Market Stats

Todd and I have switched nights for the Market Wrap and he will be with you on Wednesday.

The headline after the market's close was about the DOW achieving the longest winning streak in three months, now at six days. The last time the DOW achieved a 6-day winning streak was off the July 1st low. During that 6-day rally it closed 680 points higher for a +7.0% gain. This past week's 6-day rally has added 338 points for a +2.9% gain. Six-day rallies just aren't what they used to be. Wouldn't it be interesting if the rally started and finished with a 6-day winning streak? But clearly the bulls can't complain since a rally is a rally and it keeps the bears from enjoying anything.

Today's rally started with a, you guessed it, with another gap up to start the day. SPX now has 12 unfilled gaps since the start of the rally from the July 1st low. As I'll review on the DOW's chart, it's even at an interesting price level where it might be topping. But let's not take away the pleasure the bulls should be feeling here after a nice run higher from the sharp decline on Friday, January 28th. That decline was a little scary but turned out to be just another dip-buying opportunity. There are not many of them and I'm sure there are more than a few of you primed and ready to buy the next dip, no matter how scary it looks. The market is doing a nice job in that respect.

Also rallying today were Treasury yields which made new highs for their run up from the January 28th sharp decline. But they then reversed and closed in the red. I'm going to spend extra time tonight on the bond yield charts because of where they're located and what might happen next. I think the bond market is something we all need to watch carefully now since they could tell us what might happen with the stock market.

Part of the excitement this morning came from more merger news, which is common for Mondays. AOL announced plans to purchase the online news site Huffington Post for $315M. The industrial firm Danaher Corp. (DHR) announced it will buy the medical-diagnostic company Beckman Coulter Inc. (BEC). Ensco PLC (ESV) is going to buy the oil development company Pride International Inc. (PDE) for $7.3B. Berkshire Hathaway Inc. (BRK) announced plans to purchase all the shares of Wesco Financial Inc. (WCC) that it doesn't already own, for a total value of about $548M. In a bullish market these merger news pieces usually stoke a little more bullish fervor.

Lowes Corp. (L) added to the bullishness with its earnings report saying it had its best quarter of the year, reporting a rise of +16% in its profits, beating expectations. Other than that there wasn't much to add to the bullish enthusiasm this morning. The market rallied just because it's the thing to do. There was no bad news so let's buy!

Copper made the news with a new high for its run up since last June's pullback low and that had bulls thinking positive about the increasing level of demand for this industrial metal and the fact that that means bullish things for the global economy and stock prices. Don't look now but the morning high was followed by selling for the rest of the day and closed below Friday's close, creating a key reversal day in the process. Shh, don't tell the bulls though because they're having a good time and we don't want to spoil their party.

So let's start with a look at the bond market because I see the possibility for a reversal and that could have ramifications for the stock market. There's been a lot of talk about money rotating out of bonds and into stocks because of the perceived lack of risk in the stock market while the bond market is at risk because of inflation. While only a few of us trade the bonds, it has become easier to do so with the creation of the bond ETFs, such as TLT and TBT (the inverse fund), and more of us can more easily participate in trading the bond market (including the emini futures for the 10-year and 30-year). But even if you don't trade the bonds I think it's important to watch them and use them for clues about what the stock market is doing, including confirmation (or not) of a move in the stock market.

We all know the Fed has been buying Treasuries in their effort to monetize the government's debt. They tell us all the wonderful reasons for buying Treasuries but the bottom line is they're trying to hold yields low (not succeeding very well yet) so that the government does not have to pay higher rates for more debt. The side benefit is lower rates for consumers and businesses (in theory). So far that policy has not worked for them because yields have risen significantly since QE2 was announced and I think much of that fear has resulted in demands for higher bond yields to compensate for the risk of owning the bonds during a period of increasing inflation. But the big question remains -- are we heading for an inflationary or a deflationary period?

Updating the chart that I showed last week for the TIPS (Treasury Inflation-Protected Securities), it shows a potentially important break down out of its up-channel from March 2009. I had mentioned last Wednesday that the bear flag pattern along the bottom of the channel since the December low looked ready to resolve to the downside and sure enough it broke the next day. Today's low tested the December low which I anticipate breaking soon.

Treasury Inflation-Protected bond fund, TIP, Weekly chart

If I view TIPS as my inflation/deflation gauge I'd have to say deflation could be winning. Obviously it's very early to make that call but if inflation was the bigger worry then why are TIPS traders not interested in bidding up the prices? And if inflationists are losing against deflationists then what might that mean for the broader bond market? If deflation becomes more of a concern then demand for higher yields may not hold up and that would mean the selling in bonds could end. And if buying starts that could mean selling in the stock market.

Starting with a 30,000-foot view of the 30-year bond, you can see in the chart below how the yield has been in a steady downtrend in a nice parallel down-channel from the high in 1994 (actually longer but that's the last peak on QCharts and is good enough for this conversation). This is why you hear about the long-term bond market rally and why so many are calling for end to it (as further support for a continuation of the stock market rally). The rally in yields from August has pushed slightly above the top of the down-channel and obviously it would be bullish for yields (bearish for bonds) if it continues to rally from here. If TYX gets above its April high near 4.86% it would be confirmed bullish, in which case I will be watching for a pullback to retest the top of the channel to hold and then continue rallying.

30-year Yield, TYX, Monthly chart

A turn back down in TYX could result in just a pullback to correct the rally from August (green) or it could start a new leg down to a new low (red). It takes a break below the August low near 3.46% to confirm the more bearish scenario. What TYX does from here could have a large influence on what the stock market does next. The weekly chart below is simply a closer (10,000-foot) view of the above chart except for one difference -- I changed the price scale to log to show that the downtrend line from 1994 is still slightly above the current high. Therefore, depending on the price scale used we have TYX either slightly above the trend line or still slightly below. It simply means it's at resistance while overbought. Usually (about 80% of the time) resistance will hold on its first test if it's overbought at the same time. Therefore at least a pullback should be expected from here. And again, that means buying in the bond market.

30-year Yield, TYX, Weekly chart

Now we zoom in a little closer (1000-foot view) with the daily chart and look at the rally from August. You can see it's in a nice parallel up-channel so clearly the trend is up and it would not be in trouble until it breaks the uptrend line from October, currently near 4.56%. A drop below 4.51% would confirm an important top is in place. Other than TYX hitting potential resistance at its downtrend line from 1994 it's also very close to a Fib price projection near 4.77% (today's high was just shy of 4.76%), which is where the 5th wave of the move up from August is 62% of the 1st wave. It's also struggling in the bottom half of its up-channel, common for the 5th wave of the move and therefore has me watching carefully for the possibility that the rally is finishing here.

30-year Yield, TYX, Daily chart

If the bond market does reverse soon it could lead to rotation out of stocks into the bond market. At some point, as always happens, traders will decide the stock market has gone far enough to have them worrying about a steeper correction. Upside potential starts to be outweighed by worry about downside risk (fear starts to take over greed). Combine this with a "safe" return in the bond market, such as 4%-5% in 10-year to 30-year Treasuries, and many fund managers start to make the switch. When enough managers start that process and the stock market starts to sell off you'll have more and more doing the same thing and what was a strong move up in the stock market turns into a strong move down. These cycles have not been abolished by the latest rally. It's not "different" this time.

When you look at a chart of TYX vs. SPX you can see the close correlation in their moves. When yields are rising bond prices are falling (money rotates into stocks) and vice versa. So it would be natural to think about yields and stock prices in synch, which is exactly what you can see in the chart below.

TYX vs. SPX, Daily chart

Therefore we can watch the bond market for clues, or confirmation, of moves in the stock market. It might not be in lock step and the correlation doesn't always hold true but for now the correlation is there. The 10-year yield (TNX) is also a good one to watch for the same reason. At the moment TNX has rallied up to potential resistance at its downtrend line from June 2007 through the April 2010 high. The chart is a bit crowded as I'm trying to show multiple possibilities through this year and into 2012. A rally much higher than today's high would have it breaking its downtrend line from June 2007 and that would be bullish (bearish for bond prices, bullish for stocks). But again, hitting resistance while overbought, on a weekly basis, leaves the odds pointing towards at least a pullback.

10-year Yield, TNX, Weekly chart

Assuming TNX does pull back from here, it won't be clear for some time whether we'll get just a pullback to correct the rally from October before heading higher again (green) or if instead we'll see a deeper decline as part of a more bearish sideways triangle pattern (red). I'll worry about which pattern it is as the year progresses. The daily chart below zooms in on the rally from October and like TYX I see the potential for a high here and now as it tagged the price projection at 3.696% (actually it missed it by .004) and then closed negative on the day. We could be looking at a shooting star at resistance so a down day tomorrow would be confirmation of an important reversal signal. As indicated with the green dashed line, we could see just a pullback and then a final high later in the month so I'll be watching for that possibility setting up in a pullback.

10-year Yield, TNX, Daily chart

So keep an eye on the bonds. I'll update the picture that I see when I'm back with you a week from Wednesday. If you follow our live commentary on the Market Monitor I'll be updating this as the pattern progresses.

Moving over to the stock market, SPX pushed above its August 2008 high near 1313 and that was a bullish move. In so doing it also pushed up to the top of a rising wedge pattern near 1321 (the day's high was shy of 1323) and hit its upside target zone of 1320-1325 that I've been watching for. On a weekly basis the chart remains bullish but caution is advised now that it's reached potential resistance.

S&P 500, SPX, Weekly chart

The daily chart shows more clearly how price has pushed up to the top of its rising wedge pattern, defined by the trend line along the highs in August and November. At the same location is its broken uptrend line from November, which is where the strong rally on February 1st stopped. So we'll see how this area of resistance is handled. A drop back below last Thursday's low near 1295 would be bearish and indicate a top of importance is in place.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 11300 to 1320-1325
- bearish below 1294

The broken uptrend line from November was tagged to the penny today so traders are either watching it or it's a measure of some rhythm to the rally's pattern. Regardless, we know it's an important trend line as rallies since the January 20th low have been repelled by it. As shown on the 60-min chart below, we could see price chop its way higher in a smaller rising wedge pattern from the January 28th low and make it up to the 1330 area before it runs out of steam. A break below today's gap fill at 1310.58 would spell more trouble for the bulls and below 1301 would say we've likely seen the high.

S&P 500, SPX, 60-min chart

The DOW pushed up to the same trend line along its highs from August as SPX did. At the same location, near 11165 is another trend line along the highs since early December. With the bearish divergence at this line of resistance, with it being overbought, I think resistance will hold. Today the DOW rallied slightly above resistance but then closed back down on the lines. Whether that's a throw-over finish or just a pause is not clear yet. It takes a drop below last Thursday's low near 11981 to tell us the high is in place.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,000 to 12,170
- bearish below 11,981

NDX looks like it could push a little higher if it has a date with its trend line across the highs since November and its broken uptrend line from August, both near 2380. As with the other indexes, a drop below last Thursday's low near 2298 would signal an important high is in place. Also similar to the other indexes, the significant bearish divergence at new highs continues to hold and this should be a big caution to those who want to chase this market higher.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2330 to 2380
- bearish below 2298

A pretty picture of an uptrend can be seen on the SOX which shows a very steady rally in a relatively tight parallel up-channel (on the weekly chart it's especially evident how narrow and steady the buying has been, with very little in the way of pullbacks since August). The top of the channel is near 471 tomorrow and if tagged it will probably act as resistance since the channel has held well thus far. Worrisome is the bearish divergence at the current high.

Semiconductor index, SOX, Daily chart

The RUT was also able to finally push to a new high but then closed essentially at it. It managed to poke above its broken uptrend line from August but closed slightly below it. A selloff from here would leave another bearish kiss goodbye. But it still takes a break below last Thursday's low near 787 to confirm the high is in. In the meantime the trend is up so bears need to respect the possibility for a push higher to 830-835.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 813 to 830-835
- bearish below 787

As Jim and I have mentioned in the past, the Total Stock Market index (what was the Wilshire 5000) is an index that's much harder to manipulate since it's made up of most of the stocks. So watching its pattern can help confirm or negate what we might be seeing in other indexes. Right now I'm seeing confirmation as it too has pushed up to the trend line along the highs from August-November, near 13950. At the same location is its broken uptrend line from November, which is where the rally into the high on Thursday, January 27th stopped, followed by the strong selloff on Friday, January 28th. It was stopped again on the February 1st rally. I also have a Fib price projection near 13935 for a possible final 5th wave in the rally from November. Same drill for the bears though -- wait for a break of last Thursday's low near 13645 to get confirmation of a high in place.

DJ Total Stock Market index, DWC, Daily chart

The top of a rising wedge pattern for the banking index, BIX, is currently near 160 and two equal legs up from the January 28th low, to complete the 5th wave, is also at 160 so I like that level for an upside target and potentially the end of its run for the move up from August. Notice too that it would satisfy a retest of the April high just shy of 163. But a break below 153 would tell us the high is already in place.

Banking index, BIX, Daily chart

The DOW continues to push higher while the TRAN patiently waits for bulls to get it out of their system. The TRAN was stopped today by its new downtrend line from its January 18th high and appears to be consolidating sideways while waiting for the DOW to turn back down. The message from Dow Theorists is bearish as the DOW's new highs go unconfirmed by the TRAN. If the TRAN continues lower from here and drops below the January 28th low near 4988 while the broader indexes push higher (if they do) I would suggest very tight stops on long positions. I think the TRAN is our canary and the fact that it has not been able to get back above its 50-dma is our warning. Another drop off its perch (with a break below 4988) will mean a dead canary this time.

Transportation Index, TRAN, Daily chart

Following up on last Wednesday's weekly chart of the dollar, which points to a rally to the 83 area regardless of the longer-term picture for the dollar, it's looking like the pullback from January has finished. The descending wedge was broken to the upside on Friday and that wedge calls for a fast retracement of it so back up to the 81 area quickly. With effectively a double-bottom pattern against its November low any rally from here would likely get dollar bears to start covering, in which case we'd be back to covering carry trades -- cover dollar shorts and sell stocks/commodities. So keep your eye on the dollar for another symbol to provide a heads up on what the stock market might do next.

U.S. Dollar contract, DX, Daily chart

Gold appears to be in a correction of its January decline. If it makes it back up to its 50-dma near 1375 it would also be between a 50% and 62% retracement of the decline. That should set up the next leg down which will break below 1300.

Gold continuous contract, GC, Daily chart

I thought Friday's close for oil on its 50-dma would lead to another leg up but today's decline has me wondering if the sharp two-day spike up at the end of January is all we're going to get. Until it breaks below 85 the pattern supports the need for one more rally leg as depicted. A break below 85 would puts oil in a more immediate bearish pattern.

Oil continuous contract, CL, Daily chart

It was a very quiet day for economic reports and it's even quieter tomorrow -- there are none. Tomorrow will also be a quiet day for earnings reports and then Thursday's usual reports, with nothing expected to be market moving this week. The market is on its own for the rest of the week as earnings reports die down as well.

Economic reports, summary and Key Trading Levels

I received a good question/observation from Rick that I thought would be worth passing along, with my response, because it's something that's on our minds and a question I receive the most -- how different is today's market and does technical analysis even work anymore. Does anything work anymore...from Rick:

"I'm passing along a link to a brief story that discusses high-frequency trading and how it is affecting the market. The story also contains a link to an interview in which the interviewee, a noted exchange expert, suggests that technical analysis has been rendered irrelevant as market volume is driven more and more by high-frequency/algorithmic trading. zerohedge article on HFT

For quite some time, I've been wondering if this could be the case while during the same time I've been reading your commentaries and your frequent utilization of technical patterns within them.

As much as I appreciate your use of technical analysis I'd like to know your thoughts as to whether or not technical analysis is becoming less reliable as, once again, your commentary/technical analysis is telling readers that the market is topping.

I've read that the current phase of the Feds' POMO program is expected to last until at least June. I would suspect that this will allow for a rising/supported market until then. How strongly do you feel that market technicals will win out against the Fed before then?

Perhaps some day high-frequency/algorithmic trading will be no more and the market will be able to trade on its own, like the 'old days'. Thanks for reading."

Thanks for the link Rick. I completely agree that a lot of technical patterns do not work as well as they used to. But I think it's unrealistic to think they won't work at all. In a momentum market many of the technical indicators will not work because of the extreme moves (think parabolic rally or decline) but they can still help. For example, trend lines using the log scale will often still be useful. Oscillators tend not to work because they simply get pegged in overbought (or oversold in a strong downtrend).

The reason I mention momentum and parabolic moves is because I do agree that HFT/computer algorithms is the new market we're trading and basically they're momentum models. That's why I've alluded to the on-off market that we have -- it's either rallying hard or it's declining hard. And when neither are happening we get very quiet tight sideways price action. It's also why I agree about the potential for more, not less, flash crashes. When social (trader) mood turns sour again, and it will, we could find ourselves in a down market that won't stop going down (the off switch). So what I'm trying to do is figure out where that turn will occur because I don't think it will give traders much time to switch sides before having to chase it to the downside.

Trader mood is very positive right now (too much for the good of the rally) and much of that has to do with the belief in the Fed, who in my opinion is given too much credit but that doesn't matter. What matters is that most traders believe it ("don't fight the Fed"). What we don't know is when or why trader mood will turn and at that point traders will lose faith in the Fed's ability to stop the bleeding. These euphoric/depressed cycles have always been and will always be with us. The next cycle of depression will cause traders to sell no matter how much the Fed tries to stop it.

The tops and bottoms of those swings is what I try to identify, obviously sometimes more successfully than at the present high. But much of my experience in the market tells me the rally is on borrowed time, which makes the coming correction likely to be worse than if the market corrected more normally on its own. So I continue to look for corroborating evidence of a market high, which is why I brought in the bond market analysis tonight. Keep watching for the signals out there and don't get complacent about this rally.

Summarizing tonight's charts, the indexes are up against potentially strong resistance. It doesn't mean the market has to turn down from right here right now but that's the potential. We could see the market hold up for another two days or two weeks but if the price pattern gets very choppy and makes only minor new highs each day it will be a signal that the rally is ending. With the overbought market I don't think it's a high probability that we'll see the resistance levels broken to the upside (other than intraday moves above it) so playing the probabilities means we should be looking for at least a pullback. If the pullback ends up with breaks below last Thursday's lows then we'll be into a more serious correction and that could mean a correction of at least the rally from November.

Keep an eye on the bond market. If we see yields start to reverse back down from here there's a good chance it will signal the start of some rotation out of stocks and into bonds. If bonds continue to sell off and the stock market pulls back you'll probably want to think about buying the dip in stocks. We want to see confirming signals between the two (the rotation from one to the other).

There are a few cycle studies pointing to the early part of this week as a turn window, with today/tomorrow in the middle of the turn window. When I combine those cycles with what I'm seeing in the price pattern and prices up against resistance I'm alert to the possibility for a high this week (if it wasn't today's). Both sides need to keep trades on a short leash.

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

Key Levels for SPX:
- bullish above 11300 to 1320-1325
- bearish below 1294

Key Levels for DOW:
- bullish above 12,000 to 12,170
- bearish below 11,981

Key Levels for NDX:
- bullish above 2330 to 2380
- bearish below 2298

Key Levels for RUT:
- bullish above 813 to 830-835
- bearish below 787

Keene H. Little, CMT