The big question on most everyone's mind is whether the bounce off Monday's low is of the dead cat variety or something more bullish. The jury is still out deliberating while the indexes have pressed up against some potentially strong lines of resistance. The jury should decide in the next day or two.

Today's Market Stats

Depending on the index we look at we see either most or nearly the entire March 21st decline retraced with this week's bounce. Many bears speculate it was mostly short covering and are itching to short the bounce. The bulls see steady buying off Monday's low and while trading volume hasn't been strong in the rally the market internals have supported the idea that the rally has more room to run. What happens over the next couple of days will help traders decide whether to look for dips to buy or bounces to short.

Today's trading was a little more lackluster than Monday and Tuesday, especially for the blue chips, and once again it can be argued either way. The bears see the short-covering rally already running out of steam while the bulls see today as more of a breather in preparation for another move higher.

The tech indexes had a better day, up about +0.4%, and the RUT was also a little stronger than the blue chips, up +0.3%. But the banks and semis spent the day in the red and bulls would much prefer those two indexes supporting the rally. There was more buying in Treasuries and that's another negative pressure on stocks. As I'll review with the charts, it's looking like we should be close to at least a pullback to correct this week's rally and potentially something a little more bearish.

The only economic reports of merit this morning were two housing related numbers -- the MBA Mortgage Index, which improved slightly from -2.7% the week prior to last week's -0.8%, and the Pending Home Sales, which improved greatly from -2.8% in January to +5.5% for February (double what had been expected). As discussed below, a big jump in consumer confidence translated to higher confidence in buying a home.

There was a big jump in consumer confidence, as reported yesterday, which jumped to 125.6 in March, up from 116.1 in February. That's the highest reading since 128.6 in 2000 and very likely reflects the confidence in the stock market after the big post-election rally. The reading was before last week's failure to get a health care reform bill passed and the stock market decline.

The high consumer confidence reading coincides with bullish enthusiasm for the stock market. There was an article in Bloomberg this morning, Bullish Americans, that showed the chart below to point out how bullish Americans have become about the stock market -- 47.4% of Americans expect the market to be higher in the next 12 months. This is the highest reading since January 2000, just before the March 2000 high.

From a contrarian perspective, the highest consumer confidence and bullish stock market sentiment since 2000 are not something the bulls should be rejoicing about. It's more likely to mean that anyone who wants to be invested in the stock market is likely already in, including fully invested mutual fund managers, and that could leave a dearth of buyers to help power the market higher.

What we don't know is how much more buying will come from corporate buybacks, which have been a huge driver behind the stock market's rally over the past several years. Extremely low interest rates have made it cheap to borrow funds for buybacks. Additionally, companies have preferred to use earnings to pay for buybacks and higher dividends. Over the longer term this is troubling since it's an inefficient use of capital resources. It's a form of financial engineering instead of investing in the future of the companies and that could exacerbate a future downturn.

The funding of corporate buybacks has resulted in a massive amount of borrowing and corporate debt levels that are now very high. If interest rates continue to climb (although I have my doubts about that) and earnings slow down with the expected slowdown in the economy (GDP has been ratcheted down significantly in the first 3 months of this year) those companies which borrowed heavily are going to find themselves in a bit of a pickle. All of this could be coming to a head at the same time consumer and investor sentiment are at/near all-time highs.

Countering the bullish investor enthusiasm is the latest Investors Intelligence reading, which was after last week's selloff. The selloff was stronger than what we had seen for more than 4 months and it scared a lot of investors. After this week's recovery we'll see if that gets reversed but today's report showed a sharp drop in bulls vs. a steady reading for bears. Bulls dropped from 56.7% to 49.5% while bears rose only slightly from 17.3% to 18.1%. The resulting spread declined by 6.4% and as Tom McClellan noted to his subscribers, a one-week drop of more than 6% oftentimes marks a bottom for the stock market's pullback.

SPX struggled to add points today but managed to finish in the green with a +0.1% gain. It remains a good proxy for the market and I'll start off the chart review with a weekly chart of SPX.


S&P 500, SPX, Weekly chart

When the price pattern becomes more difficult to read I find that trend lines and channels often do a good job guiding traders. Along with moving averages and Fibonacci levels they provide reasons to watch for possible support and resistance. Back in mid-February SPX had climbed above its trend line along the highs from April-August 2016 and stayed above the line until it dropped back below the line last week.

With the rally to yesterday's and today's high (a test of yesterday's high) SPX is now back-testing this trend line and is potentially setting up a bearish kiss goodbye if it falls back down. But if the bulls can keep up the buying pressure for the next couple of weeks we could see a rally to the 2450 area before meeting the next lines of resistance.


S&P 500, SPX, Daily chart

I've drawn in a down-channel for the pullback from March 1st that uses a trend line along the two lows of the pullback and attaching a parallel line to the high in between the two lows (a typical channel construction) and yesterday's and today's rally also tested the top of this down-channel, currently near 2361.

As mentioned above, additional resistance is at the trend line along the highs from April-August 2016. Only slightly higher, now near 2365, is the broken 20-dma and for all these reasons I think it's going to be tough to power higher. But if SPX does make it above 2366 (and holds above) then we'd have a bullish heads up that we'll see a stronger rally.

Key Levels for SPX:
- bullish above 2390
- bearish below 2322


S&P 500, SPX, 60-min chart

The 60-min chart shows price struggling at the top of its down shown on the daily chart above. At the same location, at 2361.58, is the 50% retracement of the pullback from March 1st. If the rally does continue on Thursday watch to see how it does at the downtrend line from March 1-15, near 2379.


Dow Industrials, INDU, Daily chart

The Dow was the weak sister today as it was the only major index to trade in the red all day. Yesterday it was able to get back above its broken uptrend line from October 2011 - November 2012, but today closed back on the trend line, near 20660. Monday's low was a bullish test of the 50-dma, now near 20495, and if the buyers can keep up the pressure we could see a test of its broken 20-dma, nearing 20820. But if the sellers return and drive the Dow back below its 50-dma we could see a decline to price-level S/R at 20K.

Key Levels for DOW:
- bullish above 21,000
- bearish below 20,412


Nasdaq Composite Index, COMPQ, Daily chart

The techs have been the stronger indexes in this week's rally and NDX is very close to achieving a new high above its March 21st high. The Nasdaq is only a smidge behind NDX but it could struggle to make it higher. When viewing the daily chart with the log price scale it puts the trend line along the highs from April-August 2016 near 5901, which is what the Naz bumped into today.

The chart below is using the arithmetic price scale, which lowers the April-August trend line but it also lowers the broken uptrend line from November-December, which is also now near 5901. So regardless of the price scale there is a trend line that's currently blocking the bull's path.

There's a possible megaphone pattern for the price action since March 1st, the top of which is currently near 5937, and this is typically a topping pattern. A marginal new high with another lower high for the oscillators would be a very bearish sign. But a rally above 5937 would open the door to 6000-6025 (where the broken uptrend line will be by April 7th when using the log price scale, which is a potentially important turn date).

Key Levels for COMPQ:
- bullish above 5950
- bearish below 5750


Russell-2000, RUT, Daily chart

After flirting with the bears last week and again on Monday, with the break below price-level support near 1347, the bounce off Monday's low has now run into possible trouble with its 20- and 50-dmas, currently near 1370 and 1376, respectively. Today's close near 1372 places it between the two averages. Only slightly higher is its downtrend line from March 1-17, currently near 1378. A rally above 1380 would therefore provide us with a bullish heads up but until that happens it's a setup for a reversal back down, especially with a short-term overbought market.

Key Levels for RUT:
- bullish above 1394
- bearish below 1335


Since the end of 2016 we saw a significant increase in the net long positions by the commercial traders in 10-year Treasury futures. The Commitment of Traders (COT) has shown a significantly large spread between commercial traders and non-commercials (the rest of us, including fund managers) where the non-commercials had steadily increased their net short positions as they continued to bet on the continuation of the selloff in the bond market.

With the Fed raising rates and threatening to continue raising them it would seem a natural bet for bond yields to head higher (with selling in the bond market). This helps explain the large net short position by the speculators. But when too many believe in something it's often wise to take the opposite trade. This is why it's important to look for extremes in the COT positions and at least shy away from trades where the speculators have piled into.

The spread between commercials and non-commercials has reduced somewhat since the beginning of March as the 10-year yield (TNX) double topped against its December high. But the spread is still wide enough to suggest yields have further to fall (further rally in bond prices) before the COT readings become more neutral.

10-year Yield, TNX, Weekly chart

The 10-year yield has stalled since mid-December and the March 10th high was a test of the December high with significant bearish divergence. It seems everyone was already in the pool and there were no more sellers to drive bond prices lower. It's possible we'll see TNX chop sideways while the overbought condition (oversold on bond prices) works its way off. But I think it's more likely we'll see at least a larger pullback, if not the resumption of the decline in yields this year.


KBW Bank index, BKX, Daily chart

Along with the "unexpected" rally in Treasury bonds following the Fed's rate announcements (as happened in 2005 when the Fed started raising rates) the decline in bank stocks following the Fed's announcements has surprised many. The common belief is that banks' earnings will improve with higher rates (it increases their profit spread between loan rates and deposit rates). The rate increase might have already been priced in when BKX peaked on March 1st but that calls into question the belief that the Fed will continue raising rates.

The weekly chart of BKX shows the March 1st high achieved a Fib projection at 99.96 (just shy of it with a high at 99.77) for the rally from June 2016 where it equals 261.8% of the first leg of its rally off the February 2016 low. It was a small throw-over above the top of a parallel up-channel for the rally from 2009 but the week closed at the top of the channel. Now the question is whether or not the rally from February 2016 is complete. The correct answer to that question will help determine whether or not we should be looking for a higher rally this year or to short the current bounce.

The bullish wave count calls the pullback from March 1st the 4th wave correction in the rally from February 2016. That interpretation calls for another leg up to above 100 -- I show a projection to about 103 where the 5th wave of the rally would equal the 1st wave. The bounce off the bottom of its up-channel for the rally from June 2016, as well as the trend line along the highs from April 2010 - July 2015, both near Monday's low at 88.10, is reason enough to feel bullish about BKX here.

Countering the bullish interpretation is the idea that we should be looking for just a 3-wave move up from February 2016 and that the March 1st high was the completion of the move. That makes the current bounce, which could get larger, something that should be shorted. In order to prove the bears correct they'll need to see BKX break below Monday's low (which is true for all the indexes).


Transportation Index, TRAN, Daily chart

As a reflection of our economy, which has been downgraded significantly since the end of last year (along with corporate earnings expectations), the TRAN is a good index to watch. Shipping goods and materials, or not, tells us when the economy is running on all 8 cylinders or if some cylinders are starting to misfire.

As with so many indexes, the TRAN topped on March 1st following a small rising wedge off the January 3rd low. That wedge was quickly retraced by last week and in the process the TRAN broke its uptrend line from June-October 2016, near 9010 at the time. This week it made it back up to the trend line, currently near 9095, for what could be a back-test that will be followed by a bearish kiss goodbye. A drop below Monday's low at 8798 would confirm the bearish setup. A little higher, if the buyers keep up the pressure, is the declining 20-dma, now nearing 9150. In order to turn this more bullish we need to see the TRAN back above 9310.


U.S. Dollar contract, DX, Daily chart

Predictably, the US$ bounced off its uptrend line from May-August 2016 when it was tagged Monday morning. We have a 3-wave move down from the January 3rd high and that could be the completion of the pullback that we'll see for the dollar. I think the dollar has lower to go before setting up a bigger rally but we could first see a higher bounce before turning back down.

The declining 20- and 50-dma's have come together at 100.62 and they could be upside targets for the current bounce. But like the stock market, a drop below Monday's low at 98.67 would be a break of its uptrend line from May 2016 and likely stronger selling. But the first downside target would be 97.65 for two equal legs down from January and then more bearish below that level.


Gold continuous contract, GC, Daily chart

Monday's spike low in the stock market was matched with a spike high in gold, which was a back-test of its broken 200-dma at 1262.50 (gold stopped just shy of it at 1261). The 200-dma is now near 1262, which matches its downtrend line from August 2016, and therefore gold would be at least short-term bullish above 1263. The next upside target would be its downtrend line from 2011-2016, near 1290.

But at the moment we have a double top at the 200-dma with bearish divergence, suggesting a turn back down. The first support level would be the 20- and 50-dma's, currently near 1230 and 1228, respectively.


Oil continuous contract, CL, Daily chart

With last week's and Monday's lows oil nearly tagged its uptrend line from April-August 2016, now near Monday's low at 47.08, and got a good bounce. Today was a strong day for oil, up +2.4%. I'm surprised oil's rally didn't help the stock market more. Oil has now made it up to slightly above its broken 20-dma, currently at 49.29.

A rally above the 20-dma would target price-level S/R near 51, which was broken sharply on March 8th. Above that level would be more bullish but it would then have to contend with its declining 50-dma, currently at 51.64. Oil might bounce a little higher but I believe it will be followed by a continuation lower.


Economic reports

Other than Thursday's usual unemployment claims data we'll get the 3rd estimate for GDP, which is not expected to change. The Atlanta Fed's GDP Now numbers suggest half the government's 2% estimate. Friday we'll receive the personal spending and income reports (no changes expected from January) and the PCE prices (watched carefully by the Fed), which is expected to show some softening in the increase in prices. We'll also receive the Chicago PMI and Michigan Sentiment, neither or which are expected to changed much from February.


Conclusion

The bounce off Monday's low looks strong, albeit on lower volume than the decline, but it's not clear yet whether it's more short covering than real buying and the start of something more bullish. The price pattern could be argued either way. As reviewed in the charts, most look ready for a pullback but the bullish interpretation of the pattern for the banks suggests it could be a pullback worth buying. I don't see enough corroborating evidence yet for that but it's a warning to bears.

Regardless of what this week's bounce might mean for the next couple of weeks, the short-term setup looks good for at least a pullback to correct this week's rally. If the pullback turns into a sharp impulsive decline, especially if it gets the indexes below Monday's lows, we'll likely see stronger selling. But if we get a choppy pullback pattern I'd look at it as a buying opportunity.

Over the next couple of days, assuming we'll get a pullback, we'll have better clues about what this week's rally means. If the rally does continue into next week we'll likely see new highs, even if only minor ones, and I'd look to April 7th as a potentially important turn date. Look for the techs to provide continued leadership to the upside if the bulls are back in the driver's seat. Look for the RUT to lead us lower if Monday's lows are broken.

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

Keene H. Little, CMT