Market Stats

The numbers above show that the market is holding on even if not in a stellar fashion. Money continues to run a little stronger into the big cap and blue chip names while many of the smaller stocks are not fairing as well. The RUT was the only index of the four to close in the red today. So the bulls are keeping the bears at bay as they make their way into the end of the month/fiscal year and into the elections. Without a display of greater interest in the upside though there is the danger the market could let go suddenly and without warning. It continues to be a time to exercise caution about the upside even if the bears have been thwarted with every selloff attempt.

The day started out on the quiet side with futures slightly green (they had given up a chunk of the overnight rally in the futures) and the morning economic reports did not surprise. And then without anything negative to worry about the bulls came charging in and drove the market higher. At its high the DOW was up a little more than 100 points. But then the bulls took a lunch break and the bears charged in and took away the rally. The DOW dropped into the red by about 40 points before the bulls had had enough and took the ball away from the bulls and drove it back up into the green by almost 40 points.

The day was a nice little seesaw day for traders able to catch the swings and ended as a doji day. As we'll review in the charts, both sides came away neither as winners or losers. In reality the day looked like another distribution day as rallies appear to be getting sold into as inventory is distributed from professional money managers to the masses who now believe in the rally continuing.

In an effort to give the bulls a fair shake and to try to stop being so one-sided bearish, I've been struggling to come up with some bullish things to say about the stock market. My mother always taught me not to say anything if I don't have something nice to say. So with that I'll wish you all a good week and we'll see if I have something nice to say about the bulls next week. :-)

Actually that's not quite true; the bulls are an optimistic lot and I like optimistic people. One thing about a bear market, and all the social upheaval surrounding it, is that I don't like it. Constantly reviewing and looking at bad news and reasons why the stock market rally will not continue is downright depressing. I remember reading that one of the reasons Bill Fleckenstein closed his bear fund last year was because his wife was tired of hearing him constantly talk about why the market was due for a large decline. I figure we've got a few more years of this bear market to finish and I can't wait for us to get back into a period where I'll be looking for all the reasons why the market will rally. It will fit my personality a whole lot better.

So bless their little hearts, the bulls have looked the bears square in the eyes and caused the bears to blink first. I have to admire them for their bravery in the face of adversity. Some may say the bulls are being Pollyannaish with a misplaced trust in the Fed. But who's to argue with their success since August? The stock market is long-term bullish and most investment gurus will tell you to stay invested for the long term. Over the past 10+ years that has looked a little foolish and the bear market will have many questioning practices of the past. But the bulls have more experience in being right, which brings to mind the quote "Never argue with a fool -- they will drag you down to their level and then beat you with experience."

When we get the next leg down, which I have no doubt will come, it will be the bulls declaring the bears are dragging the bulls down to their level. It will be a valid complaint. But back to the issue at hand -- how do I say bullish things about the market when I don't see any? I may see small pockets of bullishness here and there but the overwhelming problem, as I currently see it, is that we have some fairly significant issues to resolve, most of which were created during the last bull market cycle. The reason we have cycles is because one usually corrects the other. We had an unusually large credit bubble (thanks to a lot of financial engineering and greed on everyone's part) and the excesses produced from that, e.g., the home building/mortgage industry, are being corrected. It's really a natural cycle even if it is painful.

I reread an article that I had saved from back in April as the market was peaking. The title of the article was "Why Business Leaders Remain Gloomy" by Rick Newman and published in the U.S. News. What caught my attention is how little has changed in the six months since it was written and here we are testing those April highs. As I said before, I have to admire the bulls for their tenacity. I'll briefly outline the points made by Newman:

1. Job growth is anemic. "There's a good chance it could take longer for jobs to return than after any other recession since the 1930s."
2. Consumers are tapped out. "'Consumers are shell-shocked,' adds John Engler, CEO of the National Association of Manufacturers. 'They're not going to lead us back.'"
3. Housing is likely to stay depressed. "...foreclosures are still near record levels and it could be years before housing generates significant numbers of new jobs. After past recessions, a strong housing market has typically been the catalyst that got the economy growing again. Not this time."
4. Small business is reeling. "Small businesses provide about 65 percent of the new jobs in America. But they're suffocating from lack of credit and closing at record rates. Healthcare reform and other new regulations from Washington are further spooking small businesses and making them reluctant to hire."
5. Banks are still in trouble. "Despite record profits at a few big firms, banking analyst Whitney believes many banks still have major amounts of bad loans they haven't accounted for yet. Americans don't sympathize with banks losing money, but as long as banks are struggling, they'll withhold the credit that's vital to economic growth."
6. Unemployment could become self-perpetuating. "If high unemployment persists, it could further threaten fragile parts of the economy, since people out of work tend to default on loans and mortgages and run out of money to spend."
7. Commercial real estate is still tumbling. "'When rates go up we'll see significant losses taken,' says David Simon, CEO of Simon Property Group, which owns more than 300 malls and other properties. Those losses won't hit consumers directly, but they'll hit banks--which is one big reason they're sitting on money instead of lending it."
8. The economy is too dependent on the government. "'The government can't fix it all,' says Patrik Edsparr, a top executive at Citadel Investment Group. The question is can you phase it out without wrecking the whole house of cards."
9. Washington is dysfunctional. "Business leaders in general are appalled by the profligate spending of the federal government, which many believe is becoming a full-blown national crisis--while Republicans and Democrats dicker over blame."
10. No part of the economy is hot. "Usually after a recession, there's rapid growth in one or two key sectors of the economy, which helps drag all the others out of the dumps. But this time, housing is moribund, growth in consumer spending seems unsustainable, and credit, the lifeblood of capitalism, remains scarce."

Would you agree this is as accurate today as it was back in April? And now we have bullish sentiment that is higher than it was in April. Traders are so convinced the market is headed to new highs that they've all bought in. As Newman mentions in his article, these down cycles are healthy and we do more damage to ourselves and our businesses by not allowing the excesses to be corrected. There is great confidence in the ability of the government to fix things. Any it would appears most market participants have great confidence in the Fed to fix what ails us.

The cycles are good things and it's been our collective unwillingness (particularly by the government) to accept the downside of a cycle. The downside of a cycle is needed to remove bad companies and management teams, streamline inventories (just-in-time inventory systems came out of the previous down cycle) and most importantly, to clear out bad debts and deflate the inflated credit bubble. Current "leadership" (and it's not just this one) has been completely unwilling to let anything fail. A politician's job is dependent on fighting the downturn, usually by throwing our money at it.

The market has been looking to business leaders to help pull us out of the economic malaise in which we find ourselves. The market cheers when the likes of Warren Buffet talk about how bullish they are about our economy. But not all business leaders apparently hold Buffet's bullish enthusiasm.

Business leaders, as insiders, are far outselling buyers of their own stock. Business leaders are not seeing enough improvement in their businesses, contrary to what Warren Buffet believes, to support their current stock prices. These are the people who know the value of their businesses best and they're getting out while the getting is good. In August the ratio of sellers to buyers was about 31:1 ($6.3B in sales vs. $210M in purchases), which is a very high ratio. Since the beginning of October I've seen reports of 1169:1 and most recently an unheard of 2018:1.

Now I agree that a lot of this selling is by those who are front running the tax-rate increase next year (assuming the Bush tax cuts are left to expire) but this is an outrageous amount of selling vs. buying by the insiders. Meanwhile CNBC and other stock-pumping entertainers on TV continue to talk about what a great buying opportunity it is right now. Bite me. Oops, sorry, I'm supposed to say nice things or nothing at all. Maria, you sound good when you're signing off.

OK, let's take a look at the charts where I'll be sure to point out some bullish possibilities (wink). Starting with the SPX weekly chart below, the rally from August has SPX getting a lot closer to potential resistance at its 200-week moving average, which stopped the rally back in April (it missed tagging it by 4 points). The 200-wma is currently at 1195.53, another 6 points above today's high. But hey, bullishly, SPX has climbed above its downtrend line from October 2007 through the April high. This is an untested trend line (needs a 3rd point to confirm it) but it does look bullish, no? If reached we'll have to see how it does near the 200-wma which is very likely a more important level.

S&P 500, SPX, Weekly chart

The daily SPX chart below shows another reason why the 1195-1196 area could be important. The 78.6% and 88.6% retracement levels are often associated with double-top/bottom patterns. The 78.6%, near 1175, is where price has been cycling around for the past week or so. If SPX can press up to the 1196 area it will be important to see how well it can stay up. In the meantime we see SPX testing its broken uptrend line from August (it broke on Tuesday), both yesterday and today, and as depicted we could see it hug that broken uptrend line into next week. A drop back below Tuesday's low near 1159 would signal we've probably seen the high for the rally.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1183
- bearish below 1159

The 60-min chart shows the uptrend line from August and how price has been cycling around since breaking on Tuesday. The price pattern is starting to make me think we're going to see a small rising wedge pattern to end the rally. This is just a guess right now but it fits with the expectation that the market will hold up into next week and finish around 1195-1196. This idea is just a guess right now but watch for choppy price action over the next few days as the market holds up -- it would be a good signal that the rally is coming to an end.

S&P 500, SPX, 60-min chart

Another reason we could see the market hold up into next week has to do with an analogy between the top in April and the one potentially forming now. Thanks to Walter who sent me the chart below, it shows the similarities of the move up from February-April and August-October. The sharp spike down on Tuesday matches the one on April 16th. The market then made a new high near 1220, 6 points higher than the April 15th high. It took 7 trading days to do it. If we add 6 points to the October 18th high at 1185.53 we get 1191.53. Adding 7 trading days to the 18th gives us Wednesday, October 27th. So between this analog pointing to 1192-ish and the 1195-1196 level on the weekly and daily charts I think it gives us a good upside target, especially if price chops its way higher into mid week next week without making much headway to the upside. That should increase your confidence level to start looking for some short entries.

SPX comparison between the April high and the current high

The DOW also dropped out of its rising wedge pattern on Tuesday and has been clawing to get back up inside the wedge since. It closed at its uptrend line from August both days and it may continue to do so if the market can push marginally higher into next week. It could result in a test of the April high near 11258. It came within 45 points of that high this morning.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 11,150
- bearish below 10,917

Looking at the Nasdaq Composite this week I wanted to point out another index that is struggling with the 88.6% retracement of the April-July decline, which for the Naz is near 2481. Today's high was 2482. It's also struggling underneath its downtrend line from October 2007. Bullishly it's holding above its uptrend line from August (it broke it briefly today) and I see the potential to rally up to the 2500 area if the market holds on into next week. As with the other indexes, a drop below Tuesday's low near 2422 would be a sell signal.

Nasdaq Composite, COMPQ, Daily chart

Key Levels for COMPQ:
- cautiously bullish above 2500
- bearish below 2422

As a side note, and noted on the above chart, there was much fanfare by the bears back in July (including by me) when the 50-dma crossed through the 200-dma to the downside. It was the "Death Cross" and meant to harbor many bad things for the stock market. That didn't exactly work out to plan for the bears. Now we've got a "Golden Cross" about to occur as the 50-dma crosses up through the 200-dma. Instead of being a bullish omen I can't help but wonder if the other side is about to get tortured with this signal.

While the COMPQ has been struggling below the April high and at its downtrend line from October 2007 the NDX has climbed above both. So the bullish thing to say here (see, I'm trying) is that the generals are not afraid and they're out there leading the charge up the hill. But I can't help myself -- the bearish thing is that the troops aren't following. Everyone knows the generals can't fight anymore -- they're too old and have put on too much weight. When they turn around and see the troops lagging behind they're going to get very nervous and come running back down to see what the problem is. When the troops see the generals running back down the hill towards them they're going to scatter, screaming like little girls.

In actuality, what's happening is money is running into the big-cap tech stocks and this is typically a defensive move. It's much safer to park your money in the big caps in the event of a selloff since it's much easier to sell the big caps without damaging price too much. Try selling a couple million shares of a smaller stock without affecting its price whereas the same order for a CSCO doesn't even cause a burp.

So we've seen a relatively stronger rally in the NDX and it continues to easily hold its uptrend line from August. But it's been struggling with another potentially important Fib level -- the 113% extension of the previous move (the April-July decline), which is typically associated with a momentum reversal (head-fake break with a throw-over finish) in a double-top/bottom pattern. If the 78.6%-88.6% retracement level doesn't hold it's very common to see a move to the 113%-127% extension level. The 113% extension is shown on the NDX chart at 2106.14. Today's high was 2106.24. If that doesn't hold the bulls back, I see the potential for a move to the top of its rising wedge pattern, currently near 2128 and climbing to 2145 by next Wednesday.

Nasda-100, NDX, Daily chart

Key Levels for NDX:
- cautiously bullish above 2106
- bearish below 2054

I mentioned above the 78.6% and 88.6% retracement levels often associated with a double top/bottom. The RUT tagged its 78.6% retracement last week and hasn't been able to make any further progress. It has been the weak sister for the past week and like the DOW and SPX has broken its uptrend line from August. It tried to climb back up above the trend line but got slapped back down and wasn't able to close at the trend line as the DOW and SPX did. Weakness in the small caps is not a good sign for the bulls. It is a good sign if you're looking for a top. But if the market holds up into next week we could see a retest of the 712 area or slightly higher.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 712
- bearish below 690

The VXX is the S&P 500 volatility index (VIX) short-term futures ETF, which has options. As you can see on its daily chart below, it's getting really pinched in its descending wedge from July. The requisite wave count (5-wave move within the wedge) can be considered complete here and if the descending wedge is the correct interpretation we'll see it come rocketing out of it. A strong rally in the VXX would obviously mean bearish things for the stock market. Wait for the break above 15.16 to confirm the move. It's got some nice potential for a call option play. See there, a bullish recommendation!

Volatility index short-term futures, VXX, Daily chart

If you'd like to see even greater upside potential, check out the weekly chart of VXX below. The bullish divergence says the downside momentum is clearly waning, especially between the April low and the current low. This looks lip-smacking good for a longer-term call option play. With option premium so low right now you can go way out and not cost an arm and a leg. And when volatility premium gets jacked up you'll get that added bonus. But wait for the confirmation of the break to the upside. You'll have plenty of upside potential to play.

Volatility index short-term futures, VXX, Weekly chart

There has been a real separation this week between the two banking indexes I watch, the KBW Bank index (BKX) and the S&P Bank index (BIX). The BKX significantly underperformed the BIX in this week's bounce so I'll show the BIX since it's stronger and I'm trying to see the bullish side of things (give me a break, I'm really trying here, wink). Oh, my bad, I can't say too much that's bullish about the BIX either; at least not yet.

The bounce off last Friday's low has brought the BIX up to its downtrend line from April but this is an untested trend line (only two points) and therefore may be of no consequence, although today it had traders selling there. The key level for the bulls is to recapture the high on October 7th at 131.43 as that would open up the door to the 137.35 level (for two equal legs up from August) or slightly higher to the downtrend line from May 2007 (using the log price scale). A rally in the banks would be bullish for the broader market, period. But a turn back down from here would look bearish and a break below the key level to the downside at 120.44 would indicate the next leg down of the bear market is underway.

Banking index, BIX, Daily chart

The TRAN has been struggling with the top of its rising wedge pattern from August. At the same time it's trying to break out of its parallel up-channel from July. If the broader market holds up we could see the TRAN attack the 4800 level. A break below 4618 would signal the next leg down is in progress.

Transportation Index, TRAN, Daily chart

The U.S. dollar's bounce off last week's low is the strongest bounce since the high in June. It looks like the kickoff to the next rally leg which should take the dollar well above the June high. I don't like the price pattern of the bounce so far since it looks corrective (3-wave move up and then big pullback this week) but I've learned over the years that the 1st wave in a new trend often leaves much to be desired, especially in the age of market manipulation by big players and there are certainly some very big players (governments and their central banks) playing in the currency markets right now as they battle each other to see who can get their currency down into the basement the fastest.

If the dollar is not finished putting in a bottom yet we could see a drop down the 75-76 area, accompanied by lots of bullish divergence, and then the start of the next rally. A drop below 77 would suggest this short-term bearish scenario. But a continuation higher and a move above Tuesday night's high of 78.61 would be a strong signal that the bigger rally is underway. But the dollar bears (all 97% of them) are not in trouble until the dollar can break out of its down-channel from June, currently near 80.70. If we see a choppy sideways/up bounce over the next few weeks that stays inside the down-channel I will become less bullish the dollar and instead start looking for another leg down that takes us to new lows (below the November 2009 low at 74.27).

U.S. Dollar contract, DX, Daily chart

Today on the Market Monitor Jane had posted some news about a new ETF that will start trading tomorrow -- Glitter (GLTR). This ETF will include the shiny metals -- gold, silver, platinum and palladium. A reader (thanks Scott) reminded me that this fits well as a signal the top is very likely in for the metals. When a trend is well established we see things like this. Usually front covers on business and general-interest magazines will show well-established trends, often at the end of the trend. The government is usually the last to recognize a trend because it takes a response from all the people to get government to move. When you hear about a government program to fix a problem they're usually too late. So when Scott also noted that many of the central banks in Europe are ending their gold sales, which many had started when gold was much lower, it could be another sign of a top in the precious metals. If these banks start buying it's usually a good signal we've definitely reached the top.

Using a chart I'm also getting the impression that gold has topped out. It appears to have finished a little shy of the 1402 upside target I've been watching but once it started breaking its steeper uptrend lines since July (the sign of a break of the parabolic move up, which warned of a blow-off top in the making) we've got a sell signal. You will often see 4 steepening trend lines and when the 4th one is broken it's your first clue the move is over. The decline to today's low has now broken the two steepest uptrend lines and found support at the 2nd uptrend line, which is the one off the July low through the August low. The move down from the high also looks like a 5-wave move which is impulsive and tells us the trend has changed to the downside. A 5-wave move down should get a bounce to correct it and then that will be followed by another leg down. After the 2nd leg down we'll have an opportunity to evaluate it for the potential to then turn around and continue higher. But for now it looks like we'll have a multi-week correction at a minimum of the rally.

Gold continuous contract, GC, Daily chart

While gold found support at its uptrend line from July, the gold miners were not quite as fortunate, closing just below that trend line today, as well as its 50-dma. But if they bounce back up tomorrow we should see a correction of the leg down from last week before continuing lower into November.

Gold Miners, GDX, Daily chart

Following up on silver's weekly chart that I showed last week, it has now given us a sell signal. After stopping at the 127% extension of the previous decline (in 2008) it has now dropped back inside its parallel up-channel from late 2008. This is typically a very good signal that the top has been made with a throw-over finish above the top of the up-channel (for a head-fake break). Silver will likely retrace the leg up from August very quickly.

Silver continuous contract, SI, Weekly chart

It seems every day oil makes the opposite move to the day before. Talk about whipsaw -- oil traders are have a wild time and the moves are big. The choppy pattern has had me thinking we'll get at least a retest of the high near 84.50 but a drop below Tuesday's low at 79.39 would suggest the top is already in place.

Oil continuous contract, CL, Daily chart

There are no major economic reports on Friday. This morning's reports were not market moving, especially as they all came in line with expectations. The only weak number was the Philly Fed number, coming in at 1.0 vs. the expected 1.4 but it came in stronger than September's.

Economic reports, summary and Key Trading Levels

Summarizing where I think we are, the bulls haven't done too much wrong yet although I think Tuesday's decline was the first chink in their armor. The bears are going to keep hitting there and try to break the armor open and land some serious blows. Wednesday's recovery was a statement to the bears -- back off or else. Today's loss of the rally showed another weakness in the bulls right now. The recovery once again was a statement to the bears to back away.

This back and forth price action, especially with the break of support, is usually a good sign of topping action as big money distributes inventory to the masses. I see the potential for the market to hold up and drive marginally higher into mid week next week. Once the end of the month/fiscal year had been made (Wednesday is within the 3-day settlement window) and we're close enough to the elections for government work we could find much less of an interest in holding the market up. As mentioned above, a choppy move higher into next week would be the signal to get ready for a strong reversal back down.

Don't jump the gun on getting short. We've seen how relentless the market can be so wait for the key levels to the downside to break before adding to any short positions, and then manage carefully. It's a day-traders market right now with all the choppy price action. Swing and position traders can't trust either side right now so the sidelines is a good place to be (remember, flat is a position). If you're long the market be careful and drag your stops up higher. Keep in mind that any disconnect to the downside could have the market jumping over your stops. I recommend market orders for ALL stop orders. A bad fill is better than no fill.

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

Key Levels for SPX:
- cautiously bullish above 1183
- bearish below 1159

Key Levels for DOW:
- cautiously bullish above 11,150
- bearish below 10,917

Key Levels for COMPQ:
- cautiously bullish above 2500
- bearish below 2422

Key Levels for NDX:
- cautiously bullish above 2106
- bearish below 2054

Key Levels for RUT:
- cautiously bullish above 712
- bearish below 690

Keene H. Little, CMT