Since the March 1st high we've seen the indexes slowly pull back as dips are bought and bounces are sold. There seems little commitment by either side to move the market and we're left wondering if the pullback is going to be just a short correction to the rally or something more bearish. The jury is still out deliberating.

Today's Market Stats

Other than the weaker small cap stocks the other indexes have not given much back in the past week and the slow choppy pullback continues to keep the price pattern potentially bullish. What's not clear yet is whether or not we'll get a larger pullback before possibly heading higher again or if instead we're going to get a large (in time if not price) consolidation over the next several weeks before then turning back up.

Of course the bears could always make a surprise attack and scare up enough bulls to hit their stops and start the market tumbling lower. We have a preliminary sell signal that goes by the scary sounding name "Ohama Titanic Syndrome," which I'll discuss more later. It wouldn't be the first time that a slow pullback/consolidation suddenly lets go to the downside so these sell signals, even if it doesn't pan out, deserve our attention.

This morning started off quietly with a continuation of the sideways choppy consolidation we've seen since Monday. The afternoon turned weaker when it became more apparent that the consolidation wasn't going to lead to another bounce. The dipsters are probably getting a little frustrated that their favorite trade for the past 100 years (OK, I exaggerate but it feels that long) isn't working. It's not much but the pullback from March 1st is already a little deeper than anything we've seen since the Trump rally began on November 4th. The risk is that the hope-filled rally will start to deal with reality.

This morning's economic reports had very little effect on the market. One surprising number was the ADP report, which showed a higher than expected gain of 298K jobs vs. expectations for 180K and an improvement from 261K in January. This was the biggest monthly gain since April 2014. And the January number was revised higher from 246K. The expectation for the NFP report this Friday is 188K, down from 227K in January, but we could see an upside surprise there as well.

The strong employment number, especially if it's mirrored in Friday's NFP report, would prompt a higher expectation for a rate increase by the Fed next week, although they're pretty much 100% now for next week. Expectations of another hike in June jumped above 50% for the first time. We did see some selling in the bond market today, which drove yields higher, but the rates we see as consumers (2-year through 30-year) are not affected by the Fed. Market forces (supply/demand) are what drive their prices. What the Fed does is somewhat meaningless for most of us.

Crude inventories were reported this morning and they jumped +8.2M barrels last week, up from +1.5M barrels the previous week. This caused oil prices to take a dumperoo and oil broke support today (I'll cover more later).

Other than that, it was a quiet day but another weak one. The market is pulling back but it's doing so slowly and in a choppy fashion. This pattern supports the idea that we'll get another rally leg out of this but it's too early to tell whether or not the decline is simply building up for a bigger move to the downside or if instead it will continue to consolidate for weeks as it's done in the past before moving higher.

The RUT has been the weaker index and that could be an indication of bigger trouble for the broader market. I'll start tonight's chart review with a top-down look at the RUT to try to discern its next move.


Russell-2000, RUT, Weekly chart

Since December, when the RUT was first approaching its trend line along the highs from 2007-2014-2015, I've been watching to see if it will be resistance. It was finally tagged February 21st and again on March 1st (at 1414). Both times it left a significant bearish divergence on the daily chart as well as the weekly chart, as can be seen clearly on MACD. Price has rolled over from resistance and the oscillators have rolled over, giving the impression that this line of resistance is going to hold.

We could of course get another quick pop back up for another attempt or we could first see a deeper pullback to its uptrend line from February-November 2016, currently near price-level support (its June 2015 high) at 1296. If we get a choppy sideways/down pullback over the next several weeks we could see the uptrend line closer to 1340 by the time it's tested in April. A choppy pullback to the uptrend line would suggest another rally leg would follow. But a sharp impulsive decline to the uptrend line would suggest a bounce would be followed by a break of the uptrend line. But for now the short-term pattern is not clear enough to suggest one way or the other.


Russell-2000, RUT, Daily chart

The RUT's daily chart shows a little more clearly the price action at the trend line along the highs from 2007-2015 and the significant bearish divergence against the December high and between the February and March highs. Yesterday and today it's been struggling to hold support at its 50-dma, near 1376, and only slightly lower is an uptrend line from December 1 - January 30, near 1367.

The short-term pattern supports the idea that the RUT will find support at either of these two levels, 1376 or 1367, and start at least a bigger bounce. That bounce could lead to at least a minor new high to again test the trend line along the highs from 2007-2015, maybe by the end of the month. The choppy pattern in a shallow rising wedge since December would likely continue and see the RUT struggle to make it back up to the top of the wedge, which will be near 1425 by the end of the month. But if we get a bigger bounce and then a break of the uptrend line from December 1st it would be a stronger sign of the bear.

Key Levels for RUT:
- bullish above 1415
- bearish below 1367


Russell-2000, RUT, 60-min chart

The RUT's 60-min chart shows the struggle around 1376 (the 50-dma) and an expectation for a drop down to its uptrend line from December 1st. It could of course break the uptrend line but it's short-term oversold and I think the odds favor a bounce off support. A high bounce that's then followed by a break lower would increase the likelihood that we're at the start of a more serious decline. But until that happens we have to keep in mind the bullish potential for another choppy climb back up to the 1420 area later this month or into April.


RUT's Relative Strength vs. SPX, Daily chart

To put the RUT's weakness in perspective, the chart below compares its strength to SPX and as you can see, it has been underperforming SPX since the RS peaked on December 8th. Even more bearish, the RS of the RUT has now dropped below the bottom of a parallel down-channel that it's been in since December. Like a stock, when it drops below the bottom of a parallel down-channel it means the decline is accelerating. A deteriorating picture for the small caps is likely to infect the broader market.

S&P 500, SPX, Daily chart

From a short-term pattern perspective it's important for the bulls to defend against a break below the February 24th low at 2352.87 since it would indicate the leg up from February 24th completed. That in turn could indicate we're going to get at least a larger pullback before potentially heading back up again. A drop below 2352 would also be a break of support at its 20-dma, now near 2355, and an uptrend line from November 4 - January 31, now near 2353.

Only slightly lower is the trend line along the highs from April-August 2016, now near 2347, and a break below that level would be key for the bears. Once SPX broke above this trend line, on February 14th, it should act as support on a back-test. If the back-test doesn't hold it would mean it was a failed breakout attempt and that would be bearish.

Key Levels for SPX:
- bullish above 2401
- bearish below 2347


SPX vs New 52-week highs, Daily chart

While the pullback from last week looks relatively small and the choppy pattern supports the idea we could see another rally, the underlying strength of the market is questionable. As reflected with the RUT's underperformance, a check under the hood reveals further weakness. The chart below is just one example, which shows the deterioration of new 52-week highs into the March 1st peak.

The indexes were looking good with their new price highs but the rally was on the back of fewer stocks participating in the rally. This doesn't prevent another attempt at a new high but it does tell us the underlying strength in the market is waning. It's not a good time to chase the market higher when this occurs since a fast reversal makes upside potential dwarfed by comparison.

We could see another sideways consolidation like we saw off the December high but notice the higher high for 52-week highs in December vs. the lower high in March. This increases the chance for a more meaningful correction, if not bearish decline, than what we saw after the December high. I'm not showing the advancing stocks minus declining stocks but it's the same picture -- fewer stock participated in the advance into the March high than we saw into the December high.

While we're on the subject of new highs, Tom McClellan noted on Monday that we're nearing the dreaded "Ohama Titanic Syndrome" for the market. This is a signal that was developed back in 1965 by Bill Ohama and is generally agreed to be a preliminary sell signal for the market. It is triggered when the number of new 52-week lows for NYSE-listed stocks exceeds new highs within 7 trading days of a new market high. The NYSE made its high on March 1st and only 3 trading days later, on Monday, new lows exceeded new highs.

New lows have exceeded new highs 3 days in a row this week, which gets us closer to Ohama's refined syndrome signal, which he believes is more accurate if the market experiences 4 out of 5 trading days with new lows exceeding new highs and new highs must decline to about 1.5% of total issuance (about 30). The number of new highs on Monday and today were 42.

By Friday we'll know whether or not we have a more accurate syndrome sell signal and with many participants worried about an overvalued market and a Trump rally that could start to unwind, the sell signal could get more investors worried about the current decline if it continues.

Dow Industrials, INDU, Daily chart

On March 1st the Dow hit its trend line along the highs from May 2011 - March 2015 and then immediately sold off the next day. It then dropped back below the top of a parallel up-channel for its rally from February 2016, near 21K. The selloff from the trend line, like the RUT, and the rollover of its oscillators has it looking more bearish than bullish. But the short-term pattern for the pullback looks corrective and supports the idea that the bulls aren't quite finished yet. We could see another attempt to break above the trend line along the highs from 2011-2015.

If the sellers overpower the buyers we could see the Dow drop down to support at its 20-dma, currently near 20700, and its uptrend line from November 4 - January 31, currently near 20630. A drop below 20630 would be more bearish, especially if the decline starts to develop into a sharp impulsive move.

Key Levels for DOW:
- bullish above 21,200
- bearish below 20,630


Dow Industrials, INDU, 60-min chart

The current decline for the Dow has it approaching potential support near 20840-20850, which includes its February highs and its uptrend line from January 31 - February 8. This afternoon's low was 20835 and the uptrend line crosses 20840 at the open on Thursday. It's a good setup for at least a bounce off support to relieve the short-term oversold condition.


Nasdaq Composite, COMPQ, Daily chart

There are a few lines of support that the Nasdaq is currently testing. It makes it a bit congested on its chart, and hard to see the multiple doji stars for the past 3 trading days, but at the moment you can see the Nasdaq testing its uptrend line from December 30 - January 31, currently near 5860 (closer to 5848 when viewed with the arithmetic price scale). Today's close at 5837 was below this trend line but only by a minor amount and easily recoverable.

A more important trend line is the one along the highs from April-August 2016, which the Naz broke above on February 14th. It has used this trend line as support on multiple pullbacks since then and the line is currently near 5840, very close to today's closing price. A failure to hold this line would leave a failed breakout attempt.

Slightly lower, near 5828, is the 20-dma and then below that, near 5810, is its uptrend line from November 4 - December 30. And finally, its February 24th low at 5800 is the last support line the bears need to cross. All of this gives us a relatively tight support zone at roughly 5800-5860 for the bulls to use to launch either another rally leg or at least a larger bounce. Until the Naz drops below 5800 there remains the potential for another rally leg to a new high.

Key Levels for COMPQ:
- bullish above 5912
- bearish below 5800


10-year Yield, TNX, Weekly chart

The sideways triangle that I've been tracking on TNX since its December high counted as complete with the February 24th low, which was a slight throw-under below the bottom of the triangle (a typical way triangles complete). Yesterday TNX broke above the top of the triangle and rallied higher today. It should be into its final leg of the rally from July 2016 and the upside target zone remains 2.606-2.687, which are two price projections based on the wave pattern. In between is a downtrend line from 1988-2007, currently near 2.635 (arithmetic price scale).

Once this rally leg from July 2016 completes we should get at least a large pullback correction (for several months) before continuing higher (that's the bullish interpretation) or it will start back down and head for new lows later this year (the bearish interpretation). I favor the bearish interpretation, which is based on the longer-term pattern and the idea that the Treasury market will be the go-to place for yield, especially if the stock market heads back down. Foreign investors who want something more than a negative interest rate on their investments will also prefer U.S. Treasuries and higher demand for them will raise their prices and drive yields lower.


Transportation Index, TRAN, Daily chart

On Tuesday the TRAN dropped out of its small ending diagonal (rising wedge) off its February 2nd low. In addition to that bearish move it has now closed back below the November 2014 high at 9310. It has tried repeatedly to clear this S/R level but has been unable to do so. It also closed below its 50-dma, near 9281, and needs to recover that quickly if it wants to keep the bears away. The last break was February 2nd but was recovered the next day. Following the significant bearish divergence into the January, February and March highs, we could be seeing the start of a more significant breakdown.


U.S. Dollar contract, DX, Daily chart

Since its February 2nd low the US$ has been chopping its way back up in what looks like a small rising wedge pattern. It looks like it could use one more minor new high to complete the pattern, perhaps near 102.75 in another couple of days. Unless the dollar rallies above 103 I'm expecting it to soon start back down and head for its uptrend line from May-August 2016, currently near 98.15.


Gold continuous contract, GC, Daily chart

Gold has made a relatively quick move down from its February 27th high, which was a back-test of its broken 200-dma, followed by a bearish kiss goodbye. It then broke its 20-dma and uptrend line from December on March 2nd, followed by a quick back-test of both on Monday before dropped lower. It has now made it down to support at its 50-dma (1210.50) and price-level support near 1205, a break of which would obviously be more bearish for the shiny metal. We could see a bounce off this support zone before heading lower but so far I'm not seeing much in the way of bullish divergence to suggest support is going to hold.


As mentioned earlier, oil got hit hard after the morning inventory report. With all the oil rig platforms coming back on line and the much higher efficiency of the frackers I'm surprised the inventory report was a surprise but apparently caught more than a few traders leaning to the long side.

In fact, the COT report has been showing a huge number of speculators betting oil will continue higher (while commercials have built a larger net-short position). As can be seen in the chart below, the number of long contracts held by speculators (the blue line at the bottom) is at the highest level seen in a long time. It's a higher level than was seen in mid-2014 just before the price of oil crashed lower. The result will likely be similar here.

Speculators in Oil, updated through March 3, 2017, chart courtesy stansberryresearch.com


Oil continuous contract, CL, Daily chart

I've been expecting oil to drop lower from its choppy bounce pattern off the January 10th low and today's decline should be followed by lower prices. There is of course the potential for another leg higher in oil but with the large number of speculators betting on that outcome I think it would be wiser to bet against them (and with the commercials).


Economic reports

The few economic reports Thursday morning will not be market moving but Friday's could move the market if there are any big surprises in the employment numbers. It will all be in the interpretation of WWTFD (What Will The Fed Do).


Conclusion

Time and again we've seen the stock market go into a holding pattern following a rally and it appears so far that a similar pattern has started. Chopping sideways/down is a way to work off an overbought condition and set up the next rally and it's possible we're in the beginning of what could be another multi-week consolidation.

The decline from March 1st is already larger than anything we've seen in the rally off the November 4th low. It's not saying much but it is a change in behavior when the dipsters can't drive the market back up following a small pullback. Whether or not the current pullback turns into a full blown decline of 5% or more (the Ohama Titanic Syndrome signal is a threatening signal) we should be prepared for that possibility. At a minimum we should see a larger consolidation and worse we could see a much stronger breakdown. In either case I think it's riskier being long the market than short it.

As long as the pullback/decline continues to be a slow choppy sideways/down pattern we'll know it's likely to consolidate and work off the overbought condition before heading higher again. The consolidation would likely last through this month (oh joy).

But if the decline starts to steepen, which the RUT is threatening to do, and gains more momentum to the downside then we'll likely get a much stronger correction to the rally and potentially the start of a much more serious decline (if the bull market finished on March 1st, only days from the anniversary of the March 6, 2009 low). It's a good time for both sides to stay cautious while we wait for further price action to provide some more clues.

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

Keene H. Little, CMT