Market Stats

The bears were cheering Thursday morning and the bulls were cheering Thursday afternoon. The numbers above make it look like just an ordinary day in the market without much movement. A little profit taking, that's all it was. But of course if you watched the deep decline this morning, starting with one of the biggest gaps to the downside that we've seen in a while, followed by a flat move into the afternoon, followed by a strong rally into the close, you have to wonder who's pulling the levers in this market.

The strong recovery into the close, even without being in the green (other than the NDX and RUT which squeaked into positive territory), is bullish. The trick for the bulls now is to get follow through on Friday morning. As I'll show on tonight's charts, there is a very bearish setup with the series of lower highs now, which calls for a strong decline through next week. But that decline needs to start immediately otherwise the bulls will win this round.

This morning started with a big gap down, one of the largest we've seen in a while, a result of futures selling off during the overnight session, and then it sold off more to a quick low by 9:45 AM. And then it was done. The market sat still for the next 3-1/2 hours with the bulls and the bears staring at each other wondering who was going to blink first. The bears hate to be stared at and they averted their gaze first. The bulls took advantage of that moment and jammed the market higher and watched with glee as the bears scurried back into the woods.

Someone with big bucks really loves to play with this market. The buying in the afternoon was prompted with a few big buy programs and the shorts took care of the rest. The little rocket ride was good enough for NDX and the RUT to close their morning gaps while SPX is not far behind. The DOW is pulling up the rear but it still managed to retrace better than 62% of this morning's decline. There are a couple of chinks in the bullish armor (the banks for one) but we won't know for sure the meaning of today's price action until Friday plays out.

The morning had started out negative and the early economic reports did not help any. Unemployment claims came in a little worse than expected, with 496K new claims vs. an expectation for 354K. This was an increase from the prior week's 474K. On first blush the durable goods orders looked good--up +3.0% vs. expectations for +1.5%--but stripping out transportation orders (there was a big aircraft order) the number came in worse than expected--down -0.6% vs. an expectation for a +1.0%. So durable goods orders are showing weakness.

Bernanke testified to Congress again today, this time in front of the Senate Banking Committee. In a version of "the dog ate my recovery" Bernanke warned the Senators not to be alarmed if the recovery appears to be slowing during the next quarter. He said the bad weather in the northeast has slowed things down. I couldn't help but smile when I read that--does he really believe himself or does he think the Senators, being economically illiterate as they are, will simply believe whatever he says. He assured them that growth would resume later this year. Whew, I feel better now that he's made that assurance.

Bernanke also answered questions about Goldman Sachs' involvement in helping Greece with off-the-books loans, through a currency exchange, which Goldman then bet against by buying a CDS (Credit Default Swap). Actually that was a smart, if not smarmy, move on their part. But if Greece collapses under the weight of all their loans and it comes to light that Goldman aided and abetted in Greece's failure, there will be hell to pay. Not even God will help Lloyd Blankfein in that case. But never fear, Bernanke is going to ask the SEC to investigate and correct any abuses.

The drop in the overnight futures session was blamed on more concern about Greece and the financial trouble it's in. Greece is of course just a symptom of the greater problem with countries at their debt limits. There's even a lot of pressure now coming to bear on the Obama administration and Congress to reign in its spending and get the debt under control. Many people are struggling with their own debt and starting to pay it down and put more into savings. If we can do it we want our government to do it and not saddle our children and grand children with monstrous debt and high taxes to pay it off. We all fundamentally understand how unfair that would be. We all also understand how wasteful Congress is with our money.

But the more immediate problem is with Greece and the fact that it's becoming more costly for them to borrow; and borrow they need to do. Standard & Poor's and Moody's credit ratings for Greece may be lowered and that would of course raise their borrowing costs. The cost for a CDS, essentially insurance against Greece defaulting on their loan, continues to climb. Many are starting to wake up to the fact that these CDS trades are essentially bets on the failure of the borrower and many are starting to believe it's a contributory cause of the failure.

Buying a CDS, which is not an open-book transaction (no exchange to trade them like other things) is a lot like shorting stocks--we all know (because the Fed and SEC have told us so) that shorting is bad because it's a bet on the failure of the company. That's why we were stopped from shorting the banks in 2008 and why they're implementing new shorting rules now (circuit breaker trips at -10% decline and the uptick rule goes into effect for the rest of the trading day and the following day). We will hear much more in the future about these CDSs and new restrictions, or at least open trading, is not far down the pike.

As for Greece, since they're at the pole position in the race to insolvency, it will be very important to see how it goes when they try to sell bonds worth more than $10B next week (they were going to do it this week but decided to push it out until next week after they present an austerity plan). The austerity plan is a requirement from the EU (European Union) before they will help with loans. And Greece's strong unions are of course having nothing to do with austerity programs--they'd rather see the country sink into the ocean than give up one penny of pay and benefits. We can expect to see mass riots in the streets and generally an increase in social strife. It will be an example of more to come as we, globally, deal with a change in social mood that is at the heart of the real problems we're facing.

During the good times no one really cared about the excess levels of debt we as individuals, states and countries were taking on. Pension funds underfunded to the tune of billions and trillions of dollar? Pushaw, what me worry? Let the good times roll. My, how the times they are a changin'.

Even California has pushed out its bond sale that they need to make in order to help them bridge their funding gap. They're worried about a failed auction. When the dogs of the credit world start experiencing trouble floating their bond issues you can bet the stock market will not be a happy camper and that's the risk we currently face.

Moving on to tonight's chart and starting with the weekly SPX chart, the latest rally attempt up to last Friday's high, finished at the downtrend line from October 2007. SPX had pushed marginally above the downtrend line in January but wasn't able to hold it. So far it's looking like that same downtrend line is thwarting the bulls again. The rising wedge pattern from last July should be retraced relatively quickly and what I'm showing is a return to the 870 level by the week of May 2nd, which is 62% of the time it took for the July-January rally. That's of course merely speculation (it could go a lot faster) and will be updated as the pattern develops further. I'm not expecting it but as shown with the dashed line, a rally back above 1121 could lead to a run up to 1228 for a 62% retracement of the 2007-2009 decline. Depending on how Friday finishes, so far the weekly candle is a gravestone doji at resistance, a potential reversal pattern that needs a down week next week to confirm it.

S&P 500, SPX, Weekly chart

The daily chart below shows that in addition to the downtrend line from 2007 SPX ran into difficulty at its broken 50-dma, currently just under 1109. After breaking below its 50-dma in January it's obviously not bullish when a retest of it acts as resistance. Bulls really need to see the 50-dma recaptured. I'm showing how a 5-wave decline from January could unfold to a low of 869 by the first week of May. Again, this is speculation based on typical wave relationships, and obviously an assumption a hard decline is about to kick in, but it's clearly subject to change without notice. And any rally back above 1113 would negate the bearish wave count and while it might not necessarily lead to anything more than a minor new high that stays below the January high, it would be potentially bullish and therefore bears beware if it happens.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1107
- bearish below 1075

The next chart, the 60-min, is a little busy with several trend lines and channels but I wanted to show the significant area of resistance the rally hit yesterday and then again today. There are three trend lines all coming together here--the new downtrend line from January-February, the downtrend line from October 2007 and the August-November uptrend line, all congregating around where SPX stopped yesterday near 1107. A break back above 1107, shown with the light dashed line, would be potentially bullish. Otherwise it was a very good setup for the start of a more serious decline into the end of March and ultimately lower into May.

S&P 500, SPX, 60-min chart

This afternoon's rally took SPX right back up to its downtrend line from 2007 and the bottom of its parallel up-channel from the February 5th low. An immediate decline is needed Friday morning to keep the bears happy (it would leave a kiss goodbye at resistance) otherwise the bulls will be the ones with smiles on their faces.

In the above charts for SPX I've shown what would be a typical move down over the next several weeks/months. The projections are based on typical wave relationships in both time and price. I will of course be updating the projections based on actual price action since the expected decline could go faster or slower than what I've depicted.

Earlier in the week I posted on the Market Monitor an interesting analogy that I'm going to be watching carefully over the next few weeks, especially if the decline starts in earnest. I often refer to fractal patterns in the market because similar patterns often lead to similar outcomes. Not always of course but when fractal patterns occur it's a good idea to watch for the possibility of a similar future price move.

I looked at price action in a prior period and compared it to price action since November to try to determine what might be next for our market. First, the top chart below shows a 3-wave move up from November to January and then a relatively sharp decline followed by a sharp bounce that retraced 62% of the January decline. As noted on the chart, the topping process in January lasted for a Fibonacci 5 days. The low on February 5th was a Fibonacci 13 trading days from the January high and was a 138% projection of the previous decline (October's). The 62% rally to last Friday's high lasted 9 trading days.

S&P 500, SPX, Daily chart, fractal pattern

The bottom chart shows a similar pattern. The topping process in August took a Fibonacci 8 days. The decline into September took a Fibonacci 21(-1) trading days and was also a 138% projection of the previous decline in May. The 62% retracement of the decline took 9 days. Now seeing the similarity between the moves, i.e., a fractal pattern, I want to see what happened after the 62% retracement in October in the lower chart. First of all, can you guess the symbol?

The lower chart above is the SPX back in 1987. The move following that 62% retracement was not pretty:

S&P 500, SPX, Daily chart, 1987

Notice after the break of the May-September 1987 uptrend line that the little bounce back up to it was the last good opportunity for bulls to bail. Will the market play out exactly the same way? There is of course no guarantee that it will. In fact I think it's unlikely that it will. But understanding the potential for the market to play out similarly you can at least understand the risk if the market drops back below the February 5th low near 1044. You can do the math but a similar 36% decline from the recent January high would have SPX down near 740, which was the spike low in November 2008. Again, that's hardly a prediction but it's a scary fractal pattern so far.

The DOW's rally off the February low took it right back up to its broken August-September uptrend line, which you can see has acted as resistance once it was broken on January 22nd. Also, the new downtrend line from January acted as resistance to the bounces following last Friday's high. Like SPX, the DOW was also battling its broken 50-dma but no luck holding above it, currently at 10373. Today it also broke back below its 20-dma but recovered above it into the close. Unless we've got a larger correction pattern developing, a drop below 10140 should be a good sign for the bears while a move back above last Friday's high near 10438 would be potentially bullish.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 10440
- bearish below 10140

By last Friday NDX had made it up to its 62% retracement of the January decline and tried 3 times to close above its 50-dma, currently near 1822, but was unable. The failure from those resistance levels looks bearish. But so far the bears haven't been able to do much with that setup. NDX is finding support at its 38% retracement of the January decline which at 1783 is also the 62% retracement of the 2007-2009 decline. It's a battle between the 20-dma and 50-dma and Fib levels so wait for resolution here--above 1831 could be bullish and below 1768 should be quite bearish.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 1831
- bearish below 1768

The RUT's daily chart below shows an interesting way to use parallel price channels. After the February 5th low was put in I drew in an uptrend line from March and then attached a parallel line to the July low, which was the first significant pullback since last March. I then saw the pullbacks in November found support at the parallel line, which is common to see with parallel channels--when price is outside them you will often see the top or bottom of the channel act as support/resistance. It told me the channel line is probably important and sure enough the rally off the February 5th low stopped right at the top of the channel.

Russell-2000, RUT, Daily chart

The RUT dropped back below its support/resistance level of 625 this morning but this afternoon's rescue got it back above that support level. Today it found support at its 20 and 50-dma's, at 619.89 and 622.27, resp. We'll see on Friday if the new downtrend line from January, currently near 631, will continue to act as resistance as it did on Wednesday. If the wave count is correct we should see the RUT back below its February low relatively quickly. If it pushes higher, watch the top of the parallel channel again, near 640 on Monday.

Key Levels for RUT:
- cautiously bullish above 634
- bearish below 600

The 60-min chart for the RUT has a similar parallel channel in effect, shown in the chart below. I drew an uptrend line from the February 5th low through the February 10th low and attached a parallel line to the February 8th high. This will often provide a channel that will contain a bounce. When it broke out the top of the channel on the 12th it was a bullish statement. After topping on the morning of the 22nd it then dropped down to the top of the channel on Tuesday, found it to be support and tried to rally again. But it failed at a lower high (at the downtrend line from January) and dropped back down into the channel this morning. Today's rally off the low stopped at the top of the channel. If there are bearish things afoot here we will see an immediate turn back down on Friday. If it doesn't turn back down but instead rallies above Wednesday's high then we'll know something more bullish is happening. So we should have a quick answer on Friday as to where this market may be headed at least for the next couple of days.

Russell-2000, RUT, 60-min chart

The banks are in no-man's land at the moment. The daily chart of the BKX below shows what could be interpreted as a bullish sideways triangle pattern, which follows the rally from March. A rally followed by a sideways consolidation is generally bullish. Therefore a break above the January high of 48.84 would be a bullish move. Put that on your chart and key off it if it happens. But a failed bullish pattern tends to fail hard so a break below the February 5th low at 43.30 could usher in some very strong selling. Set an alert on your chart at that level as well. Now we wait for price to tell us which way the next big move will be. Notice how the 20-dma (in green, not labeled) is supporting pullbacks so a break of it, currently at 46.18, would be a bearish heads up.

KBW Bank index, BKX, Daily chart

The reason I want to key off the banks is because I want to follow the money. Today's bounce off the low in the banks was not nearly as strong as the major averages. While the small caps and techs got back to slightly positive on the day, the blue chips were slightly weaker but got close. The banks (BIX and BKX) finished the day down about -1%. If much of this morning's selling is due to worries about financial contagion then the banks' failure to rally more strongly this afternoon says we should be concerned about the rest of the market. If the banks join the bullish party then we should listen to that.

Diving in a little closer on the BKX chart, the next chart gives us some immediate things to watch for. Following the rally off the February 5th low I had posted the Fib price projections for the bounce earlier in the week on the Market Monitor. I liked the bearish setup because BKX failed, to the penny, at the price projection at 47.85 on Monday. It confirmed the wave pattern as a bearish corrective count, meaning the bounce off the February 5th low should fail.

KBW Bank index, BKX, 60-min chart

I then watched the uptrend lines to see how price would behave around them. The steepest was broken with the spike down on Tuesday and then became resistance to the bounce up to Wednesday's high (never actually touched the broken uptrend line). This morning's spike down then broke the next steepest uptrend line and this afternoon it rallied back up to it for what could be a retest. This is the way steeper trend lines tend to break and get retested.

Therefore the setup for Friday is for an immediate turnaround and head lower, leaving another failed retest and kiss goodbye. If instead the BKX runs higher, and especially if it gets back above 47.60, the market will be talking to us. Then go back to the daily chart and look for at least a run up to the top of its sideways triangle near 48.60 and watch how price behaves around that level. A break below the last uptrend line, near 46, would confirm the bears are in control, in which case look for a move back down to at least the bottom of the sideways triangle pattern near 44. What BKX does should have a bearing on what the broader market does.

The TRAN found support at its 20-dma this morning and had one of the strongest recoveries--well up into positive territory. It even recovered back above its 50-dma. It closed slightly above its downtrend line from 2008 (log scale) so any continuation higher on Friday would clearly be bullish, especially if it were followed by a pullback that finds the downtrend line to then be support. But right now the candle is a bearish hanging man doji at resistance. A down day on Friday would confirm the reversal signal.

Transportation Index, TRAN, Daily chart

A turn back down on Friday would also leave another bearish kiss goodbye at the downtrend line. Not easily seen on the daily chart but more obvious on the 60-min chart, the uptrend line from February 5th was broken this morning and this afternoon's rally was back up to it for what could be a retest before heading south again. We'll know more on Friday.

The dollar has been chopping around for several days now and the price pattern has become less clear. I'm expecting the dollar to push higher but it's not clear if it will first pull back a little more. I've bracketed price action with trend lines in order to get a heads up which direction it will head. It might chop sideways over to its uptrend line from November, to relieve some of the overbought indications, before heading higher again. I'll review it next week to see if it clears up some.

U.S. Dollar contract, DX, Daily chart

Bullishly gold has broken its downtrend line from December and continues to use it for support on pullbacks, including yesterday's and today's. If the dollar pulls back further we could see another leg up for gold with an upside target of 1170-1180. A rally above 1132 would say that's likely to happen. In the meantime the bearish wave count calls for a steep decline and a break back below 1083 could open up the flood gates of selling.

Gold continuous contract, GC, Daily chart

Gold bounced today and with the afternoon bounce in the stock market the gold miners had a good day as well. GDX left a bullish outside day up (bullish engulfing candle) so that looks bullish for a continuation of the rally in the miners. Lots will depend of course on the overall tenor of the stock market as well. But the bulls will have to deal with some moving averages, starting with its 200-dma where it stopped today. The 20-dma is crossing down through the 200-dma, at 43.67, and today's close was just below both. A little higher it would have to deal with its 50-dma coming down towards 45. Then it would have to deal with its downtrend line from December, currently near 46. So the bulls have their work cut out for them. If today's bounce fails at the 20/200 it's going to leave a bearish kiss goodbye.

Gold Miners, GDX, Weekly chart

Oil is the same as the others in that it could go either way here and we need to let price lead the way. It's holding its uptrend line from February 5th and I see the potential to rally at least up to the top of a rising wedge pattern (which is a bearish pattern), near January's high (83-84). But if the bulls fumble the ball here we'll see a break of the uptrend line and the possibility for a swift move lower, heading below 70 into March.

Oil continuous contract, CL, Daily chart

Friday morning has a few economic reports that could move the market--the 2nd estimate for GDP numbers will be out before the open, and then Chicago PMI, Consumer Sentiment and existing home sales shortly after the open. But I don't think there is much in the way of economic reports that will move this market much. Even today's reports, initially blamed for the further selloff in the morning, ended up not being cared about after the first 15 minutes of trading.

Economic reports, summary and Key Trading Levels

Summarizing where we are tonight, it's a bit of a coin toss but we should know the answer to the coin flip very early on Friday. The bears need to see an immediate decline Friday morning (nothing more than a quick and minor pop higher followed by immediate selling). The bearish price patterns and lines of resistance require an immediate move lower, which has the potential to really pick up speed to the downside. If the bulls continue to run with the ball and charge higher the bearish setups will be negated.

If the bearish setups do get negated it's going to be harder to judge what the market will do next. It's possible we'll get only minor new highs before heading lower again or we could see a whole new rally leg that equals at least the one off the February 5th low, which for reference would mean SPX 1154, essentially a retest of the January high. There's even the potential for a run higher into May and see SPX run up to its 62% retracement near 1228. While I do not foresee the level of bullishness required to get the market that high, I can't and won't argue with price. So the first warning will be a rally above last Friday's highs. Bears need to listen to the market if that happens and trim your short positions way back.

One challenge the bulls will have is the lack of short players to help the market higher. And as far as a wall of worry, there is none. The VIX has collapsed back down to just above 20--complacency rules and that's usually not conducive to strong rallies. So tread carefully on the long side even if we get a further rally on Friday. And if the bears do grab hold of this thing tomorrow and drive the market back down we could see selling get out of control quickly. At least the bearish wave count supports that possibility.

I think my discussion around the banks, and using the BKX charts, pretty much sums up what I'll be watching tomorrow and next week. We'll let price lead the way and try not to get our toes stepped on.

Good luck and if the market starts back down watch out for the grizzlies--you can't outrun them. I'll be back with you next Thursday hopefully with a little clearer picture of what March could look like.

Key Levels for SPX:
- cautiously bullish above 1107
- bearish below 1075

Key Levels for DOW:
- cautiously bullish above 10440
- bearish below 10140

Key Levels for NDX:
- cautiously bullish above 1831
- bearish below 1768

Key Levels for RUT:
- cautiously bullish above 634
- bearish below 600

Keene H. Little, CMT