Market Stats

The strong selloff yesterday afternoon, closing near the lows, looked bearish. Then the selling started right away this morning and that looked bearish. Then the bounce was looking weak and corrective and that looked bearish. When it looks like a bear, smells like a bear and growls like a bear, buy it. That was the message from today's market.

The DOW looked more bullish all day. It bounced more strongly off this morning's low and made only marginal pullbacks before proceeding higher again. It didn't make a new high above yesterday's but came very close. Something for the bears to hang their hopes on, the lack of new highs today keeps alive the possibility that today's bounce was simply a strong correction to the start of a more significant decline. We know big money can move this market big when they want to and there is probably a strong effort to keep the market jacked up so that they can continue to liquidate inventory. There is also a big effort to hold the market up into month end.

But for the bears to gain another foothold in this market it must sell off immediately tomorrow. Any follow through to the upside, whether right away or after a pullback, will be bullish for a run to new highs into next week. I'll provide some upside targets in that case.

Helping the bulls today was a good Leading Economic Indicators report this morning. It rose +1% in September, making it the 6th straight month of increases. This reinforces the belief that we've seen the worst of the economic conditions and that businesses will soon improve. Over this 6-month period the index is up +5.7% and is the fastest increase since 1983 (which is when the economy was coming out of the malaise of the 1970s and 1982 is recognized as the start of the great bull market). There's a lot of hope that we're starting off on a similar growth path again. The coincident indicator was flat so there's still a lot of work to be done to show the recovery will show up in other ways. As many have noted, we still need to see a pickup in demand and it needs to happen soon.

The unemployment number was a non-event since it hasn't moved much. And therein lies the problem as the number of newly unemployed continues to grow. We've never seen unemployment like this at this stage of recovery as many are calling it. Without employed people we will continue to see consumer sentiment turn down and spending dry up. The demand that is needed to improve the coincident indicator above is simply not going to show up if unemployment continues as it is. And there are not many businesses who are saying they're ready to do some serious hiring in the next several months. Hope is a wonderful thing, except in the stock market.

But let's see what the charts are telling us about today's bullish response. Like a siren call, SPX 1121 is beckoning the bulls to keep buying and drive the market higher so that SPX can tag its 50% retracement of the 2007-2009 decline. The bulls should lash themselves to the mast and cover their ears so they're not enticed into a trap. At least that's how it feels. I think there are too many people expecting to see at least that level achieved and we all know what happens when too many expect the market to do something.

But so far there's nothing bearish about the weekly chart. If SPX finished near here (1090-ish) on Friday we'll have a doji for the weekly candlestick. That's the 2nd candle of a 3-candlestick pattern called the evening star. A red candle next week would complete the reversal pattern. That's only a heads up for what could happen and the significance of it in the larger pattern is that once this rally is complete we should start a multi-month decline that will likely take SPX back down to the 800 area if not new lows. A break of the uptrend line from March, currently near 1050, would signal the next leg down has already begun.

S&P 500, SPX, Weekly chart

The 1100 level has been resistance for the past week and it was again yesterday. Yesterday it then broke, again, the uptrend line from July through the September low, and today bounced back up towards it (it's a little higher than today's high). If the market sells off on Friday, even if it pokes a little higher first, it will look like a bearish kiss goodbye. As shown on the weekly chart, the 50% retracement is near 1121. Slightly lower and shown on the daily chart below, later next week is the intersection of the broken uptrend line it ran into today and the downtrend line from October 2007, near 1110.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1100 (to maybe 1110-1130)
- bearish below 1074, confirmed with a break below 1050

If the market is held up into next week (month end), instead of driven higher, a choppy rally up to about 1110 might be something we'll see. Otherwise a strong rally could see SPX head to the top of its expanding triangle pattern, which will be up near 1137 by the end of next week. If we get selling instead, a break back below yesterday's low near 1074 would be a bearish heads up that we've seen the high and below 1050 (the March uptrend line) would confirm it.

On the 60-min chart I'm showing the intersection of various trend lines near 1106 next Tuesday and then 1110 on Wednesday. This is only to show the potential for where SPX might end up early next week and what to watch for. If these trend lines act as resistance it will give you an opportunity to test the short side if you like to try to catch tops. But again, any hard selling on Friday, especially with a drop below 1074, should see a quick drop to the March uptrend line near 1050, a bounce and then a break of it.

S&P 500, SPX, 60-min chart

The expanding triangle is shown more clearly in bold blue on the daily chart and the top of it continues to beckon the DOW towards it. By mid week next week it will be near the 10325 level which is where it would close the October 6, 2008 gap, the last to do so. If that's what the market is waiting for it will be an outstanding shorting opportunity once it gets there. A drop below 9900 would instead tell us it might not make it any higher.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 10000 (to about 10200-10300)
- bearish below 9900, confirmed with a break below 9600

Today the DOW tested its broken uptrend line from October 2nd and pulled back. If it continues to ride up underneath this trend line into next Tuesday it could top out around 10230 where it will also hit its trend line along the highs since May, which has consistently held down rallies. But as mentioned above, 100 points higher is where it would close the October 6, 2008 gap and tag the top of its expanding wedge. So the 10230-10325 zone makes for a wide target, that's the area I'd look for a top to the rally (if it presses higher from here).

Dow Industrials, INDU, 60-min chart

NDX tagged the 62% retracement of its 2007-2008 decline (at 1773). It's either consolidating for another run higher, perhaps as high as its trend line along the highs since May, which will be near 1840 by mid week next week. Have I mentioned the negative divergences at new price highs? Yea, I know, they're glaring at us but haven't amounted to anything yet. But when they do, the selling will likely kick in hard.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 1773
- bearish below 1730, confirmed with a break below 1710

Like the broader indexes there remains the potential for another leg up in the semiconductors into the end of the month. The trend line along the highs since January will be near 340 by the end of the month so that makes for a good upside target should the rally continue into next week. Otherwise a break below 315 would indicate the high on October 14th was the final high.

Semiconductor index, SOX, Daily chart

The RUT found support this morning at its uptrend line from July through the October 2nd low. If the rally can continue into next week we're looking at its downtrend line from October 2007 as the upside target, near 640 by next Wednesday. A break below 590 would be a break of its uptrend lines, including the one from March, and its 50-dma. That would tell us the rally is over.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 624
- bearish below 600, confirmed with a break below 590

One thing I'm watching carefully now is the VIX. I don't normally use it as a timing tool but instead more as a warning tool. When it gets to extremes it is a good warning that the trend could reverse soon. It's now reaching a bearish extreme for VIX (meaning bullish sentiment extreme for stocks) which has marked previous stock market lows. By dropping to a new low below the July and September lows it has completed a 5-wave move down from January and that completes an A-B-C pullback from its high in October 2008. Now it's a matter of how low can it go before bottoming (and the stock market topping).

Volatility index, VIX, Weekly chart

The weekly chart shows a descending wedge pattern for the decline in VIX from January, the bottom of which is down near 16. It's currently finding support near 20 which has marked the times when previous stock market highs were nearing exhaustion (May and August 2008 were the last two times). But obviously if it were to drop to the 16 area we would be seeing new stock market highs and that's one of the big cautions for bears right now. It takes a break above the September 27th high of 29.56 to tell us the VIX found a bottom. That should add proof to whatever topping signals we've received for the stock market. Until that happens we haven't seen any trend reversals yet.

Two weeks ago I showed a weekly chart of the 20+ Year Treasury ETF, the TLT, since I thought it was a good setup for a reversal to the downside following its 3-wave bounce off the June low. It subsequently dropped fairly hard the following day and a little more the following week. It then bounced back up for a perfect test on Tuesday of its broken uptrend line from June 2007 and has since dropped away from that. The setup continues to look good for further downside and a break below last Thursday's low of 94.37 and especially its uptrend line from June, which is approaching 94, would be confirmation that new lows below June's 87.56 will likely be next.

20+ Year Treasury ETF, TLT, Daily chart

It will be interesting to see what happens to the banking index if it rallies a little further and hits about 138.25 on Friday and then drops back down. I noticed the trend line from the May high across the August high was briefly broken in September but then price dropped back below it. It rallied back up for a kiss goodbye on September 22nd and dropped to its October 2nd low. Then it rallied back up to a trend line from the August high across the September high, briefly broke it on October 14th and then reversed back down to yesterday's low. Now it's bouncing back up towards it, which is sitting near 138.25 on Friday. Might it be for another kiss goodbye? If it instead pushes to a new high above 138.56 it could push up to a Fib projection just shy of 142. If it does this by mid week next week it would also be a poke above a new trend line from the September high across the October high. Little fractal patterns could be playing out here.

Banking index, BIX, Daily chart

The transports left a bullish hammer for today's candlestick so any follow through to the upside on Friday will be a good reversal signal and I'd expect to see a move up to the 4237 area, which is the 62% retracement of the 2008-2009 decline. A couple of trend lines above and below that level will be worth watching as well. First thing it has to do is break its downtrend line from May 2008 and hold above it, currently near 4000.

Transportation Index, TRAN, Daily chart

The US dollar finally made it down to its price projection at 75.23 where the 5th wave of the move down from March equals its 1st wave, a very common relationship. The low so far is 75.08 (yesterday). In making its low yesterday it also did a small throw-under below the bottom of its descending wedge from August (which is the final 5th of the 5th wave) and then bounced back up inside the wedge. This created a buy signal but we don't have any good reversal signals yet. The setup remains a good one for a significant low for the dollar so we'll see if buying kicks in on Friday and next week. A multi-month rally should follow, one that should eventually take it above the March high near 90 sometime next year.

U.S. Dollar contract, DX, Daily chart

If the dollar is putting in a bottom there's a good chance the metals are putting in a top. Gold achieved a price objective of 1071 last week but has been consolidating since then. This sets up the possibility for one last push higher (especially since the consolidation is taking on the shape of a small sideways triangle, usually a good indicator that the last leg of the move is about to happen). But a drop below 1043.70, the October 16th low, would suggest the high is already in, which would be confirmed with a drop below 1025. The larger price pattern calls for a significant decline in gold, one that could take it below its 681 low in October 2008.

Gold continuous contract, GC, Daily chart

Not shown on the chart above is the possibility for a rally up to the 1130 area where there are a couple of Fibonacci levels of interest. So if gold rallies much above 1075 I think there's a good chance we'll see gold head up to 1130-1134, regardless of what the dollar is doing.

With an expectation that we're close to topping in both the stock market and gold (at least that's my opinion) I thought I'd take another look at the gold miners. The weekly chart shows the parallel up-channel for the rally from the October 2008 low. It has been very choppy and looks much more like a correction to the previous decline rather than the start of a new bull market leg up (looks like a big bear flag pattern). The wave count has been tricky but fits well as a double zigzag, where the 2nd a-b-c move is the rally from April 2009 (the April low is labeled wave X on the chart). Two equal legs up for this a-b-c move is at 48.35 which is very close to the 78.6% retracement of the 2008 decline. The high on October 13th was 49.74. It takes a drop below 41 to indicate we've seen the high but right here is a good setup for the reversal back down (which should drop well below the October 2008 low of 15.83).

Gold Miners, GDX, Weekly chart

Oil is also at a level that's a setup for a reversal. The only thing it hasn't done yet is reverse (like the dollar and gold, and the stock market for that matter). I have two Fib price projections, based off the highs and lows within the rally from January 2009, for the current rally, at 81.73 and 83.05. The high so far, on Wednesday, is 82.00 so it's now within the target zone. Price has poked above the top of a parallel up-channel for the rally off the July low and slightly above the mid line of the larger parallel up-channel. It's a setup for a reversal but if it doesn't then we've got upside potential to the top of the larger up-channel which is near 94 by the end of the month. Many are calling for $100 oil so we should soon find out if they're right.

Oil continuous contract, CL, Daily chart

The only major economic report tomorrow is the existing home sales which are expected to be slightly better than August. Any major disappointment in this number could tank the market, which is already on pins and needles about the state of the economy. Earnings improvement from cost cutting is not the way to grow the economy. If we find out fewer people are buying and selling homes it will show people are still retrenching.

Economic reports, summary and Key Trading Levels

Summarizing, today's rally looks like another save by the bulls. But without new highs above Wednesday's there is the possibility that it was simply a strong correction to the start of a stronger decline. For this bearish scenario the market must start down immediately on Friday and it should sell off strong (a 3rd wave down) and take the market well below this morning's lows. So the bears know what they need to do, and do it quickly.

The bulls just need to hold the bears at bay. If we see a pullback that is choppy and consolidating and then a push higher there will be very little question in my mind that the market will push to new highs next week. I provided quite a few levels to watch for my mid week next week, especially around some trend lines. By mid week next week many fund managers will be more than happy to take profits off the table and call it a year, locking in their bonuses and taking away the risk. Selling next Thursday and Friday would not show up on the books for what was held in October.

I think we'll have an answer to this question fairly early on Friday. The only caution about a choppy sideways/down correction tomorrow, which typically means it's a continuation patter for the rally, is that I've seen many of these patterns fail near the highs. It seems to catch a lot of bulls leaning the wrong way and napping. The whoosh to the downside from these patterns is a result of panicked bulls closing their positions quickly.

But a correction tomorrow, followed by new highs, would clearly be bullish and I'd then watch to see how mid week sets up for a possible reversal.

There remains a problem with the rally as of late so don't get complacent about it if you're sitting in some long positions and waiting to take profits. The rally is simply flat running out of steam. I've shown the below chart a few times and it's obviously not a timing tool (similar to the VIX chart in that respect) but is a warning about the current state of the rally. The chart below shows the NYSE making new highs while the advance-decline line getting worse.

NYSE vs. Advance-Decline Line, Daily chart

What stands out particularly strong is the fact that the new high into October had a very glaring negative divergence in the a-d line (the chart shows the 10-dma of the a-d line to smooth out daily fluctuations). First, the higher price high in October was met with a significantly lower a-d high and this followed a longer-term negative divergence where each new high this year was not being met with a new high in the a-d line. October's high is glaring in this respect. What's going on now is distribution of stock to the masses.

Second, the October 2nd low was accompanied by a strongly negative move in the a-d line where it broke the uptrend line from March and it broke the level where prior pullbacks in May, July and August found support. The lower low in the a-d line on October 2nd was met with a higher low in price (vs. the September 3rd low). This is all bearish divergence. And now, while price is trying to hold up, the a-d line is deteriorating (the 10-dma is again breaking the uptrend line from March). Caveat emptor is about all I can say when I look at this chart.

One last chart, since I had pounded the table two weeks ago about a setup for shorting Google (GOOG), I figured it was time for an update. I follow very few individual stocks but this one is an interesting one. My short play of course didn't work. I liked the setup to short it on Friday, October 9th, which you might have been able to do around 515-520, and use a stop above the October 8th high of 523.25. That stop was hit the following Monday and it's been up hill since then.

Now I'm looking at its weekly chart, using the log price scale because of the big price swings, and notice that it has pressed up against the top of a parallel up-channel (you have to draw them in manually when you use the log scale) right where it's hitting the 62% retracement of its 2007-2008 decline (556.26). Might it be ready to reverse from this resistance area? It's not a pound-the-table setup but it's a good setup nonetheless. Be careful if you're long the stock and thinking there's plenty more to the upside. If GOOG closes near today's 554 price it will leave a doji for the weekly candle--a possible reversal pattern (evening star) in the making.

Google, GOOG, Weekly chart

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

Key Levels for SPX:
- cautiously bullish above 1100 (to maybe 1110-1130)
- bearish below 1074, confirmed with a break below 1050

Key Levels for DOW:
- cautiously bullish above 10000 (to about 10200-10300)
- bearish below 9900, confirmed with a break below 9600

Key Levels for NDX:
- cautiously bullish above 1773
- bearish below 1730, confirmed with a break below 1710

Key Levels for RUT:
- cautiously bullish above 624
- bearish below 600, confirmed with a break below 590

Keene H. Little, CMT