Market Stats

It's been a typical opex week with an effort to hold the market up; most opex weeks tend to be bullish as most participants seem to prefer selling puts rather than calls and there's then an effort to keep the market above the sold put levels. Coming into opex there were a lot of SPY puts and calls around the 110 level (SPX 1100) and this will often tell you where the market will settle. On Tuesday and Wednesday it was certainly apparent that 1100 was resistance.

Both Tuesday and Wednesday saw selling into the close after failing to get through 1100. After Wednesday's regular-hours close the futures suddenly sold off even more. This combination looked like bearish price action and even an overnight rally that got ES (S&P 500 emini futures) up almost 8 points was not able to hold back the sellers following the morning economic reports. The selling from Wednesday's high and into Thursday morning looked pretty much straight down and didn't find a low until near midday.

The unemployment numbers this morning spiked the futures down (about ES 11 points) which is not typical behavior. The market usually ignores this report. That immediately told us how nervous the market is. Initial claims came in at 500K vs. the expected 478K, which was bad but not to cause a spike down of 11 points on ES. The number however was the worst we've seen in nine months. The bottom line is that no matter how many jobs the Obama administration says they've saved, it's not showing up in the unemployment lines. The economy is slowing again, after the government stimulus is wearing off, and the stock market is losing its footing.

Most of us do not need a reminder about how tough it is out there for jobs. I think most of us know of several people who have lost their job and how difficult it has been for them to get reemployed. I've seen this graphic before but not updated through May. Until the employment picture improves we're not going to see a growing economy. In front of the elections it's going to be "it's the jobs stupid". Unemployment rates by county

The other two reports this morning were the Leading Economic Indicators and Philly Fed. The Leading Indicator was up +0.1% so there was some growth there but obviously not very much. The expectation was for +0.2%. As you can see in the chart below, the sharp turn down this year is looking reminiscent of the turn down in 2004. The sharp rise in 2009 was mostly government stimulus and removing it shows there's not much else besides the government's spending (which has only grossly increased our debt which now needs to be paid with dwindling government income).

Leading and Coincident Economic Indicators, chart courtesy

Of the ten indicators there were five that rose (which are not necessarily a good sign): interest rate spread, average weekly manufacturing hours, the index of supplier deliveries, average weekly initial unemployment claims and manufacturers' new orders for non-defense capital goods.

The remaining five indicators that were down were: the index of consumer expectations, building permits, real money supply (a sign of deflation and the Fed's inability to expand the monetary supply) and stock prices. Manufacturers' new orders for consumer goods and materials held steady.

All in all it was not an encouraging report but that did not stop the Conference Board's economist, Ken Goldstein, from saying "The indicators point to a slow expansion through the end of the year." And somehow he believes the data "do not point to a recession." I'm not sure about you but I feel much better now.

The next economic report, the Philadelphia Fed index, was also a disappointment. Both reports came out at 10:00 AM and the market dropped sharply following the news. The Philly Fed index was a big miss and disappointment, coming in at -7.7 vs. the +8.0 expected. Even with the large government stimulus program over the past year was not able to lift the Philly Fed index above its previous high in 2004. So as part of the recognition phase that we're entering (for the next leg down in the stock market) these reports are starting to open up the eyes of the market which has been running on hopium for a long time. The dealer (the government) is being throttled by the people (who are screaming "no mas") and the economic numbers are starting to reflect the fact that there's not much following the government's efforts.

Philadelphia Fed Index, chart courtesy

The stock market continues to run around at full speed in a small room. It's not wearing any protection equipment and the walls are looking rather bloodied now, blood from traders who are trading this wild trapped animal. There are a lot of very smart experienced traders, individuals and money managers alike, who are getting beat up daily trying to trade the swings. Almost to a person there seems to be agreement that the market is simply no fun to trade anymore. Something has fundamentally changed and those of us who trade the market are up against the machines, and the machines don't like anyone else playing with them.

Consequently we're seeing small and big players alike simply leaving, taking their marbles with them. Liquidity is drying up and that makes for an even wilder animal in a smaller confine. Tight trading ranges see sudden explosions to one side or the other only to be reversed hard the following day. Carrying positions overnight carries a larger risk than normal. We are in a truly difficult time for the market (and economy) so you're living through a time that you'll be able to tell your kids and grandkids about. Understand that you're not alone if you're feeling whipped by this market. Also understand you can still make money but you have to do it differently; you have to learn to trade differently.

While the powers that be in this market (larger government-supported hedge funds like Goldman Sachs as well as the government itself, along with the Federal Reserve system) will not give up their power willingly, the market will take it from them. It's a battle between the titans and our job is to nibble on the crumbs from their food fight. Grab a crumb and quickly run back into your hole to nibble on it. Wait for another, run out and grab it and run away before you get stepped on. While I'm not a day trader at heart I've realized over the past year in particular that I have to manage my trades more carefully. Position trades are going to have to turn into swing trades and swing trades may only last a day if I'm lucky. I need to grab my crumb and scurry out of the way.

I'm finding many technical analysis tools are not working as well as they used to. I like EW (Elliott Wave) but I find the patterns get distorted a lot in this manipulated market, making it harder to trust. Trend, support and resistance lines regularly get broken only to be recovered the next day. I am finding Fibonacci retracement levels and projections working as well as they always have (not always but well). But they're the only tools we have (would you rather trade on fundamentals or news?) and we do the best we can with them. We get our setups, we take our trades and then we carefully, and more tightly, manage them, taking profits where we can and minimizing losses. Look for your 3:1 ratio (profit:loss) and minimize your losses and you will make money. Discipline is required now more than ever.

So don't despair, you're not alone in fighting this monster and I think together we'll have the best chance of beating it and making some money for ourselves. A lot of people are leaving the market out of frustration but I hope all of you reading this can hang in there with us and trade much smaller positions and less frequently if you have to. If you had set a goal previously to make $X per month then change that to $X/3 or something like that. Lower your expectations and trade to stay in the game. Only in that way will you keep your abilities sharp and more importantly you'll be able to read the market better as it changes. Then when we get a good trading period you'll be there to take advantage of it. Stay nimble, stay disciplined and be careful.

And with that let's see what this monster of a market has thrown at us this week. Since May price has been oscillating around a long-term uptrend line from 1990 through the 2002 low. You can see how it's been using it as support since September 2009 and if it lets go this time I think it will the last time it will see it for a very long time. The H&S topping pattern since January's left shoulder continues to be a possible pattern. The first failure near the neckline at 1040 resulted in a head-fake break. The neckline is now sloping downward and is near 1000. If that level breaks I doubt very much it will be a head fake. But as shown with the dashed line, there will remain the possibility for a choppier decline into next year. I consider this to be a much lower probability than the dark red price depiction but after it gets down to the 950 area I'll worry about trying to figure that out.

S&P 500, SPX, Weekly chart

Coming into Monday's trading I was showing on the Market Monitor an expectation for a low Monday morning and then a bounce into mid week to correct last week’s decline. Following the bounce correction I’m looking for a stronger decline into the end of the month. And this expectation has been playing out so far and interestingly it's following fairly closely an analog pattern (similar fractal pattern) with the lead up to the 1987 crash.

The analog is between price action since April of this year and price action following the August 1987 high. Referencing the daily chart below, after the initial decline from April to May 25th we got a 3-wave correction that finished at last week's high. From there we dropped down to a low Monday morning and then bounced to a high on Tuesday which was tested on Wednesday (remember the days of the week to compare to 1987) before it starts back down into what should be a stronger decline.

S&P 500, SPX, Daily chart

As I look at the depiction for the decline, and considering the possibility about the analog with 1987, I'm wondering if I'm being too conservative in my downside depiction. I've often said I do not like to predict a market crash--that's a fool's game. Having said that, when I look at the analog between 1987 and today it does cause me to wonder a bit. The April-August 2010 pattern looks very similar to the August-October 1987 pattern:

S&P 500, 1987, Daily chart

The October 2, 1987 high is equivalent to the August 9, 2010 high. The first drop off October 2, 1987 completed on Monday, October 12th (the start of opex week). It then bounced into mid week, topped out on Tuesday and then tested on Wednesday. Thursday closed lower. Is it starting to sound familiar by now? There was then a stronger decline into Friday followed by a gap down on the following Monday (the crash). So if this analog continues to play out similarly with a strong decline on Friday it will have my attention and my money will be in short trades. Regardless of whether or not we get a crash into next week, do you want to be long with this kind of risk facing you?

Key Levels for SPX:
- cautiously bullish above 1107
- bearish below 1100

There is some disagreement between the indexes with Wednesday's highs (the RUT and NDX made higher highs above Tuesday's whereas the DOW and SPX did not). This changes how I interpret the decline from Tuesday/Wednesday and keeps alive the possibility we'll see another rally leg on Friday and possibly into Monday (dashed on the 60-min chart below). One other possibility is for a new low Friday morning (target is 1065), a bounce back up to retrace a portion of the decline from Tuesday and then let go on Monday. I wish it were a little clearer as we head into Friday but at this point I'd suggest being ready for anything (or nothing), especially since it could be a boring opex Friday.

S&P 500, SPX, 60-min chart

The wedges that I've drawn on the DOW's daily chart below should give a good sense of why trading has been difficult, especially since the high in April. Wedges are usually filled with very choppy and whippy price action as both sides battle it out for control with one side gaining slowly (the bears in the move down into May and bulls in the move up into August). The next move though should be a strong decline where the bears virtually take over the market. As with SPX, there is a chance for another leg back up to complete a slightly larger (in time if not price) correction to the decline from last week but it needs to start up quickly tomorrow. Any new low below today's would strongly suggest we will not get a high bounce.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish to 10520
- bearish below 10209

NDX found resistance this week at its 20-ema and 200-dma. Today's close was also back below the 50-dma. I show the same possibility as the others for another leg up for a larger bounce, possibly up to the 1880 area but the greater risk is for a hard decline from here.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 1880
- bearish below 1801

This week's bounce for the RUT took it up to resistance at it 20-ema. It came close to its broken uptrend line from July 6th but couldn't quite make it up to its broken 50 and 200-dma's so it was weak relative to these resistance levels. If the market manages another leg up for its bounce it should be able to test the 640 area otherwise look out below.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 640
- bearish below 639

The 10-year yield as at a potentially important level that could start a reversal. The weekly chart below shows a possible a-b-c pullback from June 2009 where the 2nd leg down has achieved 162% of the 1st leg down at 2.54% (it remains a little shy of the projection at 2.55%). If the leg down from April 5th is completing the pullback then we'll see yields start to head higher. A push back above 4.0% would be bullish. A drop below 2.5% would suggest the bearish pattern that should eventually take TNX to a downside target of 1.2%-1.3% (the price depiction is just a guess at this time as it could head more quickly down to the bottom of its down-channel, currently near 1.4%.

10-year Yield, TNX, Weekly chart

The banks look like they might have put in a bottom for now and ready for a bounce to correct the decline from August 2nd, perhaps back up to the 50-dma near 14.45 before letting go to the downside. The other more bearish interpretation suggests the bottom could fall out right here right now. In fact the price pattern for the broker index (XBD) looks particularly bearish right here. So follow the money if the banks break down from here but watch for a possible bounce into early next week (in which case the broader market should hold up as well).

Financial sector ETF, XLF, Daily chart

The Trannies look like the broker index and ready for a breakdown from here. If it drops back below the broken downtrend line from April 30th, currently near 4150, the price pattern suggests we could see a sharp and strong decline, one that will take out the July 6th low near 3872 in a hurry.

Transportation Index, TRAN, Daily chart

Just as the stock market could be ready for a stronger decline, the US dollar looks ready for a stronger rally. But also similar to the stock market, but inversely, I see the possibility for a little more pullback in the dollar before it will be ready to rally. Back above its recent high at 83.35 would be the signal that the next leg up was underway.

U.S. Dollar contract, DX, Daily chart

I don't have a chart for it this evening but the commodity-related equity index (CRX) has a pattern that suggests we'll see an immediate and sharp decline from here. Since this index has been in synch with the broader market it has me leaning to the downside sooner rather than later.

Gold ran higher today and I'm wondering if people are jumping into the shiny metal as a hedge against a possible attack by Israel against Iran's nuclear reactor that's about to go online. There are a lot of news stories about the possibility and the fact that the attack will have to happen within the week, before the startup of the reactor, otherwise it becomes a radiation hazard).

What surprises me is that oil is not streaking higher. It instead sold off today. If Iran is attacked and they shut down the Straits of Hormuz, through which some 40% of the world's oil is shipped, the price of oil could easily spike above $100. So we've got a mixed signal between what we're seeing in gold and oil. The run into gold might be more out of a fear about what's going to happen with fiat currencies as the global economy continues to soften and the world's central banks continue to mass produce more money. The trouble for gold bulls is that the money supply is actually shrinking (as indicated in today's LEI report, which is the true definition of deflation). The shrinking money supply takes away the inflationist's support for that reason to hold gold as a hedge.

The bounce off gold's low in July looks like it's heading for the $1250 target where the bounce would have two equal legs up. That would complete an a-b-c bounce correction of the decline from June and should be followed by a continuation of the decline to well below $1000. The risk for gold bulls is that the decline could start at any time now (notice the run up to potential resistance at its broken uptrend line from November 2008).

Gold continuous contract, GC, Daily chart

The gold miners index (GDX) has a very similar pattern to gold and could push a little higher to a price projection at 52.89 for two equal legs up from July. But it's currently struggling with its broken uptrend line from February and could start back down at any time.

Gold Miners, GDX, Weekly chart

As already mentioned, I'm surprised there isn't a premium on oil's price right now if the rumors about Israel/Iran had any merit. Maybe that's telling us all we need to know about the rumors. The decline in oil could be ready for a bounce now or after a little lower, perhaps for a test of the July 6th low near 71.

Oil continuous contract, CL, Daily chart

There are no major economic reports on Friday so the market will be free to fend for itself.

Economic reports, summary and Key Trading Levels

In case you haven't heard, we've got a Hindenburg Omen (HO) in effect since August 12th. The following criteria must be met in order for this signal to be achieved:

1. The daily number of NYSE new 52-week highs and lows must both be greater than 2.2 percent of total NYSE issues traded that day.
2. While not a rule, the smaller of the 52-week highs and lows must be greater than or equal to 69 (to meet the requirement that the number be at least 2.2% of the total issues).
3. The NYSE 10-week moving average is rising.
4. The McClellan Oscillator is negative on that same day.
5. That new 52-week highs cannot be more than twice the new 52-week lows (however it is fine for new 52 Week Lows to be more than double new 52-week highs). This condition is absolutely mandatory.

If the (HO) is reconfirmed within 36 days, so by mid September, the signal becomes even stronger. In that case the HO would be signaling a 77% chance of a market decline of 5% or more. Now 5% is not a market crash and the signal is only good for a 25% chance of a true crash and the signal lasts for 120 days. That's not very helpful from a timing aspect (since it takes us out into mid December). While we've had this signal in the past, and no crash has occurred without it, it's only a warning.

One of the problems with this HO signal right now is that everyone seems to be talking about it. What's obvious to most is mostly not worth knowing. When too many expect something it's often when the market comes up with a different surprise (even if it means the PPT will step in and try to prevent a crash). Having said that, considering where I see the price pattern, this signal needs to be taken seriously. If ever there was a time the market is set up for a severe disconnect to the downside, this is it. It doesn't mean a crash is coming but it means the risk is there and it's a higher risk than I've seen for a very long time, even more than the crash setup I saw in May 2008. Caveat emptor (and of course sellers always need to beware).

For a quick summary of tonight's charts, the primary indexes have me unsure as to whether to expect at least a bounce on Friday and perhaps into early next week before it starts heading down more quickly. But many of the other indexes I watch, including the brokers, transports and commodity-related equity index, have me thinking we're perched on the edge right here. If the market starts to sell off on Friday I think it will be serious. It could open up the crash gate and Monday might not be pretty. Therefore any selling on Friday that holds into the afternoon would have me getting into more short positions to take home over the weekend.

A short position over the weekend could even be considered a JIC trade (Just In Case). If the rumors about Israel taking out the Iranian nuclear reactor come true they'll have to take care of it within days before the reactor is loaded with the fuel rods and activated. Otherwise it becomes too much of a radiation hazard. If things remain quiet over the weekend and the market starts a rally you can simply cover and watch to see if another shorting opportunity sets up. I'd rather be watching for a shorting opportunity than a buying opportunity. With the conditions ripe for a strong selloff (if not a crash) I would be very reluctant to hold any long positions overnight.

Friday could be a quiet opex Friday, especially with low summertime volume, or it could be explosive (either direction). The lighter volume is inducing some strong volatility as the program traders run the tape strongly in one direction. If it's to be a quiet day I'd suggest no trading until the end of the day and then be looking for a short entry.

Good luck and I'll be back with you next Monday or Wednesday (switching next week as I'll be traveling on Thursday).

Key Levels for SPX:
- cautiously bullish above 1107
- bearish below 1100

Key Levels for DOW:
- cautiously bullish to 10520
- bearish below 10209

Key Levels for NDX:
- cautiously bullish above 1880
- bearish below 1801

Key Levels for RUT:
- cautiously bullish above 640
- bearish below 639

Keene H. Little, CMT