Stocks markets around the world are central-bank driven (not fundamentals and may would argue not by anything else) and this past week we heard from both the Federal Reserve and Bank of Japan. Both are essentially on hold and the market is not entirely happy with that stance.

Week's Indexes

Review of Major Stock Indexes

As can be seen in the table above, just about all sectors suffered a loss in the past week. Utilities, a defensive sector, did well and finished +2.1%. Oil service did well with the price of oil continuing to climb higher (+5% for the week and nearly +20% for the year). The metals and commodities also did well, helped some by the US dollar's decline.

The techs were hammered this past week (about -3%), thanks in large part to biotechs (-5.9%) and the SOX (-3.5%), and they also finished in the red for the month of April. The blue chips finished the weak lower but were marginally positive for the month. Transports also struggled more than the blue chips, down -2.7% for the week and -0.9% for the month, which is a reflection of higher energy prices and slowing economic conditions.

This past week the stock market struggled with more economic numbers that indicate more trouble ahead. Some of the reports were decent, such as pending home sales, while others were not, such as housing starts and permits, durable goods orders, personal spending and Chicago PMI (it dropped to barely above contraction at 50.4). The deteriorating economic numbers is what prompted the Fed, with Wednesday's FOMC announcement, to not only hold rates steady but to also indicate they might not be able to raise rates in June either. Their dovish comments helped the market rally Wednesday afternoon but then the Bank of Japan (BOJ) torpedoed the market on Thursday.

I think it's important what happens to the Japanese market, reflected with the Nikkei 225 stock market index, because it's a reflection of global sentiment. As one of the weaker countries, financially speaking (not to dismiss the weakness in many of the EU countries), they're one of the leading market indicators because they've been out in front of the central banks in "helping" their economies. They have suffered pretty much continual recessions since they peaked in the late 1980s and unfortunately the Japanese experiment is now being followed by the U.S. and Europe. Japan is closer to the end game than we are but what happens with them will be instructive and therefore part of my discussion this weekend.

The markets had been anticipating the BOJ would implement more QE with their announcement on Thursday but instead they decided to do nothing. And nothing is bad for a market that is totally dependent on central banks doing something more. Most everyone expected the BOJ to increase their QE through the purchase of ETFs (essentially buying more stocks). The BOJ already buys stocks and all of Japan's government bonds (by simply creating the money out of thin air to do so), which has resulted in no market for Japanese government bonds -- there's only one buyer and they can therefore keep interest rates low (or negative) even while the government heads further into insolvency.

Japan is already technically bankrupt with no hope of ever being able to pay down their debt. As John Mauldin has said, "Japan is a bug in search of a windshield," but typically the bond market forces companies/governments into bankruptcy by not buying their bonds and/or driving yields much higher to compensate for the higher risk (until the company/country can no longer afford to pay the interest rates). In this case there is not a normal Japanese government bond market to force Japan into bankruptcy since the BOJ simply prints more money to keep things going (for now). They've also been purchasing stocks but have been promising to do more and therefore their decision to Not do more buying was a shock to the system. So by not adding to their already significant QE program traders saw that as a failure to help the market, I mean economy.

The Nikkei 225 index dropped nearly 1000 points (about -5%) into its low on Thursday (their market was closed on Friday) and the sharp drop could lead to the next leg down if the bounce off the February low is an a-b-c correction to its decline from last year's high. On the chart below the NIKK is the red line and the black line is SPX. Notice how closely the indexes have correlated over the years and how SPX met back up with NIKK at the 2015 highs after SPX charged ahead in 2014. The NIKK caught up in early 2015 after the BOJ started supporting their market with more QE, but that stopped helping their market after the mid-2015 highs. Now note the spread since February -- either the NIKK has some serious catching up to do or SPX has some serious correcting to do. While SPX tests its November-December 2015 highs the NIKK is not even close to doing the same. My bet is SPX is way out of whack with reality and has a serious correction coming, especially if NIKK drops below its April low near 15750 (which would leave a confirmed a-b-c bounce correction to the decline instead of something more bullish). Keep watching NIKK for clues for SPX.

Nikkei 225 index vs. S&P 500 index, 2013-present

Currently we have the three primary central banks -- the Fed, ECB and BOJ-- holding their current programs but not adding to them as they assess the results of their experiments (everything they're doing is one grand financial experiment). Not adding more stimulus is as good as taking it away as far as the markets are concerned. Paradoxically, not getting higher prices will drive buyers away and higher prices needs more liquidity, which is provided by more stimulus from the central banks. You can see how they're stuck between a rock and a hard place.

The U.S. stock market briefly rallied Wednesday afternoon only because it felt the Fed was forced to hold back on further rate increases. Never mind it's because the global economies are slowing, corporate revenues are slowing and earnings are in decline, and consumer spending is slowing. All of those things tell us the market should be in decline but hope for more central bank assistance continues to push the market higher. With the central banks going on hold (for now) it has the markets now worried, especially as we approach the season starting with "sell in May and go away."

A Look At the Charts

S&P 100, OEX, Weekly chart

At its April 20th high OEX tapped its downtrend line from July-November 2015 and then started pulling back. Last week it broke its uptrend line from February through the April 12th low, which was the first sign that the leg up from February has completed. A longer-term view is shown with its weekly chart below and I've drawn a curve over price action since 2012 to show the rolling top pattern. This represents a slow-motion topping pattern, which is further confirmed with the bearish divergence on the weekly oscillators. This also follows the achievement last year of the price projection near 950 (actually about 3 points shy of it) for the completion of an A-B-C bounce off the 2009 low where the c-wave is 162% of the a-wave. The bearish wave count, rolling top and bearish divergence leads me to believe the next big move will be a drop below price-level support near 810 on its way to much lower lows in the coming years. But before that happens we might see price consolidate between the 810 and marginal lower highs for several more month.

S&P 100, OEX, Daily chart

The OEX daily chart below shows last week's breakdown from its up-channel off the February low. This follows the test of its July-November 2015 downtrend line on April 20th and the combination puts it on a sell signal that can only be negated with a rally above its April 20 high at 938.30. A bullish heads up would be a rally above Thursday's high at 929.55 since that would leave a confirmed 3-wave pullback. The next support level to watch, assuming it will drop lower, is its broken downtrend line from November-December 2015 and its 50-dma, both of which will soon cross near 905.

Key Levels for OEX:
-- bullish above 939
-- bearish below 903

S&P 500, SPX, Daily chart

On Monday SPX also broke below its uptrend line from February through its April 12th low (a common theme as you'll see on the rest of the charts), as well as dropping back below its July-November 2015 downtrend line, both near 2091 at the time, and then on Tuesday and Wednesday it back-tested its broken uptrend line. Thursday's selloff left a bearish kiss goodbye following the back-test, which put it on a sell signal and then on Friday it gapped down below its 20-dma. It found support at an uptrend line from March 24th, which fits as the bottom of an expanding triangle (shown on the chart) and this pattern fits as a topping pattern. It's possible there will be one more leg up inside this triangle, which from here would look like a blowoff top with a test of the May 2015 high near 2135. But I think that's a lower odds scenario and at most I'm looking for a consolidation on Monday, perhaps for a couple of days, and then lower.

Key Levels for SPX:
-- bullish above 2100
-- bearish below 2033

S&P 500, SPX, 60-min chart

Looking at the daily chart above I can see the potential for a drop down to its 50-dma later this coming week, currently near 2033, followed by a bounce correction the following week and then a stronger decline into the end of May. But from a short-term perspective we don't yet have proof that the trend has turned down, which is why I'm showing the potential for another rally up to the 2135 area. At the moment we have a 3-wave pullback from the April 20 high, as can easily be seen on the 60-min chart below. It could be an a-b-c pullback which will now lead to a bigger bounce as part of a larger pullback pattern or it could lead to another rally leg to new highs. But if we see a choppy sideways consolidation (I've drawn a little sideways triangle as an example) followed by another leg down we'd then have a 5-wave move down from April 20, which is what the bears want to see since that would confirm a trend change to the downside. Until we get a 5-wave move down we do not have evidence from price that a trend change has happened and therefore both sides need to trade cautiously.

One thing that happened Friday afternoon, and which is a good example of what to watch for in this situation, is the price action following the Friday morning decline. The decline broke below the bottom of a down-channel created with a downtrend line through the first bounce (Wednesday) and the parallel line attached to the first low (Monday). Once this channel was broken to the downside it made it more bearish, especially with the drop below 2066 where the pullback from April 20th had two equal legs down (stopping there would have been a good setup for a reversal back up if it was just an a-b-c pullback). Friday's late-day bounce was held down by the 2066 projection and the bottom of the channel and that's bearish as long as it continues to hold as resistance. A 4th wave consolidation (the sideways triangle idea) would be a typically pattern if the trend is down. So any bounce on Monday that holds above 2066 would be the first bullish heads up for bears to get defensive. As I'll review for the techs, that's something we could see.

Dow Industrials, INDU, Daily chart

On Monday the Dow broke its uptrend line from February 24th (drawn from the 2nd wave through the 4th wave of the rally from February) and that tells me the leg up from February finished at the April 20 high at 18167. That high achieved the projection at 18110 for two equal legs up from August 2015, for a big A-B-C correction, as well as the top of a parallel up-channel for the A-B-C bounce correction. It's a good setup for at least a larger pullback before heading higher but the more bearish pattern suggests we've started the next leg down that will be much stronger than either the one into the August low or the February low.

Key Levels for INDU:
-- bullish above 18,120
-- bearish below 17,484

Nasdaq-100, NDX, Daily chart

When NDX gapped down on Friday, April 22nd, it left a bearish island top reversal in its wake (it had gapped up on April 13th, ran sideways and then gapped down). NDX is now on a sell signal but it's also short-term oversold and finding support at its crossing uptrend lines (June 2010- November 2012 and March 2009 - August 2015), near 4345, which could lead to a stronger bounce correction before heading lower. The short-term pattern suggests a little lower first and then a larger bounce correction but the start of another rally to a much higher high can't be ruled out yet. While I believe that's the lower-odds scenario, it's a good time for bears to be a little defensive until support breaks. The QQQ chart at the end of this report shows another reason to get defensive if you're playing the short side.

Key Levels for NDX:
-- bullish above 4525
-- bearish below 4213

Nasdaq Composite, COMPQ, Daily chart

The Nasdaq looks the same as NDX with the strong breakdown below its uptrend line from February and Friday's close below its 50-dma, near 4784. But if the 50-dma holds as support and the Naz is able to climb back above Thursday morning's high near 4889 it would be a bullish heads up that it's either in a large consolidation pattern or new highs are coming. Above 4970 would confirm a bullish pattern. In the meantime, a choppy sideways consolidation near Friday's low would point lower so early-week price action should provide the clues needed to figure out what the larger pattern could be.

Key Levels for COMPQ:
-- bullish above 4970
-- bearish below 4780

Russell-2000, RUT, Daily chart

The RUT has been the stronger index since April 20th when the other indexes topped. The RUT chopped its way higher from there into Wednesday's high and then on Friday it joined the list of indexes that have broken their uptrend lines form February. But so far it's only a one-day break and it held support at its crossing 20- and 200-dma's and its broken downtrend line from June-December 2015, all near 1126. If that holds as support we could see a bounce at least back up to its broken uptrend line, near 1145 by Monday afternoon. However, not shown on the daily chart below, Friday's decline also broke a short-term shelf of support at 1132-1134 and managed to bounce back up to it Friday afternoon. If that's a back-test of S/R that's followed by a drop below 1126 on Monday it would keep the RUT on a sell signal. We should know fairly quickly which side wants the ball on Monday morning. But until the RUT can close above 1149, which is where its 50-week MA is currently located it remains on a weekly sell signal. The RUT hasn't been able to get back above its50-dma since dropping below it last August and it again held back last week's rally.

Key Levels for RUT:
-- bullish above 1162
-- bearish below 1119

SPDR S&P 500 Trust, SPY, Daily chart

Last week I highlighted the fact that SPY was coming down after piercing the top of its BB and this was accompanied by a bearish divergence for MFI (highlighted on the chart), which was a bearish sign. Thursday it tried to hold the midline (20-dma) but Friday that support line broke (207.34) and now it looks like it could drop from here down to the bottom of its BB, currently at 203.29. By this chart we would not see a setup for a buy signal until we see volume spike above 180M (Friday's volume did spike on the selloff (bearish) but was 142M). MFI has not dropped yet to potential support near 50 so watch for this possible setup before thinking about buying the "dip."

Powershares QQQ Trust, QQQ, Daily chart

Unlike the SPY chart above, QQQ's chart below does show a potential buy setup for at least a bounce. The techs, and especially the NDX (QQQ), got hit hard this past week and that has QQQ quickly expanding its BB and pushing below it. Williams %R has dropped below -90 and volume has spiked above 50M, all of which has warned traders in the past to expect at least an oversold bounce correction, such as we saw back in November-December 2015. If QQQ bounced back up to its midline (20-dma), currently near 109, it would be about 3% rally and nice trade. I'm not saying it will happen from here but it's a buy setup and therefore a warning for bears right here. As mentioned on the NDX chart, I see the potential for a little bounce and then lower in the early part of the week before setting up a larger bounce correction (I think that's all we'll see) but again, bears have fair warning for at least the short term with the QQQ chart.


We have some good topping signals with bearish divergence for the indexes and the small selloff so far looks like it could lead to lower prices. But especially for the techs, short-term oversold could lead to at least a decent bounce in the coming week. We do not yet have confirmation from the price pattern that the uptrend has reversed into a downtrend but the early signals are there. This coming week will either confirm a trend change or confirm the uptrend is still intact.

The bears want to see a choppy consolidation over the next couple of days and then another leg down. That would likely lead to a higher bounce the following week but it would tell us the trend has reversed to the downside. But a rally back above Wednesday's highs would leave just a 3-wave corrective pullback and point higher. For the RUT it would be to new highs for its rally from February (the RUT is still a good sentiment indicator). For this reason I think we'll have a better answer from this week's price action

Trade safe, have a good week and good luck with your trading. This weekend's Index Wrap will be my final one but I'll still be writing the weekly Market Wraps (typically on Wednesday). If you have any questions, don't hesitate to email them to me. I usually get back in only a few hours at the most.

Keene H. Little, CMT

Technicians look ahead. Fundamentalists look backward. The true language of the market is technical. - Joe Granville