Market Stats

Today was a strong day as far as points go, and in fact it was the 3rd strongest point gain for the DOW this year. But once again it would have been nicer for the bulls to see stronger volume behind it. Today's volume was lighter than Tuesday's plus day but at least stronger than Wednesday's down day. But volume this week has been lighter than Friday's down day so the bulls are still fighting the problem of general lack of interest in buying.

It sounds strange to say lack of interest in buying after a 31-point gain for the S&P. But if it hadn't been for the strong overnight rally in the futures, which had the S&P up about 16 points after the first 5 minutes of trading I think it would have taken a lot more volume to achieve the same kind of point gain during normal trading hours. That's been the story of rallies since March 2009--the bulk of them occur during the overnight futures (easier to manipulate) and then the cash market simply gaps up to catch up.

I used to trade currencies because of the ability to trade them 24 hours a day, as they seemed to trade as much during the overnight hours for the U.S. as during the day, which made technical analysis more reliable than low volume trading. That was until I realized I needed some sleep. The way the stock market is behaving and with more activity in the overnight session I might have to trade the futures overnight since that's when the bulk of the moves appear to be happening. The big overnight moves are causing large gaps on the charts and it's been a challenge to trade after the gap. Sometimes there's been follow through in the direction of the gap and other times the gaps have been reversed quickly. It has added another dimension to trading and in many respects a very difficult dimension.

It's very likely neither side has been helped by the big gap moves and if you're not a day trader (preferring swing or position trading), this market is probably driving you crazy (I know, it's not a very far drive for me). The good news for the bulls today is that this morning's gap up wasn't given back by the end of the day like we saw on Wednesday. In fact the market did its usual melt-up into the close like it's done so many times before during bear market rallies. The bears were once again scratching their heads wondering what has fundamentally changed to warrant such a strong rally. Those are the same bears that have to keep reminding themselves that a "logical market" is an oxymoron.

This morning on the Market Monitor Jane had observed that the a-d line was as bullish as it was on May 27th. On that day the market started with a big gap up and then just melted higher all day with only small pullbacks. It was noted then that we could have a similar day, and in fact we did. On May 27th the S&P gained 35 points and closed at its high. The market then sold off the next two days and completely retraced that day's rally. May 27th was the first time it had tested its broken 200-dma (the 2nd time, also a failure, was four trading days later on June 3rd).

The big question today is whether or not the 31-point rally on the S&P will meet the same fate over the next two days. Like on May 27th today we had a high a-d line we closed at the high of the day. It also closed at some potentially important resistance levels which I'll get into later. Do I think we could have a repeat performance following the May 27th rally? Yes, that's the setup. If the bulls can get some follow through on Friday then the pattern would change and we'd at least have a short-term bullish setup. So the test is on first thing Friday morning.

There's been no change to last week's SPX weekly chart. I'm projecting a low of about 870 by the end of June and then stair-step lower to about 750 by the end of July. Obviously the move down needs to get started right away. I'll update the projection as changes require.

S&P 500, SPX, Weekly chart

On May 27th SPX hit its 200-dma and beat feet to the south the next two days. Today SPX hit its downtrend line from May 13th and could turn right back around and head south again. Any drop back down, especially below 1042, would likely result in a swift decline as the bearish wave count calls for multiple degrees of 3rd waves to unwind to the downside. Whenever we've had this kind of setup in the past I've essentially ignored them because it's such an unlikely event (crash leg). It's usually ended up being some kind of corrective pullback that leads to new price highs (in this case, back above the April high).

While it remains possible we will in fact get another rally leg to new annual highs, I'd be very surprised to see it. Too much damage has been done to investor psyche (the withdrawals from stock funds backs this up). I've also mentioned a few times recently how much the market is set up like it was in 1929 and 1987 and that setup is not only still with us but the stock market has done nothing wrong in continuing to support that setup. The very bearish wave count in fact completely supports a coming crash leg. Therefore, while it's very rare to get a crash of the magnitude seen in 1929 and 1987, the risk remains large for it tonight. That's why a decline below 1040, hitting a large number of stops that are likely parked down there, would likely open the flood gates of selling.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1108
- bearish below 1042 and much more bearish below 1000

The possible moves as I see them tonight are: one, a reversal of today's rally and the start of the crash leg; two, a slightly higher bounce to the 1107 area for another test of the 200-dma and achieve two equal legs up from the May 25th low. Following that higher bounce would be a resumption of the selling (pink price path) The dashed line shows the possibility that the move down from April might finish a descending wedge pattern (for a leading diagonal 1st wave down) which will be followed by a large bounce into early July. That would then be followed by strong selling into August. The astrological setup calls for a market crash in August, +/- 2 months. So we're in the window.

Speaking of astrological setups, now we'll look at the simplest trading system around, our MPTS (Moon Phase Trading System). After years of development (one could see millions of years), the moon turns out to be one of our best turn indicators. The market has liked neither new or full moons since the April high and we've got a new moon on Saturday. That makes it risky for the market on Friday/Monday since the market is rallying into the next new moon.

S&P 500, SPX, Daily chart, MPTS

On the daily chart it looks like SPX stopped at its downtrend line from May 13th but as can be seen in the 60-min chart below, it actually poked above it this afternoon. That could be bullish if it holds, especially if a pullback retests the broken downtrend line and holds. But SPX made it up to a high of 187.85, 3 cents higher than a projection at 1085.82 where the bounce off Tuesday's low achieved two equal legs up (labeled a-b-c on the chart). That's the setup for a reversal back down.

S&P 500, SPX, 60-min chart

Moving in closer to that little bear flag drawn on the 60-min chart above, the 10-min chart below shows the move and some Fibonacci symmetry that I like for a reversal. The bounce off Tuesday's low actually counts better as two a-b-c's separated by an x-wave, known as a double zigzag wave count. The two a-b-c's achieved equality at 1087.82. The first a-b-c had the c-wave achieving a high 200%+ (twice the size) of the a-wave, shown at 1075.20 on the chart. The 2nd a-b-c had the c-wave achieving half the size of the a-wave at 1087.86 (well, it's a penny shy of it). All of this is contained in a parallel up-channel. Do you see the symmetry involved here? Fascinating, especially if it works as a reversal signal, which is what I'm expecting and we'll know immediately on Friday whether it is or not.

S&P 500, SPX, 10-min chart

The DOW looks the same as SPX (as do most indexes and sectors) and today's rally brought price up to potential resistance at 10175 where the bounce off Tuesday's low achieved two equal legs up. It stopped just shy of its 20-ema, at 10210 and also just shy of the 78.6% retracement (10196) of the decline from June 3rd. This retracement is considered the line in the sand--exceeding it usually leads to a complete reversal of the prior move. So above 10196 would suggest the DOW will climb above the June 3rd high at 10315. But just before it gets there it would have to deal with a price target at 10298 where it would have two equal legs up from May 25th, its 200-dma at 10310 (which stopped the rally on June 3rd) and then a little higher at 10334 is the big 50% retracement of the 2007-2009 decline. To say there would be stiff resistance around the 10300-10334 area would be an understatement. Conversely, a climb above 10334 would be a bullish statement. I'm from Missouri on this one--I'll need to see it to believe it.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 10350
- bearish below 9835

One possibility that I've taken off the SPX and DOW charts, but I'm showing on the NDX chart, is for a much bigger bounce into next week (opex). Many talking heads have been discussing the possibility of a large H&S pattern developing since the left shoulder formed in January (with April the head and now developing the right shoulder). First of all, when talking heads discuss technical patterns it's usually a good idea to look for failure of it. If too many expect something from the market that's when the market loves to disappoint too many.

But let's say we will get a larger right shoulder. In that case two equal legs up for a bigger bounce off the May 25th low would be almost up to NDX 1913. Otherwise NDX has the same setup as the others and a drop back down on Friday, especially back below 1770, should usher in some very strong selling. The bullish thing to note is the close back above its 200-dma. Obviously upside follow through is now required to convert that into something the bulls can hang their hat on.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 1935
- bearish below 1770

Different symbol, same pattern. On the daily chart it doesn't look like the RUT hit any kind of resistance and in fact looks bullish having closed back above its 200-dma. Resistance by its downtrend line from May 13th is higher around 651, which is also where its 20-ema resides. So if there's any further rally on Friday keep your eye on that level.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 650
- bearish below 595

Moving in a little closer on the move up from Tuesday shows the same a-b-c kind of bounce with equality at 640.51. Today's high was just short of it at 639.79. Once again it's a setup for an immediate reversal back down so we'll see if the bears take advantage of it.

Russell-2000, RUT, 60-min chart

Treasury yields and the stock market have been more in synch than not, especially since the April high. As bonds have rallied the stock market has declined, as money rotates from one side to the other. This makes watching yields a good exercise. Right now, looking at the 30-year yield (TYX), you can see the same pattern as the stock market. Today, while the stock market was hanging back after its morning high, yields had started higher and were making new daily highs while the stock market was still pulling back. It made for a good predictor of the afternoon rally in stocks. So keep an eye on TYX to see how it handles its downtrend line from April, near 4.27%, since any "selling" in yields (buying in the bonds) could result in the stock market following. It's the bond market that drives the stock market, not the other way around.

30-Year Treasury Yield, TYX, Weekly chart

The bounce off Tuesday's low in the banking index (BKX) is just shy of achieving two equal legs up, which would be at 49.27 (48.97 is the high so far). The BIX has done a little better than two equal legs up (139.08 was today's high and 138.59 is two equal legs). Between the two indexes one could say the objective has been met. At the same time BKX is trying to poke through its downtrend line from May 13th so any failure here would likely lead to new lows and the same crash setup as the broader market. If it can continue higher on Friday it potentially opens the door all the way up to its 50-dma near 53.

KBW Banking index, BKX, Daily chart

As with the other indexes and sectors, the TRAN is close to achieving two equal legs up from Tuesday at 4311 (today's high was 4273) which matches its downtrend line from May 3rd on Friday. So if the Trannies can push a little higher on Friday morning that's the level to watch for resistance.

Transportation Index, TRAN, Daily chart

The U.S. dollar looks like it finished its 5-wave move up from November. The final 5th of the 5th wave had a price target at 89.17 where it would equal the 1st wave (the little leg up in March) and the dollar's high was 89.10. Price has dropped back inside the little ascending wedge that formed from mid May to early June so that's usually a good indication that the last leg up has completed. The completed 5-wave move calls for a multi-month correction of that rally leg, which I've shown on the chart. A 3-wave pullback to about $82 by October is shown, which would be typical, but that's obviously just a guess at this point. The main point is that the dollar is now due a rest and the euro should be ready to rally. The bullish sentiment in the dollar and bearish sentiment in the euro are at extremes and make each ripe for reversals.

U.S. Dollar contract, DX, Daily chart

A drop in the dollar over the next couple of months should be bullish for gold. Just one problem--gold seemed to outrun the dollar to the upside, disconnected from its normal inverse relationship. Gold seems to be marching to the beat of its own drummer and its drummer may be getting tired. As with the dollar, gold looks to have completed, or nearly so, a 5-wave move up from February and that should be completing a larger 5-wave move up from October 2008, which in turn should be completing a 5-wave move up from 1999, which in turn completes a large A-B-C pattern from 1976. Therefore this is no ordinary high in gold. It's a high that's been in the making for a very long time and is therefore due a very large correction.

The weekly chart of gold shows further upside potential to 1371.20 but considering where it is in relation to its long-term up-channel and waning momentum (note the bearish divergence at the latest high as compared to the wave-3 high in November 2009. I'm not showing the monthly chart but it's interesting to note that there's also a long-term monthly bearish divergence at the current highs vs. the wave-(3) high in March 2008. So on multiple degrees we have 5th waves finishing and all are showing confirming bearish divergence. This is a major top that's forming.

Gold continuous contract, GC, Weekly chart

As shown on the daily chart below, I see the possibility for gold to give us one more new high, perhaps up to about 1275, but that's not required. I think gold bulls are pushing their luck by hanging around now. And I think it's definitely too late to chase gold higher. Most of us are getting inundated with junk emails about what a great buying opportunity it is to buy gold. Bullish sentiment on gold is at an extreme and with the waning momentum (more bearish divergences on the daily chart as well), it would appear that gold is running out of buyers. As a reminder, since I find is fascinating, look at how similar the weekly and daily charts are. One is a fractal of the other. This adds to my confidence level that we're looking at a major high being put in.

Gold continuous contract, GC, Daily chart

One of the reasons given for owning gold is for a hedge against inflation. But the longer-term view of inflation, through the eyes of TIPS holders (Treasury Inflation-Protected Securities), tells me that there's not enough interest in those bonds to warrant worry about inflation. The weekly chart of the TIP ETF shows an A-B-C bounce off the October 2008 low to now be complete as of the May 6th high (the stock market flash crash). BTW, if May 6th was the flash crash, now that the stock market has broken the May 6th lows, what's the name given to this slower-motion crash? But I digress. The TIP chart shows less concern for inflation today than back in early 2008 and the pattern calls for much lower prices. And that suggests to me that the bond market will soon be telling us that inflation is not the worry (it's the dreaded 'D' word--"disinflation").

TIPS Bond Fund iShares, TIP, Weekly chart

And this brings me back to gold and what I think could be developing. Part of my argument against gold is that it is in fact leading to a Perfect Storm that will catch a boat load of gold traders going the wrong way. Sentiment measures are at a bullish extreme so all those who want to be long gold are now in--those who are long are now potential sellers and that makes it vulnerable to the downside.

The primary reason I see for the rush into gold is fear of what's happening with currencies. As the European Union is under pressure to survive, meaning the euro also, and as fiat money is devalued to make debt repayment easier, gold becomes the currency of choice. The expansion in the money supply is the gold bull's argument as to why inflation will become a huge problem and why gold is the perfect hedge.

The problem with the inflationist's argument is that it's wrong. The monetary supply is actually shrinking as debt destruction continues on course. Deflation is the problem that we will have before inflation becomes a problem. Once this becomes more widely recognized the gold bulls will be running for cover. All asset classes, except cash, devalue in a deflationary environment and that means gold as well.

When I combine the fundamental reason for why gold should decline with the technical charts showing a bearish chart pattern, going back 34 years, it’s setting up the perfect storm for gold bulls. I think it would be wise to take profits on gold holdings, go to cash for a couple of years (protection of capital is far more important than return on capital) and then climb back into gold at much lower levels because then the gold bulls' arguments will be more correct.

Oil looks like it wants to test its 200-dma at 76.74. Slightly higher is its broken uptrend line from July 2009. And then just above those two levels, at 78.40, is the 62% retracement of the decline from May 3rd. Therefore I think the oil bulls will have a lot of trouble pushing through the 76.74-78.40 area. Bullishly I see RSI breaking its downtrend line but from a price pattern perspective it's looking like just an a-b-c bounce off the May 20th low which should be completely retraced as oil heads much lower into the summer.

Oil continuous contract, CL, Daily chart

Today's unemployment data continues the sideways trend we've been in this year--no real improvement but it's not getting worse either. But let's face it, without an improvement in the unemployment picture it's bad out there. Record numbers of people unemployed for more than six months, large numbers being dropped off the end of the line each month (which is why the U-6 number keeps climbing while the "official" unemployment rate stays the same).

The Trade (im)Balance remains as lopsided as usual--we just keep shipping dollars overseas since we don't manufacture much of our own stuff anymore. But we keep buying it. And the Treasury Budget is as bloated as ever. Other than that, what's not to love about the economic numbers today? Reason to rally, no?

Tomorrow's reports are not expected to move the market unless there's a real disappointment in the Michigan Sentiment numbers or the retail sales. Excluding autos the retails number is forecast to drop by -0.2% while the market is expecting it to be flat. If it comes in positive we could see the rally continue, but if it comes in worse than even -0.2%, especially if the sentiment turns down, we could see another short-lived rally.

Economic reports, summary and Key Trading Levels

Summarizing where we are, I think the market is in serious trouble. You wouldn't know it by today's price action but under the hood the market is in more trouble than the point gains would tell you. The price pattern is very bearish if we get any follow through to the downside next week. Selling could become exacerbated by opex. Those who have followed me for a while know I rarely use the term crash but this is one of those times I'm not only comfortable using the term I'm actively warning investors about it. I'd rather have egg on my face for being wrong about this than to have seen it coming and said nothing.

What's the worst that's going to happen to someone if they go to cash and then find out the market rallied without them? They lose some potential profits. Oh cry me a tear. What's the worst that could happen to someone who is fully invested and the market crashes 50%+ without them getting out (how many times have I heard "I can't sell now because I'd take a loss")? The multiple degrees of 3rd waves to the downside tell me to be cautious. The setup coming into this period of time, which is remarkably similar to the 1929 and 1987 patterns, tell me to be more than cautious. The sentiment of the crowd that still looks at every bounce as proof the bottom is in tells me to be scared (for them).

All I can do is show the setups and let the market show us the way. As traders we know the market is always right so don't fight it if it does something different than you thought it would do. If the market rallies on Friday and into next week (for a typically bullish opex week) then we'll watch for the next setup to the downside. While there may be relatively brief periods to the upside I remain confident the bear has returned and that we should be trading in the direction of least resistance. That means day traders only for long trades and then swing and position traders look for reversals to play the downside. That's what I'm trying to show the setups for tonight. If they don't work, step back and we'll wait for the next bus to take us where we want to go. That's the beauty of this game--they keep sending busses to come pick us up and we get to be choosy as to which one we take.

Good luck as we head into opex and I'll be back with you next Thursday. BTW, a closing comment, or question, if the Thursday prior to opex is often a head-fake day, what was today?

Key Levels for SPX:
- cautiously bullish above 1108
- bearish below 1042 and much more bearish below 1000

Key Levels for DOW:
- cautiously bullish above 10350
- bearish below 9835

Key Levels for NDX:
- cautiously bullish above 1935
- bearish below 1770

Key Levels for RUT:
- cautiously bullish above 650
- bearish below 595

Keene H. Little, CMT
Chartered Market Technician