Market Stats

Reversals of reversals of reversals. Either this market is being wickedly unkind to both sides, just hitting stops on both sides of the market and thoroughly frustrating traders (especially if you try to hold overnight) or else we've got one hugely confused market right now. And a confused market is a dangerous market to trade. Need I say more?

Bernanke's talk on Wednesday left market participants feeling glum. For political reasons Bernanke can't say we're headed for a double-dip recession (or worse that we never came out of the first one) so instead he says these times are "unusually uncertain". The market hates uncertainty and it showed its angst with the selloff following the gap up and run up into his speech on Wednesday. Bernanke's "slower growth" points to another global slowdown (recession in normal speak) and while he can't say recession specifically he can at least be on the record as having pointed out that the economy looks like it could slow down again. He's well aware of how history pulls out quotes that showed complete naivety (remember the "this will be contained" quote?) so I'm sure he's doing his best to say what he wants but feels he can't come right out and say it.

For once I would love it if one, just one, of these guys would tell the truth and stop being so wishy-washy with their words. It's the reason I'd never make a good politician. I'd tell people like it is, let them make appropriate plans (how can you plan in this environment?), I'd have us all take our medicine and then get on with life. Ugh, enough preaching to the choir.

So today the market must have decided that Bernanke meant "unusual uncertainty" must mean we're going to see the economy grow in no uncertain terms. Yea, that's the ticket. Let's rally!

Actually we can thank Europe for the start of our rally. Futures were already up about 15 S&P points before the bell and the gap up, following Wednesday's smash down into the close, had both sides scrambling to do some buying at the open (especially the shorts who couldn't get out fast enough). The rally was essentially over by 10:00 AM after it quickly added 9 more S&P points to the board. SPX was up about 25 points by then, consolidated, added a whopping 3 points with a choppy rally into the late afternoon before closing down 1 point from its 10:00 AM high, finishing +24 for the day. If you weren't already in a long position at yesterday's close then you missed the rally. And if you weren't in a short position at prior high closes you probably missed the short play. Both sides can't win for losing right now and both sides are losing at this roulette wheel.

The bank stress tests in Europe will be announced on Friday and they rallied hard today (up more than 3%). Our banks rallied in sympathy (+4%) and I can't help but wonder if they're going to have a sell-the-news reaction to the announcement. Surely they don't actually believe the stress tests are anything other than a feel-good exercise. We did the same thing in 2008 and the market rallied on the "good" news so it's no surprise Europe is having the same reaction. But caveat emptor--the positive reaction for us did not last very long. Later I'll discuss some of the financial shenanigans the banks are involved with that masks the real problems. But in the meantime, perception is reality and as long as traders perceive it to be good news and buy it then the market will go up. Don't fight the feeling (just don't trust it either).

As for positive earnings being a reason for the rally, really? Have you looked at the daily responses to earnings these past two weeks? Good earnings are sold one day and bought the next. Then it switches and bad earnings are bought one day and sold the next. If you can successfully trade this market based on earnings results I seriously would like to know your secret.

In all seriousness, this market's whacky behavior is dangerous. Volatile price action like this is typically not a healthy sign for the market. Bull markets thrive on a steady diet of worry with some good news sprinkled in for good measure, and tend to march higher at a relatively steady pace. When it becomes manic-depressive, as if it's bipolar off its meds, it's usually a sign of a market in a topping process. It could rally a little further, as I'll show in a bit, especially into the end of the month, but in my opinion it becomes more vulnerable the higher it pushes from here.

I mentioned on today's market monitor that I feel like I'm herding a bunch of cats as I try to keep up with the wave pattern for this market. Each day lately it looked like it was picking a direction and then the next day it was the next direction. Oh wait! I mean I want to go this way. Forget ping-pong. This feels like I'm the ball in that arcade game (the name of which escapes me at the moment--see my mind is turning to jelly). We're dealing with an Alzheimer's market--it forgets on a daily basis where it is (but hey, at least it can hide its own Easter eggs).

What's interesting about the price volatility is that it's not really showing up in the VIX itself. Oftentimes price volatility from uncertainty is associated with a higher VIX level as that uncertainty results in a greater willingness to buy options as either a hedge play or a pure directional play. Instead the VIX is showing some complacency. The wall of worry for the bulls is not there and that's actually bearish. The VIX is down testing its 200-dma for the 3rd time since June 21st and MACD is showing bullish divergence. While I see the possibility for the VIX to drop a little lower to its broken downtrend line from January 2009 (if the market is going to rally into the end of the month), currently near 21.60, I think the potential bullish setup here for the VIX is of course a bearish setup for the stock market.

Volatility index, VIX, Daily chart

SPX has rallied back up to its 50-week moving average, which stopped last week's rally, currently near 1097. This is where SPX stopped today so the bulls have some work to do tomorrow. If SPX can close above 1097 on a weekly basis it will be bullish into next week otherwise another weekly close below 1097 could have some bulls pulling the plug.

S&P 500, SPX, Weekly chart

SPX pushed above its 50-dma and downtrend line from April today and that's bullish. Or is it a head fake break? Not that we've seen that many head fakes lately. Speaking of head fakes, I enjoyed Todd Harrison's update (on Minyanville) yesterday when he stated the following:

"It's no shocker trading revenues are down across the board for Wall Street firms; over the last quarter, we've highlighted several 'best in breed' industry veterans who have offered that this has been the toughest tape they've ever seen. We can call it "trading deflation" as the War on Capitalism continues to rage.

"Let's use the S&P for illustrative purposes; strong start this year, a quick 9% haircut, a 16% sprint that slightly violated resistance (S&P 1200), a grind lower, FLASH CRASH!, the knee-jerk rebound, and then -- just to really confuse everyone -- a sideways range, complete with a head-fake higher (above S&P 1100-1115) and a false break lower (below S&P 1040).

"Yet here we are, clowns to the left of us, jokers to the right, and stuck back in the middle of the range."

I thought that was a perfect summary of the market and he wrote that before trading started Wednesday morning. So back to the chart below, will today's break above resistance see follow through or will it be another bull trap? If it pulls back, which is due, and finds support at or near 1080 and then proceeds higher above 1100 then we'll have a good sense that we should see some follow through to the rally next week. If the rally continues I'll be watching for resistance near 1112 (200-dma and a Fib price projection) and if that's cleared then a shot up to the 1150 area looks very doable. If it were to rally above 1160 then I think there's a good chance the market will rally in August and quite possibly to new annual highs (1250-ish). But a drop back below 1056 from here would spell immediate bearish trouble for the market.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1113
- bearish below 1056

Many are pointing to an inverse H&S pattern developing since May (left shoulder in May-June, head into July 1st, right shoulder being this week's low). First, will the inverse H&S pattern be any more reliable than the oft-discussed H&S topping pattern that developed since January? Second, H&S patterns (inverse or otherwise) or more reliable at the end of a long run and not in the middle of a run (it's not reliable in a correction to a trend). A bullish inverse H&S pattern here would be in the middle of a longer-term rally from March 2009 and therefore is not a reliable pattern. As shown with the pink price depiction, we could see a leg up to the 1150 area, "confirming" the inverse H&S pattern, only to find it fail to the downside just as the regular H&S top failed after the break below the 1040 neckline and down to 1011 on July 1st. So be careful about H&S patterns that are discussed by financial media. Once again, if it's obvious to many it's obviously wrong.

In addition to the 50-week moving average discussed with the weekly chart, it's also an important number on a shorter-term basis. Two equal legs up from Tuesday, for a possible a-b-c bounce, is at 1097.33. Today's high was 1097.50. It's possible the sharp zigzag bounce up from Tuesday was enough to whip a lot of bears out of their positions, suck in some longs and now the market could start down in earnest. That's the bearish setup. The bullish setup calls for just a pullback correction, perhaps to about 1080-1081 (50% retracement and back down to its broken downtrend line from April), and then a continuation of the rally into next week.

S&P 500, SPX, 60-min chart

I've got a couple more SPX daily charts that are interesting (at least to me). I haven't updated the MPTS in a while (Moon Phase Trading System) and it shows the possibility for a turn on July 26th (Monday) which is the next full moon. The two previous phases, June 26th (full moon) and July 11th (new moon) were close to market turns so it will be interesting to see what happens around Monday, especially if SPX is able to bounce up to its 200-dma (1113) around the same time.

S&P 500, SPX, Daily chart with MPTS

Next is a daily chart that I squished in order to show back as far as I could (August 2008). The 67-day cycle is something Jeff Cooper discussed in his update and I thought it was rather interesting. Cooper loves numerology and I find it fascinating when he finds all these number relationships. He's the one that turned me onto the Gann Square of Nine chart years ago. At any rate, he identified a 67-day cycle that seems to be doing a good job identifying market turning points. What's interesting about the 67 days is the relationship to the March 2009 low, which rounded off was 667. Pure coincidence? Perhaps. The significance now is that the next turn date by this cycle study is on July 30th (Friday, end of month).

S&P 500, SPX, Daily chart with 67-day cycle

So the two charts above point to next week as being a potentially important turning point. When you throw in another astrological event, something I don't understand but astrologists say is scary, a Cardinal Climax is a particular alignment of 5 planets, something that hasn't happened in 1000 years (some say 10,000 years). Arch Crawford says certain planetary alignments put people under additional stress and of course that's reflected in their mood which is then reflected in the stock market. This particular alignment is supposed to be accompanied by some particularly nasty things (possibly involving a nuclear/radiation event). Crawford is calling for a market crash and he has been too correct in many of his past calls to dismiss him lightly so the fact that the timing of this astrological signal is coinciding now with some other potential turn signals, well, let's just say I'm sitting up straight and watching carefully. We'll get another update on all this next week but be thinking ahead about what your plans are, especially if the turn comes earlier in the week.

The setup on the DOW is the same as SPX. It pushed above its downtrend line from April today and its 50-dma, which is bullish. It seems to be struggling under both its 200-dma, currently near 10392, and its 50% retracement of the 2007-2009 decline. These longer-term retracement levels can remain significant for some time, especially if price action around a retracement level now provides additional price-level support/resistance. For the DOW this was the area of the price consolidation in November/December 2009. If the DOW can get through 10400 it should be able to make a run for it up to 10500 if not higher into the end of next week. In the meantime there is the potential for the bounce to have completed today and now down we go.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 10,500
- bearish below 10,007

The NDX pushed right up to its downtrend line from April, near 1870. It has its 50 and 200-dma's below, in the 1840-1845 area, and its downtrend line near 1870. A close below or above either should tell us the next direction, at least for a couple of days. With the dashed line I show the possibility for a higher rally into August but like the DOW and SPX, we could see only a minor run higher to complete an a-b-c bounce off the July 1st low and then a turn back down.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 1870
- bearish below 1784

With respect to its downtrend line from April, the RUT is the weaker index. It has a very good rally today (+3.7%) but now it's getting ready to run into potentially tough resistance. Its downtrend line and 299-dma are both near 639. Not shown but two equal legs up for the bounce off Tuesday's low is near 638. Slightly higher is its 50-dma at 643. So 638-643 could be a tough wall to break through. The bearish wave count calls for the start of the next leg down from here.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 645
- bearish below 602

While the banking indexes did well today, probably helped by high expectations for a successful stress test of Europe's banks, tomorrow will show how well the banks are doing. Everyone knows the emperor is wearing no clothes but no one will yet admit it to themselves and they're certainly not telling the emperor. Just last week, with the closure of 6 more banks in the U.S., the records show that the banks were overvaluing their holdings on average about 50-75%. This is really extraordinary and the full value of the problem is not coming to light until the banks fail.

The FASB (Financial Accounting Standards Board) rule 157 allows banks to carry their loan inventory at whatever value the bank thinks is fair, which usually means the value long before the credit crisis hit and loans started failing left and right. Most know that many of these loans are not worth the paper they're written on. But allowing the banks to carry them at full value, vs. writing them down now and taking the write-off against reserves (which are woefully inadequate, especially now that banks are digging into their reserve accounts to help this quarter's earnings), we are being led to believe the banks are in good shape. As Todd Harrison has commented several times now, when a FASB ruling has the power to hold up or crush the banking sector (and in turn the entire market) you know we have a major problem.

One of these days the man behind the curtain will be exposed for who he is. It will probably happen when banks start failing en masse and we collectively can no longer deny that banks have a major problem--there's way too much debt that is failing (part of the debt destruction process that we're going through). There are all kinds of machinations going on to thwart the needed correction but we only make it worse. I'd rather not see us get stuck in 3-decade-long process of price discovery (economic malaise) and instead prefer to see us take out medicine, get better, and get back to growth. Alas, it's not what the politicians, who are more worried about their jobs than doing the right thing, will allow to happen.

So as I said, the banking indexes had a great day (+4%) and it will be interesting to see if there will be any follow through after Europe's bank-stress report is released (sell the news?). The BKX index has pushed up to a previous downtrend line from April, which is just under potential resistance at its 20-ema and 200-dma, both near 48 (BKX closed at 47.64). Slightly higher is its 50-dma near 49 and then its downtrend line across the July 13th high which is currently dropping down through 50, a price level that has been support/resistance in the past. The decline from July 13th looks impulsive which suggest the current bounce off yesterday's low will be just a bounce correction to be followed by a stronger decline into August. Follow the money if it turns back down in earnest.

KBW Bank index, BKX, Daily chart

The TRAN is another index that rallied right up to its downtrend line from April and stopped. At the same level, 4324, is a Fib 62% projection for the 2nd leg up in an a-b-c bounce off its July 6th low. If today's rally did not complete the a-b-c bounce then the next upside projection at 4490 should be next week's target.

Transportation Index, TRAN, Daily chart

The Baltic Dry index is another transportation index and is used to measure the shipments by sea. Global transports rely heavily on ships and therefore this index is very good for identifying swings in the global economy. While our stock market will not follow it exactly, you can see in the chart below it does follow it very closely. Since the stock market high in 2007, other than the outsized rally in the BDI into the May 2008 high (which is the red/black line), they've been in synch and this makes sense. But now we have a negative divergence where the BDI made a lower high this year while SPX pushed to a new high in April. The BDI has broken support at its September 2009 low while SPX bounced off that low. Care to guess which way SPX will head next? It might make it a little higher next week but the global slowdown in shipping says stock bulls are whistling past the graveyard right now.

Baltic Dry index, BDI, vs. S&P 500, Daily chart

The dollar's decline into last week's low did a good job in completing the a-b-c decline from the June high. This is either all of the correction to the November-June rally, which means we'll see a kickoff to a major dollar rally, or else the June-July decline is only wave A of what will become a larger A-B-C pullback into October, which is the way I've currently got it labeled. We won't know which it is until a larger bounce gets underway and I can see how impulsive vs. corrective it is. If it drops a little lower first, watch the 50% retracement level of 81.68 for support.

U.S. Dollar contract, DX, Daily chart

Gold found support at its uptrend line from October 2008 and could make it higher still to the 1215 area (Fibs and 50-dma) before turning back down. If you look at the daily chart with the log price scale you'll see that the previous consolidation in early July was on top of the uptrend line from 2008 and the bounce that's shown in dark red would take it back up to its broken uptrend line. So far gold has run into resistance at its new downtrend line from late June and any break to new lows from here could turn quite bearish in a hurry.

Gold continuous contract, GC, Daily chart

The gold miners index looks interesting right here. After breaking its uptrend line from February and finding support at its 200-dma, it has bounced back up to its broken uptrend line and promptly pulled back today from the test. It's a setup for a kiss goodbye at broken support and if it lets go from here it could drop rapidly.

Gold Miners, GDX, Weekly chart

While gold languishes oil rallies. The very choppy price action since the May low says the rally effort will fail and it will fail hard. The only question is from what level. With the renewed push higher I see Fibs and its broken uptrend line coinciding around the 80.00-80.50 area for resistance. If it can push through that area then the next upside target would be 82-ish and then 86-ish (which would also be a test of the May high). A drop back below 76 now would be a sell signal.

Oil continuous contract, CL, Daily chart

This morning's economic reports had no effect on the market. Earnings had no effect either (regardless what the talking heads on TV said). The market was in rally mode long before earnings and economic reports were announced. This morning's economic reports were not good, or certainly not supportive of the rally. It'll matter soon but not today. Friday has no major economic reports.

Economic reports, summary and Key Trading Levels

How to summarize where we are...let me count the ways. Let's see, OK I have a flower in my hand with a few petals to pluck...she's bullish...she's bearish...she's bullish...she's...

As I told a colleague today, if I stand on my head I see a bunny rabbit in the price pattern. I think it's the one from "Alice in Wonderland". Lots of smoke and mirrors.

Seriously though, this market may be jumpy and whippy and it obviously requires great care in managing your trades right now. When it does let go to the downside I'm afraid it's going to be very fast and it will be difficult to get aboard without shorting it in the hole. But that doesn't mean shorting it here and holding on for dear life while the market rallies another 50 S&P points (or more). I may have a strong opinion about the bearish setup for the market but it doesn't mean I'm right. As always, follow the key levels identified on the charts and use those to tell you which way the market is heading next. While I struggle with the wave count sometimes it's just as easy to follow trend lines, moving averages and oscillators to get the clues you want.

The bottom line is that today's rally may have finished a 3-wave bounce to correct the decline from last week. It's a very high bounce and not typical for a correction, which is what has me thinking we'll see higher highs next week before the market turns back down in earnest. The risk for longs is that the market could turn down immediately from here, which of course would simply add to the list of daily reversals.

The bears need an immediate decline that drops below Wednesday's lows. That would be a strong indication that the bounce correction did in fact finish today. A drop below Tuesday's low would of course confirm that.

The bulls need to see a pullback followed by a push back above today's highs. That would confirm we're into at least a higher a-b-c bounce off the July 1st lows, in which case look for the upside targets I've identified on the charts. Any rally higher next week may not last very long and therefore holding positions overnight is simply not worth the risk (imo).

We could see a rally into the end of the month/start of August and I'll certainly be evaluating that next week if it occurs. I'm feeling like there's a really big move coming and I don't think it will be to the upside, for whatever that's worth. Be very very careful out there.

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

Key Levels for SPX:
- cautiously bullish above 1113
- bearish below 1056

Key Levels for DOW:
- cautiously bullish above 10,500
- bearish below 10,007

Key Levels for NDX:
- cautiously bullish above 1870
- bearish below 1784

Key Levels for RUT:
- cautiously bullish above 645
- bearish below 602

Keene H. Little, CMT