Market Stats

The Thursdays prior to opex weeks often saw head-fake moves that were then reversed as the market headed into opex. But that seemed to be truer when the market turned down on Thursday and then rallied hard into opex. It seemed like a good time to pick up some cheap front-month call options, sell some deep ITM puts and then ramp the market up to make some serious dough.

But lately it seems we've been getting bullish Thursdays followed by even more bullish opex weeks. So today's bullishness certainly has the potential to continue into next week if the pattern holds out. The initial reaction to earnings has been positive so the market has that going for it. All in all, it seems like a good time to be bullish the stock market. Too bad I'm not.

While I recognize the potential for more rally I also see the potential for topping right here, right now. I'll show a few charts that strongly suggest that possibility but I also know what the current trend is. Trying to time tops can be a frustrating, and costly, game to play. I do remember being pretty frustrated back in September/October 2007 and it became difficult to believe the market would ever come down. The new highs into October 2007 were in the face of mortgage defaults (that would be "contained") and a credit contraction that had already started. I remember thinking, wondering, if I just wasn't able to see all the bullish things that were neutralizing the negatives. But sanity returned to the market as it became more and more difficult to sugar coat the news.

We're now going through the same thing--deja vu all over again. I'm wondering what is it that I'm seeing that is so different from what the pundits are seeing, and buying. For instance, earnings--Bloomberg recently reported that the consensus is for a -23% y-o-y decline for operating EPS, which would be the 9th consecutive monthly decline. But I guess most think it's so bad that this must be the bottom. That's called hope and usually it doesn't work well for investing.

Rising unemployment is spreading to rental vacancies as apartment vacancies have hit their highest level since 1986, up to 7.8%. And this happened in the typically stronger summer months. Leases are going unsigned and office rentals are going unfilled. For Lease and For Sale signs continue to increase in most areas. Consumers continue to retrench and pay down debt as banks continue to drop their credit lines.

The bottom line is the market has continued to push higher in the face of reality, using hope to bolster their opinions that the market is a good buy here. As I'll show on the charts, retests of broken trend lines may instead be giving us a good bye signal. I feel particularly cautious about this opex period because I see the potential for a big move. I can only go by what the charts are telling me but my gut says be careful either way.

If the market continues to react positively to reduced earnings we could see the remaining shorts throw in the towel and get a rip snorting rally next week that becomes a blow-off move. SPX 1120-1140 would be an upside target in that case. But if money managers are used to regularly selling put option premium, a bullish trade, to collect their premium each month, it could spell trouble if the market doesn't hold up into opex. Covering or hedging by buying puts and/or shorting stock could exacerbate any selling during opex week. These weeks tend to be bullish but when they're bearish they've been very bearish. Tread carefully into next week.

Alcoa kicked off the rally starting last night with their earnings report and that had equity futures ramping higher and we started the day with a gap up (the 3rd one since last Friday so I'm watching for signs that it may have been an exhaustion gap)

I'm going to look at several weekly charts along with the daily charts tonight because I think it's always important to keep looking back to see where we've been and what it might mean for where we're going. As always, I'll start with the SPX weekly chart which shows price is still battling with the 89-week moving average. There's nothing special about that moving average except that it's a Fibonacci number and I noticed it did a good job supporting pullbacks during the 2002-2007 rally and held down the first bear market rally into May 2008. If the bulls can drive the market higher into opex next week we could see the 1120-1140 area where I suspect the rally will stop.

S&P 500, SPX, Weekly chart

As a reminder of the levels that coincide in the 1120-1140 zone, the 50% retracement of the 2007-2009 decline is near 1121 and crosses the downtrend line from October 2007-May 2008 by the end of this month. There is an important Gann number from the Square of Nine chart that shows 1136 right in the middle and square to 1576 (the October 2007 high) and 768 (March 2003 low). The other important level on the chart is 1069-1070 which is opposite the above numbers on the chart. This is of course where the market has stalled since September 16th.

As shown on the daily chart below, the other Fibonacci numbers of interest are near 1127 and 1133 which are price projections based off previous highs and lows within the rally. And lastly, using the Square of Nine chart again, the numbers are often referred to as "vibrating" off one another and matching dates. Perhaps it has to do with the "vibration" of our solar system and some things we react to but don't know exactly why. At any rate, prices will often react to dates that are around the Square of Nine chart (365 days of the year nearly the same as 360 degrees in a circle). Using the March 6, 2009 date as the starting point, October 16th (next Friday) vibrates off 1121, the 50% retracement level.

So my point of all this is that the 1120-1140 area has a lot of potential for an upside target but more importantly for resistance to any further rally if it gets there. The only thing that bothers me about expecting a move up to that level is that it seems too obvious (the downtrend line and 50% retracement at any rate). But as shown on the daily chart below, the trend line along the highs since August 25th crosses the downtrend line and Fib projections in the 1120-1130 area by next Friday as well. This trend line could be the top of a broadening topping pattern called and expanding triangle (not common but is a legitimate reversal pattern). So again, the market could be topping right here, right now, or it could press higher into next week or by the end of the month and rally into the 1120-1140 resistance zone. Be very careful here.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1070
- bearish below 1020

The 60-min chart below shows SPX struggling with its September 29th high near 1070 and its broken uptrend line from July, near 1068 by today's close. It poked above it but could not hold above it so that's a bearish signal (kiss goodbye in the making if it drops down on Friday). I do see the possibility for one more press higher (dashed red line) to perhaps the 1075 area and then the start of at least a bigger pullback. The pattern calls for either a pullback (pink) or the start of the next big leg down (dark red). The bulls are running with the ball right now and have not fumbled. It takes a break below 1045 for a bearish heads up and below 1030 to confirm we've seen the high.

S&P 500, SPX, 60-min chart

Before moving the DOW's chart, I want to show another SPX weekly chart to show the possibility for a larger A-B-C bounce pattern into next year. There will be a few charts on tonight's newsletter that point to a move from this year's rally to new lows next year (could be significantly lower and faster). While I remain convinced that this year's rally is just a cyclical bull market rally within a secular bear market (which should have another 8 years or so to run), it doesn't necessarily mean the cyclical bull will end with this year's rally. We should start back down soon but the question remains what kind of decline we can expect. The following chart shows a pullback into January 2010 and then another big rally leg into August 2010.

S&P 500, SPX, Weekly chart

I'm showing Fib retracements and Fib time projections based on the 2007-2009 decline. If I assume we've seen the high for the 2009 rally and call it wave A of an expected A-B-C bounce into next year then I'm looking for a wave-B pullback. Notice that the rally has taken 38% of the time the 2007-2009 decline took (numbers for the vertical time projections are at the bottom of the chart). A 62% price retracement of wave A is near 815 and I'm projecting the bottom of the decline at the 62% time projection (which is January 2010). I then project wave C to equal wave A in price and that takes it up to about 1228 which happens to be the 62% retracement of the 2007-2009 decline. If that A-B-C bounce takes as much time as the decline it will end in August 2010 (the 100% time projection). From there we could expect the next big bear market leg down that takes the market below the March 2009 low.

This is all clearly conjecture but I wanted to show what it could look like if we're only in the first leg of a bigger cyclical bull market. The end result is the same--we'll either head to new lows from here or after the next leg up next year (but makes a big difference in how we trade the market over the next 12 months). Both scenarios start with a big decline (such as to SPX 815) and that's why I continue to discuss the importance of the price pattern that calls for a big decline either way. Then at the end of the year or early 2010 we can start trying to figure out whether we want to get long the market or stay short.

And now onto the DOW. Like SPX we could see the DOW press higher into next week where price could run into resistance again at its trend line along the highs since May, which will be up near 10100 later next week. In the same location will be the broken uptrend line from July. If the negative divergences are persistent at another new price high it will add to the bearish signal. It takes a break below last Friday's low near 9230 to confirm we've seen the high although the bears will still need to break the March uptrend line near 9300 (likely to happen if the others have already broken theirs by that time).

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 9835
- bearish below 9230

After breaking below its uptrend line from July last week the NDX then recovered back above it this week so it's questionable how much meaning its uptrend line has. The more meaningful one, as with the others, is its March uptrend line. A break below last Friday's low would be a confirmed break of that uptrend line. Then the bears would have to contend with potential support at its broken downtrend line from October 2007, which coincides with the 50% retracement at 1629 at the end of next week. I have the key level to the downside at 1656 but in reality it needs to break below 1629 before the bears can afford themselves even a little bit of comfort (bears should Never feel comfortable in a short position, period). As depicted in pink, upside potential is to the 1800 area next week if the bulls light a fire under this market.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 1734
- bearish below 1656

NDX will be interesting from here because of what I see setting up for two of the big tech guns, GOOG and AAPL. I smell possible trouble for Google's rally this week, and in fact for its rally from its November 2008 low. GOOG got a big lift this week because of the news release about various agreements with AT&T and Dell for its Android software on a phone to compete with Apple's iPhone. What's interesting is that this week's news-related spike has brought price right up to the top of its rising wedge pattern shown on its weekly chart below.

I posted the GOOG and AAPL charts this morning on the live Market Monitor because I liked the setup on these. This is what I posted this morning: "These wedge patterns typically have a 5-wave pattern labeled a-b-c-d-e, as is shown on the chart. It's often a news-related move that finishes off these patterns, usually with a quick throw-over (or throw-under in a descending wedge), so there's just a little bit more that this rally could extend but any move over $519 followed by a drop back below that level would create a sell signal."

Today's high for GOOG was 523.25 which in fact did a little throw-over above the top of the wedge (seen better in the daily chart following the weekly chart below). It closed at $514.18 and this created the first sell signal by this pattern. As I've mentioned before, the significance of these rising wedge patterns is that they typically get completely retraced (so back below the November low) and in a faster time than it took to build the wedge (the decline to a new low could happen in just a few months).

Google, GOOG, Weekly chart

The daily chart shows more detail of the leg up from July which is the e-wave. It needs to be a 3-wave move (labeled a-b-c on the daily chart below) and the c-wave (the leg up from August 19th) needs to be a 5-wave move (labeled i-ii-iii-iv-v on the chart). The 5th wave of the e-wave (you following all this?) tends to be the throw-over "emotional" wave and that's exactly what we have this week. The 5th wave (this week's rally) typically equals the size of the 1st wave, which is the projection I'm showing at $518.39 and that's been achieved now. There is negative divergence at this week's high relative to last week's (as it should be for a 5th wave relative to a 3rd wave). I don't know if this will really be the top for GOOG but I'll take this setup every day of the week. This is a pound-the-table short play setup right here, right now. Keep your stop tight for now--just above today's high. It will be worth probing again next week if stopped out and it makes only a minor new high. I'll track this for a little while to see how it does.

Google, GOOG, Daily chart

AAPL is the other big one that's giving me a sell setup here. The monthly chart, for which I'm using the log price scale because of the huge price gain from 2003, shows a 5-wave move up from 1997. As mentioned above for GOOG, the 5th wave is usually negatively divergent against the 3rd wave and so far that's what we're seeing--the current high is essentially testing the December 2007 high and is showing negative divergence against that high. That supports the longer-term wave count which calls for a large pullback to correct that rally (down to and probably lower than the previous 4th wave low which is the January 2009 low of 78.20.

Apple, AAPL, Monthly chart

Now we zoom in on the leg up from January and primarily on the leg up from June which is the 5th wave of the leg up from January. In its wave count each 5th wave has extended which is interesting because that usually happens in the "last gasp" move. I don't show them on the chart because it would get too crowded but I have several Fib projections based off the highs and lows in the rally pointing to 192-194 for a top to AAPL's rally. Today's high was 191.80 which also brought it close to the top of its rising wedge pattern, which is the trend line along the highs from February. So there is the potential for a little higher on this stock but if you're long the stock and want to try to squeeze the last penny out of this one, you could end losing $10 in a heartbeat instead. Like GOOG, this one is set up for a short play now and just keep your stop just above today's high. If stopped out, look to try again next week.

Apple, AAPL, Daily chart

To round out the tech picture we'll look to see how the semiconductor stocks are doing. I've shown the SOX chart the past couple of weeks to point out the bearish picture I've been seeing in that index. I went so far as to say if there just one chart I had to hang my hat on and trade accordingly it would be the chart of the SOX and I'd be short the market. Nothing has changed although I do wonder if it will be able to hold up or bounce just a little more if the broader market rallies next week. But so far, the break of its uptrend line from July and then retest with a bearish kiss goodbye on Tuesday leaves me with the bearish impression this one is headed lower sooner rather than later.

Semiconductor index, SOX, Daily chart

Like the NDX the RUT broke but the recovered back above its uptrend line from July so I'm not sure how important a trend line it is. A break below last Friday's low near 576 would also be a break below its March uptrend line and I think that would be a more significant break. It could fail at any time but does have some upside potential to about 645 if the market rallies into opex next week.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 617
- bearish below 576

It's been about a month since I showed a chart of the bonds using the 20+ Treasury Bond ETF, TLT. At that time I had pointed out the bounce off the June 2009 low would achieve two equal legs up if pushed up a bit more to 99.19, which it did last week. This week we've seen a pullback and the setup is for the start of a move down below the June low. Bonds have been more in synch than out of synch with stocks so we could be seeing the markets get ready for another round of simultaneous selling.

20+ Treasury Bond ETF, TLT, Weekly chart

After breaking its uptrend line from July the banking index (BIX) has made it back up to it but has stalled. Today's red doji could be a reversal pattern in the making (needs a red candle on Friday to confirm it). If it does drop back down it will leave a bearish kiss goodbye. If it manages to rally next week I see upside potential to about 137 before it tops out.

Banking index, BIX, Daily chart

I looked at a couple of the bigger banking names such as Government Sachs, GS, whose price pattern from the mid-August low looks like a completed 5-wave move. That sets it up for at least a pullback and if the broader market is ready for a larger decline the completed move for GS from August may have completed its move from November. Many of the other banks look much weaker than the broader market.

I'm running out of room for charts tonight so I'll just mention updates for the home builders and transports. The home builders got a nice little bounce off last Friday's low and they were due a bounce after a fairly strong decline from its September 17th high. It closed at 266.92 and its broken 50-dma is at 282.71. I do not think it will reach the 50-dma before turning back down again.

The trannies also got a nice bounce off last Friday's low but so far it's just a 3-wave bounce which would achieve equality in the two legs up at 3925 (today's high was 3890). A retest of its broken uptrend line from July would be a little higher at 3950. So there's good correlation there for a high at 3925-3950. It should then continue lower and break its March uptrend line, which is just above Friday's low now.

For the U.S. dollar I'm putting the weekly and daily charts together below because I'm limited to 20 charts in a newsletter so I'm running out of space. The weekly chart shows the a-b-c pullback from November 2008 (when many stock indexes bottomed). The c-wave is the move down from March 2009 (when the rest of the stock indexes bottomed) and it needs to be a 5-wave move. The 5th wave would equal the 1st wave at 75.23 which is the projection shown on the chart. Today's low was 75.68. Was that close enough? As can be seen on the daily chart today's candle looks a little like a hammer at support. A closer look at the move down from September 29th supports the idea that it needs to consolidate a little and then give us a final low next week but this may literally be close enough to a final low where I would suggest considering a long play in the USD. The dollar ETF is UUP.

U.S. dollar, DX, Weekly and Daily charts

The bearish sentiment for the dollar is running about 96%-97% at the moment so this one is ripe for a short squeeze, especially if there are a lot of traders using the dollar for a carry trade (borrowing, or shorting, the dollar to invest long in another currency). So I've got a price pattern and sentiment on my side in recommending a long play on the dollar. I know I'm in a very slim minority when I recommend this play and that actually gives me comfort. All this talk about getting rid of the dollar as the world's reserve currency is probably just that. While it may happen sometime in the future it would be very disruptive to the financial markets today when they're already teetering on the edge. The status quo is needed for stability.

While the U.S. is highly leveraged now, with debt ballooning, the other major countries are not in much better shape and many are in much worse shape. Europe has a worse banking problem that the U.S. and their real estate loans are in much more trouble. The banks are hiding the problems but probably will not be able to do so during the next downturn. The U.S. dollar will still be perceived as the best place to hide when there's so little to choose from elsewhere. And that's what will boost the value of the dollar. Forget about real values. It's the same with the stock market--it's all about social mood and sentiment.

There is also an 80-week cycle for the dollar and the cycle just bottomed last week so the cycle will start to add upside influence. I've got an EW count, sentiment extreme and the cycles on my side. Do I have anyone who would like to take the other side of my bet? I know you're out there because you've emailed me your opposing opinions. Ah, that's what makes a market.

So if the dollar is getting ready to rally that could/should depress the prices of stocks and commodities, including the metals. The combination of the drop in the US dollar in the past week and support holding last week (the broken downtrend line from March 2008), it was all the gold bulls (of which there are about 92% the last time I checked) needed to make a serious attempt at new highs above the March 2008 high of 1033.90. That was accomplished on Tuesday and now they're adding icing on top of the cake. In so doing price has pushed above the top of a parallel up-channel for price action since July. A drop back below 1034, would be a sell signal. However, I do see the possibility for a relatively quick down-up sequence to perhaps the 1080 area before starting back down, especially if the dollar reverses back up. The real test for the bulls will be to hold the March-February downtrend line again on another retest.

Gold continuous contract, GC, Daily chart

While gold has pushed above its March 2008 high silver has not done the same. So far this is bearish non-confirmation of gold's rally. The gold miners, GDX, also has not made it above its March 2008 high so gold stands all alone and naked. GDX has achieved a Fib projection at 48.35 for its bounce off October 2008 low. The wave count looks complete at this point for a correction to its 2008 decline. The daily chart also shows this week's high negatively divergent against the September 16th high. The pieces look in place for a reversal in this index.

Gold Miners, GDX, Weekly chart

Silver's pattern looks very similar to GDX. I see the possibility for a relatively small down-up sequence to finish its leg up from September 28th, which could take it to the top of its parallel up-channel for price action since October 2008 near 18.50 next week. Once its rally has completed there should be by a strong decline which should take silver below the October low of 8.40. You can play silver with its ETF, SLV, or the inverse ETF which is ZSL.

Silver continuous contract, SI, Weekly chart

Oil may be marching to the beat of its own drummer so it's not very clear to me where it could head next. The consolidation over the past few months suggests I'm not the only one wondering where to next. A break of either the high or low of the consolidation, near 75 and 58, should signal the next direction. Based on the price pattern I think the move will be a big one--either up to about 104 or down below 40. I wouldn't place any bets yet.

Oil continuous contract, CL, Weekly chart

There's only one economic report tomorrow which is Trade Balance. I rather doubt it will be a market mover so the market will be left to react to earnings reports. I personally don't pay much attention to the reports because frankly it doesn't matter what they say. First, I don't really believe what they're telling me. Second, it matters more how the market reacts to the report and hopefully we can see a setup on the chart that's just waiting for a catalyst.

The only report from this morning worth mentioning (I don't believe any of the unemployment numbers) was the U.S. Wholesale Inventories report, which came in at -1.3% vs. the expected -1.0% and not quite as much as July's -1.6%. This is the 12th consecutive month of declines and is the longest stretch since records began in 1992. It's probably the 12th month people have been saying this is good for the economy because it means businesses will be gearing up now to replenish inventories. OK, whatever. It means the economy continues to slow down and demand for products is not sparking businesses to restock their inventories. Speculation about that being bullish is merely speculation. There are no signs of a pickup in demand and therefore no signs that businesses are ready to add capacity to build inventories. In fact we're seeing exactly the opposite.

As I mentioned in the beginning of tonight's report, be careful about this opex next week. If we start to see some selling it could become exacerbated by hedging bullish positions. People may be forced to cover their short puts or sell stock to hedge, both of which are bearish. We don't often see a negative opex week but when we do it tends to be accompanied by some very strong selling. One never knows what could trigger the initial bout of selling but stay aware that any selling could get out of control quickly and be primarily opex related.

Summarizing tonight's charts I'd say the market is at risk of turning down into opex and as mentioned above, any selling could get carried away. Dip buyers could get creamed next week if they keep trying to buy while others are trying to hedge. So stay particularly cautious this cycle since I see chart setups for an immediate decline. Best case as I see it currently is for a pullback and then new high into the end of next week. We'll have time to review the charts next Thursday to see if there is potential for a continuation of the rally into the end of the month. There are some cycles that point to November as a turning point. Perhaps it will be a high but that's not what I currently see.

The key levels to follow on the charts are fairly wide apart primarily because of the big rally this week. It takes a break below last Friday's lows to indicate we've definitely seen the highs. The key levels to the upside are much closer so respect them if you're short the market--a break above them (the September highs in most cases) could even see a blow-off top (SPX 1120-1140) in only a week's time. Anything is possible and price is king--don't argue with it.

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

Key Levels for SPX:
- cautiously bullish above 1070
- bearish below 1020

Key Levels for DOW:
- cautiously bullish above 9835
- bearish below 9230

Key Levels for NDX:
- cautiously bullish above 1734
- bearish below 1656

Key Levels for RUT:
- cautiously bullish above 617
- bearish below 576

Keene H. Little, CMT