This month's rally has been in anticipation of stronger earnings announcements and the market has not been disappointed. As long as the announcements remain positive we could see the market continue higher. But things are getting a bit frothy and there are reasons for concern.

Today's Market Stats

Today's relatively strong rally in the Dow was brought to us courtesy of Boeing's (BA) nearly +10% rally. AT&T (T) also received a positive response, up +5%, to its earnings report and the two companies easily compensated for some weaker stocks in the Dow 30. The banks struggled again, which kept the S&P 500 flat for the day, while techs continued to march higher. A good chunk of the RUT's strong rally on Tuesday was given back today and its chart is telling us there's a reason for bulls to be a little concerned about any further rally potential.

Earnings announcements have driven the stock market higher with upside surprises, or at least without significant downside surprises. It's a busy week for companies' announcements and the expectation is for continued good news. Not that it currently matters to most market participants, but earnings aren't actually as good as they seem on the surface. The surface results sound fantastic though - since 2009 earnings for U.S. companies have increased +265%.

SPX is up about +271% since its low in March 2009, so that's pretty good correlation with the growth in earnings. But the trouble with earnings is that the growth has been mainly accomplished through the use of smoke and mirrors. Sales for these same companies have increased only +32%. Either companies have been extremely efficient in cutting costs (since prices haven't increased much) or else they've done some financial engineering to accomplish earnings growth that is nearly 9 times sales growth.

The smoke and mirrors is of course stock buybacks, which reduces the number of shares outstanding and that in turn drives EPS higher, even if in fact earnings did not improve. With the use of nearly zero-cost borrowing companies have been the primary driver behind the buying of their own stock and hence higher prices. One could argue whether or not it's smart for companies to be paying top dollar for their stock right now.

Unfortunately the borrowed money has not been put to productive use, such as capital investments, but instead only to buy their own stock as a way of "improving" their earnings announcements (which of course helps executive pay compensation from their stock grants/options). When that buying stops we have to wonder who will be available to buy the stock in place of the companies' purchases. I know, the Fed will step in and start buying (wink).

For now the stock market likes the new and improved earnings announcements and this month's rally has been in anticipation of good earnings. Comparing results to Q2 2016 is an easy comparison but comparing the coming quarter to Q3 2016 is not going to be nearly as rosy. Therefore this quarter's earnings run (remember those in the dot.com era?) could see at least a temporary peak in the bull run.

There were no surprises from the FOMC announcement this afternoon. The rates stayed the same and the Fed is promising (threatening?) to start reducing its balance sheet soon. With the Fed's worry that inflation is not ticking higher it is hinting that rate hikes could be slowed down from what they had previously discussed. The result following the announcement was a small pop up from this afternoon's pullback in the stock market, another spike down in the US dollar, a spike up in gold and a spike down in Treasury yields, all of which was a reaction to the possibility that the Fed will have to stand still on further rate hikes.

The Dow was relatively strong today and it made yet another new all-time high. As mentioned above, its rally was primarily due to the positive earnings reaction in Boeing (BA, +9.9%) and AT&T (T, +5.0%). BA is very bullish with its gap up and higher run to new all-time highs whereas T looks like short covering following an oversold decline from February. BA's 21-point rally added more than 140 points to the Dow, which more than accounted for the Dow's 97-point rally today.

BA has had a nice run up from January 2016 where it has more than doubled its price from a low at 102 to today's high at 234. Interestingly, and what is a common theme in the indexes, it's possible today's positive reaction will be the icing on the cake for its rally from 2009. Looking at the chart of BA shows a clean 5-wave move up from March 2009 and while it could stair-step a little higher, the wave count is suggesting caution about expectations for further upside. McDonald (MCD) had a similar bullish gap up yesterday but gave up about half of it today.

Boeing Company, BA, Monthly chart

The monthly chart of BA, shown below, is using the log price scale but if you view it with the arithmetic price scale you'll see the rally from February 2016 has gone bullistic (purposely misspelled) and a parabolic climb usually doesn't end well. It's particularly vulnerable here as it tests its trend line along the highs from April 2010 - February 2015 (waves 1 and 3, which is often where the 5th wave terminates), so far with a slight poke above the line near 231. A small throw-over followed by a close back below the line would create a sell signal so the bulls need to keep the rally going on Thursday.


With its 30 components the Dow can be easily swung up and down by one or two good or bad companies and a lot of people don't like following the Dow because of this. But it's still the number one reported index that people hear about and it's a good indicator of sentiment. Starting off with its weekly chart there are some warning signs dead ahead.

I could easily argue for higher prices and in fact I think there's a good chance for higher prices on Thursday. But I also see a strong possibility that only minor new highs, if any, could complete the big rally from January/February 2016. I think it's a risky time to be chasing the market higher.


Dow Industrials, INDU, Weekly chart

The Dow is getting pinched between its uptrend line from November 2016, which has been supporting all minor pullbacks since May, currently near 21515, and its trend line along the highs from May 2011 - March 2015, near today's close at 21711. The significant bearish divergence against its March 1st high suggests it's not a good time to bet on a bullish breakout. It could happen and a rally that stays above 21800 would be a bullish move.


Dow Industrials, INDU, Daily chart

The Dow has been chopping its way higher since the June 29th low, which is normally an indication it's in an ending pattern. That interpretation if further supported by the waning momentum (bearish divergence). I mentioned above that the Dow would be more bullish above 21800 but perhaps not for much more. There's a price projection at 21888 (where the 5th wave of the rally from April would equal the 1st wave) and that projection crosses the trend line across the highs of the rally from April on the 1st of August.

The Dow would therefore be more bullish above 21900 and as long as the bulls can keep the Dow above Monday's low at 21496 it stays bullish. Just be aware that the form of the wave pattern can be considered complete at any time, including right here.

Key Levels for DOW:
- More bullish above 21,900
- bearish below 21,496


Dow Industrials, INDU, 60-min chart

This morning's quick high for the Dow was a test of a trend line along the highs from June 20 - July 14 (gray line on the 60-min chart below), as well as the trend line along the highs from May 2011 - March 2015 (purple line), which is one of the reasons why I say the rally could be considered complete here. There's also a 5-wave move up from June 29th in a rising wedge (ending diagonal) to complete the 5th wave of the rally from April. However, it would look "prettier" with a pop up to the top of the rising wedge identified as the trend line along the highs from July 3-14, near 21830 by the end of the week.


S&P 500, SPX, Daily chart

A little different wave count for SPX has me looking for the completion of the leg up from June 29th, like for the Dow, to complete the larger rally pattern. Two equal legs up from May 18th points to 2506.80, which crosses a trend line along the highs for the rally from March (April 26 - June 19) on August 7th. That trend line is currently near 2494 so depending on how quickly SPX rallies up to the line (assuming it will) we could see a top at roughly 2594-2507. The first sign of trouble for the bulls would be a drop below last Friday's low at 2465.

Key Levels for SPX:
- more bullish above 2507
- bearish below 2435


S&P 500, SPX, 60-min chart

Today's consolidation following the morning high has it looking like we should get another leg higher. Another small rally would then do a good job completing a 5-wave move up from last Friday and I have projections for it near 2485 and then 2498. The short-term pattern suggests SPX might have trouble making it much above 2485. A drop below last Friday's low at 2465 would suggest a high is in place.


Volatility index, VIX, Weekly chart

If nothing else it's at least entertaining to see how low the VIX is going to go before bottoming. The weekly chart below shows this week's poke below the bottom of its 2-year bullish descending wedge (with bullish divergence) and the bounce back up inside the wedge. Normally this creates a buy signal (for the VIX) so we'll soon find out if this week's low (8.84 this morning) will be the final one. A rallying VIX doesn't mean the stock market has to reverse back down but a rising VIX with a rising stock market would be a warning sign.

In addition to the uber-low VIX we have the CNN Fear & Greed index hitting Extreme Greed (79 today, 81 yesterday). The COT report shows dumb money sitting in a historically large net short position, meaning they're expecting even lower VIX. Hmm, a very low VIX with a large net short position by dumb money and a bullish sentiment extreme -- what could possibly go wrong? Long vol seems like a good play here.

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


Nasdaq-100, NDX, Daily chart

Like the other indexes I see the potential for techs to push a little higher. NDX could make it up to its trend line along the highs from November 2014 - July 2015, which will be near 6015 by the end of the month. But I'm seeing waning momentum on the short-term charts and oscillators threatening to roll over on the daily chart. The wave count can be considered complete at any time and it's a big reason I'm suggesting not chasing this higher. Pull stops up tighter if in long positions since the coming correction could be a doozy.

Key Levels for NDX:
- more bullish above 6020
- bearish below 5725


Russell-2000, RUT, Daily chart

Following last Friday morning's spike above the trend line along the highs from 2007-2015, the RUT immediately dropped back below the line. On Tuesday the RUT had a strong rally and made it back up to Friday's high (practically to the penny). Today's high at 1452.02 was to the penny. I thought Friday's spike high was a fat-finger trade since IWM did not do the same thing and it's amazing how many times a fat-finger trade is followed by a test.

With two failures to hold above the long-term trend line (which fits as the top of a large megaphone topping pattern) it becomes riskier to hold long positions here. A sustained rally above 1462 (a short-term price projections I have for the current move) would be more bullish but at the moment it's looking like a setup for a reversal back down.

Key Levels for RUT:
- more bullish above 1462
- bearish below 1415


S&P Midcap 400 index, MID, Daily chart

Occasionally I show a chart of MID because it's an index that shows nice form. Perhaps because it's not as easily manipulated as the other indexes but whatever the reason, it has been showing a nice setup for an ending pattern, which might have been triggered today.

The choppy rally from March formed a shallow rising wedge (ending diagonal 5th wave) and following the July 6th low I thought we'd see one more leg up to the top of the wedge, which occurred on Tuesday. Today's decline follows yesterday's little throw-over (a classic finish to the pattern) and creates a sell signal. The only way to negate the sell signal is a rally above yesterday's high at 1795. Confirmation of a top would be a drop below the bottom of the wedge, currently near its 50-dma at 1747.

A short-term rising wedge, for the final leg up from July 6th, was broken today as well and that helps confirm a top is likely in place. The broader averages could continue to rally a little more but this index has "SELL!" written all over it. We should see a fast retracement down to the May low near 1683 (and its 200-dma) before getting a decent bounce correction and then another leg down.


Transportation Index, TRAN, Daily chart

The TRAN has been acting weaker than the Dow since its high on July 14th. Last week the TRAN dropped back below its highs since last December and left behind a failed break-out attempt. The Dow's new highs since July 14th has not been confirmed by the TRAN and Dow Theory says that could be a problem (all the pundits were all over the Dow Theory buy signal when the Dow and TRAN made new highs together in early July but they've been strangely quiet since the TRAN's reversal).

The little bounce off last Friday's low has so far only resulted in a back-test of price-level S/R near 9490. A drop below the 50-dma, currently near 9378, and the November 2014 high at 9310 would be further confirmation that a high is in place for the TRAN. The bulls really need the TRAN to pick itself up and at least get back above its broken 20-dma near 9591.


U.S. Dollar contract, DX, Daily chart

The poor dollar has fallen and can't get up. It's been nearly a non-stop decline this month and once it broke below the bottom of a parallel down-channel for the decline from January, near 94.75 last Tuesday, it's making a bee line for possible support near 93.

The bottom of a down-channel for the leg down from May is currently near 92.90 so the dollar would clearly be more bearish with a sustained break of support near 93. In that case the next support level is near 90 (a trend line along the lower lows since early 2015). The dollar is due at least a bounce off support but at this point it's looking like we should expect lower lows after a bounce correction.


Gold continuous contract, GC, Daily chart

The only thing surprising about gold is how little it has rallied while the dollar gets punished. It did rally today while the dollar declined and that has gold testing its 62% retracement of its June 6 - July 10 decline, at 1262.59 (today's high was 1263.40).

A little higher is the broken uptrend line from December 2016 - May 2017, currently nearing 1270. It's possible gold is starting another rally leg but that wouldn't become more apparent until it's able to break its downtrend line from September 2011 - July 2016, which stopped the rally into the June 6th high and is currently near 1284.


Oil continuous contract, CL, Daily chart

Oil spiked up yesterday and then added a little more today. The result is that oil now has achieved two equal legs up from its June 21st low, at 48.92 (today's high was 5 cents shy of that projection). A little higher is its 200-dma and downtrend line from April-May, both near 49.40. If oil makes it above 50 it would look more bullish but at the moment it looks like a bounce correction that will lead to a continuation lower.


Economic reports

Thursday's economic reports are not likely to be market moving unless the Durable Goods report comes in much weaker than expected. It's expected to improve from May's -1.1% to +2.9% in June.


Conclusion

The bull market continues and the uptrend is still intact. There are cracks showing in the foundation and some indexes are flashing strong warning signs (such as MID) but there is no proof that the market is topping. I see evidence that suggests a top could be forming here or in the next day or two but obviously that's speculation and an attempt to see through the snow in my crystal ball (I need to learn to stop shaking it first).

The stock market is rallying in anticipation of good corporate earnings reports and so far the market has not been disappointed. What happens after the earnings, especially with a more difficult comparison with Q3 2016, is anyone's guess but it could prove challenging for the bulls to attract more buyers. The stock market is after all a "greater fools" market that's always in search of people willing to buy it for a higher price than the person before them.

We have a very low VIX and very high bullish sentiment. Stability breeds instability (waiting for a Minsky moment). Wave patterns suggest the market is topping, either here or in just days if not hours. But don't try to catch rising knives since we could be in a bona fide melt-up phase where the Dow will rally thousands of points more. Liquidity is strong and the cumulative advance-decline line supports the continuation of the rally. The trouble is it's sentiment driven and sentiment can turn on a dime, especially if you're the one feeling like the greater fool. Trade carefully here.

Good luck and I'll be back with you on Monday as Tom and I switch days next week.

Keene H. Little, CMT