After being ignored for a long time, the political news surrounding Trump is starting to scare investors who have been content to keep buying as long as the Trump agenda was still possible. That agenda appears to be in trouble and therefore so too might be the rally.

Today's Market Stats

Starting with a sharp decline in equity futures last night, the decline continued today and we had one of the worst selloffs that we've seen since September 2016. Since the rally from November the worst previous selloff was March 21st when SPX lost almost 30 points, vs. today's nearly -44 points. SPX snapped several layers of support today and wiped out in a single day the gains made since April 21st, 18 trading days ago. That follows a quick new all-time high Tuesday morning and it leaves a helluva bull trap up there, near 2406, with today's close nearly 50 points (-2%) lower at 2357.

I'm reluctant to turn the start of tonight's review into a political discussion but obviously it can't be avoided when the reason for today's market decline is based more on the political fighting that's going on rather than anything more market related. Of course the rally from November has been more politically motivated than anything specifically related to the economy or stocks in general. If anything, the environment for stocks has become less supportive of higher prices but hope for what Trump's team was doing kept the rally alive.

The market has been ignoring bad news for a long time, which was actually a sign of strength. Whether it was higher P/E ratios while earnings declined or signs of trouble in the credit markets (default rates are ticking higher) or geopolitical angst, the market didn't care. More trouble? Woohoo, let's rally!

Earnings estimates have been dropping, which has been causing an increase in P/E ratios to historically high levels. The market has been pricing in perfection, whether it was political accomplishments, interest rate changes or geopolitical events and yet all of those conditions have been deteriorating. The market just didn't care but once it does start to care it will then care about historically high P/Es. And if the 'E' is coming down, as it has been for two years (today's earnings are lower than where they were two years ago) then the 'P' will have to come down faster.

As followers of technical patterns in the charts we know that the news will matter when the charts tell us it will matter. The charts have been showing weakening momentum as the indexes hit resistance levels and it was the reason I've been suggesting upside potential is dwarfed by downside risk. The charts have been warning us that we're going to get some kind of news-related event that will suddenly become the catalyst for a correction.

Yesterday's setup for the Nasdaq was an especially strong warning sign even though it closed at its high. We couldn't know what kind of catalyst would provoke some selling but the setup was there, telling us to be very careful about the upside. The same with VIX -- it hit the bottom of its bullish descending wedge last week and started to bounce back up this week, which was a warning sign that something is going to spark a market selloff. We just never know what the spark will be (if we did then it wouldn't be a surprise).

The catalyst for today's decline (starting with a dump in the futures last night) is Trump's potential demise. At least that's the way the media, which hates Trump, is portraying it. There's a lot of false news in the media-inspired frenzy at the moment and as NY Senator Chuck Schumer warned Trump several weeks ago (in so many words), "Don't piss off the intelligence community or else they'll bite back harder." The constant stream of "intelligence" leaks bears out Schumer's warning.

How much all of this political haranguing is real vs. how much is fake news is anyone's guess. But regardless, it's going to affect people's moods and their impression of Trump and his ability to get things done. The rally from November has been based on the changes the Trump administration would be able to make, primarily healthcare reform, tax reform and providing an economic boost through an increase in infrastructure spending.

The healthcare reform is on life support and I'm being kind when I say that. The other reforms and spending plans are in serious jeopardy, especially now that Trump is on the ropes (if you believe the media reports). The Democrats smell blood and are already talking about impeachment hearings. In the end the over-anxious Democrats are probably shooting themselves in the foot because they're forcing Republicans to support Trump, even if reluctantly, and they are the majority party. But that only fans the flames of war between the parties and the mood change from hope to despair will be a rally killer for the market.

The techs have been on a stronger bullish run than the rest of the market and they also led the way down today. The tech indexes lost 2.5% today while the blue chips lost 1.8%. The RUT was also weak, as it has been since December 2016, and it lost 2.8% today. The weakness in the RUT has been another warning sign, especially as it continued to sell off while high-P/E stocks continued to roar higher.

We've had a distorted market for a while and that could continue for longer but a fractured and distorted market is always a time for caution when you're thinking about the upside. It might not be time to aggressively short this market but it's certainly a good time to get defensive about the long side. Bonds rallied strong today, which shows a strong move into the relative safety of bonds. The pattern for bonds supports higher prices so today's move might not be reversed any time soon.

I'll start off tonight's chart review with the VIX since it made a monster move today (up +46%). It's still at a relatively low level (15) but typically a fast move like today's is a sign of "too far too fast" and gets reversed hard the next day. We've seen this time and again during the multi-year stock market rally. I suspect there was a lot of covering of short puts today, especially inside opex week, since many institutions regularly sell premium and then wait for their short puts to expire worthless. It's been a strong income generator since yields have been so low in non-stock assets.

Buying back the short puts is bearish (just like buying puts and shorting stocks, which is also done to hedge short puts) and that's likely one thing that spiked the VIX today. The spike in the VIX could be the kickoff to a much larger pullback/decline in the stock market, especially since we had a nice setup for the reversal. But today's stock market decline looks ready for a bounce correction and that means a likely pullback for the VIX tomorrow.


Volatility index, VIX, Weekly chart

Last week the VIX had dropped back down to the bottom of its bullish descending wedge from 2015 (with confirming bullish divergence since April 2016). I don't know if this is the start of a breakout from the wedge but that's the potential. Today's rally in the VIX now has it testing its downtrend line from August 2015 - November 2016, closing its gap down on April 24th and nearly retracing its decline from April 17th.

The Nasdaq provided a very nice setup into a high yesterday and it's a good index to start a review of the market since it's trading well technically. I'll do a more thorough analysis of the Nasdaq tonight in an attempt to show why yesterday's high is potentially very important.


Nasdaq Composite index, COMPQ, Weekly chart

With the fractal nature of the market, Elliott Wave analysis counts the moves as impulsive (5-wave) or corrective (3-wave or more complex). The move up from 2009 is a 5-wave move and once complete it will be followed by a very large multi-year correction to the rally (potentially something more bearish). It's important to have a good idea where we are in the bull market rally so that extra precaution can be taken when the pattern is telling you to.

As with any of the technical tools available to us, wave counts are somewhat subjective and can be interpreted in different ways. Only after seeing what follows a particular count can the larger count be verified. If the wave count on the weekly chart of the Nasdaq below is correct then we're in the 5th wave of the rally from October 2011 (I'm looking at the rally from October 2011 is the c-wave of a large A-B-C bounce off the 2009 low). The rally from October is in the parallel up-channel shown on the chart.

The 5th wave is now a 5-wave move with an "extended" 5th wave. It's possible we'll see the Nasdaq stair step higher into the end of the year, which would mean just a choppy multi-week pullback before pressing higher again. But the extended 5th wave met a price projection yesterday, at 6167 (with its high at 6170) while hitting a trend line along the highs for the rally from February 2016. The new high was showing bearish divergence against its March 1st high, which was another warning sign.


Nasdaq Composite index, COMPQ, Daily chart

The daily chart of the Nasdaq, shown below, focuses on the latter portion of the 5th wave in the rally from February 2016. The final 5th wave of the move is the leg up from April 13th and it can be seen more clearly how it rallied up to 6167 and its trend line along the highs from April 2016 - March 1, 2017. Yesterday's candle is a hanging man up against resistance, which was a warning sign that it could be followed by a reversal. Today's decline wiped out more than 3 weeks of gains (back to April 25th).

Key Levels for NDX:
- bullish above 6170
- bearish below 6000

Nasdaq Composite index, COMPQ, 60-min chart

The final 5th wave, which is the leg up from April 13th, is shown in more detail on the 60-min chart below. It too will be a 5-wave move and the final little 5th wave is the leg up from May 11th. As it neared the 6167 price projection and the two trend lines along the highs from April 2016 and a shorter-term one from May 1st, it too looked like it was completing a 5-wave move.

I had no idea yesterday what the catalyst for a decline would be but as with the saying, "when the student is ready, the teacher will arrive," so too can it be said "when the market is ready, a catalyst for reversal will arrive."

The multiple degrees of 5th waves completing at the 6167 area led me to believe it would be very strong resistance and the potential completion to the long bull market. That's yet to be proven since it's going to take a lot more price action to see what develops from this high but the potential is for a significant decline to follow.

We could see the Nasdaq drop down to its uptrend line from November-April, near 5985, before setting up a bigger bounce correction but it's also possible the bounce will start from here. It wouldn't surprise me to see a quick flush to the downside Thursday morning and then a snapback reversal to the upside, especially if the uptrend line holds. But once the bounce correction completes, maybe on Friday, we should get another leg down.


S&P 500, SPX, Daily chart

SPX also broke several levels of support, including uptrend lines and its 20- and 50-dma's. It dropped well into its two gaps on April 24th and 25th and basically wiped out the gains made over nearly four weeks. With today's low at 2356 it came within about 7 points of closing its April 24th gap (2348.90). If that gap is closed with a spike down Thursday morning I think it would set up a good reversal back up into a larger bounce correction.

We could see a bounce back up to its 20-dma and broken uptrend line from November-April, near 2386. That would be a nice trade on the long side but I'd then look for another reversal back down into a stronger decline. That's the current setup for this week and into next but obviously subject to change as the market dictates. What the bulls don't like here is the double top against it March 1st high with bearish divergence.

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


Dow Industrials, INDU, Daily chart

The Dow has been weaker than SPX and it has a pattern that is different enough to suggest today's decline could be the completion of a pullback from April 26th. That would be a bullish setup for the resumption of the rally so the bears can by no means feel complacent here. I'm looking for a bounce correction that could see the Dow back up to about 20890 to back-test its broken uptrend line from November-April and its broken 20-dma.

A 62% retracement of the decline from Tuesday would be at 20868. Watch for a possible closure of its April 24th gap, at 20547, Thursday morning to set up at least a bigger bounce. That would also be a back-test of its broken downtrend line from March 1 - April 5, which it had broken above on April 24-25. Below 20547 would be more bearish.

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


Russell-2000, RUT, Daily chart

Starting last Thursday through yesterday the RUT kept bouncing off support at its uptrend line from November-April. But that trend line was broken with authority today and the bearish pattern suggests only a small bounce/consolidation on Thursday before heading lower into next week before setting up a larger bounce correction. If it spikes down in the morning and reverses from price-level support near 1347 I would not press bearish bets.

From a strictly price projection perspective, the move down from April 26th achieved two equal legs down today at 1353.60 (actually it stopped 25 cents short of that level) and that could be the completion of a 3-wave pullback correction that will now lead to the start of another rally (or just more sideways chop that the RUT has been in since December).

Key Levels for RUT:
- bullish above 1401
- bearish below 1355


10-year Yield, TNX, Daily chart

With the strong selloff in the stock market today it wasn't surprising to see the Treasury market rallying, which dropped yields. The flight to safety increases demand for the relative safety of Treasuries, driving their prices higher.

A downtrend line from June 2007 - December 2013 for TNX was broken in early December 2016 but it wasn't able to make much headway to the upside after that. It instead formed a double top between December and March near 2.62%, with bearish divergence, and the "valley" between the tops is near 2.3%. The difference between those two levels, 0.32%, becomes the downside projection below the 2.3% floor, which is near 2.0%.

A break below 2.3 in mid-April was followed by a recovery to a lower high and now today's decline is another break below price-level support near 2.3. Today's decline also dropped TNX below support at its downtrend line from 2007 and its uptrend line from July-September 2016, both currently near 2.25. TNX stays bearish below that level but watch for support at its 200-dma near 2.14.


KBW Bank index, BKX, Weekly chart

There were very few sectors that escaped today's selling. The metals, commodities and utilities did well by not selling off, but leading to the downside, and in synch, were the semiconductors and banks. I often say I like to see the SOX and BKX in synch to help support a market move and they both supported today's decline, down -4.4% and -4.1%, resp., which of course is not helpful to the bulls.

The big banks were especially weak, with BAC, GS and MS as examples -- they were down -5.9%, -5.3% and -5.6%, resp. Following the money says we shouldn't even think about getting long but we know moves don't go in a straight line, especially with this market.

BKX has hit potential support at its trend line along the highs from April 2010 - July 2015. BKX broke above this trend line in November, hit the top of its parallel up-channel from 2009 in February-March, came back down for a back-test of its 2010-2015 trend line and then bounced back up to a lower high. Now it's back down to the 2010-2015 trend line, now near 88.40, and my expectation is that support will fail. But never say never to the bulls and now's their chance to rescue the banks.


U.S. Dollar contract, DX, Daily chart

The US$ has been in free fall for the past four trading days, including today. Tuesday's close was marginally below the bottom of a possible bullish descending wedge and a rally today would have left a buy signal.

But instead the dollar has now firmly broken below the bottom of the wedge, currently near 98.20, which leaves a failed bullish pattern in its wake. A failed pattern tends to fail hard so the decline could continue for several more days before we see a correction. The bearish pattern would be in question if the dollar makes it back above 98.15.


Gold continuous contract, GC, Daily chart

The other participant of flight to safety was gold, which finished the day +24.40 (+2%). Just as the stock indexes broke a few support levels in one day, gold also broke a few resistance levels today. It jumped $10 over its 20-, 50- and 200-dma's, all near 1250. It also got back above its broken uptrend line from December-March, currently near 1258.

If the stock market gets a bounce on Thursday we could see gold lose its fight with resistance. If it closes back below 1250 the bearish pattern suggests the start of another leg down. But if the gold bulls can keep up the buying pressure and keep gold above 1260 it will stay potentially bullish (the real test for the bulls will be getting gold above price-level S/R at 1308).


Oil continuous contract, CL, Daily chart

As mentioned earlier, the metals and commodities were beneficiaries of money running out of stocks and looking for a home besides Treasuries. Oil rallied +1.5% today but it's still battling its 50- and 200-dma's, both near 49.30. If the bounce off the May 5th low is just a correction within a larger decline, this is a good place to look for a high and the resumption of the decline. Only slightly higher, at 49.94, is the 62% retracement of the April 12 - May 5 decline. Stronger resistance would be price-level S/R near 51, which would make it more bullish above that level.


Economic reports

The market was not concerned about any economic reports today, not there were any to be concerned about. Thursday's Philly Fed and Leading Indicators will also likely be ignored. There are no major economic reports on Friday. With earnings season winding down and a quiet week for economic reports it's obvious the market went looking for other news. ;-)


Conclusion

The market has been on edge for a while and the market pundits (talking heads) have been beating the drum about why it's different this time and why the market will keep rallying. But with slowing momentum and greater concerns about the economy slowing down, P/E ratios climbing, geopolitical angst, sell in May and go away, etc., it shouldn't be surprising to see the market take a hit. The news really isn't any different today than it's been but the market seems a little more sensitive to it right now.

It's opex week and there could be a big effort to save the week with a rally on Thursday, starting of course with an overnight rally to gap the market up in the morning. That would effectively blow the new shorts back out of the water.

But margin selling could create a gap down in the morning, in which case I think it would probably set up a buying opportunity (for a trade). As reviewed in the charts, there are some potentially strong support levels not far below today's lows and a quick washout in the morning (to get the margin selling out of the way) could lead to a snapback rally.

Whether today's selling was a washout event that will now lead to another rally leg or is instead just the start to a larger decline will be the argument going forward. The large move in VIX suggests at least a snapback correction but I think the market has more work to do on the downside even if it's to be just a pullback before heading higher next month. That means the next large bounce correction should be watched carefully as a shorting opportunity. I don't think the market is done shaking the trees yet.

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

Keene H. Little, CMT