There might not be a lot of volume behind this week's rally but the buying has been enough to keep the bears away, allowing the market to drift higher. The question for the rest of the week is whether or not the indexes will be able to drift up through resistance.

Today's Market Stats

Last week the market tanked (on Wednesday) because of the political turmoil surrounding President Trump. This week the indexes have nearly retraced all of last week's loss and yet nothing has changed surrounding Trump as more investigations are launched in an effort to smear/clear his name. The VIX is back down below 10 and the big question is why was it so scary last week but nothing to worry about this week? To answer that question would require us to figure out a logical stock market, which of course is an oxymoron.

There's been a big liquidity push into the market in the past week and it could be argued that some big players, including central banks, have been behind the effort to recover the market and keep investors investing. The one missing component this week has been volume and a strong rally (in points) without the volume behind it makes is a little more suspect.

This being the week before the Memorial Day holiday weekend it's typical for us to see lower trading volume. It has in fact made it easier to push the market higher. With the indexes up against resistance we'll now see whether or not the sellers stay away at least before the weekend.

There wasn't much in the way of economic reports to move the market this morning. Mortgage applications were up +4.4%, reversing the previous week's -4.1%. This is a volatile weekly number and gets very little attention. Yesterday's report of new home sales in April showed a lower than expected number (569K vs. 605K expected and down from 642K in March). This morning's report of existing home sales was similarly lower but not by as much. Expectations were 5.65M, a slight drop from 5.70M in March, but the actual number was 5.57M, down -2.3%.

Total housing inventory increased 7.2% in April to 1.93M existing homes (a 4.2-month supply at current sales rate), but it's still down -9% from a year ago. As further evidence of a shrinking home ownership rate, despite a population increase, this was the 23rd consecutive year-over-year decline in the housing inventory. However, with the Millennial generation now hitting the age where they become more interested in home ownership, we could soon see a renewed demand for housing.

The existing home sales were down in every major region except the Midwest but the median sales price for single-family homes rose 6.1% to $246,100. As opposed to the new-home prices, which have steadily declined since early 2013, the median price for used homes has risen each month for over 5 years (this was the 62nd consecutive year-over-year gain). The time on the market for used homes fell to a new low of 29 days vs. 39 days a year ago. So all in all, the housing market is looking healthy, although it's becoming more of an affordability issue. There is a lack of affordable housing, especially for the lower- and mid-market range.

Lumber futures prices have been rising steadily since October 2015, doubling from $200 to a high just over $400 in April. The futures have pulled back slightly from April but price remains in a strong uptrend with no signs of weakening. As Tom McClellan has noted, lumber futures prices tend to lead new home sales by about a year and therefore it's looking like new home sales should continue to increase this year and that might reflect stronger buying interest from the Millennials, even as the Baby Boomers look to downsize.

The bigger problem for new home construction is labor. Many of the trade industries are begging for people and I know that in my hometown of Spokane, WA there are apprenticeship programs (remember those?) and trade association education programs that are trying to entice people into the home construction industry. There is a strong need for new people and that's negatively affecting how many homes can be built right now. It would appear we might now need fewer college-educated kids, with their $50K student loans to pay off, and more trade-educated kids who can earn decent money without monstrous loans holding them back.

The FOMC minutes were released at 14:00 and they caused a little volatility before finishing near the highs of the day. With the low trading volume it's not hard to move the indexes around but apparently shorts were spooked and some buyers jumped in. There was nothing new in the minutes so it was likely just some relief buying following the release of the minutes.

The FOMC minutes reflected agreement on a system to start reducing their balance sheet, which consists mostly of government bonds. They've been holding their balance sheet steady by rolling over expiring Treasuries but are now in agreement to start letting some of the Treasuries expire without replacement. They will be setting caps on how much will be allowed to roll off each month without reinvesting the proceeds. The initial caps will be set low and any proceeds over and above the caps will be reinvested.

The schedule of release of their bonds will be pre-announced in an effort to keep the market informed and reduce surprises and that's likely what the stock market liked. The reaction in the bond market was favorable -- bond prices rallied slightly, which dropped yields back down from their afternoon highs.

The Fed is a little concerned about the slowing inflation and economic indicators in Q1 but they think it's "transitory" and believe their forecast will have to be adjusted as inflation and the economy tick back up. The problem of course is that the Fed has a perfect record of never getting their forecast correct. If they think inflation and the economy are both going to tick higher my bet is that it's going to do the opposite. There are plenty of reasons to expect the long-term deflationary cycle to continue but I won't get into those tonight.

As mentioned earlier, last week's decline has largely been retraced but now we're at the point where we were last week, facing the same resistance levels. The question for the rest of the week is whether or not there will be enough volume (the pressure behind the buying) will be enough to shove the indexes up through resistance.

I was tempted to title tonight's report "I Ain't Afraid of No Bears" based on the quick reversal back down in the VIX from last week's spike up.


Volatility index, VIX, Weekly chart

Just as we had a "too far, too fast" spike to the upside last week, we now have a "too far, too fast" spike back down. The collapse of fear about a lasting downturn, which has driven the VIX back below 10, is worrisome. The VIX closed at 10.02 after hitting a low at 9.88 today and is again not far from the bottom of its large descending wedge from 2015, currently near 9.67. The low on May 9th was 9.56. A low VIX is not a reason to sell your stocks but it is a reason to be more cautious than usual. A retest of the highs for the stock market is being accompanied by a test of the lows for the VIX, and with continued bullish divergence. What, me worry?

In last Wednesday's wrap I kicked off the review of the major indexes with a look at the Nasdaq because it had a very nice setup for a reversal following Tuesday's high and it looked like Wednesday's strong decline was the kickoff to a larger decline. That has now of course been negated with the retracement of the decline. But I had shown an alternate wave count that suggested a pullback from Tuesday's high could lead to one more new high to complete a 5-wave move up from March 27th. Guess what we now have?


Nasdaq Composite index, COMPQ, Weekly chart

Not much has changed on the weekly chart and that means the Naz is still up against resistance at a price projection at 6167.53, which is where the extended 5th wave of the rally from February 2016 is equal to the 1st through 3rd waves. The more bullish interpretations says we need to see the Naz stair-step higher over the next several months and potential up towards 7000 but that would only become more evident after seeing a choppy pullback/consolidation instead of an impulsive decline.

The risk here is that the rally from February 2016 is completing and it will be followed by at least a larger pullback correction, one that could see the bottom of its up-channel from 2011 tested, which is currently near its March 2000 high at 5132.


Nasdaq Composite index, COMPQ, Daily chart

As a reminder, the rally from February 2016 is the 5th wave of the rally from 2011 (to complete an A-B-C rally from 2009). This 5th wave is a 5-wave move and its 5th wave is the leg up from March 27th, shown on the daily chart below. The smaller 5th wave equals the 1st wave near 6164, which was achieved with today's high at 6166.

That gives us longer- and short-term projections at 6164 and 6167, putting today's high in the middle. There is of course last week's high at 6170 that might also be resistance. But if the Nasdaq gets above 6170 and stays above that level then we could see a rally to the 6200-6210 area to test the trend line along the highs from April 2016 - March 1, 2017. This trend line and the 6167 projection stopped last week's rally. So far the test of last week's high is showing a significant bearish divergence. And with the VIX now back below 10, what, me worry? I ain't afraid of no bears (or double tops).

Key Levels for COMPQ:
- bullish above 6210
- bearish below 5996


Nasdaq Composite index, COMPQ, 60-min chart

Dialing in closer, the 60-min chart shows the 5th wave of the rally from March 27th, which is the leg up from last Thursday. This means we're into the 5th of the 5th of the 5th wave and there's every reason to believe we're headed shortly for at least a much larger pullback.

Using the arithmetic price scale, vs. the log scale price used on the daily chart above, the trend line along the highs from April 2016 - March 1, 2017 sits a little lower and was tested with today's high at 6166. There's additional upside potential but this is another setup for a reversal and this time with a double top. The leg up from last Thursday is building a slight rounding top (there's no good uptrend line for the rally) as it hits resistance. Nah, I'm still not worried (wink).


S&P 500, SPX, Daily chart

SPX needs buyers to continue from here otherwise it's going to look especially bearish. Following the March 1st high last week's slightly higher high was with bearish divergence and the selloff left a double top. Now we have a test of last Tuesday's high at 2405.77 with today's high at 2405.58 with an even more significant bearish divergence. Bulls need a break above 2410 (and hold above) in order to negate the bearish divergence and a triple-top setup. I think the selling could get nasty if it starts back down from here.

Key Levels for SPX:
- bullish above 2410
- bearish below 2352


Dow Industrials, INDU, Daily chart

The wave count is not at all clear on the Dow since it either finished with a truncated 5th wave or has a funky looking 4th wave and a truncated 5th wave. For now I'm using trend lines for guidance and today's rally brought the Dow up to its downtrend line from March 1 - April 26th. This downtrend line stopped the rallies on May 9 and 16 and therefore is a trend line traders are watching.

In addition to this trendline resistance (until proven otherwise), the broken uptrend line from November is currently near today's closing price at 21012. Once again, the bulls really need to keep up their buying here. Otherwise we'll have more tests of previous highs with bearish divergence.

Key Levels for DOW:
- bullish above 21,047
- bearish below 20,553


Russell-2000, RUT, Daily chart

The RUT's price pattern since last December has been nothing but corrective 3-wave moves and as such it makes it nearly impossible to discern what its next move is likely to be. Using trend lines and channels is usually effective in identifying potential turns and at the moment the RUT is up against its downtrend line from April 26th, currently near today's closing price at 1382.

Better seen on a 15- or 30-min chart is a rising wedge for the leg up from last week and the RUT broke down from it with today's pullback from the morning high. The afternoon bounce took it back up to the bottom of the wedge, leaving a potential back-test and now waiting to see if we'll get the bearish kiss goodbye with a selloff on Thursday.

Key Levels for RUT:
- bullish above 1401
- bearish below 1351


10-year Yield, TNX, Daily chart

The bond market reacted positively to the FOMC minutes and reversed the buying up until the afternoon release. This of course dropped yields, which closed below yesterday's close and could now be ready for another leg down toward the 2.00% objective out of its double-top pattern between last December and March. The bottom of the trading range (the valley between the double top), near 2.3, was tested with this afternoon's high at 2.297. A continuation lower tomorrow/Friday would more strongly suggest the decline in yields will continue.


KBW Bank index, BKX, Daily chart

The banks could also be ready for the next leg down. Yesterday's high at 91.75 was a back-test of strong resistance at its broken 20- and 50-dma's, at 91.72 and 91.60, resp. It was also a back-test of its broken uptrend line from June 2016, currently near 91.50, which it had broken below last week. There's a lot of resistance here and it's a reason the bulls need to keep up the buying and bust through it. Otherwise a decline on Thursday would leave a bearish kiss goodbye at resistance and a reason to sell. The downside objective for the H&S top, near 75.30, still beckons. That alone would be a 17% loss from here.


Transportation Index, TRAN, Daily chart

Another H&S top, another back-test. The TRAN bounced off its 200-dma last week and has now made it back up to its broken 20- and 50-dma's, at 9046 and 9065, resp., with today's high near 9045. They'll be near 9040 and 9060 on Thursday but at the moment the TRAN has also made it back up to a downtrend line from April 25th, near 9025, closing slightly below it today at 9022. Again, the bulls need to keep up the buying pressure otherwise a selloff from here would leave a bearish kiss goodbye at resistance. The downside potential is to 7900 (from the H&S pattern), which would be a decline of about -12% from here.


U.S. Dollar contract, DX, Daily chart

The US$ has been in decline since topping in January and the decline has been steepening since the bounce to a lower high in early March. On May 16th the dollar dropped below the bottom of a potential bullish descending wedge, which was a bearish move (leaving behind a failed bullish pattern).

It's looking like we should see a drop down to at least the bottom of a parallel down-channel, currently near 96. I'm expecting the dollar to eventually break down below the bottom of the channel but it should provide at least a bounce/consolidation before dropping lower.


Gold continuous contract, GC, Daily chart

The short-term pattern for gold is not clear enough to suggest a higher-probability move over the next week. With it struggling to get back above its broken uptrend line from December-March, currently just above today's close at 1258.60, it's looking vulnerable to another leg down from here. But I could easily argue we'll see a pop up to its downtrend line form 2011, near 1282, before heading back down. It would obviously be more bullish if it can break its longer-term downtrend line.


Oil continuous contract, CL, Weekly chart

Since June 2016 oil has essentially traded in a choppy sideways trading range and it's nowhere near breaking down or up yet. The weekly chart below gives a better sense for where it is than a daily chart. Today's high at 51.88 is a test of the long-term uptrend line from 1998-2008. There's a little more upside potential to its downtrend line from May 2015 - January 2017, currently near 53.30, which is the line that stopped rallies in February and April.

Much above 53.30 for oil would have me looking for a run up to the top of a parallel up-channel for its choppy rally following June 2016 high, which could also have it testing price-level S/R near 58.50. The overall choppy pattern continues to suggest we're going to get another leg down for oil, potentially below its February 2016 low at 26, and that could start from the 52-53 area or possibly higher.


Economic reports

There will be no market-moving economic reports on Thursday and then on Friday we'll get Durable Goods Orders and the 2nd estimate of GDP. With the Fed on data-dependent mode, thinking the economy is improving from Q1, these numbers could sway the market, especially since we should have very low volume on Friday.


Conclusion

Many of the indexes have bounced back up to potentially strong resistance and until the market can rally some more it's looking vulnerable to another reversal back down. This might be a time where the 2nd mouse will get the cheese (the first one who shorted last week's high took the bait and paid dearly for it). Most bears will be reluctant to try shorting this market again but we have a nice setup for them to try. Only in hindsight will we know whether or not the market has a different plan.

It's possible the market will simply drift a little higher into the end of the week in front of the holiday weekend. Without a lot of points added to the board it would keep the bears away and then we'll get a truer sense of market direction next week. But beware of the possibility for a negative day on Thursday, which would kick out some potentially important sell signals.

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

Keene H. Little, CMT