strong reasons to hedge any bets/positions on the long side.


Nasdaq Composite index, COMPQ, Weekly chart

The weekly chart of the Nasdaq shows an up-channel for the rally from 2010-2011. The wave count suggests the rally from February 2016 is the 5th wave and as usually happens, it has acted weaker than the rallies before it. It has been pressing up against the middle of the up-channel but other than minor breaks above it, such as right now, it hasn't been able to break through on a closing weekly basis. Currently near 5530 we'll see if it has better luck this week and then more importantly if it will be able to hold above the midline for next week's close.

You can see the bearish divergence on RSI since the end of 2013, which is not necessarily a rally killer but it does offer a reason to believe the rally will not be able to make it up into the top half of its up-channel. The leg up from February is also now a 5-wave move with the 5th wave being the leg up from November. It too is showing bearish divergence since August, which helps confirm the wave count. So we have a 5th of a 5th wave here and when it finishes it will mean a very larger retracement at a minimum. This is the riskiest time to be long the Nasdaq since a breakdown is likely to occur quickly.


Nasdaq Composite index, COMPQ, Daily chart

Today's daily candle for the Nasdaq is a hanging man doji up against the top of its rising wedge pattern for the rally from November (5th waves typically create ending diagonals (rising or descending wedges) since the momentum declines and it becomes more and more difficult to add more points). Today's hanging man doji is not a guarantee for a reversal but if Thursday finishes in the red it would be a confirmed bearish reversal pattern. But a rally above 5575, that stays above that level, would be a bullish breakout from the bearish rising wedge pattern and I'd expect to see the Naz proceed up to the top of its larger rising wedge (for the rally from February), which will be near 5645 by the end of next week (end of opex week and inauguration day).

Key Levels for COMP:
- bullish above 5575
- bearish below 5485


Nasdaq Composite index, COMPQ, 60-min chart

Trend lines for the short-term view are getting crowded around current price action and it's hard to say which one is the stronger one. But at the moment, the top of the rising wedge for the rally from November is currently near 5572 and we could see another test of that line, like Tuesday's test, to complete the rally. The short-term bearish divergence on the 60-min chart, along with the bearish divergence on the daily and weekly charts, tells us the rally is likely running on fumes and when the little rocket engine quits we're going to see a return to earth. This rally could see just enough buying to continue to work its way higher into next week, typically a bullish week, but I think it's a bet that carries higher risk than normal.


Nasdaq-100, NDX, Daily chart

NDX is similar to the Nasdaq in that it has run up into its trend line along the highs from November 10 - December 13 and closed on the line with today's close at 5050. On Thursday the trend line will be near 5060 and obviously it would be more bullish above that level (on a closing basis). If long this index (QQQ) I think a good stop is this morning's low at 5012 since a drop below that level would indicate a top is likely in place.

Key Levels for NDX:
- bullish above 5060
- bearish below 4960


S&P 500, SPX, Weekly chart

Not a whole lot has changed for the SPX weekly chart since not much has happened since it made a high at 2277 back on December 13th. It's been in a 50-point trading range since that high but with today's close at 2275 it's currently just below 2277. For several weeks I've been pointing to the trend line along the highs from April-July-August 2016, which fits as the top of a rising wedge for the rally from February, as the upside target if the bulls can keep the market heading higher. That line will be near 2310 by Friday, January 20, which would take us through opex week and into the President's inauguration, both of which could keep the market bullish. That would likely be a MOAP (Mother Of All Puts) setup if it happens.

After opex and after the inauguration is when things could fall apart, if not before then. Keep in mind that a rising wedge tends to be retraced faster than the time it took to build it and therefore a quick return to the February low at 1810 is the bearish potential in front of us. This would presumably happen because of disappointment from recognizing that nothing is going to change in Washington, DC. For those who remember all the "hope and change" talk back in 2008, as Sarah Palin later once asked, "how's that hopey changey thing workin' for ya?" Unfortunately, very little changes in Washington just because we get a new titular head in place. It's possible we're going to see disappointment settle in quickly after Trump gets sworn in.


S&P 500, SPX, Daily chart

While there is still the potential for SPX to rally up to the 2310 area, as mentioned above, there are some things that suggest it's not going to happen, or that it's not going to make it that high even if it is able to push higher. The first thing is the waning momentum in the rally, as can be seen with the bearish divergence on the daily momentum oscillators. Last Friday's new all-time high at 2282 was met with a significant bearish divergence and it would now be difficult to even suggest being in a long position here. SPX has been struggling near the important Gann Square of 9 level, at 2271-2273 (the levels that are aligned/square with the March 2009 low in both time and price), and today's close at 2275 makes it only the second day (January 6th being the first day) was a close above this Gann zone. Price action has been very choppy for weeks and it could go either way here but it's looking vulnerable to breaking down sooner rather than later. But if the buyers can push this index a little higher it would then be able to test price projections at 2286-2290, which are based on price relationships in the wave count.

Key Levels for SPX:
- bullish above 2291
- bearish below 2233


S&P 500, SPX, 60-min chart

The SPX 60-min chart below is to show an idea how this market could continue to frustrate both sides with a choppy rise higher (two steps forward, one step back). This is for the bullish possibility and is just an idea to watch for since it could keep the rally going in a move that continues to lose strength (momentum) in a small rising wedge to complete larger rising wedges (look out below if it completes next week the way I've depicted). Rising wedges are filled with choppy 3-wave moves (or something more complex but still corrective) and they make it difficult for traders to hang on. This pattern assumes the uptrend line from November 4 - December 30 will continue to hold, as it did this morning. If long, I'd use this uptrend line for a trailing stop and bears who want to play this conservatively, wait for a break of the uptrend line to confirm the top is likely in place.


Dow Industrials, INDU, Daily chart

There are many pundits who are bound and determined to put on their Dow 20K party hats and we could see a 4th attempt on Thursday if this afternoon's rally sees some follow through. Follow through is what has been lacking so if we get some Thursday morning that would be a stronger statement all by itself. On Monday the Dow broke its uptrend line from November 4 - December 30, which is now higher and near 20120, but has not been able to break down below its 20-dma (except marginally with Tuesday's close slightly below it), which is currently near 19890. Another close below this MA could spell trouble for the bulls but at the moment all the choppy sideways price action since mid-December looks like a bullish continuation pattern. If the Dow instead breaks down it would leave a failed bullish pattern, something we've seen at past important highs. Flip a coin for direction from here.

Key Levels for DOW:
- bullish above 20,000
- bearish below 19,718


Russell-2000, RUT, Daily chart

While the techs were running higher since mid-December the RUT ran sideways, chopping up and down between 1354 and 1389. This is a bullish continuation pattern following its November-December rally and upside potential is to its trend line along the highs from 2007-2015, which will be near 1408 by the end of next week. But at the moment the RUT has banged it head on the trend line along the highs from April-June-August 2016 (blue line), which it's been chopping around since mid-December. Today's rally might have been a back-test of the trend line and any selloff from here would leave a bearish kiss goodbye. A drop below 1354 would spell trouble for the bulls since it would leave a failed bullish pattern behind. But keep an eye on MACD at the zero line here since a turn back up from here would create a buy signal (the overbought condition has been relieved with the sideways consolidation). If MACD drops below zero and RSI drops below 50 we'd have further confirmation that the bears are running the show.

Key Levels for RUT:
- bullish above 1410
- bearish below 1354


KBW Bank index, BKX, Daily chart

The banking index has been consolidating sideways for a month now, since December 8th. This too is a bullish continuation pattern and if it breaks out to the upside, starting with a sustained rally above 93.70, we could see a run up to the top of a parallel up-channel from February, currently near 97.50, and perhaps up to a Fib projection at 100.44. The price projections shown on the chart are based off the rally leg from February to May 2016 and you can see how price reacted around each projection in the leg up from June. It's been consolidating on top of the 200% projection (where the leg up from June is twice as large as the February-May rally). As mentioned for the RUT, the sideways consolidation has relieved the overbought condition and if MACD turns back up from the zero line it would be a buy signal. The bears need to see BKX below the bottom of its consolidation range, near 90.80, to indicate the bullish pattern could be failing.


U.S. Dollar contract, DX, Weekly chart

The US$ has continued to pull back but it's not clear yet whether it's going to be just a small pullback correction before heading higher or if it is instead the start of the next leg down inside a megaphone pattern. The dollar rallied during the overnight session and into this morning's news conference by president-elect Trump. His lack of information about his expected fiscal and tax policies created some concern and the dollar crashed back in the late-morning session. Could this be the beginning of the recognition phase where the market begins to realize that not much is going to change out of Washington? As for the dollar, we simply need to see how the next week or two go before getting a better idea about what the next big move will be.


Gold continuous contract, GC, Daily chart

Gold has now made it up to the bottom of a previously broken down-channel for its decline from July. At the same location, near 1193, is its 50-dma so it's a double resistance level for the bulls to deal with. Gold is starting to attract a lot of buyers again so if they can keep up the buying pressure we could see a test of price-level resistance near 1205. A 38% retracement of the leg down from November 9th is 1206 so between price-level resistance and the 38% retracement I'd say gold would be more bullish above 1206. But at the moment it remains possible the bounce is just another head fake, like the one off the October 2016 low, and will be followed by another leg down.


Oil continuous contract, CL, Daily chart

This week oil dropped back below the line across the highs from October 2015 - June 2016, which leaves a failed breakout attempt in December. A pullback in early January held the trend line but Monday's decline dropped oil back below it at 52.40. Today's rally was back up to the line and now we'll see if it holds as resistance. This trend line has/had the potential to be an inverse H&S neckline, which had an upside projection to about 77.50. But a failure to hold the breakout is obviously not bullish and if today's back-test is followed by a bearish kiss goodbye it would likely start stronger selling. It's a good place to nibble on a short play for oil (such as with puts on one of the ETFs or buying an inverse ETF) since you can keep your stop relatively tight.


Economic reports

There are no significant economic reports on Thursday and then on Friday we'll get the PPI numbers, retail sales, business inventories and Michigan Sentiment. These could move the market but in reality the market remains disconnected from any kind of fundamentals and pretty much ignores all economic reports.


Conclusion

For about a month the stock market has been chopping sideways. The techs have been stronger in this regard with January's rally and new highs for the tech indexes. This has left us with a bit of quandary when looking at the different indexes since the sideways consolidations look like bullish continuation patterns and the expectation is for another rally leg out of them. But the tech indexes are now up against potentially strong resistance and look like they could top out at any time, including with today's highs. We could see some rotation into the safety of the blue chips and watch them rally while the techs pull back but at this moment that's pure speculation.

The other factor affecting the market is that we're heading into a typically bullish week, opex, and at the same time next Friday, January 20 is the president's inauguration day. The market has been rallying under the assumption (dare I say "hope") that the market will benefit from the Trump administration's policies. Hope-filled rallies too often turn into disappointment-filled selloffs and I see that as a distinct possibility. Call it a buy the rumor, sell the news setup in front of us.

But from here I can only speculate what factors could influence the markets and even then it's a fool's game trying to figure out how the market will react to those factors. We still have to consider what the Fed will say and how that will affect the market's mood. So we stick with the charts and at the moment each has to be traded on its own merits. The techs say be very careful with the indexes up against resistance. The other indexes say we should be getting ready to buy now for the next rally (but keep in mind that there's the possibility for the bullish continuation patterns to fail, in which case all of the indexes will come tumbling back down).

It's a good time to stay cautious through next week and while it might be a normally bullish period, when it's not it's usually very bearish. Manage your options positions carefully into next week.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

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