The stock market was in rally mode this morning following the stronger-than-expected ADP report but then ran into trouble following the FOMC minutes this afternoon. It was the worst reversal since February 2016.

Today's Market Stats

The morning started with a big gap up and rally following the 08:30 release of the ADP report, which showed a gain of 263K jobs vs. the 175K that had been expected (although February was revised lower from 298K to 245K). Even the US$ was rallying until the FOMC minutes were released at 14:00, at which time the balloon popped and all came tumbling back down. The end result was a strong rally that reversed into the red, creating the worst intraday reversal since February 2016.

At 10:00 the ISM Services number was released and at 55.2 it was a decline from February's 57.6 and less than the expected 57.0. That took a little wind out of the bull's sails and then at 10:30 the Crude Inventories report showed an unexpected increase of 1.57M barrels. Oil's price tanked after 10:30 and that put a damper on the stock market. But the stock indexes pushed back up in the afternoon to test their morning highs and into the 14:00 release of the FOMC minutes.

The FOMC minutes revealed a Fed that's talking about the possibility of starting to trim its bloated $4.5T balance sheet this year. That idea of course scared the market that's been dependent on the Fed's easy-money policies and lots of liquidity in the markets. Not helping the stock market were some comments by some Fed members who thought the stock market prices were "quite high relative to standard valuation measures."

The FOMC minutes created more questions than answers and the market of course hates uncertainty. The plan to start reducing the Fed's balance sheet might change the Fed's plans about raising rates. The expectation has been for two more rate increases this year and while their dot-plot of likely rate changes still reflects this, now the discussion is that the Fed could pause while it looks for a way to reduce its balance sheet.

Reducing their balance sheet would mean the Fed will not roll over all expiring Treasuries, the big nut of which matures in 2018-2019, and by reducing their purchases it would lower overall demand for Treasuries. Lower demand would drive prices lower and in turn yields would turn higher. Therefore reducing their balance sheet and raising the discount rate would both depress the market and possibly the economy. Trapped between a rock and a hard place are we?

Interestingly, the bond market didn't move much this morning nor this afternoon so it seems we simply had a volatile stock market trying to figure out what's going to be important as it looks forward. Treasury yields actually pulled back a little this afternoon after the FOMC minutes were released, showing there's not much fear about the Fed becoming more active with rate increases and/or balance-sheet reduction efforts.

The resulting afternoon turnaround created a loss for the stock market indexes with SPX swinging 25 points from about 18 in the black to 7 in the red. It was the worst bearish reversal since February 2016 and that kind of headline is not going to inspire bulls to buy this dip, even though that is clearly a possibility in this market. Many could look at this afternoon's selloff as an overreaction and therefore a good buying opportunity. SPX remains above its 50-dma, which is what many are basing their buying decisions on.


S&P 500, SPX, Weekly chart

The SPX weekly chart shows last week's decline back below the trend line along the highs from April-August 2016, which it had rallied above in mid-February. Friday's close was essentially on the trend line, saving it for the week, but so far it's back below the line, currently near 2370. I continue to show upside potential to the 2450 area by the end of the month, primarily because of the choppy pullback from March 1st, but at the moment it's looking like the higher-odds scenario is for at least a larger pullback before heading back up (weekly oscillators confirming the rollover).


S&P 500, SPX, Daily chart

The trend line along the highs from April-August 2016 is shown as the purple line on the daily chart below. Both it and a downtrend line from March 1-15 are now near 2370 so that's the first level the bulls need to get through, which would likely lead to a rally above this morning's high at 2378 and then potentially above 2400 in a new rally leg. But following today's reversal, if the bears get some follow through from here, which has been lacking in both directions since March 1st, a break of the 50-dma, near 2346, and the uptrend line from November 4 - March 27, near 2343, would likely trigger stops on long positions.

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


S&P 500, SPX, 60-min chart

The 60-min chart shows the choppy nature of the price pattern since the March 1st high. We have a 3-wave move down into the March 27th low and that's been followed by a 3-wave bounce into this morning's high. When you get 3-wave moves in both directions it leaves the larger pattern questionable since it could literally go anywhere from here, including remaining inside a flat correction. I show the potential for a leg down to a price projection at 2300, for two equal legs down from March 1st and a test of price-level S/R, but at this point it's just a guess that we'll see at least a larger pullback.


Dow Industrials, INDU, Daily chart

The Dow's daily chart looks virtually identical to SPX but with different trend lines. Like SPX, it's been trapped between its 50-dma as support and 20-dma as resistance. It tried to break free of its 20-dma this morning, currently near 20743, but the reversal left a failed breakout attempt. At about 20595 the 50-dma is less than 50 points below today's close and we could see that tested on Thursday if the bears get some follow through selling. Between the 20- and 50-dma's is the uptrend line from October 2011 - November 2012, currently near 20700 (using arithmetic price scale)

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


Nasdaq-100, NDX, Daily chart

NDX finally reached the top of a possible megaphone pattern that's been building since March 1st. Today's high was a minor poke above the top of the pattern and the failure to hold left a sell signal that can only be reversed with a rally above today's high near 5480. The megaphone pattern is a topping pattern and the risk for bulls from here is that today's rally completed the leg up from November. That's obviously a very early call but it's the current risk for those wanting to hold long positions through a "correction."

Key Levels for NDX:
- bullish above 5480
- bearish below 5316


Russell-2000, RUT, Daily chart

Following the initial blast to the upside this morning the RUT gave in to selling much earlier than the rest of the market. When the market turns weak it has been the RUT that has consistently led to the downside and today was no different. It was the first one in the red and should lead us lower if that's what's in store for the market in the coming week.

What the bears really need to see is a strong break of price-level support near 1347. The first downside target in that event would be a price projection near 1310 and its uptrend line from February-November 2016, currently nearing 1300. The bulls need a rally above last Friday's high near 1390 to once again open the door to its trend line along the highs from 2007-2015, near 1422.

Key Levels for RUT:
- bullish above 1390
- bearish below 1335


10-year Yield, TNX, Daily chart

As mentioned earlier, when the stock market blasted higher this morning, the bond market gave a ho-hum response and that was the first indication the stock market might be overreacting to the upside. When the FOMC minutes came out and spooked the stock market into giving up all of its gains, and then some more, the bond market still didn't react much and even rallied a little this afternoon. This has most bond watchers confused since a Fed that is raising rates and/or trimming its balance sheet should be causing the bond market to sell off and yet it's been doing the opposite.

TNX shows a sideways consolidation since its December 15th high and is only back down to the bottom of the trading range near 2.3%. At the moment it's now back-testing its broken trend line along the highs from July-November 2016 and could be setting up another rally leg. But following the March 10th high I've been thinking we're going to get at least a larger pullback correction, one that should see a test of the 200-dma, currently near 2.02%. A drop below support near 2.3% would likely trigger buy stops in the 10-year Treasuries, which would further lower yields. For the moment one could say TNX remains bullish above 2.3 and then would turn bearish below 2.3.


KBW Bank index, BKX, Daily chart

The banks have been relatively weak since March 1st, which has been a warning sign for bulls. We like to see the banks leading a rally, which they did following last November's election. Last week BKX back-tested support at its broken trend line along the highs from 2010-2015 but this morning's high was only a test of its downtrend line from March 1-15. The resulting selloff looks bearish and points to a break of support near 88. The bulls would be in better shape with a rally above the downtrend line, near today's high at 92.98, and then its broken 50-dma, at 94.18.


Transportation Index, TRAN, Daily chart

Like the banks, the transports have been warning us that not all is well with the economy. Most everyone keeps looking for evidence of an economy that is doing well but they've turned their backs on indications of an economic slowdown. The TRAN is one of those warning signs and its chart shows a failed attempt to regain its broken uptrend line from June-October 2016, which it dropped below on March 21st. It managed to close back above the line last Thursday when it closed on its broken 20-dma but that was followed by a drop back below the line and it has not been able to close above its declining 20-dma, which will be near 9090 on Thursday.


U.S. Dollar contract, DX, Daily chart

The US$ pushed higher all day today and then got volatile at the release of the FOMC minutes before giving up all of the day's gains into the close. The resulting price action was an intraday rally above both its 20- and 50-dma's but a close in between them, which are currently at 100.27 and 100.60, respectively. Today's candle looks like a shooting star at MA resistance and it drops further on Thursday it would confirm the reversal candlestick pattern.


Gold continuous contract, GC, Daily chart

When the dollar tanked this afternoon gold did the opposite and rallied about $13. But it wasn't good enough for another test of its broken 200-dma, which was tested on Tuesday. Currently near 1261, the 200-dma is now near its downtrend line from last August and for this reason gold would be more bullish above 1263. There's a small bearish divergence the bulls need to negate and a rally above 1263 would do it. But with a longer-term price pattern that suggests another leg down for gold, the risk for gold bulls is for the current bounce to fail at any time.


Oil continuous contract, CL, Daily chart

Oil's intraday reversal from an early-morning high left a failed attempt to get back above its broken 50-dma near 51.50. It also closed marginally back below price-level S/R at its October 2015 high at 50.92. If today's reversal is followed by more selling on Thursday it could be the start of the next leg down for oil.


Economic reports

There are no market-moving economic reports Thursday morning but Friday we'll get the NFP report and other employment data. Based on this morning's reaction to the ADP report we could have some more volatility Friday morning.


Conclusion

Following a corrective pullback in March we have so far just a corrective bounce into today's high and it appears we could see another leg down for at least a larger pullback from the March 1st highs. But paradoxically, the strong techs could be the weak link here. The Nasdaq and NDX each have a megaphone topping pattern off their March 1st highs and both tested the tops of their patterns with today's highs. The relatively strong reversal leaves me with the impression that their rallies might have completed today.

If the techs have topped out and the RUT continues to lead to the downside in any further selloff it could turn things uglier for the bulls. We might get just a larger whippy corrective pullback, one that could last most of April, before starting another rally leg to new highs. But the risk for a larger decline is something that needs to be respected, especially if the "Trump" rally gets trumped by the bears who start talking about the failed policy changes Trump was going to try to ram through Congress.

Our hope-filled rally could quickly turn into disappointment and now with the Fed talking about reducing its balance sheet earlier than expected there is the potential for the Fed to create additional worry. If the Fed is becoming worried about another stock market bubble and wants to avoid being blamed for yet another one, they could be saying some things now to cool the rally. I'm sure they believe they can create a "small" pullback that would then lead to another rally. They could be correct but then again they have a habit of thinking they're actually in control of things.

All of which is to say it could be close to the time where you'll need to buckle yourselves in for what could turn into a more volatile market than we've seen in a while. Even the VIX is starting to show greater volatility in the past few weeks.

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

Keene H. Little, CMT