The Dow was the only one of the major indexes to finish today in the green but only be a small amount. The day was more or less a continuation of the consolidation from last week and we wait to see if it results in another leg up.

Today's Market Stats

We know the market is overbought and overloved and showing signs of tiring. But that hasn't stopped the bulls from keeping the bears away and as long as the buyers keep buying the small dips, which they're doing, we have higher potential. There are enough warning signs to suggest caution about chasing the market higher but there are no signs of a top yet. There's nothing for a bear to chew on but at the same time it's looking risky to the upside, all of which has traders heading for the sidelines while waiting for the next good setup.

The only economic report of significance today was the FOMC minutes, released at 14:00. The indexes had been chopping sideways (slightly up for the Dow) before the release, did a little squiggle after the announcement and then continued chopping sideways for the rest of the day. Virtually no reaction.

Even though we've seen recent data that suggests inflation is already at the Fed's 2% target rate, the Fed believes there's little risk to the economy. The Fed believes they have "ample time to respond" to any rise in inflation. Call me unconvinced, especially knowing how well they've been able to predict anything about the economy, ever. They have a perfect record of never being right.

The lack of urgency on the Fed's part means there's not likely to be a change to their expected plans on raising rates. This was reflected in a sharp decline in the U.S. dollar following the announcement (and spike in gold) while Treasury rates dropped sharply. All the moves were relatively small but the reactions were telling -- universal agreement that the Fed may stay somewhat reluctant to raise rates even while threatening to do so.

Apparently there is some disagreement between the Fed heads about how the labor market is doing. With the official unemployment rate currently at 4.8% there are some who fear rising wages could boost inflation faster than expected, which they argue means a need for higher rates sooner rather than later. But apparently the majority does not hold that opinion and the minutes reflected more caution than aggressiveness about raising rates.

The Dow's day in the green makes it 9 in a row from February 8th and 13 up days if we ignore the minor loss on February 8th. But it too is showing signs of weakening and likely near a top for at least the leg up from January. At the same time we're seeing many signs of increased risk as investors show more signs of greed and not enough fear (although the VIX has been slowly climbing as the rally makes its way higher).

One of the highlights of the rally is how steady it's been with practically no volatility. At first glance that would seem bullish -- nice steady accumulation and it could very well be just that. But typically a lack of volatility for a period of time leads to an expansion of volatility and with that a big price move. The question here is whether that will mean an acceleration higher or a fast drop back down.

The S&P 500 has now gone more than 50 days without a 1% move in either direction, which is the longest stretch since 1970. Think about that for a moment -- it's been nearly 50 years since the market has been this quiet and we're now facing a tired market that has investors feeling bullish to an extreme.

In addition to the quiet rally, we haven't seen a 1% correction since October 11th (91 trading days), which is the longest streak since 2006. This also begs the question about what kind of correction will follow this quiet period. Without the normal inhalation-exhalation the market becomes even more vulnerable to a strong disconnect to the downside. A little volatility moves traders in and out of the market, which in turn strengthens the remaining holders. Instead, we now have a lot of "untested" long players who will likely bail quickly out of fear (and fear is more powerful than greed).

Assuming we're overdue a correction the big question is whether it will be just a pullback correction or something more bearish. We could see a multi-week, scare the hell out of the bulls, kind of pullback and then set up the next big rally. Or we could start a major reversal back down. We'll have to wait for clues from the pattern of the pullback/decline (corrective vs. impulsive) to help figure that out later. First we have to identify when the current trend (up) has changed.

In support of just a pullback and then higher is a record that strongly favors the bulls. Sam Stovall, Chief Investment Guru at CFRA, issued a call this morning that says we should remain bullish for the year. He noted that since 1945 there have been 27 years where the S&P 500 was positive in both January and February and each of those years finished higher, no exceptions. In only 2 of those 27 years the S&P finished lower in the subsequent 10 months but never to a loss for the year.

The chart below shows each of the 27 years in which both January and February were positive. The average rise was +24% and with the S&P currently +5.5% for the year that's a lot of growth potential. Only 1987 (+5%) and 2011 (+2%) finished below where SPX is currently and so the question now is whether or not this year will be different.

S&P 500 returns since 1945 when January and February are positive, chart courtesy CFRA

One could argue that things are very different now than they were prior to 2009, especially with a volatile president at the helm and a Fed that is becoming less accommodative. I certainly would not use this 27-year record as a reason to mortgage the house and put it all in the stock market but it does provide a reason to only cautiously think about the bearish potential while the market is pulling back (assuming the current stock market hasn't negated the laws of gravity).

I see higher risk for the market than the above record would suggest and it's reason enough for me to recommend not riding the next pullback in long positions with the assumption that it will come back. I think the risk is high that it won't come back and that this year will break the above 27-year record.

It will be a while before we'll have a better idea about the possibility for a more significant decline but with the potential for an explosive move, presumably down, is it really worth the risk in simply plugging your nose and holding on through the next downturn? And if you like to play the short side we could soon be in a position to play.

The RUT has reached a potentially very important level and how it does from here could tell us lots about what this market might do next. I'll therefore start off tonight's chart review with weekly chart of the RUT.


Russell-2000, RUT, Weekly chart

I've shown the RUT's weekly chart before to point out the big megaphone pattern that has developed since early 2014. A trend line that runs along the highs from June 2007-March 2014-June 2015 is currently near 1412 and Tuesday's high missed it by only 2 points. While the RUT would be more bullish above 1415, based on this pattern, we need to keep in mind that it's a bearish pattern and it calls for a decline to the bottom, which is the trend line along the lows since February 2014.

For some perspective, that line will be near 825 by the end of this year. The May 2011 high was at 868. The short-term pattern remains bullish since it's obviously in an uptrend, which is why it would be more bullish above 1415. But with the bearish divergence at the current high at vs. the December high (daily and weekly charts) I think it's a high-risk bet to be thinking long here. And if you wouldn't buy it here should you also be thinking of selling?


Russell-2000, RUT, Daily chart

The RUT's daily chart shows a tiny little air gap between Tuesday's high and the trend line along the highs from 2007-2015. We could see another attempt to reach the line, and it might even poke above it (to hit a lot of stops), before starting back down but that's a high-risk bet here. While the RUT remains bullish until proven otherwise, the setup here is for a top of significance. A drop back below the downtrend line from December 9th, currently near 1376, which would also be a break of its uptrend line from November, would confirm a top is in place. We have a setup for a top but no confirmation of it.

Key Levels for RUT:
- bullish above 1415
- bearish below 1376


Russell-2000, RUT, 60-min chart

The 60-min chart of the RUT shows the first crack in the bull's foundation with today's break of its short-term uptrend line from February 8th. I see the potential for a bounce back up to a minor new high to do a back-test of that uptrend line, which would result in it reaching the trend line along the highs from 2007-2015. But again, it's not something I'd be willing to bet any money on. If it happens, watch for continuing bearish divergence and short a rollover from resistance. The second sign of trouble for the bulls would be a drop below the February 16th low near 1391.


S&P 500, SPX, Daily chart

SPX is now nearing a price projection at 2376, which is where the 2nd leg of a 3-wave move up from December 30th would be 162% of the 1st leg up. It should be noted that the pieces are in place for a top at any time but obviously the bulls have had different ideas and keep buying the small dips. That could continue but again, the risk for a big move is high and chasing this higher from here is too risky unless you're day trading this.

Key Levels for SPX:
- more bullish above 2377
- bearish below 2300


S&P 500, SPX, 60-min chart

The 2nd leg of the rally from December 30th is the leg up from January 31st and the 60-min chart shows the 2376 projection for it. There are a couple of other shorter-term projections at 2373 and 2382, which gives us a relatively small range to watch for a possible high. The little sideways consolidation off Tuesday's high looks like a bullish consolidation pattern that is holding at the uptrend line from February 8th, both of which call for another rally leg on Thursday.

One more leg up would do a nice job finishing the wave count for the rally from January 31st so watch it carefully for a possible shorting opportunity. On the other hand, if it breaks down from here it would be immediately bearish.


Dow Industrials, INDU, Daily chart

The Dow looks like SPX with the February 14th break above its trend line along the highs from April-December 2016. That made the Dow even more bullish and now it stays bullish as long as the trend line holds as support on a pullback. The bulls now need to negate the bearish divergence against the December high. A top would be confirmed in place if the Dow drops below its January 26th high at 20125.

Key Levels for DOW:
- stay bullish above 20,550
- bearish below 20,125


Nasdaq Composite index, COMPQ, Daily chart

The Nasdaq turned more bullish on February 14th when it broke above the tops to two rising wedge patterns, one for the rally from February 2016 and the other for the leg up from November. The tops of those rising wedges cross on Thursday near 5800 and as long as that level holds as support on a pullback it will stay bullish. But a drop back below 5800 would leave a throw-over finish to the two rising wedge patterns and that would likely lead to a very strong selloff (rising wedges get retraced very quickly).

There is still some upside potential to a price projection at 5940.60, which is where the 5th wave of the rally from November would equal the 1st wave. But the 5th wave has already met its minimum expectation, at 5801 (62% of the 1st wave), and therefore rally completion can be called at any time.

Key Levels for COMPQ:
- stay bullish above 5802
- bearish below 5700


10-year Yield, TNX, Weekly chart

Treasuries continue to consolidate since mid-December and TNX remains inside a sideways triangle that has formed for the consolidation. This is a bullish continuation pattern and therefore the expectation is for another leg up. But a triangle consolidation typically leads to the last leg of the move (up in this case) and therefore I'm not expecting much higher (lower for bond prices). A downtrend line from 2007-2013 is currently near 2.63% (the December 15th high was 2.621%) and a price projection for an a-b-c bounce pattern off the January 2015 low points to 2.687%.

Assuming we'll see another rally leg those are the two levels to watch. But if TNX drops below its January 12th low near 2.3% I'd start to think more bearishly about yields sooner rather than later, especially since a failed bullish pattern would likely mean a fast drop in yields. This could happen if there's a sudden rush into the relative safety of bonds.


KBW Bank index, BKX, Weekly chart

Last week I pointed out how BKX had reached a price projection target zone at 97.07-92.21 with a high at 97.25 last Wednesday. Since then it's been struggling to push higher but has only been able to reach 97.08 and 97.12 yesterday and today, respectively. The sideways consolidation is potentially bullish, like the broader averages, in which case the next upside projection is 102.19. That's where the 5th wave of the leg up from June 2016 would equal the 1st wave. But it's important to note that the pattern can be considered complete at any time.


SPX comparison to Relative Strength of TRAN/UTY and XLY/XLP, Daily chart

The TRAN's chart is not clear at the moment, except that it has developed a strong bearish divergence since early December at its new price highs in January and lost week. But I think we continue to have a bearish warning when comparing the strength of the TRAN to the Utility index (the black line on the bottom chart below). The TRAN has been underperforming UTY since December, including into this week, and that's not a good sign about the economy.

The same can be said when looking at the underperformance of the Consumer Discretionary (XLY) vs. Consumer Staples (XLP), which is the blue line on the bottom chart. This tells us the consumer is spending more carefully and more on staples than want-to-have stuff. This often accompanies a slowdown in the economy.


U.S. Dollar contract, DX, Daily chart

The US$ dropped sharply after the FOMC minutes were released this afternoon, which is another indication that traders in the dollar believe the Fed may be reluctant to raise rates soon (rate hikes make the dollar more attractive to investors, which drives the price higher). But this afternoon's pullback has retraced only a small portion of the bounce off the pullback into the February 16th low. While I see the potential for another move higher for the dollar, perhaps up to about 102, I think there's a higher probability for the dollar to continue its decline from its January 3rd high. At the moment it's struggling to get back above its broken 50-dma, currently at 101.37.


Gold continuous contract, GC, Daily chart

Doing the reverse of the dollar, gold had declined during the day but did a sharp reversal back up at 14:00 and erased most of the day's loss. But by the end of the day the daily candle was just another doji inside the trading range that gold has been in since February 8th. This consolidation suggests we'll see another leg up for gold, which fits the projection I've been showing at 1273.20 for two equal legs up from its December 15th low. Or perhaps it will only make it up to its broken 200-dma, currently at 1264.50. Above 1274 would be more bullish for gold but for now I'm thinking we're getting only a bounce correction off the December low that will then be followed by a resumption of its decline.


Silver continuous contract, SI, Daily chart

Looking at silver to see how it's confirming (or not) the pattern for gold, I see the same potential for at least a little higher before turning back down. Two equal legs up from December 20th points to 18.32 and the top of rising wedge for its bounce off the December 20th low will be near 18.50 by the end of the month. But the oscillators are threatening to roll over as silver struggles with its 200-dma, currently at 17.95 (as well as its 200-week MA at 18.01), and it's nearing its downtrend line from July 2016, currently near 18.22. With all of this it looks like silver might be able to make it up to 18.22-18.50 but might roll over sooner rather than later.


Oil continuous contract, CL, Daily chart

If nothing else oil has been tenaciously holding near its December 12th high at 54.51. One could easily interpret the choppy sideways consolidation since then as a bullish continuation pattern, in which case we could see oil rally to 59-60. But with the COT report showing a very bullish speculator crowd vs. a bearish commercial crowd I think it's safer to bet with the commercial traders.

The bearish divergence since December also makes it difficult to think about the long side, although the bleeding off of an overbought condition from December while price has chopped sideways can also be considered bullish. Above 55.50 would be arguably bullish but until then I think there's a higher probability for a breakdown.


Economic reports

The rest of the week will remain quiet as far as economic reports go. The market will be responding more to overseas events and markets.


Conclusion

The stock market has been moving higher in relatively small steps but the lack of selling has made it relatively easy for the buyers to keep the market moving steadily higher. There are no signs of a market top but there are plenty of signs of waning momentum and deteriorating market internals. There's no reason to short this market but there's also elevated risk in chasing this higher.

As mentioned above, the sustained length of time without much in the way of volatility actually makes the market riskier here. While it's possible we'll see a strong acceleration higher I think the higher-odds probability is for a strong breakdown that scares lots of traders out of the market. It's likely we're going to see a strong spike in the VIX in the process (June VIX calls anyone?).

It's too early to short (although we could see a setup on Thursday or Friday) and it's too late to get long, which leaves many traders on the sidelines here. Wait for your setup and don't force a trade; look for your candidates to short while waiting for the correction.

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

Keene H. Little, CMT