This week we've seen rally attempts get sold into. But then the morning lows have been followed by a bounce back up and the two things combined has it looking like controlled selling (distribution) and it provides a warning sign. But it doesn't prevent new highs for at least some of the indexes, such as the techs, although it might be a choppy ride higher.

Today's Market Stats

This morning started with a big gap up in the stock market indexes but it was short-lived as the sellers hit almost immediately. Rallies are being sold into but not aggressively. Following the morning selling we've seen the market slowly march back up into the close, even if not to new highs, to set it up all over again. It looks like a distribution pattern with smart money handing off inventory to the retail crowd. We should be doing the same, even if the indexes will be making new highs in the coming week. The market is holding up but is not strong and that's our cue to protect positions while waiting for the green light to play the short side.

This morning's economic reports were not all that encouraging, although the market pretty much ignored them. Mortgage applications were down -3.2% in the past week, down significantly from +4.0% the previous week.

In the pre-market session we received the ADP Employment report and it was much stronger than the expected +165K, coming in at +246K. There was barely a bobble in the futures market.

At 10:00 we received the ISM Index (a little better than expected, at 56.0) and Construction Spending, which was worse than expected. At -0.2% for December, construction spending was down from +0.9% in November and it was the opposite of the expectations for +0.2%. The market was already selling off when this report came out so this was probably ignored as well.

In the afternoon we heard from the FOMC and to no one's surprise they kept the rate the same (0.5% to 0.75%). They believe the economy is still on a moderate growth path and while consumer and business sentiment has improved since the November election they note business investment remains "soft." The market is expecting two more rate increases this year with the first one in June. Nothing in the Fed's statement changes the market's expectations.

The Fed wants to see what becomes of the tax and infrastructure spending plans from Congress and whether or not Trump will be able to successfully push his agenda. By the Fed's next meeting in March they'll have a better idea about what those plans might be. In addition to Congressional tax and spending plans the Fed wants to see if the consumer and business sentiment holds up and improves the economy.

If the Fed wants to raise rates 3 more times this year it was expected they would start dropping hints about when the first one would come, even as early as March. With no hints it has some wondering if the Fed sees trouble ahead and wants more data before even hinting about when to expect the next rate increase. There is of course the possibility that it will be another one-and-done rate increase like 2016.

Helping today's stock market was AAPL's rally following its earnings report last night. Its price shot higher in the after-hours session yesterday and then continued higher most of the day today and was up +9.14 before giving back some in the final hour, finishing +7.40 (+6.1%). While it helped the market, especially the techs, it wasn't enough to thwart some of the selling pressure and other than a small gain for the Dow (+0.1%), it was only the techs that did well today. But AAPL hit an important level today and is now at risk of a reversal.

As can be seen on AAPL's weekly chart below, it has rallied back up to its broken uptrend line from June 2013 - August 2015, which had stopped it previous rally into its September and October 2016 highs. In addition to this trend line there is a price projection at 130.74 for two equal legs up from May 2016 (today's high was 130.49). It's possible that today's rally capped off an a-b-c bounce correction off its May 2016 low that will now be followed by a stronger decline. There is currently no evidence that AAPL is making a high here but the bearish setup is for one (and reason enough to protect positions in this stock). What happens in the next week will tell us more.

Apple Inc., AAPL, Weekly chart

One of the reasons why I suspect AAPL could fall back down (after all, AAPL tells us gravity works) is because I see enough evidence in the major indexes that provide at least a warning sign that the market could be in trouble. I've been thinking we'll see a market high around some coinciding cycle turn dates in the February 8-10 window. That could still be the case and it's reason enough to stay cautious about the short side but the price patterns are not clear enough to suggest either a top is already in place or that we are still due one more new high. Both sides need to be especially cautious here.

I'll start tonight's chart review with a weekly view of the Nasdaq since it's one of the stronger indexes (along with the stronger NDX) but is also showing reasons why we should be very careful about further upside expectations.


Nasdaq Composite index, COMPQ, Weekly chart

I've shown the Nasdaq weekly chart before to point out how it has ridden up underneath the midline of its up-channel from 2010-2011. It has pushed marginally above this midline, which is currently near 5600, but it's also running into the top of a rising wedge pattern for the rally from February 2016. There's a 5-wave move up inside the wedge and the 5th wave is the leg up from November 2016.

The 5-wave move up from February 2016 fits well as the 5th wave of the rally from October 2011, which fits well as the completion of the c-wave of an A-B-C move up from March 2009. In other words the current high has the potential to be a MAJOR top to complete the cyclical bull market off the 2009 low. Upside potential is significantly dwarfed by downside risk and I think it's appropriate to position/protect yourself accordingly.


Nasdaq Composite index, COMPQ, Daily chart

The price pattern for the move up from November is not clear enough to say with confidence that a top is either already in place or still has some more upside to go. We have a rising wedge for the rally from November to complete a rising wedge from February 2016, both of which are bearish patterns and suggest complete retracements of the wedges in a time that will be faster than it took to build the wedges.

Depending on how the top of the larger rising wedge from February 2016 is drawn (from April through either the August or September highs) we have upside potential from 5677 tomorrow up to about 5760 in another week. The top of the rising wedge from November is currently near 5703 and will be near 5730 in another week. I depict a stair-step move higher into next week but I think the risk is for a breakdown at any time.

Key Levels for COMPQ:
- bullish above 5668
- bearish below 5522


S&P 500, SPX, Daily chart

SPX is holding inside a little parallel up-channel for the leg up from December 30th, the bottom of which was tested on Tuesday and as long as SPX stays above its January 23rd low at 2257 it remains potentially bullish for a rally to trendline and Fib resistance near 2321. But the short-term pattern suggests the bulls could be in trouble from here.

We have what looks like a small impulsive move down from last Thursday's high followed by a corrective bounce. At the moment it looks like we have a good setup to be short against this morning's high at 2289. Above 2289 would keep the bullish pattern alive but as with the Nasdaq, there is strong potential for a stronger decline to kick into gear at any time.

Key Levels for SPX:
- bullish above 2301
- bearish below 2257


S&P 500, SPX, 60-min chart

If SPX does manage to push higher into a turn window near February 8th it could happen something like what I've depicted -- another a-b-c move up from Monday to the 2315-2321 area. But as already mentioned, with a corrective looking bounce pattern off Monday's low I think it's important to recognize the bearish potential from here. The next leg down, whether from here or after another quick spike up Thursday morning, would likely be much stronger selling than we've seen so far.


Dow Industrials, INDU, Daily chart

The Dow's pattern is very similar to SPX and looks just as vulnerable to breaking down at any time. But if the cyclical time studies will continue to support the bulls we should see another push higher into at least the February 8-10 time window. Upside potential for the Dow, if they can get some stronger buying going, is near 20400 where it would run into the trend line along the highs from April-December 2016 by next week.

The pullback from last week has been stubbornly holding onto the uptrend line from February-June 2016 (purple line), which acted as support at the January lows and is so far holding as support. But a drop below its 50-dma, currently near 19700, and its January 19th low near 19678, would likely lead to much stronger selling. Between 19675 and 20126 could be filled with a lot of chop and therefore be careful not to get whipped around.

Key Levels for DOW:
- bullish above 20,126
- bearish below 19,675


Russell-2000, RUT, Daily chart

For nearly two months the RUT has been consolidating in a shallow down-channel off its December 9th high. This looks like a bull flag pattern and the expectation is to see a rally out of this. I'll continue to lean this way, which challenges the bearish patterns for the blue chips, until price proves the bullish projection wrong. Upside potential is to the trend line along the highs from 2007-2015, near 1410 next week, but the bulls can't waste any time breaking out of this bull flag pattern.

The first indication of trouble for the bulls would be a drop below the January 23rd low near 1341. But because we could get a 3-wave pullback from last Thursday, with two equal legs down at 1332.71, I'd want to see a drop below 1332 before believing a stronger decline is underway. The risk if you're hoping for higher prices is that what looks like a bullish pattern could fail and failed patterns tend to fail hard. If the indexes have peaked (or we might see some peak while others are already done) I suspect the RUT will lead the way down.

Key Levels for RUT:
- bullish above 1385
- bearish below 1341


30-year Yield, TYX, Daily chart

Treasury yields bounced back up from their January 12th lows but so far to only a lower high vs. their December 12th highs. The 30-year yield, TYX, is again challenging its downtrend line from February 2011 - December 2013 and so far is not having any better luck than December's challenge. If I look at the daily chart below with the log price scale the downtrend line from 2011-2013 is up near 3.25% and I show the possibility for a rally to that level before turning back down. It's not clear yet whether TYX is going to head back down from here or after a little higher but the expectation is for a turn back down.


KBW Bank index, BKX, Daily chart

The banks have been running sideways for as long as the RUT, since the December 8th high for BKX. As with the RUT, the sideways consolidation looks bullish and the expectation is for another rally leg. Upside potential for another leg up this month is to the 100 area and a break above 94 would have me leaning that way. But if the sellers step in and drop BKX below its January 18th low at 89.17 it would look more bearish. Below 87 would tell us an important high is already in place.


Transportation Index, TRAN, Daily chart

The TRAN had a nice 3-day run last week into the high on January 26th. But over the next 3 days it gave it all back and now it's trying to again hold onto its 50-dma, currently near 9165. A loss of support here could spell trouble for the bulls, especially following a double top with its December 9th high and the significant bearish divergence between the two. A breakdown in the Transports would not be a good sign for our economy. A slowing economy would put the Fed on hold, which would have huge ramifications for stocks, bonds, commodities and currencies. Keep an eye on this index.


U.S. Dollar contract, DX, Daily chart

The US$ has been chopping its way lower since the high on January 3rd but it's been a steady decline. It's starting to show some short-term bullish divergence and could be setting up a larger bounce correction into February before continuing lower. I think there's a good chance we'll see the dollar decline over the next few months and drop down to its 200-dma, which coincides with an uptrend line from May-August 2016, currently near 97.30.

Over the next few months I think we'll see the dollar drop down to its 200-week MA, currently at 90.30 and probably near 91 by May where it would also meet a trend line along the lows since early 2015. It will likely be a choppy decline over the next few months, which will make projections difficult, but until I see some bullish evidence that negates the bearish wave pattern I'll stick with the idea that we need one more new low for the dollar before it will be ready for a stronger rally later this year.


Gold continuous contract, GC, Daily chart

Gold remains potentially bullish as long as it holds above its 50-dma, which was tested last Friday. It is again back above price-level S/R near 1205, closing slightly above it the past two days. The bulls need to drive gold above its October low at 1243.20 in order to negate the bearish wave count that calls for another new low before setting up a larger bounce. If gold drops back below its 50-dma, currently near 1176.70, it would be a stronger signal that a new low is coming.


Oil continuous contract, CL, Daily chart

The short-term pattern for oil makes it difficult to make short-term projections but the setup continues to support the idea that we're going to get at least a deeper pullback and potentially something more bearish. But first we need to see oil below the trend line along the highs from October 2015 - June 2016 (bold blue line), currently near 52.45. This line has been acting as support since January 23rd and if it breaks we should see lower prices. A drop below the January 10th low at 50.71 would confirm a breakdown but until that happens there remains upside potential to 57 later this month where it would again run into the top of a parallel up-channel from last August.


Economic reports

There are no significant economic reports Thursday morning. Friday morning's we'll get the NFP numbers, which are expected to be significantly higher than the December numbers. Based on today's ADP report it's looking good for the higher numbers but if they come in lower than expected we could see a negative reaction in the stock market.


Conclusion

The stock market is acting weak. We're seeing evidence of distribution with active selling into rallies. The short-term patterns for the Dow and SPX support the idea that last week's highs were THE highs and we're in the early stages of a more significant selloff.

The rally pattern has been choppy for the techs, which looks like an ending pattern (small rising wedge within larger rising wedges). But the choppy move could extend higher and with a turn window on February 8-10 I continue to look for supporting evidence that the rally will extend higher for another week.

I see a lot of downside risk right now and considering the small amount of upside potential I don't think you have the reward vs. risk in your favor on the long side. There will be better opportunities to trade the long side. Having said that, it's early to be thinking aggressively short.

I did like the setup for a short play following today's bounce off the morning lows but with a stop at the morning highs. This might work better for the blue chips than the techs. But it's a time for caution by both sides until we get a clearer signal to expect either a new high into next week or to abandon the long side and get more aggressive on the short side.

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

Keene H. Little, CMT