Market Stats

Is it just me or does it seem like the market is really struggling for every point? It's like watching a marathon runner who can no longer stand up and is instead crawling towards the finish line, bloodying his knees with every push forward. Even the very strong rally in the banks today barely got the rest of the market into the green. If not for another rally in the final hour the indexes would have closed in the red. But the market eked out another gain so that's better than selling (unless you're a frustrated bear).

We did not have any market-moving reports this morning so the market was left to fend for itself and most of the day was very listless trading. The trading volume for the week has been running about the same as the first half of December and at least today's volume matched Tuesday's. But with the relatively stronger volume today it didn't really help the indexes. As can be seen in the numbers above, the up volume was only marginally better than down volume but the decliners nudged out the advancers. It was more a day of churning than anything else. If not for the push back up in the final hour the numbers would have been worse.

So the market keeps chugging higher but the follow through to Monday's buying has been less than exciting. There wasn't much market news to review so I'm just going to jump right into the charts tonight.

I'm going to start off with the DOW's charts tonight since it's giving me a little clearer picture of what I think is playing out. Many discount the DOW because it's only 30 stocks, not representative of the "real" market, etc. but from an EW (Elliott Wave) perspective it can be quite accurate. We all know everyone, and I mean everyone, follows the DOW. If there were ever an index that affects how people are feeling about the stock market, it's the DOW. EW patterns are reflective of trader (social) moods and I've often found the DOW meets Fibonacci targets better, uses trend lines and price-level support/resistance better and generally trades well technically. Not always of course but often enough to stay useful as an index to track.

So starting with the DOW's weekly chart, and using the log price scale, the DOW's rally is now bringing it close to its downtrend line from October 2007 through the May 2008 high, currently near 10625-10630. Last month it broke its uptrend line from March and is now pushing back up towards what could be a retest of it. The DOW sits only slightly above its 50% price retracement at 10334.

Dow Industrials, INDU, Weekly chart

The vertical line running through next week, which shows 61.8% at the bottom, is related to the time it took for the 2007-2009 decline. A common correction retraces about 50% of the price of the previous move in about 62% of the time. So from a price and time window we're there.

The daily chart shows how the DOW has been sneaking its way up towards its downtrend line for the past month. It has formed a bearish rising wedge pattern (actually one inside the other), with the negative divergences supporting the bearish interpretation of the pattern. A final push higher on Friday, whether directly after the jobs report or after a small knee-jerk reaction to the downside, would do a good job completing the pattern. It can of course continue much higher and a move much above 10650 that holds would be bullish. But right now and until proven otherwise, this is a very bearish setup.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 10650
- bearish below 10424

Zooming in closer to the rising wedge pattern shown on the daily chart, there is another one for the move up from December 9th. The top of the smaller one is close to 10630 on Friday and makes for a good upside target (since it would tag its downtrend line from 2007 at the same time). If the DOW punches up to that level and fails it should be a very good shorting opportunity. If it drops below 10505 from here it will indicate we've already seen the high.

Dow Industrials, INDU, 60-min chart

SPX has already pushed up slightly above the top of its rising wedge pattern and based on yesterday's doji at Fib and trendline resistance I thought it was a good setup for a reversal back down today. But alas, the bulls weren't ready to give up yet. If the DOW can push a little higher on Friday we should see SPX make it up to the 1146 area before potentially turning back down. A failure below today's low near 1131 would say we've seen the high but it takes a drop below 1115 to confirm that.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1138
- bearish below 1115

Inside the rising wedge pattern shown in the daily chart above are two small rising wedges. Today's rally had SPX pushing up against the tops of two smaller ones, one from mid December and the other from Monday. A small spike above it, near 1143 (on the jobs report?) followed by a collapse back below it would create a sell signal and below 1131 would confirm it. These multiple rising wedge patterns makes it either extremely bullish (meaning they're not rising wedges but instead price is building steam pressure to blast higher out of them) or extremely bearish as the price pattern comes to a conclusion at multiple degrees. We're about to find out very soon (hours to days) which it will be but based on the wave count inside these wedges I believe the market is getting ready to break down hard.

S&P 500, SPX, 60-min chart

One thing that I had pointed out earlier this week on the Market Monitor is how the waning momentum for the rally from March is warning us of a potentially strong break to the downside when it comes. I looked back for the most recent times we saw a continuing waning momentum on the daily/weekly charts and found two times back in 2006. The top chart below shows the negative divergence that ran for 6 months in the first half of 2006. A break of the uptrend line (not shown) was all you needed to know to either get short or get out of the way. It was followed by a sharp break lower and retraced 62% of the prior up move.

Waning momentum on S&P 500, 2005-2006

During the 2nd half of 2006 we had another rally with waning momentum for 4 months. It too was followed by a sharp break lower once its uptrend line broke, and it quickly retraced 38%. Now we've got a rally that has had waning momentum for 5 months. So if 6 months resulted in a 62% retracement and 4 months gave us a 38% retracement, any guesses what a 5-month negative divergence will give us? Let's pick 50% which would mean SPX will quickly drop back down to 900 for about a 20% haircut. I don't think it will stop there but even if it will be just a pullback that's a large decline to ride out in hopes it will then rebound back up. Your choice, but I think I'd bail on a break of the current uptrend line near 1121, the 50% retracement of the 2007-2009 decline.

Waning momentum on S&P 500, 2009-2010

Because the NDX topped out a little later in October 2007, a time projection based on its 2007-2009 decline puts the 62% projection in this week and that's what I'm showing on its weekly chart. It's showing waning momentum and hugging its uptrend line from March through November but I suspect it's going to break very soon now.

Nasdaq-100, NDX, Weekly chart

The NDX daily chart below also shows the vertical line identifying the 62% time projection, which fell on January 5th. The high so far was on January 6th (by 2 points). It too could push marginally higher on Friday and it needs to do so in order to avoid breaking its uptrend line from March-November (the green uptrend line). This uptrend line was broken briefly twice in December and recovered each time. A third break may not hold this time and it closed right on the line today.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 1877
- bearish below 1814

I've mentioned many times to look to the semiconductors not just for what the techs might do but also the broader market. Semiconductors are ubiquitous in most of our products and therefore the index makes a great tool to analyze the health of our economy. If it can keep rallying that would be a good sign but I think it's about ready to turn down. The SOX reached a Fib projection at 364.44 for its rally off the November 2nd low. Today broke its uptrend line from November 27th and the oscillators are tipping over from overbought. We can only guess that it will start its decline from here but it sure looks like a good setup for it.

Semiconductor index, SOX, Daily chart

Like the others, the RUT is getting pinched in its rising wedge pattern for the move up from November. If the market holds up into next week it could press higher to a Fib projection near 652. If it instead turns around and heads south, a break of today's low near 633 would also be a break of its uptrend line from November 27th. A break below 625 would confirm we've seen the high.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 640
- bearish below 625

There are many financial advisors who recommend investors diversify into emerging markets. The theory is that a downturn in one country will not be matched in another. In theory that is a good idea but the problem now is that we're a global economy. We all pretty much move in synch and a look over the past 10 years shows it pretty clearly. While we'll see different timing of peaks and valleys we all move together in unison (some just move more than others). Therefore diversifying into other countries' markets is not actually diversifying.

Currently the chart of the emerging markets looks ready to top out with our market. There is a rising wedge pattern with negative divergence since last summer (sound familiar?). The wave count for the rally off the November 2008 low looks like it should complete at any time now and that points to a breakdown as the next big move. EEM is the ETF for the emerging market sector and EDZ is the inverse ETF.

Emerging Markets ETF, EEM, Daily chart

The banks were downright bullish today, up about 4% and the strongest sector. The healthcare stocks gave them a run for their money but the banks got most of the lovin' today. In fact this week has been very bullish for the banks--it looks as though the banking indexes were shot out of the cannon starting on Monday. I hate to think that the banks are being manipulated (cough) in front of opex but it sure looks suspicious when compared to the rest of the market. But I'm sure it's because people are suddenly finding the banks to be undervalued (double cough). Regardless, the weekly chart of the BKX shows us upside potential to the top side of a rising wedge pattern for its rally from March, where it intersects its downtrend line from 2007 near 55 by the end of January/early February. If the banks stay positive I don't think the broader market will be able to sell off so this one bears close scrutiny.

KBW Bank index, BKX, Weekly chart

Looking a little closer at the banks, using the financial sector SPDR (XLF), I see a bullish break of its downtrend line from October 2007 (log scale). At the same time it broke above its 50-dma. Both of these are clearly bullish so what's not to like? When I see a bullish break of resistance like this I like to see volume behind it. While today's volume was the strongest it's been all week, the volume for this week's rally hasn't even made it up to the volume in the first half of December when it was simply consolidating, which makes this week's rally somewhat suspect. Countering the idea for a continuation of the rally in the banks is the thought that we could be getting just an a-b-c bounce off the November 2nd low (to complete wave-b as labeled on the chart, to then be followed by a c-wave decline). A price projection at 15.36, for two equal legs up from November 2nd, which was tagged today, could be all we'll see out of XLF. We'll know more on Friday but if the banks tuck tail and run from here we'll know it was simply completing a correction.

Financial sector SPDR, XLF, Daily chart

A strike against the bulls this week is the price action I'm seeing in the Transports. This index looks to be in the beginning stages of a breakdown. In December it achieved two Fib projections near 4200 and almost tagged its downtrend line from May (log scale). It then broke a short-term uptrend line from mid December and bounced back up to it this week for what looks like a bearish kiss goodbye. The fact that it is not confirming the DOW's new highs is bearish. A break below 4055 would confirm a top has been made but until then we could see the TRAN dragged kicking and screaming higher with a broader market rally (a rally back above 4200 would be at least short-term bullish).

Transportation Index, TRAN, Daily chart

After the U.S. dollar's strong rally off the November low to its December 22nd high, it has been chopping up and down in what appears to be a bull flag pattern. This should resolve to the upside and it should rally very strongly (more than the initial rally leg). That will put pressure on the commodities (and very likely the stock market this time), including the metals and oil. In fact silver looks particularly juicy to a bear right here--it has bounced back up for what appears will be a retest of its broken uptrend line from July. The next leg down in silver should be very strong. SLV is the silver ETF and ZSL is the inverse ETF. Gold and the gold miners look to be in a very similar correction and pointing lower once the bounce finishes (may have already finished).

Silver continuous contract, SI, Daily chart

Tomorrow we'll get the jobs numbers and I suspect we'll see some volatility after the report, especially if there are any surprises either way.

Economic reports, summary and Key Trading Levels

One of the reports coming out tomorrow afternoon, which will barely register a blip in the markets, is the consumer credit report. I think the market should be paying more attention to this report rather than to some analyst who thinks the S&P 500 earnings will multiply by 1000% next year (OK, maybe I exaggerate a smidge). With a continuation in the contraction in consumer spending, as shown by the contraction in consumer credit, this market will never see the kinds of earnings numbers everyone is projecting. There's no sign of a bottom in the credit contraction.

Consumer Credit through October 2009

When you look at the spike up in credit card delinquencies it becomes clearer that the debt destruction continues (part of the contraction cycle that marks a deflationary period). Between paying down debt or simply walking away from it (such as many homeowners are doing), debt is destroyed. That in turn decreases the money supply (no matter how hard Bernanke fights it with his helicopter) and that in turn is what deflation is all about. We'll see the results in lower prices, which are helpful to us consumers, but it's the money supply that determines whether we'll experience inflation of deflation; or excuse me, the PC term is disinflation. There's a reason Bernanke says he expects to be accommodating for the foreseeable future. Hyperinflation is a real risk later but not yet.

The market likes a wall of worry to climb over. This wall of worry is usually marked by a high VIX, high put/call ratio (lots of put buying), and investors reluctant to enter the market. I could be wrong but I think that wall was torn down a long time ago and investors should start looking around--there's no more worry out there. The VIX is down below 20, the put/call ratio has reached the extremes that have marked previous market highs and investors are fully invested.

Bullish sentiment is at the highs seen at previous major market highs, including the 2007 high. Bearish sentiment is lower than it's ever been since just before the 1987 crash. A chart from SentimentTrader shows the percentage of investors' money invested in stocks vs. cash. The amount in stocks is the highest it's been since October 2007 while the amount in cash is lower than it's been since 2000.

Individual Investors' Allocations, chart courtesy TraderSentiment

All that cash on the sidelines we keep hearing about? It's in the market. Where is the future buying going to come from? Worse, the bears have become virtually non-existent and short interest is very low. There won't be many shorts to help drive the market back up once it starts down since we'll have mostly sellers and very few buyers. It's one reason why we see the sharp breaks to the downside once the market lets go after long periods of waning momentum (referring to the charts I showed earlier for 2006).

The trend is your friend but when the market breaks down quickly, the trend becomes the enemy to many. Complacency reigns supreme and most investors do not protect themselves or get out of way quickly enough. Before they know it they're down -20% wondering if they should now sell. Don't be complacent here. Even if you feel bullish about the coming year you need to ask yourself whether or not you're willing to take that kind of heat. And if it doesn't come back as everyone promises? These are tough decisions and only you can make it for yourself

One last chart, which I've shown before, is just another example of the market losing its momentum. While the NYSE makes marginal new price highs, it is coming from fewer and fewer participants, as shown in the chart below. The advance-decline line shows fewer stocks are participating in the rallies.

NYSE Composite, NYA, vs. Advance-Decline, Daily chart

The 10-dma of the a-d line shows a clear bearish divergence since September. As with the other charts I showed earlier, showing how long the bearish divergences can continue, this chart is not a good market timing tool either. But when price breaks from this kind of topping action it's likely to break hard. The longer it's held up, the harder it falls. Caveat emptor.

One final final chart--for those who think it's different this time and that this is going to be a good year for the bull, I saw this table posted by Todd Harrison today over at Minyanville. Very interesting comparison between the conditions at the start of the bull market in 1982 and where we were in 2009. It completely supports my contention that the 2009 rally has been a correction within a larger secular bear market, which unfortunately has lower lows to probe before it's finished torturing us.

1982-2009 Comparison metrics, data courtesy Gluskin Sheff

Quickly summarizing what I see, I think the market might be able to hold up into opex week and press a little higher. Certainly if the banks remain strong we should see a continuation of a broader market rally as well (although the strong rally in the banks today barely lifted the blue chips and did not help the techs).

But, I see enough evidence in the charts that suggests this week's rally will exhaust the last bit of cash available to prop the market up, let alone drive it higher. I think big money has been using the rallies to sell into, to offload their inventory to the masses. Whether it's Fibs, trend lines, rising wedge patterns, negative divergences on all time frames or important sectors not confirming the rally (like the Trannies), I get the impression that this week's rally has been a last-gasp effort. If the market is unable to rally into opex it could go quickly in the other directions.

Opex weeks tend to be bullish. But when they're bad they're very bad. Probably because so many traders are forced to hedge their positions in a down market during opex, the additional selling of stock/futures, calls or buying puts (either buying to close sold puts or buying protection) all adds to the downside selling pressure in the market. It's why opex can be particularly volatile. So be careful if you're long heading into opex.

Good luck this coming week and I'll be back with you next Thursday to see how it all played out.

Key Levels for SPX:
- cautiously bullish above 1138
- bearish below 1115

Key Levels for DOW:
- cautiously bullish above 10650
- bearish below 10424

Key Levels for NDX:
- cautiously bullish above 1877
- bearish below 1814

Key Levels for RUT:
- cautiously bullish above 640
- bearish below 625

Keene H. Little, CMT