The tech indexes had a good day today while the others consolidated yesterday's losses. There are some important support levels that are holding, giving bulls hope that the 1-day selloff is finished, but that will depend on how the consolidation/correction plays out in the next day or two.

Today's Market Stats

Tuesday's decline saw high volume heavily skewed toward selling while today's volume was lower and the internals were only mildly bullish. A bounce attempt was made but on lower volume and relatively flat internals, suggesting the bounce attempt is a correction to the decline and not something more bullish. But we'll know more after another day or two.

There are many concerns that more investors are now talking about and most of them are market negative. The level of bullishness was doused with cold water after Tuesday's decline as the Trump trade starts to fizzle with the reports of difficulty that the Trump administration is having with the health care reform, which is the first major package they're trying to get through Congress.

The CNN Fear & Greed index has dropped from Extreme Greed (78) a month ago to the present Fear reading (32). The index was already pulling back from a month ago, indicating investors were starting to feel more and more nervous about the market. When it started to become apparent that the Trump administration wasn't going to be able to reinvent the Federal government the worries about his programs started to show up in investors' attitudes.

The health care reform is the first major package that Congress is trying to get through and with a Republican-led Congress the inability to push through reform has many wondering what other programs are going to be difficult to get through the sausage-making process. The rally from November was built on hope, not substance. It was the hope that health care reform, new spending programs, tax reform and other incentives for businesses (such as removal of excess regulations) would get done quickly and help the economy, jobs and business profits.

Now it's starting to look like many of those programs will get pushed out and may not even see the light of day if Congress remains locked in debate about everything. Interestingly, a log-jammed Congress is actually better for the economy since they seem only able to screw things up rather than fix them. But it's that expectations thing -- many have been expecting great things out of the Trump administration, hence the "Trump trade" and now that things are looking less hopeful we're starting to see some air let out of the hope-filled balloon.

Hope-filled rallies tend to be the weakest because they're not built on fundamentals. They might be considered fundamentally-supported rallies but they're based on the hope that the fundamentals will improve (with Trump's policies). When the reality hits that those changes will take longer to achieve, if ever, hope can turn to despair and bullish sentiment can evaporate in a heartbeat.

Many were wondering what sparked Tuesday's selloff, especially since the day started with a gap up. When a market is overbought and running on fumes it's a tinder box looking for a match. The catalyst is often something small that would normally not affect the market. But when investors start getting nervous and they pull their stops up tighter it usually doesn't take much to trigger enough selling, which then triggers more selling as stops get hit.

Late-to-the-party buyers also panic quickly and run for the doors at the first sign of trouble. This is why a market that's gone for a long period with practically no corrections is a more dangerous market. A good analogy would be a forest that has grown thick with underbrush because of the years of firefighting control. When the fire does finally get out of control and all that underbrush lights off it becomes a vicious fire.

Controlling the selling has left the market with a lot of underbrush that should have been burned away with regular and deeper corrections than we've seen for the past 4 months. It will only be known in hindsight if we're at the start of that process or if hope will live a little longer and drive the market back up. We still have many looking at this "dip" as a buying opportunity.

I consider the RUT one of the more important indexes to watch currently because of its leadership. It's a more volatile index, which can throw traders off the trail, but at the beginning of what could turn into a more significant decline I think it's important to watch what the RUT does since it's a good reflection of the bullish/bearish mood of the market. So I'll start tonight's review with the RUT.


Russell-2000, RUT, Weekly chart

Just as the RUT did at its June 2015 high when it banged into the trend line along the highs from 2007-2014, it has started a more significant pullback than we've seen since the November 4th low. It's too early to tell if we'll get a stronger pullback, like what happened following the June 2015 high, or if instead we'll see another attempt to get through the 2007-2014-2015 trend line, which will be near 1422 by the first week of April.

The first thing the bears need to do is get the RUT below price-level support at 1296 (it June 2015 high) and its uptrend line from February-November 2016, near the same level. In the meantime the larger trend is still to the upside.


Russell-2000, RUT, Daily chart

The daily chart shows the rejection at the 2007-2015 trend line following the March 1st high. Interestingly, when the chart is viewed with the arithmetic price scale the trend line is lower and acted as resistance to the bounce into the high near 1394 last Friday.

On Tuesday the RUT dropped down to price-level support at 1342-1347, shown with the horizontal red line on the daily chart below. Today it dropped below support but then rallied back up to it this afternoon and the day finished with a bullish hammer candlestick at support. This is generally a good reversal signal so watch for follow through to the upside on Thursday.

I show the potential for a bounce into Friday before heading lower but we'll have to wait to see if the bulls have different plans. If the sellers continue to pressure the market and the RUT drops below this morning's low at 1335 we could see a move down to the uptrend line from February-November 2016 and its 200-dma, maybe near 1290 next week.

Key Levels for RUT:
- bullish above 1394
- bearish below 1347


Russell-2000, RUT, 60-min chart

In addition to the bullish hammer for the daily candlestick, there's another reason why the bulls could get another rally leg. The move down from March 1st is a 3-wave move and the RUT achieved two equal legs down near 1335 today. It could be just an a-b-c pullback correction that's now ready for the next leg of the rally.

It's going to be tough to tell in the short term what it's going to be but if we get an impulsive rally, and certainly if it breaks the downtrend line from March 1st, we'll have a better clue about a new high coming. The bearish setup calls for a higher bounce and then a much stronger decline to follow.


S&P 500, SPX, Daily chart

There are multiple possible paths for the market from here, which is of course no different than any other time. But the challenge at the moment is trying to figure out whether Tuesday's strong decline (strong relative to what we've seen in the past 4 months) was meaningful as far as a trend change or just the completion of a pullback correction.

We've seen multiple times in the past where a strong down day ends up being the completion of a correction instead of something more bearish and that remains possible here. It's why I mentioned the 3-wave pullback on the RUT's 60-min chart -- it's the same pattern for the blue chips as well and it could now lead to another rally to new all-time highs.

But if we've started a more significant pullback/decline, and we're certainly due for one, we should see only corrective (choppy) bounce attempts and then lower. For now watch to see if SPX can make it back above its trend line along the highs from April-August 2016, currently near 2360. If it continues lower, watch for possible support at a short-term uptrend line from December 30 - January 31, near 2330, which coincides with its 50-dma.

Key Levels for SPX:
- bullish above 2390
- bearish below 2330


Dow Industrials, INDU, Daily chart

As mentioned above, the blue chips have the same pattern and at the moment that means a 3-wave pullback from March 1st could now be followed by a new rally to a new high, potentially up to about 21,275 where it would hit an intersection of trend lines shown on the daily chart below. If the sellers continue to apply pressure, maybe after a higher bounce into Thursday or Friday, we should see the Dow drop down to its 50-dma, currently at 20420. Below that there's not much support until price-level S/R near 20K.

Key Levels for DOW:
- bullish above 21,000
- bearish below 20,579


Nasdaq-100, NDX, Daily chart, Arithmetic price scale

Today NDX used its trend line along the highs from April-August 2016 as both support and resistance at its low and high, which sounds a bit strange until you look at the chart with both the log and arithmetic price scales. The first chart below is using the arithmetic price scale and you can see this morning's low at 5327 touched the trend line and then bounced. Near the same level is a potential price-level support zone at 5330-5338, where it closed its March 1st gap up and tested the lows on March 6th and 9th. This looks like a bullish back-test and if support holds we could see the start of another rally leg to new highs. But a close below 5330 would suggest another leg down for the pullback/decline.

Key Levels for NDX:
- bullish above 5440
- bearish below 5330


Nasdaq-100, NDX, Daily chart, Log price scale

Now we look at the same NDX chart but with the log price scale, which shifts the trend line along the highs from April-August 2016 up a little bit. This trend line was broken with Tuesday's decline and today's bounce made it back up to the line, near 5368 (where it closed). Now we have a bearish back-test of the trend line and only slightly higher is its broken 20-dma, near 5371. Following the bearish back-test we could see another leg down for a larger pullback/decline. We are left wondering if this trend line is now support or resistance and it depends on how you view the chart.

We could get a little larger bounce off this morning's low where it would achieve two equal legs up near 5387, which is between a 50% and 62% retracement of its decline (5383 and 5396, resp.). Unless Tuesday's decline completed a sideways correction off the March 1st high we should see the decline continue following this bounce.


10-year Yield, TNX, Weekly chart

Treasury yields peaked on March 10th, a few days before the FOMC announcement to raise rates. Since the announcement on the 15th yields have declined, which leaves us wondering if it's been simply a sell-the-news reaction or something more. The bond market is considered smarter than the stock market and the rally in bonds (decline in yields) could be indicating the start of a more significant shift.

One reason why I suspect we could be starting a more significant shift is because the wave count for the rally from July 2016 looks complete following the triangle consolidation from December into February and then the minor new high into the March 10th high. TNX has since dropped back into the triangle, which is typically a good indication the high is in place.

At a minimum we should expect a larger pullback to at least correct the rally from last July. More bearishly, the larger wave pattern suggests we still have another leg down to new lows coming in 2017-2018. Lower yields would reflect the idea that worries of inflation will shift back to worries about deflation. We have a huge credit bubble (personal, corporate and government) waiting to be popped and a credit collapse is a cause for deflation. I firmly believe we still have that in front of us.


KBW Bank index, BKX, 60-min chart

A rate increase from the Fed is supposed to help banks but like the bond market we've seen the opposite reaction than what was expected. The banks were pulling back marginally since March 1st but then started to accelerate lower after last week's FOMC announcement

What's instructive, from a price pattern perspective, is how price played out this week, which is shown on the BKX 60-min chart below. On Monday I had noted the brief break below the bottom of a bullish descending wedge, which had developed since the March 1st high. The recovery back inside the wedge during the day had it looking like a throw-under finish that would lead to a rally.

As I noted to readers, the one non-confirming signal was the lack of bullish divergence at the lows inside the descending wedge. This suggested the bullish descending wedge was going to fail and that a drop below Monday morning's low at 94.39 would likely see acceleration of the selling. The sudden drop into Monday's close below Monday morning's low was the warning sign that we should expect strong selling on Tuesday, which is exactly what happened.

When a price pattern fails it tends to fail hard and this is a perfect example of it. The drop below 94.39 Monday afternoon resulted in a strong selloff, which was predicted by the failed bullish pattern. BKX then dropped below its uptrend line from June-September 2016, currently near 91.10, and is struggling to bounce back up to it. If it remains resistance on a back-test look for additional selling to follow. A rally back above the trend line would be potentially bullish but only if we see an impulsive move back up.


Transportation Index, TRAN, Daily chart

The TRAN has been another leader to the downside, reflecting concerns that the economy is not doing as well as we've been hearing from economists. The small rising wedge for the last part of its rally from January into the March 1st high was met with significant bearish divergence and once it dropped out of the wedge on March 7th it began to sell off harder.

The TRAN has now made it down to support at its uptrend line from June-October 2016, tagging it with this morning's low at 8903, and could get at least a decent bounce correction. But with a lack of bullish divergence at this morning's low it's looking like trendline support will break.


U.S. Dollar contract, DX, Daily chart

The US$ made a closing low at 99.51 on January 31st (and a lower intraday low at 99.19 on February 2nd) and the dollar is trying to hold at its January 31st closing low, finishing today at 99.48. There are some hints of short-term bullish divergence suggesting a bounce is coming but for now there's downside potential to the uptrend line from May-August 2016, near 98.45, which is coincident with its 200-dma. Below that is a price projection at 97.65 for two equal legs down from its January 3rd high.


Gold continuous contract, GC, Daily chart

Gold rallied fairly strongly on Tuesday as the stock market tumbled. It looked like a safe-haven play. It added a little more today but after a morning pop up (with the stock market's quick decline) it's now looking like the bounce could be topping (bearish divergence last week). If the bounce has a little more life to it we could see gold challenge its broken 200-dma, near 1262.70 (today's high was 1251.50), and its downtrend line from August-September 2016, currently near 1266. Above 1270 would be more bullish but until that happens I'm thinking we have a strong selloff coming.


Silver continuous contract, SI, Daily chart

Silver has a very similar pattern as gold but it didn't quite as strong a rally on Tuesday. Its bounce off the March 15th low is not as strong as gold's rally as it battles its broken 20- and 50-dmas, which are currently at 17.59 and 17.52, resp. Today it closed at 17.55. Only slightly higher is its downtrend line from July 2016, currently near 17.73, and silver would be more bullish above that level, but maybe only for a trip up to its broken 200-dma, near 18.06, before heading back down.


Oil continuous contract, CL, Daily chart

Oil is now nearing its uptrend line from August-November 2016, currently near 46.30, about 70 cents below this morning's low. It's starting to show bullish divergence so I suspect support will hold and it might even get a bounce from here. The moves for oil, like most commodities, are mostly 3-wave and right now we have a 3-wave pullback from its January 3rd high. We could therefore start a bounce back up, a multi-week consolidation on top of its uptrend line from August-November. If it can get back above price-level S/R near 50.90 it would be more bullish but the larger pattern suggests we'll only get a bounce correction before dropping lower.


Economic reports

Thursday will be another quiet day for economic reports. New home sales will be reported, which are expected to have ticked higher in February as compared to January. That wasn't true for existing home sales that were reported this morning so we'll see if new homes are doing a little better than existing. Friday we'll get the durable goods report, which is expected to show improvement in February.


Conclusion

Today started with a little more selling, probably by those who received a few margin calls following Tuesday's strong selling. Margin debt is at record highs and there are a lot of traders using margin to max out their bullish accounts. Any decline is going to hit them with margin calls and that's one of the risks for the current market.

But the morning selling was followed by a bounce and now we need to figure out whether it's going to lead to something more bullish or just one of the dead cat varieties before heading lower. If we see the market consolidate near the lows for a day or two it's going to look more bearish. But if the bounce develops into a sharp move back up we'll then have to think about the possibility for new highs following the corrective pullback off the March 1st highs.

The pattern for the tech indexes suggests we'll get at most a high bounce before dropping back down. How the price pattern develops for the next two days will provide clues for how next week is likely to go.

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

Keene H. Little, CMT