As was expected at this point, the Fed raised rates 0.25% with today's announcement. What was a little surprising to many was the lack of a hawkish tone about further rate increases.

Today's Market Stats

There were practically no surprises from the FOMC's announcement this afternoon as it delivered an expected +0.25% rate increase and mentioned it's on track for two more rate increases this year. Considering the recent inflation and employment data there were some who began to believe the Fed would have to be more aggressive than just two more rate increases this year and only 3 next year.

Slow and steady seems to be the Fed's mantra and if the data continues to show stronger inflation we'll have to see if the Fed changes their tune. The lack of a more hawkish tone to the Fed's announcement helped spark a rally in the stock market as it realizes the Fed is not going to kill the goose that's laying the golden eggs. It also helps explain the rally in the bond market and the decline in the US$. It might even explain the disappointing reaction in the banking sector.

While the broader market rallied this afternoon the banks did not. Usually a rate increase is good for banks since it widens their spread between loan rates and rates paid to their depositors. The banks should have rallied and the fact that they didn't means there's worry that the Fed might see something that will dampen their enthusiasm about raising rates.

One area of concern is commodity prices -- they've been in decline since early February, which was a lower high for the commodity index compared to the June 2016 high. In other words, commodity prices have not been mirroring stock prices and it could be an indication that the global economy is slowing. The U.S. would not be immune to the slowdown and if the banking sector starts leading to the downside, along with the small caps, it would be a warning sign for the broader stock market.

The US$ also reacted negatively to today's announcement, which is opposite of what it normally does. Higher rates make the dollar more desirable, which in turn drives the price higher. Seeing the opposite today is the currency market (smartest of them all) telling us things might not be as rosy as the stock market's rally would have us believe.

Bonds also reacted opposite to what would have been expected. The Treasury market rallied, which drove yields lower at a time when the Fed is raising rates. The bond market is the place to watch, not the Fed, and while a post-FOMC reaction doesn't mean the move will continue, it does offer fair warning. A rallying bond market would put negative pressure on the stock market.

So the day turned out to have some mixed messages and the same can be said about the stock market. While the rally in the stock market is showing signs of slowing, there's nothing yet to confirm a high is in place. That leaves bulls in control until we see something that says otherwise.

The problem at the moment is that the stock indexes do not have clear short-term patterns and that leaves the direction for the next several days up in the air. But as I'll show the charts, starting with the Dow's weekly chart, I think upside potential is limited while downside potential looks to have the greater potential for a trader.


Dow Industrials, INDU, Weekly chart

At its March 1st high the Dow tested the tops of two up-channels, one for the rally from February 2016 and the other for the rally from May 2011. The tops of these two channels actually cross near 21215 next week and we could see another test of the tops of the channels if the rally holds up into next week. The vulnerability is for a drop down to at least the bottom of the up-channel from February 2016, perhaps near the January low near 19678 by mid-May. The Dow would obviously be more bearish below that level.


Dow Industrials, INDU, Daily chart

If I view the rally from January 19th as needing a final 5th wave, it would equal the 1st wave near 21225, which is very close to the tops of the two up-channels mentioned above. That's the upside potential I currently see. But the short-term pattern supports the idea that today's rally might have been the conclusion to a small bounce pattern off the March 9th low and now we'll get another leg down for the pullback/decline from March 1st. Whether another leg down would then lead to another rally or something stronger to the downside would have to figured out after getting the decline and seeing where it might stop.

Key Levels for DOW:
- bullish above 21,225
- bearish below 20,770


Dow Industrials, INDU, 60-min chart

The Dow's 60-min chart shows a closer view of how it held support at its uptrend line from November 4 - January 31, including another test of it this afternoon before the FOMC announcement. Based on a projection for the bounce pattern the Dow would be more bullish above 21050, in which case I'd look for a rally to the 21225 target. But a drop below this afternoon's low at 20870 would be a bearish heads up and then below Tuesday's low at 20786 would confirm we're getting another leg down for at least a larger pullback. Two equal legs down would target 20585 and it would be more bearish below that level.


S&P 500, SPX, Daily chart

SPX has the same pattern as the Dow and I see an equal chance of a little more rally but it wouldn't turn more bullish unless it was able to get (and stay) above 2410. If we see a sharp reversal back down Thursday morning I'd look for a drop down to at least 2343 where it would achieve two equal legs down from March 1st. Much below that level would have things looking more bearish.

Key Levels for SPX:
- bullish above 2410
- bearish below 2340


SPX vs 52-week highs, Daily chart

The problem the market is experiencing right now is a lack of participation in the rallies, which is one of the indications we're likely much closer to the end of the rally that at the start of a bigger one. The number of new 52-week highs continues to decline, which shows us the rally to new highs (or tests of highs) is happening on the backs of fewer and fewer stocks. New 52-week lows beat new highs 4 out of the 5 days last week. Unless this gets turned around we should be looking for selling opportunities instead of buying opportunities.

In addition to some of the technical indicators that show the market's rally is tiring, there are some fundamental reasons why we should be wary of any further rally attempts. We're getting plenty of warning signs and while they don't pinpoint exactly when we'll see a market top (wouldn't it be nice if it was that easy) we do have enough to tell us to be very careful on the long side.

Along with the declining number of new 52-week highs, another measure of lack of participation can be found in the numbers of senior executives of companies who don't believe this is a good buying opportunity. When they are doing a lot of insider buying it should give us confidence to add to our own portfolios. And just the opposite is also true. Currently, according to SEC filings, insider buying is at its lowest level in the past 30 years. Let that sink in for a bit and it's clear company leaders do not like the investment opportunities in their own companies and yet other investors keep snapping up the stock. Big warning sign.

The stock market is extremely over valued and the lack of insider buying supports that view. The P/E ratio of the S&P 500 stocks is now above 26.5 and the only other two times it was higher in the past 100 years was in 2000 and 2008, both of which were not good years to be invested in the stock market.

The Cyclically Adjusted P/E (CAPE), which smoothes out the previous 10 years, has only been higher twice in the past 100 years as well -- 2000 and 1929. Again, not good years to be invested in the stock market.

Complacency in the market is also a dangerous time and the lack of a 1% pullback for 106 straight days at this point has many feeling the market is impervious to any bad news. The longer a market rally goes without corrections the more vulnerable it becomes to an even larger correction as all those late-to-the-party buyers start to bail en masse. The last time the S&P went this long without a stronger correction was 22 years ago (1994) and the most recent time it went close to 100 days without a 1% correction was prior to the 2008 crash.

Stocks are expensive, complacency is high and we haven't had any large corrections since October. What could possibly go wrong?


Nasdaq Composite, COMPQ, Daily chart

The Nasdaq also has the same pattern as the blue chips and a continuation of the rally on Thursday would open the door to new highs (it tested today's high but no new high yet). There's upside potential for the Naz near 6000, another 100 points higher, if it can make it up to the trend line along the highs from November-February. The first sign of trouble for the rally would be a drop below Tuesday morning's low near 5832.

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


Semiconductor index, SOX, Daily chart

One of the drivers behind the rally in the techs, especially the NDX, has been the semiconductor sector. But that might be about to change if the multiple trend lines and bearish divergence on the SOX daily chart will have anything to say about the current rally. The SOX has been pushing up against the trend line along the highs from March-July 2016 and it has now run into the trend line along the highs from July 2014 - June 2015.

It's getting pinched in a rising wedge pattern and the waning momentum for the rally suggests the end of the rally could be very close, if not here. Conversely, a rally out the top of its rising wedge would be a bullish move but it will obviously need a strong catalyst to void the bearish divergence. A drop below the February 24th low at 955 would be confirmation a top is in place.


Russell-2000, RUT, Daily chart

The RUT has been more volatile than the other indexes and today it outperformed to the upside. As I'll show further below, the RUT has been underperforming the market for a while but today it got back a little bit of its greater loss. It still has further to go to challenge its March 1st high and the first thing the bulls needed to do was get the RUT back above its 50-dma, near 1376, which it did today with its high at 1385.69. The next hurdle is its broken 20-dma, near 1388, and if it can rally above that level we could see a run back up to its trend line along the highs from 2007-2015, near 1420.

But at the moment there's a bounce pattern off its March 9th low that suggests today's rally is going to be followed by another leg down for the decline off its March 1st high. The first downside projection in that case would be 1328 for two equal legs down and then near 1293 and a test of its uptrend line from February 2016 as well as its 200-dma

Key Levels for RUT:
- bullish above 1422
- bearish below 1347


RUT's Relative Strength to SPX, Daily chart

The RUT has been a concern for bulls since December when it started to significantly underperform the market. The chart below shows the Relative Strength (RS) of the RUT as compared to SPX. You can use technical indicators on RS charts just like others and there are two things to point out here.

Note the RUT's RS dropped below the bottom of a parallel down-channel, on March 7th, for the decline from December. Just like a stock, when it does this it means the decline is very likely going to accelerate lower. In this case it could mean SPX will rally without the RUT or that the RUT will lead it to the downside. Currently it has bounced back up to the bottom of the down-channel and this is a typical back-test which will lead to a continuation lower if the bearish message from this chart is correct. If you're looking to play the short side in the market, assuming the indexes turn back down, the RUT (IWM) is the one to pick on.


20+ Year Treasury ETF, TLT, Daily chart

Bond prices, as represented by TLT, have been in decline since the July 8, 2016 high and last week, on March 8th, TLT broke below its uptrend line from February 2011 - December 2013. But today's bullish reaction to the FOMC announcement has TLT back above the uptrend line, leaving a possible head-fake break (or is today's rally the head fake?). Notice too that Monday's low was slightly lower than its December 2016 low but with significant bullish divergence. It's looking like a bottom could be in but that would not be confirmed until it rallies above its February 24th high at 122.14. Potential resistance to a further bounce is the bottom of its previously broken sideways triangle, currently near 119.60.


KBW Bank index, BKX, Daily chart

The banks have been pulling back marginally with the broader market since March 1st but what was surprising was to see the banks selling off after the FOMC announcement this afternoon, just the opposite of what the broader market was doing. Was the rate hike already priced in? I could say that's probably true if the banks had rallied into today's announcement but that's not the case. For the moment it's a question mark but if the banks continue to show weakness it would be another warning sign for stock market bulls (how many do we have now?).

BKX has dropped back down to a mid-line in an up-channel from April-June 2016. The last time it did that was January-February before launching another rally leg. Back then it was also being supported by its 50-dma, which is currently a little lower, at 94.10 today. This morning's low was 95.49, which was nearly tested with this afternoon's low at 95.51.


U.S. Dollar contract, DX, Daily chart

The US$ reacted negatively to the FOMC announcement, dropping more than $1 (-1%) from its pre-FOMC price, which is a relatively large move for a currency. Apparently the Fed's less-than hawkish statement about future rate increases was reason enough to sell.

From a chart perspective today's decline looks bearish because it followed Tuesday's back-test of the rising wedge pattern off the February 2nd low, which was broken on Monday. The back-test has been followed by a bearish kiss goodbye and there's a good chance the decline will continue to at least its uptrend line from May-August 2016, currently near 98.50, which is also where its 200-dma is located. The dollar remains bearish below its March 2nd high at 102.27.


Gold continuous contract, GC, Daily chart

Gold did just the opposite of the dollar by spiking back up following the FOMC announcement. Gold had broken price-level support near 1205 last Thursday and had been hanging around under support. Today's rally popped gold back above 1205 and it was able to get back above its broken 50-dma at 1214.90 (with a high at 1222). I see higher bounce potential to at least the broken 20-dma, near 1229, but following the February-March decline it's looking vulnerable to another leg down.


Oil continuous contract, CL, Daily chart

Tuesday morning's sharp decline in oil was reversed with the afternoon sharp rally, which retraced the morning decline. The resultant bullish hammer candlestick for Tuesday is pointing to at least a larger bounce (in time if not price) before heading lower. If oil can get back above price-level S/R near 51 it would provide us a with a bullish heads up but for the moment I think there's a higher probability for either a consolidation or for it to head lower sooner rather than later.


Economic reports

There were no surprises in this morning's economic reports and with the market more focused on what the Fed will do it didn't matter much anyway. On Thursday we'll get the unemployment claims data as well as housing starts and permits, which are not expected to change much. We'll also get the Philly Fed index for March, which is expected to show a decline from February, and the JOLTS report on job openings.


Conclusion

The post-FOMC reaction was expected since rarely have we found the market to sell off following their announcement. It's as if buy programs are preset to make sure the market doesn't sell off. We can't have the Fed embarrassed by such a thing. What happens the following day is usually more telling and it's often a reversal of the post-FOMC afternoon move. That would mean at least a down day on Thursday but as shown on tonight's charts, there are some upside targets that the indexes could be heading for.

With a very complacent market, one that's overbought and showing waning upside momentum, it's a risky time to be long the market. Following the market higher with trailing stops seems like a prudent thing to do. Placing stops just below pullback lows is a good tactic here.

Whether we'll get a catalyst that sparks stronger selling (something greater than 1%) or just a tired market that starts down and trips stops along the way, we're likely close to significant high for the major indexes, if the highs are not already in place. There are no signs yet of a market top (no strong impulsive moves down) so there's not much for bears to do yet.

But if you're itching to get short, use this time to look at Relative Strength charts to see which indexes, sectors and stocks you want to consider. I have a feeling when a breakdown happens it's going to happen quickly. In the meantime, if you're long the market just enjoy the ride with the knowledge that your stops are set and that you'll let the market tell you when it's time to pull the ejection handle.

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

Keene H. Little, CMT