Sell in May didn't work for the bears and now the seasonally weak period of August-September might disappoint them as well. The pullback from the August highs for the major indexes looks more like a correction to the rally than something more bearish and the bulls continue to hold the reins to this market.

Today's Market Stats

The strong rally off Tuesday's gap-down start to the day, followed by more rally today suggests the bulls couldn't stand it any longer and decided to jump in with both feet and buy the dip. It's a little too early to tell whether or not the 2-day rally is going to lead to something more bullish or is instead just another bounce in what has been a choppy price pattern this month. But the failure of the bears to push the market below some strong support levels leaves the bulls in charge until proven otherwise.

August is on track to decline less than -1% for August (the Dow is on track to close near the July closing price at 21891) and it's hardly the kind of correction bears were hoping to see. Following the nervousness about what N. Korea is up to, or more accurately, nervousness about how the U.S. will react, geopolitical concerns have died back down and the stock market has experienced a relief rally the past two days.

But while the major indexes are showing resilience, there are several indicators that tell us not all is well under the surface of the market. Whether it's the number of stocks trading above their 200-dma (bearish divergence there) or the number of advancing vs. declining stocks or how much money is flowing into and out of stock funds, the resilience in the major averages looks to be more of an effort to hold the indexes up for show (for public consumption) than real strength.

The chart below (sorry for the black background for those who still like to print out these reports) shows the fund flows over the past three weeks for Government Bonds, Gold, High Yield (junk) Bonds and U.S. Equities. Basically the message is that investors are taking risk off the table by moving some money into government bonds and gold while withdrawing money from junk bonds and equities.

The move out of equities (probably a lot of money has simply been moved to cash) is significant and yet the major indexes are holding up reasonably well. That probably won't be true for September if outflows from equities continues once most people are back from vacation next week.

Flow of Money To/From Funds, chart courtesy Bloomberg.com

Trading volume has been especially slow and this could be factor in the whippy price action we've seen this month. This week we might be seeing more of an effort to simply hold the market up into the end of the month, which is easier to do when the volume is light. Once most traders return to their desks next week (after Monday's Labor Day holiday) we should get a better idea as to whether or not the past 2-day rally has more meaning than just a bounce correction.

Helping the bulls today were some positive economic reports, although there was actually a brief selloff in the futures following the reports in the pre-market session and the market actually opened down. But at least the reports didn't hurt the bulls' efforts to continue yesterday's rally. The ADP report showed stronger employment growth in August (237K) than was expected (180K) and an improvement over the 201K for July. The other pre-market report was the 2nd GDP estimate, which came in at +3.0% and better than the expected +2.7% and an improvement from the previous estimate of +2.6%.

The market hasn't moved much this month and therefore not much has changed on the charts. As far as determining the next big move following this month, we're left with confusing and diverging signals and since price is king we're simply going to have to let the market show us the way. We can get some more hints from the charts but even they're not helping much at the moment. Flip a coin for direction from here, which means traders need to stay cautious and recognize that this is not the best time to trade (knowing when not to trade can "make" you more money than what you trade).

I'll start off tonight's chart review with one of the best market proxies we have, the S&P 500 index.


S&P 500, SPX, Weekly chart

SPX started August at 2470 and closed today at 2457, down -13 (-0.5%), which means not a whole lot has happened on the weekly chart. But still holding as support is the uptrend line from February-November 2016 and this is an important trend line for the bulls to defend. If the bulls can continue to put pressure on the bears we could see another rally leg to the trend line along the highs from November 2015 - February 2017. SPX had nuzzled up to just below this trend line multiple times since May and it currently sits near 2525.

Also near 2525 is the location of the mid-line of the up-channel for price action since 2010-2011, which has been acting as resistance since March. Another trend line along the highs since April 2016 (excluding the March 1, 2017 high) is also near the same 2525 level. It makes for a good upside target area as well as strong resistance if reached.


S&P 500, SPX, Daily chart

The leg up from March 27th, labeled green wave-4 on the weekly chart above, is shown in more detail on the daily chart below. It has created a parallel up-channel for the move, the top of which will be near 2525 on September 19th, just after opex Friday on the 15th. The top of the channel is currently near 2510 so depending on how long it takes to reach it (if it does) we'll be able to see how it's setting up for a possible high.

The bearish pattern calls for the resumption of selling as soon as the leg up from Tuesday completes since it will be a 3-wave bounce pattern off the August 21st low and potentially lead to a stronger decline as part of a larger pullback pattern. The lack of impulsivity in the moves up and down since the August 8th high unfortunately leaves us guessing which direction will be the next big move (50-100 points).

Key Levels for SPX:
- bullish above 2470
- bearish below 2428


S&P 500, SPX, 60-min chart

Dialing in closer to the price action since the August 8th high shows the 3-wave decline to the August 21st low and the 3-wave bounce to the current high. Two equal legs up from August 21st points to 2465.62, which could be the extent of the rally from Tuesday and then back down for a larger pullback from August 8th. But for now it's bullish with SPX breaking its downtrend line from August 8-16 and getting back above price-level S/R near 2454 (it did a quick little back-test just before today's close so a continuation higher on Thursday would be bullish, especially if it can get above 2466.


Dow Industrials, INDU, Daily chart

The Dow was a little weaker than the other indexes today but it has the same pattern as SPX. It was unable to get through its broken 20-dma, which SPX managed to do, and a turn back down from here would leave a bearish kiss goodbye following the back-test. But if the bulls keep up the pressure into the weekend we could see the Dow make it up to its broken uptrend line form November 2016 - May 2017, which will be near 22040 on Friday. A drop back below price-level S/R near 21680 would be the first sign of trouble for the bulls since it would also be a break of its 50-dma, currently near 21695, and the bottom of an up-channel for price action since April.

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


Nasdaq-100, NDX, Daily chart

Strength in the semiconductors and biotechs, along with the FAANG stocks (especially NFLX, +3.5%), helped the tech indexes outperform the other indexes today. NDX made it slightly above its downtrend line from July 27 - August 8, near 5925, and unless that break turns into a head-fake break with a strong decline back down on Thursday it's looking like the tech indexes could push to new highs in the coming weeks.

I show a rally back up to its trend line along the highs from November 2014 - July 2015, which will be near 6100 by mid-September. This is the trend line that stopped the rallies in June and July and another attempt would create a 3-drives-to-a-high topping pattern. The bulls need to hold NDX above the downtrend line from July and then get RSI to break its downtrend line from May. The first sign of trouble for the bulls would be price below Tuesday's low at 5785.

Key Levels for NDX:
- bullish above 5945
- bearish below 5750


Russell-2000, RUT, Daily chart

The RUT also broke its downtrend line today, this one from July-August, which had stopped the RUT's rally on Tuesday. It has also climbed firmly back above its broken uptrend line from March-May, currently near today's open at 1383. With today's high near 1393 it came within about 4 points of price-level S/R near 1397. There's higher potential to the 50% retracement of its decline, near 1401, and then a neckline at the lows in June-July and then August 3rd, which is nearing its broken 50-dma at 1407.

Back above its 50-dma would be a more bullish move but at the moment the bounce off the August 18th low fits as just a correction to an impulsive decline, which suggests lower prices once the bounce correction completes. This is obviously different from the projection I show above for NDX so we'll have to let the market tell us which one is correct. The short-term patterns over the next week should help resolve the difference.

Key Levels for RUT:
- bullish above 1413
- bearish below 1347


10-year Yield, TNX, Daily chart

For the past several updates on TNX I've been showing a bullish descending wedge for the pullback from July. But the bullish pattern was missing the bullish divergence, which suggested it would break down instead and that's what it did on Tuesday. Today it bounced back up to the bottom of the wedge and if it makes it back inside the wedge, with a close above today's close at 2.143, it would leave a head-fake break and that could lead to a rally.

If TNX continues lower from here (with a rally in bond prices) we would likely see TNX drop down to the bottom of a larger descending wedge pattern for the pullback from December 2016, which will be near 2.00 in the first week of September. I would expect to see this happen if the stock market declines.


KBW Bank index, BKX, Daily chart

BKX has pulled back from its August 8th high in what could be interpreted as a bullish descending wedge with maybe a hint of a bullish divergence. It successfully held its 200-dma yesterday after dropping below it at the open. Today's rally got it further away from support but it hasn't been able to test the top of its wedge yet (downtrend line from August 8-25, currently near 93.86).

A drop back below support at its trend line along the highs from April 2010 - July 2015, near 91.90, would be more bearish and then we'd have to watch for the possibility of bullish divergence at a new low for the pullback, especially if it holds inside its descending wedge. The bottom of wedge will be near 90.30 after the first week of September.


Transportation Index, TRAN, Daily chart

The Transports have had a nice bounce off the August 24th low and I see additional upside potential to price-level resistance near 9490. But first it has to deal with potentially tough resistance where it closed today near 9309. The November 2014 high at 9310 has been price-level S/R since then. The downtrend line from July-August crosses the 9310 level today and its broken uptrend line from June 2016 - May 2017 is also now near 9310.

The 9310 area is tough resistance to break through but obviously it would be more bullish if it does. The next line of resistance is its broken 50-dma, currently near 9374, and then above that is its August 16th high near 9448. After getting through those levels it would then be looking at 9490. Failure of the current rally could happen at any time.


Relative Strength of TRAN vs. INDU, Daily chart

The TRAN has been doing a little better than the Dow this month, as can be seen on the relative strength (RS) chart below. This chart shows the relative weakness since last December and as with many RS charts we can use technical analysis to help determine when weakness will continue or reverse. There's a nice EW pattern playing out and it looks like we could see the TRAN outperform the Dow for at least a little longer.

When one index outperforms another it's not always because it's rallying. It could be that it sells off slower than the other so it's important to note that this is only RS we're looking at. But if you're a pairs traders (long one, short the other), this tool can be helpful. The longer-term EW pattern for this looks bearish for the TRAN, which means the TRAN will could rally slower than the Dow or decline faster. Once the bounce correction off the August 2nd low completes I expect it to continue lower (as depicted).


Relative Strength of RUT, TRAN and BKX vs. SPX, Daily chart

I track a few indexes against SPX to look for warning signs and the chart below compares the RUT, TRAN and BKX against SPX. All have been underperforming SPX since last December and that's not a healthy sign for the market. Clearly it hasn't mattered to the market's rally but eventually it will catch up and right now it's just a warning sign.

I have the starting point for this chart in December 2016 when they all peaked together. You can then see the TRAN has more significantly underperformed SPX and I think this is important since it's a sign of economic slowing, which the broader market hasn't shown any concern about yet. The weakness in the RUT is also a concern because it shows weakness in the bullish spirit that drives markets higher.

If I showed a chart of HYG (junk bond index) against TNX you'd see the same thing. Again, weakness in an index like the RUT is the canary that's fallen off its perch but the coal miners haven't noticed yet. Soon they too will run out of oxygen. Lastly, the weakness in the banks is always a concern since following the money is usually the right way to go. It will all matter at some point but this market remains extremely distorted by easy credit.


U.S. Dollar contract, DX, Weekly chart

Keeping the big picture in mind for the US$, the weekly chart below shows the big expanding triangle that has formed since the March 2015 high. The bottom of the triangle is near 90 and it's the reason I've been looking for a drop to that level before it will be ready to bounce back up. The next rally should take the dollar back up to the 106 area by mid-year next year.


Gold continuous contract, GC, Weekly chart

Gold's weekly chart below shows the bullish break of its downtrend line from September 2011 - July 2016, which happened August 9th. I have some upside price projections to watch carefully and the first ones have now been met. Looking at the bounce pattern off the December 2015 low, the 2nd leg up (the rally from December 2016) is 62% of the 1st leg at 1329.54, which was met with Tuesday's high at 1331.90. If the bounce off the December 2015 low is to achieve two equal legs up then we're looking for a rally to 1456.40.

The leg up from December 2016 is also a 3-wave move and the 2nd leg (the rally from July 10th) is 62% of the 1st leg near 1311, which has also been met. Two equal legs up from December 2016 points to 1377.10. There's also price-level resistance at 1308 and 1347. Therefore there are multiple levels of potential resistance to a further rally between 1308 and 1377 and the rally could fail at any time.

I don't show the daily chart but the leg up from July 10th has formed a rising wedge and Tuesday rally created a potential reversal pattern with the pop above the wedge, near 1322, and then a close back below it, leaving a shooting star candlestick at resistance. With the minimum price projections having been met and a daily pattern that's warning of a reversal back down, it's going to be important for gold bulls to hold the line if we see a drop back down to the broken downtrend line from September 2011 - July 2016, currently near 1274.


Oil continuous contract, CL, Daily chart

Oil's pattern has been nothing but a bunch of overlapping choppy corrective moves all year and that makes projections very difficult. Using trend lines, which are often excellent trading guides in this environment, the nearest support level is the uptrend line from February 2016 - June 2017 (untested), currently near 44.50. Only slightly higher is a price projection for two equal legs down from August 1st, which points to 4478. Oil looks weak after breaking its 50-dma, currently near 47, and that follows the bounce off this support on August 17th. The oscillators also support further downside for now. It takes a drop below 44.50 to turn oil more bearish.


Economic reports

Thursday morning will be busy for economic reports, some of which could sway the market. Personal income and spending are both expected to show an increase while the PCE prices are expected to stay at the same +0.1% The Chicago PMI is expected to stay about the same as July while pending home sales are expected to decline. Kind of a mixed bag of numbers that probably won't move the market.


Conclusion

Whether or not there's an "agenda" this week to rally the market and close August with a minimal decline, or maybe a slight gain, the end result for the month is rather neutral. The whippy price action could resolve either way and while the bulls remain firmly in control of this market we still need to consider the seasonally weak period that we're in.

Once most traders are back at their desks next week (Tuesday) we'll have stronger trading volume and with volume we should get a stronger conviction for whatever move happens. We're heading into a holiday weekend, which is typically bullish and the bulls therefore have that tailwind to work with. Just keep in mind that the bounce pattern off the August 21st lows could be just that, a bounce that will be followed by another drop lower.

There's a lot of weakness under the surface of this market so be careful and don't get complacent about the upside. There's still plenty of upside potential for this market but I remain unconvinced we'll see it head higher from here. September has a reputation for being cruel to bulls but we do have to wonder if it will be just another seasonal pattern that gets ignored by the bulls. The tough thing to ignore will be the budget/debt ceiling debate. Congress has proven themselves incapable of getting anything done (not that that's a bad thing) and the headlines could be depressing. It's that "uncertainty" thing.

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

Keene H. Little, CMT