French election results and a bolt Trump tax plan have had investors feeling bullish the stock market this week. Follow through has been lacking and we're left to wonder if tax-plane reality will be a kick in the pants.

Today's Market Stats

Other than the excitement over the French election results on Sunday (Marie Le Pen did not do as well as had been feared by the market), Tuesday's gap-up was presumably on the hopes that Trump's tax plan, which was announced today, would spark another big rally. The tax plan is supposed to decrease corporate tax rates, boost the standard deduction for personal returns (effectively reducing personal tax rates) and simplify returns. It all sounds great but of course the devil is in the details.

I saw two headlines today on MarketWatch -- one was "Trump's tax plan sets the stage for Dow 30,000" and the other was "Here's how much a Trump tax-plan letdown could whack the stock market." The first article talked about how a significant reduction in the corporate tax rate (to 15% and 10% on repatriated earnings), along with some other changes, could boost corporate earnings. That in turn would support higher stock prices and Dow 30,000 here we come. Makes me think of trying to breathe on Mt. Everest without supplemental oxygen.

The other article talked about why the tax plan could struggle to get approved. We have a hope-filled rally that's unfortunately likely headed for disappointment. A tax plan without a lot of details about how it's to be paid for could be a challenge, to put it mildly, since Congress, even a Republican one, is not likely to pass a plan that puts us further into debt by another $3T to pay for the tax breaks. Any whiff of a failure to get Trump's tax plan passed is going to disappoint a lot of investors who have been buying on the assumption the plan will get passed.

I'll add my own opinion of the tax plan -- it has a snowball's chance in Hell of passing. There are too many entrenched special interests which make a lot of money with the existing tax scheme. A big tax cut without offsetting tax gains will be very difficult for Congress to swallow. A big tax cut with offsetting tax gains would simply mean taking money from one pocket and putting it in the other and that could easily have the net effect of zero. There are too many in Congress who want to see Trump fail and the bigger the changes he calls for the more they'll push back. Bully for Trump for coming up with a bold proposal but unfortunately we have a Congress and special interests who are not interested in bold. Bold scares them.

Today started quietly and remained quiet for most of the day. The RUT continued its relative strength but ran into strong resistance (more later with its charts). The techs were relatively weak today and remained near the flat line while the blue chips tried to rally with the RUT. By the end of the day, following the announcement of the Trump tax plan, all but the RUT finished in the red. This begs the question about whether or not this week's rally was buying the rumor and this afternoon was a small sell-the-news reaction. We'll know more on that score after Thursday's trading.

This week's rally in the stock market was brought to us almost exclusively by the morning gaps on Monday and Tuesday. Those spikes to the upside might have been mostly short covering since there was little buying that followed. And with SPX essentially testing its March 1st high, at 2401 with today's high at 2398, the bulls would like to see some greater participation by all stocks instead of fewer than were seen at the March 1st high.

S&P 500 vs. new 52-week highs and Advancing-Declining stocks, Daily charts

As can be seen on the charts below, the number of stocks participating in the rally to new highs has been declining since the highs last November/December. The advancing minus declining stocks also peaked in December and there's a strong bearish divergence since mid-March. This is even with the number of small caps rallying to new highs this week.

Other than the French election and Trump's tax plan there hasn't been much to move the market this week. Other than some home sales data yesterday there was little in the way of economic reports to sway the market one way or the other. Thursday's reports, including durable goods orders and pending home sales might move the needle but probably not much. The market will now need to digest this week's gains and decide whether or not to add to them.

Trump's tax plan included a large reduction in corporate tax rates and a plan to help small businesses. The latter is one of the reasons why the RUT rallied strong off the April 13th low -- investors were climbing aboard in what was expected to be a big boost to small caps. The result might have been a rally up to strong resistance and now disappointment might start to set in.


Russell-2000, RUT, Weekly chart

Today's rally brought the RUT right up to its trend line along the highs from 2007-2014-2015, near 1426 (today's high was 1425.70). The last time this trend line was tested was on March 1st and before that on December 9th. This is the 3rd test and with the significant bearish divergence since December there is a good possibility this is setting up a 3-drives-to-a-high topping pattern at the top of a large megaphone topping pattern. There is also a small megaphone pattern up against the larger one.

For those who use DeMark Sequential counts (not shown on the chart), a daily sequential sell signal triggered this week and next week we'll get a weekly sequential sell signal. This chart alone, until the RUT can successfully break above the trend line, and stay above, should scare the bulls into getting very defensive.


Russell-2000, RUT, Daily chart

Other than the 2007-2015 trend line there doesn't appear to be much in the way of a further rally for the RUT. It has broken above its March 1st high, near 1415, and the oscillators have room to run to the upside. All the bulls need to do is rally the RUT above 1434 (that level is shown further below on the 60-min chart) and keep it above the trend line near 1426. That could be a tall order, considering how it reacted to the trend line in June 2015, December 2016 and March 2017. Play defensive until the bulls can prove this time will be different.

Key Levels for RUT:
- bullish above 1434
- bearish below 1364


Russell-2000, RUT, 60-min chart

There is one price pattern that supports a move up to about 1434, which is where the leg up from April 13th would be 162% of the March 22-31 rally (for a possible a-b-c bounce within what will become a larger corrective pattern off the March 1st high). Between the 2007-2015 trend line, near 1426, and the 1433.84 projection we have potentially stiff resistance to any further rally. By the same token, it would be more bullish above 1435.

The rally from April 13th developed steeper uptrend lines, indicating the rally was going parabolic. This afternoon's relatively small pullback broke the steeper uptrend line and that's another warning sign that the rally peaked today.


S&P 500, SPX, Weekly chart

Looking at the SPX weekly chart, there are a few different ways to interpret the wave count for the rally from January/February 2016. One thought is that we need to see a larger pullback correction from March 1st before potentially heading higher again. Counter to the possible top that the RUT is putting in (yet to be proven) is a bullish wave count that calls for higher prices for at least another month.

A rising wedge pattern for the rally suggests 3-wave/corrective moves for each of the waves and we could be into the final 5th wave. If the 4th wave correction in the rally, which is the pullback from March 1st, completed at the March 27th low (we could get another leg down to about 2300 before it completes) then I would expect a 3-wave move up to complete the 5th wave of the pattern, which is what I'm depicting in bold green.

The minimum projection for the 5th wave in this pattern is to the 2500 area. A price projection near 2507 crosses the top of the rising wedge in mid-June. There is by no means a guarantee that we'll see a rally from here to there but it's the upside potential as long as we continue to see bullish price action. The first sign of trouble for the bulls would be closure of this week's gap up (last Friday's close at 2348). Whether or not that would lead to just another pullback before starting the rally to new highs is something that will have to be figured out later.


S&P 500, SPX, Daily chart

Today SPX came within less than 3 points from its March high at 2400.98 before pulling back in the final hour. The result is a shooting star candlestick at resistance, which is a potential reversal candlestick. A down day on Thursday would confirm the reversal. But to stay with the bullish price path shown on the weekly chart above, I would expect to see higher prices in the coming days and support at the March 1st high.

There is an intermediate-term price pattern that is short-term bearish but still longer-term bullish. At the moment we have a 3-wave move down from March 1 to March 27 that's been followed by a 3-wave move back up to today's high. That could be followed by a sharp decline to 2275-2300 to complete a larger 3-wave pullback from March 1st before setting up the final 5th wave rally shown on the weekly chart. This possibility would be evaluated more carefully if and when we get a sharp move down to the 2300 area.

Key Levels for SPX:
- bullish above 2401
- bearish below 2348


Dow Industrials, INDU, Daily chart

Like SPX, the Dow is at risk of putting in a double top against its March 1st high. A rollover in the oscillators from here would show a significant bearish divergence and obviously that's not something the bulls want to see. They'd rather see a continuation of the rally and it would be more bullish above the March 1st high at 21169, in which case I'd look for a rally to the trend line along the highs from May 2011 - December 2014, which will be near 21400 by early May.

If the rally is completing here we'll see the Dow drop back down to close this week's gaps and a drop below Tuesday's gap (Monday's close) at 20763 would be the first bearish warning sign.

Key Levels for DOW:
- bullish above 21,170
- bearish below 20,760


Nasdaq-100, NDX, Daily chart

Yesterday and again today NDX tested its trend line along the highs from April 2016 - March 2017, currently near today's high at 5564. So far there's no proof this trend line will hold as resistance but that's the bearish setup, especially if the daily oscillators roll over from here.

The wave count for the rally from November also supports the idea that today's high might have been THE high. The rally started with a series of 1st and 2nd waves, a longer middle 3rd wave (December 30 - March 1) and then a series of 4th and 5th waves to finish "unwinding" the count. The final 5th wave equals the first 1st wave at 5561.79, which was achieved today. The combination of the wave count, price achievement and trend line could be too much for the bulls to handle and any turn back down from here has the potential to develop into a stronger selloff.

Key Levels for NDX:
- bullish above 5562
- bearish below 5442


10-year Yield, TNX, Daily chart

Bond investors reacted to the Trump tax plan announcement by buying bonds, which dropped yields from their 2-week high, as they worry that the tax plan will likely not pass through Congress without major changes and a big battle. The bond market, which is arguably smarter than the stock market, is saying they're not worried about an economy that could expand and drive inflation higher.

From a price pattern perspective, TNX has been able to bounce off its April 18th low and get back above the downtrend line from June 2007 - December 2013, near 2.27, as well as the bottom of the November-April trading range, near 2.31. It also climbed back above its broken 20-dma, currently at 2.306, all of which is potentially bullish. Today's little pullback to the bottom of its November-April trading range could be a back-test that will lead to higher yields (lower bond prices).

A drop back below 2.26 would likely mean a drop lower, possibly down to a price projection at 2.00 (the width of its November-April trading range). This is the way I'm currently leaning and I'll continue to believe lower yields are directly ahead unless TNX is able to climb back above its broken 50-dma, currently at 2.40.


KBW Bank index, BKX, Daily chart

The banks got a strong bounce with the rest of the market but is now hitting potentially strong resistance as well. On Tuesday BKX came close to back-testing its broken 50-dma and then sold off, leaving a shooting star candlestick at resistance. It then tried again today and successfully hit its 50-dma, at 93.56 with its high at 93.67, but then sold off again, leaving another shooting star.

A double failure is not a good sign for the bulls but they could pull a surprise here and rally BKX above its 50-dma. I would turn more bullish the banks if BKX can close above 93.60, otherwise this looks like a setup for a reversal back down. The bears would be in better shape with BKX back below its 20-dma, currently near 90.80.


Transportation Index, TRAN, Daily chart

The transportation stocks were weaker than the broader market today and the TRAN finished down -0.9%. This follows a back-test of price-level resistance at 9310, which is its November 2014 high, with yesterday's high at 9301 and today's high at 9275. In addition to price-level resistance it also back-tested its broken uptrend line from June-October 2016.

In addition to those two lines, a price projection at 9294 for two equal legs up from March 27th was also achieved. That makes three reasons why the TRAN should turn back down and today might have been the start of the move down. Conversely, the TRAN would be more bullish above 9310.


U.S. Dollar contract, DX, Daily chart

On Monday the US$ broke below its uptrend line from May-August 2016 and price-level support, both near 99.10. Today the bounce back up tagged its broken uptrend line and then sold off. It looks like a back-test followed by a bearish kiss goodbye, giving it the setup for further decline. It would be at least short-term bullish above Monday's gap close, at 99.67, or it might get a bounce/rally off the bottom of a possible descending wedge (a trend line along the lows from December), near 98.39. But with the break also below its 200-dma, at 98.94, if it stays below that level we could see a sharper decline from here.


Gold continuous contract, GC, Daily chart

Gold pulled back a little stronger this week as the stock market rallied (less fear) but at the moment it could be just for a back-test of its recovered 200-dma, currently near 1257. Another bounce back up would give gold the chance to test its downtrend line from September 2011 - July 2016, near 1300. The price projection at 1335 is where the bounce off the December low would achieve two equal legs up. But it's possible the bounce is already completed and now we'll see gold head back down. A drop below its March 30th low at 1241 would be a confirmed break of its uptrend line from December.


Silver COT report, 2007-present

Silver is looking weaker than gold and today it closed below its uptrend line from December, which could be forewarning us that gold will follow. And even though silver has pulled back sharply from its April 17th high it hasn't stopped speculators from betting it's just a dip to buy. As can be seen on the Commitment of Traders (COT) report, the non-commercial traders are net long in a big way (much more so than anything seen since 2007). In the meantime the commercial traders have a huge net short position. Care to guess who's going to win this bet?

Gold and silver don't always trade in sync but they do more than not. This is fair warning to gold and silver bugs to protect long trading positions (vs. those who own the metals for the long term and are not trading the metals). I think we'll have lower prices on both to give us a good opportunity to become long-term holders of the metals.


Oil continuous contract, CL, Daily chart

Oil's sharp decline from April 12th had it quickly breaking back below its 50- and then 20-dma's and it's now holding support at its 200-dma, at 48.92. It's also trying to hold onto its uptrend line from April-August 2016, currently near 49.53. A drop below its 200-dma would have me looking for a test of its uptrend line from August-November, near 47.60. A drop below its March 22nd low at 47 would confirm the next leg down is in progress. A rally back above price level S/R at 50.92, as well as its coincident 20- and 50-dma's, would be at least short-term bullish.

The COT report for WTI crude is not near any kind of extreme but it does show a spike up in the net long position of speculators and a spike in the opposite direction by the commercials with their large net short position. The last time they were near the current levels, at the end of October, oil experienced a sharp decline into the November 14th low.


Economic reports

Thursday will be a little busier for economic reports but unless there's a real negative surprise in the durable goods numbers I don't think the market will be paying much attention. It seems too focused on The "Donald."


Conclusion

As shown on tonight's SPX chart, I see upside potential for this market for at least another month as it continues to work its way higher (not in a straight line of course). But the RUT and NDX charts give me pause -- they show a strong reason why you want to have very tight stops on long positions and why you should be looking to short today's highs. Shorting this market is obviously trying to catch rising knives at the moment and it's a risky thing to do.

Waiting for confirmation of a top, starting with a sharp impulsive reversal back down, and then shorting a bounce with a stop at a new high, is a more conservative way to try shorting the market. But I know there are a lot of Type A traders out there who are itching to short the top. Any rollover from here is an opportunity to do that.

Hat tip to Carla for the info on short interest in the S&P 500, which is at a low not seen since May 2007. I haven't seen the actual numbers but obviously a very low level of short interest makes it more difficult to drive the market higher with short covering. Perhaps that's one reason why there was so little follow through to the gap-up starts on Monday and Tuesday.

Between the ultra-low VIX (below 11), which indicates complacency, and the lack of shorts we might not be far from an "exogenous" event that creates more than a little panic in the market, and without shorts to use for driving the market back up. There might be more upside left to this market but the downside risk is again dwarfing upside potential. Caveat emptor.

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

Keene H. Little, CMT