Since last week's strong showing in the stock market it has been consolidating and we had more of the same today. The techs were relatively strong but they were weaker today as they start their consolidation/reversal. We continue to wait for the next big move.

Today's Market Stats

The reaction to AAPL's earnings report in the after-hours session on Tuesday was negative and it drove NDX futures (NQ) lower. That pointed to a negative open for the techs but they recovered quickly this morning, as did AAPL. The other indexes continued their week-long pattern -- the RUT is relatively weak while the blue chips chop sideways/down and hold the middle ground.

Between the sideways/down consolidation for the blue chips, which looks like a bullish continuation pattern, and the corrective (3-wave) pullback for the RUT we have a potentially bullish setup for the market. That doesn't mean it can't drop lower first but at the moment it's looking more bullish than bearish.

This morning's economic reports had little effect on the market. The ADP Employment report was in line with expectations, coming in at 177K vs. expectations for 170K but a drop from 255K in March (which was revised down from 263K). ISM Services came in better than expected at 57.5 vs. expectations for just a small bump up to 55.8 from 55.2 in March.

There was a small gyration around this afternoon's FOMC announcement but with no real changes from the Fed there wasn't much for the market to react to. There was practically no expectation from the market for a rate increase and true to expectations the Fed kept rates the same.

The Fed reiterated its goal to raise rates twice more this year but did acknowledge a slowdown in the first quarter. The FOMC statement made reference to the slowdown but thinks it is "likely to be transitory." The general feeling by analysts is that the Fed's statements were essentially neutral since there was an absence of information about what plans the Fed might have about reducing their balance sheet.

Until the Fed has more data to help identify whether or not the slowdown in Q1 is in fact "transitory" (they love that word) they are wisely keeping their cards close to the vest. Holding rates steady and not discussing balance sheet reductions is a smart move so as not to disturb the market. Wow, I actually said the Fed made a smart move. Will wonders never cease?

With the FOMC announcement out of the way the market can now focus on earnings and so far they've been good. But one of the problems continues to be how accurate these earnings are. So many expenses are moved "off the books" and there are so many accounting gimmicks (GE is famous for them) that it's really anyone's guess how healthy companies really are (or aren't).

There are also some big problems with company's balance sheets and that is far more important that one quarter's earnings. Some of the biggest companies are in serious trouble. Johnson & Johnson is an example -- it reported operating cash flow of $18.7B in 2016 in its annual report. That sounds great but the problem is how much it's spending. With the cost of dividends, stock buybacks, debt repayment (companies have borrow big time in the past several years, much of it to pay for stock buybacks and dividends), capital expenses and more, JNJ spent $22.8B in 2016, $4.1B more than it earned.

AT&T is another example -- they earned $39.3B in operating cash flow in 2016 but they spent $44B on dividends, stock buybacks and capital expenses. Disney earned $13.2B but spent $16.7B. GE didn't have any positive operating cash flow. These big companies are not alone and they're some of the more heavily weighted companies in the S&P 500 index. It's an unsustainable trend and all the borrowing of these companies is starting to weigh them down.

Another consequence is that investors are now much more heavily invested in ETFs than individual stocks or sector mutual funds. So pricing of individual stocks is now becoming blurred. Fundamentally strong stocks are lumped together with weak stocks and they're all being bought and sold together. This is a phenomenon that is unprecedented and the big question is what happens when the market gets hit with large sell orders. All stocks will get sold, not the weak or selective ones. The baby will get thrown out with the bath water.

These are fundamental issues with the current market and while it doesn't prevent a continuation of the rally (hell, we could be in the middle of a massive melt-up that will take the market much higher than most believe possible) any cracks in the foundation should be watched closely since like a crack in a large dam, once the water starts to break through it could develop into a massive flood in a heartbeat.

As for the immediate future (the next week), I do see the potential for the market to head higher following the pullback correction from last week. I'll start the review with the SPX weekly chart.


S&P 500, SPX, Weekly chart

The pattern for the rally from February 2016 has formed a rising wedge pattern, which is common for the last leg of a larger rally, which in this case is the one from March 2009. The wave pattern is not clear, which means there are several possibilities. My best guess is as labeled on the weekly chart below, which calls for the rally to continue and potentially into June before we'll see a final high near 2500.

The correction following the March 1st high might not be over yet and we could see a sharp leg down to the uptrend line from February-November 2016, currently near 2300. That would be enough to scare a lot of bulls out of the market and get it ready for the next rally. But if it continues to chop its way higher from here I would be more cautious about upside potential.


S&P 500, SPX, Daily chart

On the weekly chart I show the key level to the downside at 2275, which is based on a pullback pattern that could see SPX drop down that low but still be in a larger bullish pattern. Below 2275 would be a much more bearish development. On the daily chart below I show the key level to the downside at 2360 since that would be a break of multiple support levels, including the 20- and 50-dma's, which care coming together near 2366, and its uptrend line from November 4 - April 13, currently near 2363.

Much below 2360 would more strongly suggest we'll get a drop down to at least 2300, if not 2275, but as mentioned above, that would not necessarily be longer-term bearish. It might be but it would depend on what kind of price pattern followed that kind of decline. Consider the possibility for a scary sharp pullback but at the moment the consolidation off last week's high looks like it will be followed by another push higher, even if it will be just a test of the March 1st high at 2401. Putting my bearish cap on, the double top with bearish divergence, if MACD crosses down, would be a time to get short.

Key Levels for SPX:
- bullish above 2401
- bearish below 2360


S&P 500, SPX, 60-min chart

The consolidation following the April 26th high looks like a bull flag continuation pattern, the top of which is currently near 2392. A break above that level should lead to at least a test of the March 1st high at 2401 and possibly up to a price projection near 2407, where the 2nd leg of the rally off the March 27th low would be 162% of the 1st leg up. A drop below the bottom of the pattern, near 2377, and then below Tuesday's gap at 2374 would be a failure of a bullish pattern and would likely lead to a sharp decline.

Whether or not a new high from here would be THE high for at least a while or if it will instead by followed by another consolidation is up for debate. The price pattern following a new high would provide the clues -- another consolidation would be followed by another push higher but a sharp impulsive decline would tell us we had a trend change. Shorter-term trading is the recommendation for now and waiting for a break in one direction or the other from the current consolidation pattern is the safer way to play the market right now.


Dow Industrials, INDU, Daily chart

Like SPX, the Dow has been chopping its way slowly lower following its April 26th high. It too looks like a little bull flag pattern and if it marks the half-way point of the rally from April 19th we could be looking for a rally to 21565, or at least up to the trend line along the highs from May 2011 - December 2014, near 21450. But a drop below the bottom of its little bear flag, currently near 20855, would be the first sign of trouble for the bulls (for at least a larger pullback) and then below 20640 would confirm the likelihood for a much larger decline (20K target).

Key Levels for DOW:
- bullish above 21,170
- bearish below 20,640


Nasdaq Composite index, COMPQ, Daily chart

With Tuesday's high near 6103 the Nasdaq came close to its trend line along the highs form April 2016 - March 1, 2017, which is now near 6131. Its pullback from Tuesday morning looks like a correction and if it continues to bounce on Thursday we could see a test of that trend line. But the pullback has the potential to develop into a more bearish pattern and any further pullback on Thursday could start to accelerate lower.

The pattern for its rally from February, like the others, could be a rising wedge, in which case we might see a choppy move higher to frustrate the bears (since it will constantly look like it's ready to break down but doesn't). Not until it breaks below its April 3rd high near 5929 would I start to think more bearishly about this index.

Key Levels for COMPQ:
- bullish above 6170
- bearish below 5928


Russell-2000, RUT, Daily chart

The RUT has been the weak sister in the past week and that's never helpful for the bulls. But so far it has only a 3-wave pullback that has nearly achieved two equal legs down for the pullback (near 1382 and today's low was 1386). Until it can get below its 20- and 50-dma's, currently near 1382 and 1379, resp., it's hard to turn bearish yet. A drop below its uptrend line from November 4 - April 13, near 1369, would have it looking more bearish. But if the rest of the market heads for at least a minor new high I see the potential for the RUT to at least test, again, its trend line along the highs from 2007-2015, currently near 1428.

Key Levels for RUT:
- bullish above 1428
- bearish below 1364


KBW Bank index, BKX, Daily chart

Following the money (the banks) is not helping at the moment in trying to figure out the next move for the market. BKX is currently stuck between its 50-dma above, currently near 93.10, and 20-dma below, currently near 90.80. The price pattern since last week does not help at the moment and I see an equal chance of rallying from here or dropping down near 90.30 for a larger pullback before heading back up. Above 93.60 would be bullish while a drop below 90 would be bearish (for a drop down to at least the 87 area).


U.S. Dollar contract, DX, Weekly chart

Today the US$ got a nice bounce but it's all within a trading range since last week when it broke its uptrend line from May 2016, near 99.15. It then tested its 50-week MA at 98.45, which is holding as support, but the choppy consolidation since last week looks like a bearish continuation pattern. We could see a back-test of the broken uptrend line, currently near 99.46, before heading lower.

We're getting some signals from the commodities markets that's worrisome if you're a bull and looking for higher stock prices. Commodity weakness in 2015 led to the largest pullback the stock market had seen since 2011 and the picture is starting to look similar. The agriculture sector is breaking down, as can be seen with company's stock prices, such as Agrium, Monsanto and ADM.

Industrial mining companies are also breaking down (uptrend lines from January/February 2016 are breaking, as can be seen on the commodities chart shown further below). Oil is also threatening to break down as is the oil services sector.

A breakdown in the commodities sector is cause for concern for two reasons: one, lower commodity prices affects the outlook for inflation; two, lower commodity prices shows lack of demand which means the global economy is slowing down. Neither of these two things is good for stock prices.

The Fed might even be forced to back off on their rate-increase campaign, including their desire to reduce their balance sheet. Even the Canadian dollar is starting to break support since its strength, and Canada's economy, is dependent on strength in the commodities. Between the commodity slowdown and an enormous housing bubble, Canada banks could soon be in serious trouble.

The Chinese stock market ($SSEC) is also in trouble, having recently broken its uptrend line from May 2016, which once again shows a slowdown in their economy and that affects demand for commodities.


Bloomberg Commodity index, DJUBS, Weekly chart

For the commodity index, DJUBS, its uptrend line from January 2016 was broken in the first week of March. The trend line was then back-tested in mid-April before dropping back down, which left a bearish kiss goodbye and sell signal. It's possible this index is in a bullish sideways consolidation and a break above 89 would be a bullish move. But at the moment it's on a sell signal and pointing lower. This bears watching over the next few weeks since it will likely help us determine which direction the next move will be for the stock market.


Gold continuous contract, GC, Daily chart

Gold lost $18 today and broke multiple support levels in the process. Yesterday it back-tested its broken 20-dma near 1271 and then dropped down to its 200-dma at 1256.70. Today it broke below its 200-dma and only paused at its 50-dma, near 1250, before continuing lower, breaking its uptrend line from December 2016 in the process, near 1243. It also closed below its March 30th low near 1241. It did close slightly above its 200-week MA, at 1235.60, so we could see at least a bounce correction but it's looking bearish from here.


Silver continuous contract, SI, Daily chart

Silver has been pointing the way for the metals, having first broken its moving averages and its uptrend line from December. It's still possible the sharp decline from April 17th will complete a 3-wave correction off the March 1st high, to then be followed by the start of a new rally. If we see a sharp rally follow the current decline I'll consider the bullish possibility more seriously but right now I'm expecting a bounce soon and then a continuation lower.


Oil continuous contract, CL, Weekly chart

Oil has dropped down to an uptrend line from April 2016, which is arguably the bottom of a rising wedge for price action since the June 2016 high. It's possible we'll see another leg up inside the rising wedge but if it breaks below the bottom of it, now near 47.60, we'd likely see oil drop much lower.


Economic reports

Thursday and Friday have a lot more economic reports but the biggest one is the NFP report on Friday. However, even that will likely receive a ho-hum response if there are no big changes or surprises, neither of which are expected.


Conclusion

Last week, on Monday and Tuesday, we had the big gaps to the upside and the market has done virtually nothing since then. The techs kept heading higher but they're now running into resistance and have started to pull back/consolidate. The week-long consolidation looks bullish and normally I'd be a buyer of this pullback. But I also know this market is overbought and losing momentum and we've seen too many of these consolidations at market highs suddenly break down instead. That makes me cautious and I'd rather wait for a break one way or the other (more than just a quick head-fake break) before entering a new trade.

The larger consolidation pattern off the March 1st highs (excluding the techs, which simply marched higher) also looks bullish but I could easily argue the need for a sharp leg down before the pullback is complete. So again, this is a tough spot to enter a new trade. If SPX drops down to 2275-2300 before it will be ready for another rally then it's clearly too early to buy the dip. I feel the upside potential does not warrant the downside risk at the moment.

If the market does push higher I think it won't be much (famous last words of a bear using no stops) before reversing back down. Be careful chasing the market higher from here (raise your stops if trailing the rally higher). Conversely, even if we get a sharp decline I would not get complacent about the short side since it could be just the conclusion to a larger pullback from March 1st and not the start of something more bearish.

Bottom line is keep your timeframe short and your trading light. It's a good time to conserve your trading capital while we wait for a better trade setup.

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

Keene H. Little, CMT