Market Stats

Today started off with a bang but the rocket fuel failed to ignite after launch and it fell back to the ground. Actually it dug a hole in the ground. Equity futures had rallied during the overnight session but then gave up some of the gains after this morning's economic reports. The market started with a small gap up and after the starting gun was fired the market sprang to life with the DOW up about 60 points within the first 15 minutes of trading. But that was all she wrote. The market immediately sold off into the red before the first 30-minutes of trading had completed. It then spent the majority of the day in a narrow trading range in slightly positive territory.

It was looking like we were going to spend the entire day stuck on hold, waiting for the job numbers tomorrow morning, until the trap door opened up on the bulls in the final 30 minutes of trading. The whole day of trading ended up being the first and final 30 minutes. The rest of the day could have spent reading a good book. The selling into the close left a bearish feel to the charts but if there was selling out of fear of what might be in the job numbers we could see the opposite reaction if the numbers do not disappoint. Trying to figure out how the market might react to whatever numbers come out is about as good as flipping a coin.

Part of this morning's excitement came from Bank of America who announced that they are so flush with cash that they're going to pay the government back its $45B TARP loan. They intend to use about $26B in cash and another $19B from selling more "common equivalent securities". The bottom line is that it will be dilutive for current share holders but they didn't seem to care. BAC had climbed as high as 16.74 (+1.09) before dropping the rest of the day and closing up only 11 cents at 15.76.

There were lots of upgrades on the BAC today and that started the wave of buying I guess. People actually trust these upgrade calls? The excitement about buying a company's stock when they're telling you they're going to massively dilute it is something I don't understand. Maybe the market did a collective "oh wait, maybe that's not a good thing" and proceeded to sell. The banking index led the way lower today and broke some support.

Selling the rallies is something that's been going on since mid November. One look at the daily charts will tell you there appears to be distribution going on near strong resistance levels. All the bullish talk on CNBC and in financial media is leading the sheeple to the cliffs--they're happily buying the stock from big money who is distributing their inventory to the masses before the bigger decline gets started. It's a never-ending cycle as people bailed, and this includes the bulk of the mutual fund managers, at the wrong time last March and they're buying at the wrong time at the December high. It always has been this way and it will always be this way.

Two things the market was not happy about today--the ISM (Institute for Supply Management) Services number and initial results from retail stores. The ISM number came in worse than the expected 51.5 (which would have been an improvement over October's 50.6) and at 48.7 was below 50 which indicates contraction. So much for the growth stories. It makes it a little harder to justify the lofty P/E levels that the market now sports.

The retail business is part of the ISM Services and its weakness did not help. Initial results of same-store sales is so far less than last year and last year's number was worse than dismal. Most everyone expected this year's year-over-year comparison to be an easy gain for sales. To come in less than last year is not at all a good sign. Granted it was only down -0.3% this year but after last year's -7.8% it was expected that we'd see some improvement. So far cyber sales seem to be doing well so once all the numbers are in, from Wal-Mart, the government and online, we'll get a better picture of overall sales.

The consumer is of course being encouraged to consume. The country's GDP depends on it. But asking an overspent and overleveraged, and scared, consumer to take on more debt is not happening. I've even seen a few articles recently recommending people skip buying Christmas presents since the money is usually spent on items the receiver would normally want anyway and it's wrong to go into debt for it. My family, for the last few years, has decided to take whatever money we would have spent on gifts and donate it to the needy. I think that's a far better way to use your money than buying stuff that ends up in the closet or garage and eventually on the table at the next yard sale.

Even though the market sold off into the close there's been no technical damage to the rally. Today's pullback fits within the category of a small correction so far. All big correction start off small of course and I'm on the lookout for the end of the rally so that you can protect as much as possible on long positions and/or get yourself into a short position for the next leg down. Last week was a very good setup for a high for the market, following the Dubai debacle, but the recovery this week knocked the bears back into their caves (again). This has been a repeating occurrence for months now and especially for the past few weeks as it looks like the market's rally is running on empty.

There aren't many bears left to knock back into their caves and that could be one reason why the flare-ups are not getting any follow through to the upside, like this morning. The little short squeeze simply stops and reverses back down. The short interest ratio is back down to 2007 levels and bearish sentiment is now even lower than it was in 2007, and as low as it was after the big rally from the 2003 low. And what few bears there are left, most are not short. Bearish sentiment is at record lows and bullish sentiment is at near record highs. This boat is about to tip over.

So forgive me for trying again but I think there's a good chance the market made an important high today. It's potentially very important since it could be THE high. I'm watching all kinds of things to help verify a major turn in progress and the signals I'm getting from the stock market, the US dollar and the metals tell me to expect a major reversal very soon for all markets.

I'm going to review a couple more weekly charts than I usually do in tonight's newsletter because there are some interesting developments when viewed on the longer time frame. Starting with the usual SPX weekly chart, it has been inching its way higher since October's high in an apparent attempt to tag its 50% retracement of the 2007-2009 decline at 1121. It got oh so close today with a high of 1117.28. I'm using the log price scale presently and that has the downtrend line from October 2007 currently near 1148. Using the arithmetic scale that trend line is lower at 1088. It's important, especially on longer-term charts with big price swings, to flip back and forth between the two price scales since each will show you potentially important support and resistance when using trend lines.

S&P 500, SPX, Weekly chart

As depicted on the chart, once this year's bounce finishes it should be followed by a continuation of the secular bear market (this year's rally is a cyclical bull within a secular bear which will probably run for at least another 6-8 years). A break below 1029 would give us a longer-term sell signal. Right now, with the market overbought and momentum waning (highlighted on RSI), I continue to look for a top to the market's rally rather than an opportunity to buy the dips.

The daily chart shows more clearly the effort that has been made to get SPX to tag its Fib level at 1121. The broken uptrend line from November 2nd has been resistance for the past three days (this morning's rally stopped dead at it). The bulls will look at the consolidation since November 16th as a bullish consolidation in preparation for a blast higher through resistance. The bears see waning momentum at resistance. If price blasts higher you'll want to see confirmation with the oscillators breaking their downtrend lines as well otherwise it will be a last gasp attempt. That's a possibility if tomorrow's jobs number sparks an enthusiastic reaction from the market.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1125
- bearish below 1084

The 60-min chart below shows how price stopped dead in its tracks this morning and got slapped silly for giving it a kiss goodbye. I show a clean 5-wave count for the rally from last Friday's post-Dubai low. That's why today's high is potentially very important since it could be the last leg up of the rally from July which in turn finishes the 3-wave bounce off the March low.

S&P 500, SPX, 60-min chart

Short against today's high is the recommended position although 1112 would be a better stop since a rally above that level would call into question what kind of pullback we had today. Hence the circle-X at that level. Today's pullback is only a 3-wave move so far and therefore a bullish response to tomorrow's job numbers could leave it as just a correction to the rally. If that happens then I think we'd have to look up and think about the possibility for a rally up to the 1150 area into the end of the year.

The DOW has made it up to an area that is going to be tough resistance. It has reached its downtrend line from October 2007, its broken uptrend line from 1994-2002 and the price projection for two equal legs up from March, at 10495. While it can certainly press higher I would think the higher-odds scenario would be at least a pullback to work off some of the overbought conditions. Countering that expectation are some bullish seasonal influences and an effort by many, including the government, to hold the market up into the end of the year.

Dow Industrials, INDU, Weekly chart

Similar to SPX, the DOW has been attempting to push higher since mid November. But while it has been able to push marginally higher we're seeing waning momentum. It looks like a distribution pattern as big money hands off inventory to retail. This could go on longer, especially with a concerted effort to hold the market up into year end, and it could go higher. The trend line along the highs since May will be near 10600 by Monday. The bulls have to like the fact that the downtrend line from October 2007 has now been broken and is acting as support. The uptrend lines from July-October and November 2nd are also acting as support.

Dow Industrials, INDU, Daily chart

The key level to the downside is currently at 10230, last Friday's low. But a break of the uptrend lines and then the 50% retracement at 10334 would be bearish so watch this level for support or a break of it and trade accordingly.

Key Levels for DOW:
- cautiously bullish above 10600 (watch the upper trend line from May's high)
- bearish below 10230

NDX has Mr. Fibonacci's footprints all over it. The last time I showed the weekly NDX chart was back in July I think. That's when the last Fibonacci time window was suggesting we watch for a turn date. Some of you will remember this chart where I'm showing the number of Fibonacci weeks between turns since the October 2007 high. Back in July I did not imagine the rally off the March low lasting into December but here we are. I was thinking it might mark a low after the decline got started. Silly me. The decline from October 2007 to November 2008 lasted a Fibonacci 55 weeks. The rally from November 2008 to December 2009 (next week) is a Fibonacci 55 weeks. In between those two end points, as shown on the chart, the significant turns occurred at the Fibonacci 21 and 34-week periods.

Nasdaq-100, NDX, Weekly chart

In addition to the Fibonacci time windows, price has been struggling since mid October near 1773, which is the 62% price retracement of the 2007-2008 decline. Mr. Fibonacci is alive and well in this index. So as we hit the next Fibonacci time line will it result in another turn? I'm thinking that's exactly what's going to happen and this one has the potential to reverse this year's rally. From a timing standpoint I always use +/- 1 week around these important time periods so we're now within the turn window.

NDX has not been able to make a new high this week with the blue chips so we've either got bearish non-confirmation of the blue chip rally or NDX will follow them higher. Higher potential exists to the trend line along the highs since September, currently near 1825. A break below last Friday's low near 1742 would be a sell signal, especially since it would also be a break of the March-November uptrend line.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 1830
- bearish below 1742

The RUT broke its downtrend line from October and its 50-dma today so that was bullish. Notice I said "was" bullish as it didn't exactly get any follow through after doing so. Today looks like a throw-over and bull trap. I'm showing two Fib price projections for the a-b-c bounce off the November 2nd low and today the RUT hit the first projection at 600.19, where the 2nd leg up is equal to 62% of the 1st leg up. Because of the overall weakness displayed by the small caps it's possible the lower Fib projection (vs. the higher one at 620 for two equal legs up) is all we're going to see out of the RUT.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 605
- bearish below 577

The news out this morning about Bank of America (BAC) sent the banking index higher but then it came tumbling back down. This afternoon it was one of the leaders to the downside. The BKX index ran up and rang the bell at its 50-dma and poked above its broken uptrend line from March through the November 2nd low. But it closed back down below both and below its support line at about 43.50. It looks like it's ready to continue its decline from October.

KBW Bank index, BKX, Daily chart

The home builders index dropped below its 200-dma today, after bouncing off it at the November 2nd low. It too looks like it's ready to resume its decline.

U.S. Home Construction Index, DJUSHB, Daily chart

Will the 4th time be the charm? Will bulls finally be able to push through resistance near 4050? I'd have a better feeling about that possibility if it was showing some strength as it approached that line of resistance. As it stands it looks like it could get rejected a 4th time.

Transportation Index, TRAN, Daily chart

The US dollar has been in what appears to be a bullish descending wedge since the November 20th high. This fits well as the final 5th wave for its decline and I expect to see the dollar come roaring out of this pattern and break out of its down-channel from August. It should catch quite a few dollar bears napping and the unwinding of the carry trade has the potential to do a lot of damage to the stock market and commodities. What I can't quite figure out yet, as of tonight, is whether or not the dollar put in a bottom or if it has one more minor new low to complete its decline. A rally above 75.67 would answer that question.

U.S. Dollar contract, DX, Daily chart

We might have received an answer to the above question as we went into the close today. Zooming in on the dollar's pattern the 60-min chart below shows a break of the downtrend line from the November 20th high and unless that turns out to be just a little throw-over it's our first signal that the dollar has bottomed. The little rally above that trend line might have been one thing that triggered the selling in the stock market in the final 30 minutes. If so, be prepared for a lot more selling in the stock market soon.

U.S. Dollar contract, DX, 60-min chart chart

With gold's rally having gone parabolic we need to take a look at its weekly chart to see what upside targets there might be. From a price projection perspective it has already achieved two equal legs up for the move up from October 2008 (shown on the chart at 1192.30). It has also exceeded the top of a parallel up-channel for price action since July 2005, currently near 1173. Both of these look bullish but it's only this week that those two levels have been exceeded. Since the move has gone parabolic the last thing the bulls want to see is a collapse back below 1170 leaving this week as a throw-over finish to its rally. Therefore, take a break below 1170 seriously if it happens next week.

Gold continuous contract, GC, Weekly chart

Shown in green is what the gold bulls want to see. Speaking of gold bulls, if you're not one you're clearly in the minority. Bullish sentiment has been in excess of 90% for almost a month now, something almost unheard of. From a contrarian perspective it's time to be very worried if you're a gold bull. But if the bulls are going to reign supreme for another several months they'll want to see a rally at least up to the 1250 area, consolidate in a sideways/down correction into the first quarter of next year and then continue rallying up to a Fib projection near 1400. A drop below the uptrend line from October 2008 would signal the rally if finished.

Moving in a little closer to the gold rally you can see the tight and narrow up-channel for price action since the end of October. Today's rally tagged the top of the channel and the bottom of it is currently near 1200 and rising about 7 points per day. A break below 1200 would be your first clue that the rally may be coming unglued. You can see how the uptrend lines have become steeper (signaling the move has gone parabolic) so once the last uptrend line breaks it's usually not long before the rest of them get broken.

Gold continuous contract, GC, Daily chart

For a really long-term perspective I found something very interesting on the chart of gold when viewing the pattern from the low in 1975. First of all, when you look at the chart below does it scream at you to get out? Does that rally look sustainable to you? I want to point out a few things having to do with Mr. Fibonacci. First, I show a projection for the 2nd leg up in the 3-wave pattern from 1975. The 2nd leg up is the rally from 1998 (it's hard to read the years because I had to squeeze the chart in) and it achieved 162% of the 1st leg up at 1228 (based on closing prices). Today's high was 1227.50. Close enough for government work?

Gold continuous contract, GC, Monthly chart (from 1975)

I've been saying for most of this year that when gold starts its pullback I think it will drop to below $600 before it's ready to launch another rally leg. That would be more than a 50% retracement and to gold bulls I am a blasphemous Neanderthal. But look at retracement from the last parabolic peak in 1979--it quickly retraced 62% before any appreciable bounce. If it were to do the same again it would drop down to 617. A 78.6% retracement, similar to what it did before, would be 457. This chart should help keep things in perspective.

Silver has also given a sell signal by doing a little throw-over above the top of its parallel up-channel from October 2008 and then closing back inside it today. It also tested its broken uptrend line from August and failed the test. It also completed a 5-wave move up from October and that calls for at least a pullback.

Silver continuous contract, SI, Daily chart

So I've got some initial signs that the dollar may have bottomed, good upside completion for gold's rally and strong signs of a top in silver. Combine this with the setup in the stock market and I think you can get a sense of why I'm thinking all the markets are now ready for major reversals. At least that's the setup.

Oil is still a question mark for me. It looks like it's in a bullish flag pattern which points to upside resolution, as I'm depicting on the chart. Maybe oil will march to the beat of a different drummer. Either that or the signals I'm getting from all the others are wrong and oil is pointing in the right direction. So watch the uptrend line from February, near 75, since a break of that level would be a bearish heads up. A break below 72.39 would confirm the top is in for oil and the decline has started, even as ugly as the initial decline looks.

Oil continuous contract, CL, Daily chart

The job numbers tomorrow are the big kahuna but what we don't know is how the market will react around them. Even an initial pre-market reaction might not hold. Stay cautious about the first 30 minutes of trading since we saw what happened today. But if the market starts down immediately, based on the other things I see in the charts, it might not recover so be careful if you're long and hoping for a bounce to start exiting positions. That bounce might be from a much lower level.

Economic reports, summary and Key Trading Levels

Quickly summarizing, since I'm running late and eating into your evening reading time, the market is set up for and honest-to-goodness high this time. Really. Not like those other false highs. This one could be it. The fact that so many other pieces have fallen into place makes for one of the best setups I've seen. Last week I did not like the fact that the dollar looked like it hadn't made its bottom yet. Now it's looking like it might have (I would have preferred slightly lower and a cleaner wave count but I can't be so picky as to wait for perfection which never comes in the market).

The significance of the high for the stock market is that it should be completing the entire rally off the March low. That sets up the next bear market decline, one that should at least test the March 2009 low and more likely break below it. It's been a great rally and it's clearly time to protect profits. If you like playing the short side, short against today's high is the recommendation. If the rally continues tomorrow and next week then I think the writing's on the wall--we'll see the market held up at least into the Christmas holiday if not the new year. It might only chop its way higher but the bulls would be happy even with that.

The metals are a very good setup for a reversal back down and that has me thinking it's supporting the idea of a high for the stock market as well. I think we'll continue to have an all-the-same market (and globally) which means there's no place to hide. Cash is king so protect it. If the deflationary cycle continues cash is the only thing that increases in value.

Be sure to take advantage of the subscription renewal packages Jim has made available. I think we've got an exciting year ahead of us and certainly one that's going to be challenging. I thoroughly enjoy the feedback I receive from you and hope you stick with us. Hopefully you'll either make a whole lot more, or save a whole lot more, than the subscription cost during the coming year. Together we'll slay the dragons and win the hand of the fair maiden. I'd show you her picture but my wife would slap me silly.

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

Key Levels for SPX:
- cautiously bullish above 1125
- bearish below 1084

Key Levels for DOW:
- cautiously bullish above 10600 (watch the upper trend line from May's high)
- bearish below 10230

Key Levels for NDX:
- cautiously bullish above 1830
- bearish below 1742

Key Levels for RUT:
- cautiously bullish above 605
- bearish below 577

Keene H. Little, CMT