Market Stats

This week's test of some major resistance levels, namely DOW 10334 and SPX 1102, resulted in a pullback. The big question as we head into opex next week is whether or not we will get another bullish one or if instead the resistance levels will prove too strong and we'll start getting some more profit taking. The Thursday prior to opex week is sometimes a head-fake day, especially if it's a down day since that's when big money has often pushed it down so they can buy cheap front-month calls and sell deep ITM put options. If that trade doesn't work because selling takes over during opex this can cause some stronger than normal selling as the bullish positions are unwound. So that's the setup after today's down day.

We've entered a potential turn window and considering the market has rallied into it (which runs from today through next Tuesday, which I'll discuss in more detail with the charts for the DOW), and considering the resistance levels that the market is up against, there is a good possibility that opex week could be a struggle for the bulls.

The topping process in the stock market, unlike the commodities market, tends to be a very choppy affair. Stock is distributed from smart money to retail and market breadth starts to suffer. That's why it pays to look under the hood rather than just the major indexes that are reported on the news each night. Over the past couple of months I've shown the NYSE chart against the advance-decline line which shows a weakening in the a-d line as the market has rallied since the summer--each new price high was not being met with a new high in the number of stocks participating in the new high.

As another example, the DOW has been making the news because it's been pushing up to new highs this month. But what is not being discussed is the fact that 20 of the 30 DOW stocks are not participating in those new highs. We've got the DOW pushing above the October high thanks to only 10 stocks. That's another sign of a lack of market breadth. Volume has been low and declining as the November rally has progressed. These are all classic signs of a market topping and not signs of a new bull market leg up.

The bigger markets, the NYSE and the DJ Total Market Index (the Wilshire 5000) have not made new highs above their October highs. The Nasdaq-100 (NDX) made a new high above its October high but the Nasdaq (COMP) has not. The troops have been unwilling to follow the generals into the slaughter house. It's been a rotation into the bluest of the blue chips, the DOW and S&P, and an abandonment of the smaller stocks. The Russell 2000 small caps index (RUT) has only been able to retrace 62% of its October decline.

But because tops in the stock market tend to be grinding affairs (often creating a rolling top) it can be very frustrating for both sides. Since the August 28th high, or about 2-1/2 months ago, the S&P 500 tacked on about 65 points to get up to yesterday's high. In between we saw some big swings below and back above that August high. While those who held on long through all that are at least up some, anyone trying to short the market (other than quick in and out trades) has been very frustrated in the market's refusal to sell off. And once it does start down it could be a continuation of the very choppy price action as the bulls buy the dips and the bears sell the rallies. This is what creates the rolling top appearance as the bulls start to lose strength and the bears gain it.

The U.S. dollar has been getting plenty of attention lately and it's because the stock market has been reacting to every twitch in the dollar. With the dollar being used for the carry trade, if the dollar starts to rally there are a lot of twitchy traders ready to sell their stock so they can buy back their shorted dollars. Then more traders short the dollar (convinced it's going much lower) and buy stock. What's interesting this week is the dollar's chart--it signaled a key reversal to the upside yesterday and followed through with a rally today. That's a big heads up for stock market bulls and bears watching into next week.

Consumer confidence has turned back down and with it most are expecting a dismal Christmas holiday shopping period. Consumers are not in a spending mood and I've had several people tell me they're changing their gift-giving plans this year. Savings will likely continue to increase. So while the banking industry has not been forced to deal with deflation of credit and money supply (they continue to party like it's 2005) the rest of us have had to deal with deflationary pressures (credit reduction and debt destruction). We're reducing our debt load and increasing our savings, all very healthy things to do for our longer-term financial health. The banking industry will be dragged kicking and screaming (and many banks will fail along the way, including some too-big-to-fail) and eventually have to deal with the consequences of a deflationary environment.

Businesses are also not in a very cheerful mood. The National Federation of Independent Business (NFIB) Index of Small Business Optimism recently rose +0.3 points to 89.1 and while it's up +8.1 points from its low of 81.0 seen last March it remains below 90. To put this into perspective, the 1980-82 recession saw this index below 90 for one quarter. So far in this recession the index has been below 90 for six quarters running. Businesses are not in any mood to expand their business and hire more people. The unemployment situation will get worse and for the first time it's a leading indicator because of the impact on consumer sentiment and spending. Only the stock market hasn't recognized this reality yet as hope still prevails.

So I continue to look for a top in the stock market. One reason is because I believe the market is close to recognizing the fact that the market sentiment got way ahead of economic realities. The other more important reason is because of the technical factors present in the charts.

SPX finally made it up to its downtrend line from October 2007 this week, currently near 1102. It bounced briefly above it yesterday but was not able to hold it. It bounced up to it this morning but was not able to hold it. I've been thinking there's a chance for it to make it up to its 50% retracement level near 1121 but after today's price action I'm having some doubts about that possibility. The negative divergence on the weekly chart is a glaring reminder that the rally is flat running out of oomph. The break of the uptrend line on RSI has already given us a sell signal and while price could head marginally higher it's a clear warning the a top is being put in place.

S&P 500, SPX, Weekly chart

The daily chart shows a closer view of price action around its downtrend line from October 2007 and its uptrend line from March, which is where today's pullback found support, near 1085. As long as this uptrend line holds we could see another leg up which could have SPX tagging its 1121 level (shown with the dark red line). At that point the wave count for the leg up from November 2nd would look complete and that could very well finish off the rally from March. But any further breakdown on Friday, shown with the dashed line, could indicate we've already seen the high for the rally.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1102
- bearish below 1070

Zooming in closer with the 60-min chart you can see where SPX found support this afternoon--at the March-July uptrend line and at its uptrend line from last week's lows (broke it briefly but then recovered into the close). This is why a continuation of selling on Friday would be bearish since a break below 1083 would be a stronger sell signal. Otherwise stay aware of the potential for a rally up to 1116, where the 5th wave would equal the 1st wave in the rally from last week's low, or up to the 1121 50% retracement level, shown on the daily chart.

S&P 500, SPX, 60-min chart

I want to get into a little something different tonight with the DOW charts and look at timing windows. The market often swings in a cycle that's not always apparent. We've all heard of the lunar cycle and how the market will sometimes act strangely around a new or full moon. Actually the highs and lows since the summer fit very well to a new and full moon cycle, which is common when a market is financially driven (liquidity by the Fed), which is a false influence, rather than economically driven, which is a more real influence. FYI, the next new moon is Monday.

Just as the market will often react around Fibonacci price levels, so too will it react around Fibonacci time periods. It's all part of our herding instinct on which Fibonacci has a lot of influence. On the DOW's weekly chart I'm showing Fibonacci time extensions based on the 2007-2009 decline. A 50% time projection is this week, shown by the middle dotted vertical line on the chart.

Dow Industrials, INDU, Weekly chart

It's hard to see in the clutter on the weekly chart but I am showing the possibility for another push higher into early next week, especially if SPX has a date with 1121. The DOW would have two equal legs up from March at 10495 which would also have it tagging its downtrend line from October 2007. That remains a possibility as long as the DOW holds above its uptrend line from March, currently near 9800. But tagging its 50% price retracement at 10334 at the 50% time projection this week is like Fibonacci karma.

But it gets even better from a Fibonacci timing perspective. The daily chart below, which has been compressed to show price action from March, shows the Fibonacci time relationships between the turning points of the rally since March. First, if we consider the 1st period to be from the March 6th low to the June 11th high (labeled wave A) and the 2nd period from the June 11th high to this week's high we have a Fib relationship between the two periods, where the 2nd period is 161.8% of the 1st period, as shown at the bottom of the chart.

Dow Industrials, INDU, Daily chart

I also show the time relationships between that first period and the subsequent turning points within the 2nd period. At the 61.8% time line (61.8% of the time for the March-June rally), in August, we saw a high. At the 100% time line, in September, we saw another high (it was in a topping pattern then). At the 138.2% time line, in October, we saw a high. And now at the 161.8% time projection, which is today, we may be getting another high (yesterday's). The fact that the time lines on the daily chart, showing today's date as important, and the weekly chart, showing this week as important, I think it behooves us to consider the very likely possibility that we've put in a high. Will it be the last one? Only in hindsight will we know but this one has an excellent chance of being that one.

Key Levels for DOW:
- cautiously bullish above 10334
- bearish below 9800

So based on just one chart tonight, the DOW's, I'd be shorting the market big time right here, right now. After having met both time and price Fibs it's a beautiful setup. It takes a drop below 9800 to confirm a high is in but that's a lot of points to give away (for a stop on a long position or an entry into a short position). I'd recommend a short play with yesterday's high as your stop for now, especially if we get a bounce off support on Friday. If SPX has a date with 1121, which would get the DOW up to its 10495 target, that would be the next shorting opportunity. If you're long the market and wondering where a good stop should be, I would not want to see the DOW back below 10K.

If SPX is going to push a little higher to its 1121 target we should see NDX join in and push above 1800. But if it drops back below 1773, which is where it closed today, it would be back below both its 62% Fib retracement and its uptrend line from March-July (which was broken in October and recovered this week), I think it would be the signal the top is in place. It's going to be critical what the market does between now and Monday.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 1800
- bearish below 1700

I'm showing one idea on the NDX chart above how a decline could play out into the end of the year. In the beginning of tonight's report I talked about a rolling top and a big decline into the end of November followed by a big bounce into mid December (in an effort to hold the market up into year-end), before letting go into January, could create that rounding top appearance. It might also build a topping pattern called a diamond top. It's just a guess at this point but something to consider for your longer-term position trading.

For the RUT, below, MACD and RSI are threatening to roll over from a lower high, like the others. This reinforces the idea that the bounce off last week's low has completed. For the RUT this is particularly important because the bounce fits well as a 2nd wave correction after the 1st wave down from its October high. That sets up a strong decline in a 3rd wave down, one that should make the October decline look small by comparison. The 200-dma, near 513, should be quickly tested if it's starting back down now.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 600
- bearish below 575

With some mixed signals from the above four indexes I like to look at the big market for some further guidance. Using the Wilshire 5000 index, now called the DJ U.S. Total Market Index (it still uses the $DWC symbol), there is unfortunately no better answer yet. Today's decline brought the DWC down to its broken downtrend line from October 2007 (for a bullish kiss goodbye?) and its recovered uptrend line from March (also for a bullish kiss goodbye?). Those lines crossed today near 11130, essentially where it closed. This keeps both sides guessing what it will do on Friday but I would expect at least a bounce. After tagging its 50% retracement of the 2007-2009 decline in October it's looking like a double top with bearish divergence at the moment.

DJ U.S. Total Stock Market Index, $DWC, Daily chart

The next chart of the S&P banking index (BIX) shows it tried to get back above its broken uptrend line from July but may have lost the fight today. Today's candle is a bearish engulfing candlestick pattern and is essentially a key outside down day. Follow through to the downside is needed to confirm it but seeing this at resistance, and closing back below its 50-dma, looks bearish. If the EW count is correct then the next move is a 3rd wave down which should be very strong and will likely have the BIX testing its 200-dma in short order.

S&P Banking index, BIX, Daily chart

The other banking index that I've been watching lately, the KBW (BKX), also flashed a sell signal today by closing back below 43.50. It tried again to get back above it and succeeded for three days this week but lost it today. This is an important level for BKX and many are watching it. As with BIX, the next move down, if it's going to continue from here, should have the 200-dma at 37.31 tested quickly (and probably will not hold).

KBW Banking index, BIX, Daily chart

The transports almost did it--the TRAN almost made is past its downtrend line from May 2008. It also tried to get back above its broken uptrend line from July. The rejection from both of these trend lines could be significant but a stronger sell signal would come from a break back below its uptrend line from March, near 3917 Friday morning. The bounce off the November 2nd low has been strong but not as strong as the DOW's and so far it's giving us a bearish non-confirmation of the DOW's new high above October's. The bounce achieved two equal legs up today when it tagged 4001.25 for a sharp a-b-c bounce correction to the October decline. It's a setup for continued selling but only if today's high is not exceeded (duh).

Transportation Index, TRAN, Daily chart

The US dollar made a bullish key reversal day yesterday with its outside up candlestick. It was followed through today with a big rally. This strongly suggests the dollar has found its bottom and that could be very significant to all other markets. Just about everything else has rallied this year since March while the dollar tanked. If the dollar reverses and starts a major rally, as I believe it will, all other asset classes are in trouble. Repeating what we saw in 2008 is the setup.

U.S. Dollar contract, DX, Daily chart

Looking at the weekly chart of the gold contract, the weekly candle is so far a bearish shooting star at resistance. There's an internal parallel up-channel, which was tagged in overnight trading, and a Fib projection based off its previous decline (in 2008) that's only slightly higher. It's very common to see a rally find a top at the 127% projection of the previous decline (same in reverse) and while gold didn't quite make it there (near 1130 while today's early-morning high was 1123.40), it can certainly be considered close enough to warn of a potential reversal back down.

Gold continuous contract, GC, Weekly chart

While the weekly candle looks like a bearish shooting star, today's daily candle is a bearish engulfing candlestick (outside down day) for another key reversal day. Seeing this candle with oscillators deeply overbought should send shivers down the spines of the bulls. I would protect long positions in gold if you're a trader instead of a buy-and-holder in the metal. The setup for gold is a big flush to the downside, one that takes it back below $700 next year.

Gold continuous contract, GC, Daily chart

Oil is baffling me at the moment. If the dollar is headed higher and the metals and stock market sell off, I seriously doubt oil is going to rally. But the price action over the past month looks like a bullish sideways consolidation. If it's not a bullish consolidation then it's getting ready to take a big tumble so be ready for that possibility if you're trading oil. A break below 73 would convince me that oil too has seen its high.

Oil continuous contract, CL, Weekly chart

Economic reports, summary and Key Trading Levels

It's a light week for economic reports and today was no different. Unemployment claims continue to show some improvement, or "less bad" but still miserable, especially for those getting the pink slip or constant rejections in trying to find employment. The chart below shows graphically how the 4-week average of unemployment has done this year and compared to the past from 1991. First, it's encouraging to see the big drop this year (how much of it is a real drop vs. those unemployed not being reported is another story). But the reason I keep stressing it's only "less bad" is because of where it still is--still north of 500K.

Initial Unemployment Claims, 4-week Average, 1991-2009

So we "only" laid off over 500,000 people last week. The 4-week average, dropping from over 650K to 550K, is a big improvement but it remains above the highest level seen during past recessions. I hardly find this encouraging news and it goes back to unemployment being a leading indicator this time and not the lagging indicator as so many try to argue in justifying why the market deserves to be where it's at. In your dreams!

Summarizing where we are, while there's a bit of a mixed message from the various charts there is an underlying bearish tone to them. I see the potential for another rally attempt, especially since we're heading into opex week. In fact, if today was the typical head-fake day (being the Thursday prior to opex week) then today's decline should be reversed. That way big money that bought some cheap front-month calls and sold deep ITM puts will make their usual killing during opex. As I laid out on the SPX charts, there's a wave count that supports another rally leg at least to 1121, which could happen by Monday and still be within the Fibonacci turn window (and hit a turn on the new moon).

But I see a lot of signs that tell me we've already topped. The metals, dollar and various sectors, not to mention the DOW, are all screaming at me to short the stock market right now, using a stop above yesterday's highs. In fact that's what I've done so understand my bearish bias. If I get stopped out I'll be looking for a very good shorting opportunity at SPX 1121/DOW 10495.

For Friday I would be surprised if we don't get a bounce to at least correct some of the decline from Wednesday. I'll be watching it carefully for signs of corrective price action and looking to add to my short position if it looks like it will roll over again. If the market drops hard out of the gate then there will be no question in my mind that we've seen the top and it will be time to short all rallies.

Heading into opex week could give us a little more volatility than usual, especially if we've topped or will top around Monday. Selling tends to become exacerbated during opex week as traders hedge or cover their long positions so be careful of that possibility if you're tempted to buy the dips.

I'll close tonight's discussion with a look at the VIX. It had spiked up at the end of October as the market looked like it was headed much lower. Since then the new rally leg in the stock market has erased people's fears again. The VIX dropped back down to its uptrend line from February 2007 and yesterday's candle is a very bullish hammer at that support line. Today's big white candle is confirmation of a reversal pattern. The higher price high in the S&P was not matched with a lower low in the VIX. I had mentioned above, with the discussion about the DOW's charts, that that chart alone would have me shorting the market here and now. The VIX chart is the supporting actor (with lots of help from the dollar's chart).

Volatility Index, VIX, Daily chart

If we see follow through to the upside on VIX it would leave us with a bullish (for VIX, bearish for stocks) inverse H&S pattern. If this were a stock would you be buying it now? Long the VIX with a stop below yesterday's low would be the recommendation.

Good luck as we head into opex week and I'll be back with you next Thursday.

Key Levels for SPX:
- cautiously bullish above 1102
- bearish below 1070

Key Levels for DOW:
- cautiously bullish above 10334
- bearish below 9800

Key Levels for NDX:
- cautiously bullish above 1800
- bearish below 1700

Key Levels for RUT:
- cautiously bullish above 600
- bearish below 575

Keene H. Little, CMT