The stock market has made very little headway in the past week as it has chopped mostly sideways. But the choppy consolidation fits as a bullish continuation pattern and while there might not be much more to the upside before a larger correction it remains a bullish market.

Today's Market Stats

Today was more of the same as we've seen over the past week. Neither side is showing much conviction and trading volume has been lighter than normal. But a choppy consolidation with low volume keeps things aligned for the bulls and we should see another leg up for the rally, potentially into next week (opex). It could be the last of the rally from August but for now that's speculative and the bulls remain in control of the tape.

Not much happened in news today and economic reports were slim. The market appeared to be worried about some geopolitical news (like N. Korea launching a missile or having a missile launched at its launch pad) but remained hopeful that today's FOMC report would provide a catalyst to get things moving again. While this afternoon's FOMC minutes didn't provide much for the market to act on there was at least a positive reaction (or perhaps stated more accurately, there wasn't a negative reaction and that keeps things looking bullish).

The market gyrated a little around the release of the minutes at 14:00 before climbing a little more and making new highs for the day (except the weaker RUT but it did get a bounce off its afternoon low). The new highs today, wait for it, meant more new all-time highs for the blue chips (a whopping penny above yesterday's high for the S&P 500). The tech indexes came close to new highs above yesterday morning's but they'll need another bump up to accomplish the "new all-time highs."

The FOMC minutes did not provide new information and reinforced what we already knew. Some Fed heads were uncomfortable raising rates any further in light of inflation running below their 2% target (although it's easily argued that inflation is actually significantly higher). Other Fed members argued they were more worried about not getting ahead of an overheated economy (I'm not sure where they're looking), which in turn could heat up inflation.

Some Fed members are worried that last week's wage numbers show they should be worried about wage inflation turning into inflation for the general economy. The nonfarm payrolls report showed an increase in wages earned and an unemployment rate that dropped. But at the same time employment shrank by 33K and something doesn't compute. I think it's much more likely that the hurricanes caused a loss of jobs for lower-paid service workers, which in turn boosted the average wages for the remaining workers. As for the unemployment rate, I'll be kind and say it doesn't reflect reality.

If the Fed is worried about wage inflation I think they're once again not looking at the right metrics. We know their economic models are highly inaccurate (it's why they've never been able to issue an accurate forecast for the economy). One of these days the Fed will finally get the boot and it can't come soon enough. I now relinquish my soap box to the next speaker.

So the Fed is still intent on raising rates, likely in December (although the minutes show that it's not assured since they remain data dependent), and then more next year if their measurements of the economy continues to support further rate increases. They of course would like higher rates so that they have room to lower them again during the next recession. While they're raising rates they've also begun their AQE (anti-QE) by not renewing the first $10B of bonds that matured last week.

In the bigger picture of liquidity $10B is a mere drop in the punch bowl but between rate increases and taking a small step to remove the punch bowl it's surprising the market hasn't started to react more negatively. That's certainly indicative of bullish enthusiasm for this market, regardless of what's going on behind the scenes or under the surface (clue the sound track from "Jaws").

The bulls continue to draw in additional support while bears remain mostly absent in the market, although there are some early signs of a crack in the foundation the bulls are standing on. The latest Investors Intelligence report showed bulls back above 60% while bears have dropped to 15%, which gives us a difference of 45%. This spread has been a reliable indicator in the past that the market is peaking. It doesn't mean the market will turn back down from here but the risk is high and it's a good time for bulls to shed their coat of complacency and tread carefully.

Along with a historically low VIX I've been watching the CNN Fear & Greed (F&G) index for sentiment clues. Last Wednesday I showed the FNG chart with SPX to point out the warning from an uber-high reading of 92, which climbed to 95 on Thursday, and how it's generally a little early in identifying the top to a market. This makes sense since a market high is often created when the market simply runs out of buyers buying the highs, which is also a reason for concern about the declining volume during the rally (shown further below with the QQQ chart).

The F&G index has now dropped back down a little (83 today) and I've updated last week's chart to show the turn back down, which is the warning sign. As you can see on the chart, when the F&G index turns down from an Extreme Greed reading, tops are generally found soon thereafter. There is of course the potential for a turn down in the F&G index to be followed by another turn up to a higher reading but interestingly, the move up from August shows a 5-wave move and suggests a top for the F&G index is now in place.

To reiterate the problem for bulls here, the F&G index is coming off a high not seen in the past 3 years (as far back as the chart goes) and that means the coming correction could be worse than we've seen in a while. October's volatility still awaits us.

SPX vs. CNN Fear & Greed index

Another warning sign comes from the declining trading volume since the August rally began. The low volume during the consolidation over the past week is bullish but a rally needs volume to show support for the move. As you can see on the QQQ chart below, Declining volume with a drop in the F&G is a double warning sign that tells us the rally is running out of fuel.

QQQ daily chart

Adding to the bull's woes is the fact that new 52-week highs have dropped off sharply since the rally has continued this month. Even with the almost-daily new all-time highs (or near new highs for the tech indexes) we're seeing less participation of the stocks in the indexes, always a warning sign. At the same time the new 52-week lows are starting to tick higher.

While we have plenty of warning signs that this bullish run since August could soon complete, the short-term pattern supports the likelihood for another push higher, either into the end of this week or into next week if we see the consolidation continue into the end of this week. We might even see a sharp pullback on Thursday/Friday to set up the rally into opex. It's been common to see a head-fake move down at the end of the week before opex. It's been a favorite way for big hedge funds to suck in the shorts (for short-covering fuel into opex) while loading up on call options and selling puts). Watch for that possibility on Thursday/Friday of this week. And with that I'll jump into the chart review of the indexes.


S&P 500, SPX, Weekly chart

Last week SPX made it back up to the trend line along the highs since April 2016 (ignoring the poke above the line in February 2017), which is now also crossing the midline of the up-channel for price action from 2010-2011. This week's tiny candle is on the line. In the big rally from 2009 the rally from February 2016 is the 5th wave and it's typical for the 5th wave to finish at/near the midline of the channel and we wait to see if the rally will continue or start a reversal back down.

With SPX getting pinched in a rising wedge for the rally from 2016 we're soon going to find out whether or not we'll see a continuation of the rally in a stronger blow-off move or if instead the rally (from February, and in turn from 2009, is coming to an end. If SPX can successfully climb above 2580 I'd be more inclined to believe the bullish scenario but let's just say I'm not a believer in that potential.


S&P 500, SPX, Daily chart

The 5th wave of the leg up from January/February 2016 is the leg up from April and the 5th wave of the rally from April is the leg up from August. From an EW perspective we're running out of waves for this bull market and it's the reason I've become so bearish -- the coming correction is going to be huge and complacency is going to hurt a lot of buy-and-holders. That's of course just my opinion but I see a greater risk for bulls now than I did in October 2007, fwiw.

Looking at the leg up from August, it's not a clear wave pattern but as I had pointed out in previous wraps, I'm waiting to see if we'll get a full 9-wave (impulsive) move up or if the 9th wave will be missing, like it was at the October 2007 high. Ideally we'll get a little larger corrective pattern off the October 5th high, as depicted on bold green, and then a final push higher into next week. But if it continues to chop marginally higher from here we could see a top get put in place sooner rather than later. As indicated on the chart, SPX stays bullish inside the up-channel from August, so above 2535, which also means we'd have a bearish heads up below 2535.

Key Levels for SPX:
- bullish above 2535
- bearish below 2488


S&P 500, SPX, 60-min chart

The parallel up-channel for the rally from August is shown on the 60-min chart below and you can it's been riding up the midline of the channel the past two days. It's been a weak effort to get to new highs this week and if continues to work its way slowly higher it might not be able to make it up to the top of the channel, which will be near 2580 by the end of the day Friday. That would actually be a bearish setup for opex.

It's been common to see a head-fake move down at the end of the week prior to opex and it's one reason why I'm thinking we could see a spike down as early as Thursday morning to then set up the rally into next week. As long as the up-channel holds a pullback I'd be a buyer of the dip for a trade (only one more leg up so don't hang on too long).


Dow Industrials, INDU, Daily chart

The has been nudging higher against a trend line along the highs for it rally from August and against an uptrend line from November 2016 - May 2017. Both trend lines are approaching the top of a parallel up-channel for the rally from April, currently near 22910. It's a similar position as SPX, which means we could see a quick pullback and then higher into next week or the rally could literally finish any day now. Unless we see a strong break through these trend lines, with volume, I think upside potential is significantly dwarfed by downside risk. Playing defense and protecting profits on long positions seems to me to be the smarter play right now.

Key Levels for DOW:
- bullish above 23,100
- bearish below 22,420


Nasdaq-100, NDX, Daily chart

The pattern for the tech indexes is not clear enough for me to make price projections but there a few trend lines to keep an eye on. Since last Thursday it has not been able to get above the broken uptrend line from June-November 2016 (green line) and only a little higher is the top of a parallel up-channel for its rally from August, currently near 6118. Two equal legs up from August is at 6099, all of which says NDX could have strong resistance from about 6090 to 6120. If it can get through that area it would then have to soon deal with its trend line along the highs since November 2014, currently near 6155. It stays bullish for now but I don't see enough upside potential (famous last words) to think about new long positions.

Key Levels for NDX:
- bullish above 6130
- bearish below 5840


Russell-2000, RUT, Daily chart

The RUT has been consolidating in a bull flag pattern off last Thursday's high. It has worked its way over to the bottom of its up-channel for the rally from August. The consolidation fits as the 4th wave correction in the rally and that calls for one more leg up to complete the 5th wave. If another leg up completes near the midline of the up-channel we could see a high around 1530 as early as next Monday. If it stays bullish all next week we could see the RUT make it back up to the top of its up-channel, which will be near 1570 by opex. The final 5th wave of a long-term rally is the most unreliable and could fail anywhere, including a truncation (no new high) and therefore I'd be very careful chasing the RUT higher -- have good stop management.

Key Levels for RUT:
- bullish above 1515
- bearish below 1452


30-year Yield, TNX, Daily chart

The pattern for Treasury yields since the December 2016 high looks like a bull flag pattern but I'm not convinced yet that we're going to see a bullish breakout. The first bullish move for the 30-year yield (TYX) would be a climb above its broken 50- and 200-week MAs, currently crossing at 2.93. Its 200-dma is at 2.92 and all were tested with Monday's high at 2.933.

There's price-level support near 2.85 and as long as that holds as support and TYX can break above 2.93 I'd be more bullish. It would need to punch through some more resistance and get above its December 2016 high near 3.2 before I'd turn more bullish but that's certainly the potential from here. Otherwise a drop back below support at 2.85 could lead to another leg lower.

The big question in my mind is what Treasuries will do if the stock market falls on hard times. Will there be a flight to safety in Treasuries, driving prices higher and yields lower? That would be a typical scenario but I readily admit this is not a normal market.


KBW Bank index, BKX, Weekly chart

The banks have been strong off September 7th low and as can be seen on the weekly chart of BKX, it rallied from another back-test of its broken trend line along the highs from 2010-2015 and now is back up to the top of its parallel up-channel from 2009. Even though it has made a minor new high above its February 2017 high it's showing bearish divergence at the new high. As with the major indexes, I see the potential for at least a little higher into next week but this is looking ready for a top and it's likely to be a major one.


U.S. Dollar contract, DX, Daily chart

The US$ has a 3-wave bounce off its September 8th low into last Friday's high and the 2nd leg of the bounce achieved 162% of the 1st leg at 93.92 with the high at 94.10. It was a good setup for a reversal back down if there's to be one more new low near 90 before it will be ready for a stronger rally. But at the moment it has pulled back to support at the bottom of its original down-channel from January and its recovered 20- and 50-dma's, all of which are now crossing near 92.75.

If 92.75 holds as support we could see another push higher and create an impulsive move up from September. That would in turn tell us a bottom is likely in place. But if it drops below 92.75 it would increase the odds in favor of a drop to 90. In any case I think the dollar is close, if not already there, to a bottom that should lead to a rally into next year.


Gold continuous contract, GC, Daily chart

With the small pullback in the dollar we've seen a bounce for gold and it's now up against resistance at its broken 20-dma near 1293. Only slightly higher is its broken 50-dma, near 1301, and price-level S/R near 1300. If gold can get through this resistance it will look more bullish, especially since it's coming off a back-test of its broken downtrend line from 2011-2016. If the dollar does continue to drop down towards 90 we should see gold break through resistance (and just the opposite if the dollar continues higher).


Oil continuous contract, CL, Daily chart

Last Friday and again on Monday oil used its 50-dma as support and got a good bounce back up on Tuesday. It consolidated today, which could be bullish but until oil can get above its September 28th high at 52.86 I think there's a good chance oil will be heading lower from here. Better confirmation of a move lower would be a drop back below its broken downtrend line from February, currently near 48.30, although a drop below last Friday's low at 49.10 would be an indication that it will drop back below the trend line.


Economic reports

Thursday morning's economic reports include unemployment claims data and Fed-watched PPI numbers, which are expected to have ticked higher from August. This will likely be written off by the Fed as "transient" because of higher gas and oil prices following the hurricane-related shutdowns.


Conclusion

The major indexes look like they could work their way higher from here but it would look better if we see a further pullback and then higher next week. The EW price pattern would look better that way and it would fit well for new highs into opex. If we do get another rally into opex I suspect it's going to be the last hurrah for this bull market, which means the bears could be on deck here. We'll have time to evaluate that potential a week from now.

With the excessive number of bulls vs. bears, waning momentum and volume, a price pattern that looks near complete and resistance levels not far away I think it's a very risky time to chase any move higher from here. Having said that, a jab to the downside on Thursday/Friday could be a good setup to trade the long side into opex. But if it in fact will be the final 5th wave of the rally it's important to keep in mind how unreliable this wave can be (anywhere from missing or truncated to extending much higher in a blow-off move).

Trading on the long side from here is subject to higher-than-normal risk since a big move back down could start with a scary gap down some morning, trapping a lot of bulls and getting bears chasing the move lower. We have the risk of no buyers showing up if everyone starts to dump their ETF positions en masse.

We're at the point where I think you'll need to sell into a decline if we see a strong decline at any time (something more than a couple hundred points for the Dow) since there will likely be very few and only small bounce attempts. This is why I think downside risk dwarfs upside potential. But we're not there yet and the bulls continue to control the tape. Keep respecting the upside as long as the bulls maintain their grip.

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

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying