For the third day in a row the broader averages finished near the flat line after creating little doji stars for their candlesticks. Investors don't know what to do next and it's showing in the market.

Today's Market Stats

The day started to the upside but like so many days before this, the initial morning buying quickly fizzled and the indexes sold off sharply. But continuing the whipsaws we've seen since last Wednesday, the morning selloff was then followed by a sharp reversal back up in the afternoon before giving back a little in the final hour.

The net result for the day was another doji day for the market, the 3rd in a row, as investors try to figure out whether or not the market can continue its bullish run. For at least the short term I think the chances of heading lower are greater than the chances for a rally from here.

There were no significant economic reports today and therefore the market was left to react to overseas and domestic news, which was very little. But there wasn't much in the way of news either and consequently the market seemed to react more to some competing buy and sell programs than anything else. The result was a day of little movement and hardly any changes to the charts.

Many times I've talked about market sentiment and how it can provide warning signs when extremes are hit. The problem right now is that we do not have any extremes and worse, we have conflicting signals. Like price action itself, we seem to be in a period of confusion for the market but that itself can be valuable information -- it's not a good time to be aggressive in either direction.


Volatility index, VIX, Weekly chart

The VIX is of course one sentiment indicator and it's starting to show more fear as the market has consolidated. Just today, with the doji finish, the VIX climbed 9.2% to 14.05. This is up from a low of 10.90 last Wednesday (just before the market crashed Wednesday afternoon).

From a contrarian perspective the jump higher in the VIX can be considered bullish and notice on its chart that it has made it up close to a downtrend line from November through the March 27 high, currently near 14.35. Only slightly higher, near 14.50, is an old uptrend line from 2014-2015, which the VIX has reacted to several times since. A break above 14.50 would likely coincide with another drop in the market but watch to see if the trend lines become resistance since a drop back down would likely coincide with a market rally.


Fear & Greed index, chart from money.cnn.com/data/fear-and-greed

The CNN Fear & Greed chart also shows we're in somewhat of a neutral position, but leaning to the fear side. It would take a further drop into the fear zone (below 20) before telling us to look for a bottom. There certainly isn't any indication of exuberance by investors right now and that leaves us room to the upside in the market.


S&P 500 COT report, Weekly chart

Looking over to the commercial traders to see what kind of sentiment we're seeing between the commercial and non-commercial traders, it's looking more bearish than bullish for the market. I've drawn vertical lines at previous times there was a large split between the groups and keep in mind that's most often it's best to bet with the commercial traders (although it cannot be used as a market timing tool).

Back in the beginning of 2015 the commercial traders (black line) reached a large net short position. The non-commercials (blue line) reached the opposite with a large net long position and in fact they tend to create more or less a mirror version of the commercial positions. But notice how the market went mostly sideways into September while the commercials trimmed their short positions and non-commercials trimmed their long positions into September.

You can see how the commercial net-long position led to a nice rally in October 2015 while they trimmed their positions. The same thing happened into the February 2016 low where another large net-long position led to a nice rally in the market. But then the opposite position was taken into August 2016, which led to a decline into November. During the rally from November the commercials have been building a large net-short position, just as they had done into the August 2016 high.

The net-short position into the August 2016 market high leg to one of the larger pullbacks we had seen all year and now, even though the market has been consolidating since the March 1st high the commercials have continued to build their net-short positions. This doesn't preclude another push to new highs for the market but it's a warning sign that the market is vulnerable here and especially so if it does press higher but the commercials keep getting more net short.


S&P 500, SPX, Daily chart

It's getting crowded on my SPX daily chart but you can see today's little doji star follows the little dojis on Thursday and Friday. Meanwhile price is getting squeezed between trend lines and moving averages. The 20-dma is currently near 2360 (SPX broke above it today but was unable to hold above) and its 50-dma is currently near 2349, slightly below today's low. It's the 50-dma that many fund managers are watching carefully since most will be dips to that support when the market is in an uptrend. A close below the 50-dma will set off sell alarms.

Coinciding with the 50-dma near 2349 is an uptrend line from November through the March 27th low (the opposite of the downtrend line shown on the VIX chart) and therefore a drop below 2349 would be a technical breakdown. What's not clear from the pattern since the March 1st high is whether we're in just a larger corrective pullback pattern, one which could last all of April, or the start of something more bearish.

The corrective pattern would mean another rally leg will follow this pullback, either from here or after another leg down for the pullback. The more bearish pattern would be confirmed if we see a strong impulsive move down, one that drops below the bottom of a parallel down-channel from March 1st, which is currently near 2311.

Key Levels for SPX:
- bullish above 2379
- bearish below 2322


S&P 500, SPX, 60-min chart

Following last Wednesday afternoon's strong decline SPX has been in a choppy bounce attempt. It's looking like a bear flag pattern with the little parallel up-channel for the bounce and the expectation is for at least another leg down.

As shown on the 60-min chart, two equal legs down from last Wednesday's high points to 2336.91. If we're to get just a 3-wave pullback we should see SPX hold near that level (assuming we'll get another leg down) and set up the next rally leg. A drop below 2336 would then point to at least a test of the March 27th low at 2322, if not the bottom of a parallel down-channel from March 1st (a larger bull flag pattern?), which will be near 2309 by the end of the trading week (Thursday), and maybe down to price-level support near 2300. Two equal legs down from March 1st also points to 2300.


Dow Industrials, INDU, Daily chart

The Dow looks the same as SPX -- the 3rd day in a row with doji star and getting pinched between trend lines and its 20- and 50-dmas. It could literally go either way here and while I lean at least short-term bearish I'd turn bullish with a rally above last Wednesday's high at 20888. But like SPX, the 50-dma, which was again tested today at 20616, is important support and a break of it could start hitting a lot of stops on long positions.

Key Levels for DOW:
- bullish above 20,888
- bearish below 20,412


Nasdaq Composite index, COMPQ, Daily chart

The techs have been no different from the blue chips with their string of doji days and the Nasdaq has been hugging its trend line along the highs from April-August 2016, where it closed today. Assuming we're going to get another leg down from its 3-day consolidation, look for a test of its 50-dma near 5819 and then potentially down to the bottom of its megaphone pattern, which will be near 5700 next week.

Key Levels for COMPQ:
- bullish above 5950
- bearish below 5769


Russell-2000, RUT, Daily chart

Last Wednesday's decline had the RUT breaking below its 20-dma and it repeatedly tried to get back above it since then. Today it rallied above its 20-dma, near 1368, but was rejected by its broken 50-dma, as it was last Wednesday, and closed on its 20-dma. A rally above this morning's high at 1376 would be potentially bullish but it would then have to get through its downtrend line from March 1-31, near 1382.

Assuming the RUT is going to head lower, a break of price-level support near 1347 would point to the likelihood of a drop to the 1310 area (price projection for two equal legs down from March 1st and an uptrend line from February-November 2016).

Key Levels for RUT:
- bullish above 1390
- bearish below 1347


KBW Bank index, BKX, Daily chart

Following the initial morning high the banking index spent the rest of the day in the red, which is not something the bulls like to see. The banks have been acting weak since the March 1st high and have been issuing us a warning about the current rally. Higher interest rates were expected to help the banks' profitability so why aren't they rallying? Does someone know something about the likelihood for more rate increases?

If BKX breaks its downtrend line from March 1st, near 92, it would be at least short-term bullish. At the moment BKX is holding support at its uptrend line from June-October 2016, which was last tested at the March 27th low, and its trend line along the highs from April 2010 - July 2015. A drop below today's low at 89.92 would be bearish, which would be confirmed with a break below the March 27th low at 88.10

Could we be seeing the right shoulder of a H&S topping pattern (left shoulder in December-January)? The downside objective from that pattern would point to 77.60 but it would first find support at its July 2015 high, at 80.87, and its rising 200-dma, currently at 81.38.


Gold continuous contract, GC, Daily chart

Gold has been consolidating below its 200-dma since testing it on March 27th (which followed a failed test on February 27th). Clearly the 200-dma, currently near 1261, is resistance and therefore gold would be more bullish above it. That would also be a break of its downtrend line from August-September 2016 and therefore a break above 1263, if it holds above that level, should lead to a rally at least a price projection near 1281 and potentially higher. A downtrend line from September 2011 - August 2016 is currently near price-level S/R at its January 2015 high at 1308.

The bearish pattern calls for gold to roll over from its 200-dma (note the bearish divergence against its February 27th high) and continue lower this year. The first sign of trouble for gold would be a drop below its rising 20- and 50-dmas, currently near 1247 and 1236, resp.


Oil continuous contract, CL, Daily chart

Oil has rallied strong since March 27th and it has helped the stock market rally at the end of March but not so much this month. The energy sector has helped the broader market so it would be helpful to the market if oil continues to rally. There's upside potential to at least the shallow downtrend line from January-February, currently at 54.73. It would obviously be more bullish above that level but at the moment, as shown further below, the COT report is not favoring the bulls.


Oil COT report, Weekly chart

At the moment today's high is showing bearish divergence against Thursday night's high and with the COT report still showing a wide divergence between the commercial traders and non-commercials, it's telling us the rally could be one of the sucker varieties. The commercials had swung to a large net-short position at the February 27th low while non-commercials were net long. The spread has shrunk a little but there's still a wide spread and the commercials have a lot of unwinding to do to decrease their net-short position. This means it's likely we'll see at least another leg down for the price of oil.


Economic reports

There were no important economic reports today and that won't change much for Tuesday. The JOLTS report will be the only report on Tuesday, which will leave the market again reacting to news from oversea. Wednesday's reports will also not likely affect the market. Thursday morning might see some reaction to the PPI and Michigan Sentiment numbers.

Friday we'll get the CPI numbers and see whether or not the retailers are still getting hammered. Retail sales will be an important indicator about our economy since it's so dependent on consumer spending. Following last Friday's dismal NFP report, which has economists wondering if the jobs market is weakening, which in turn would weaken consumer spending.


Conclusion

We have a mixed sentiment picture at the moment, more neutral but leaning bearish. From a contrarian perspective bearish sentiment can be bullish for the stock market. But sentiment has not reached an extreme and is therefore not that much helpful at this moment. But the COT report suggests the stock market is at risk here and while it does not preclude another rally leg it is telling us not to trust another rally if we get it, especially if the commercial traders load up on more short positions at new market highs.

Both the semiconductor and banking stocks were at the bottom of the list of sectors today, which is not a good sign for the bulls. The SOX and BKX should be in sync to the upside to help a rally. Instead they were in sync to the downside today.

Today's trading was on light volume but the market internals favored the bulls. All of this is simply presenting us with a mixed picture of the market and no clear direction. My best guess is for at least another leg down following the bear flag pattern off last Thursday's lows. Once we get another leg down (assuming we will) it will then be time to watch for a possible reversal to the upside. Hopefully the picture will be a little clearer when I do Wednesday's update.

Good luck and trade carefully (quickly, if at all) in this choppy environment.

Keene H. Little, CMT