Market Stats

Following the scary little selloff on Monday afternoon and into Tuesday morning, which did a very good job setting a bear trap, this week's rally has done a good job at turning the majority of the market participants bullish again. VIX has dropped back down below 18 and fund managers are draining their cash accounts to load up on stock in front of quarter end to show their clients how smart they are. What happens after quarter end is anyone's guess.

The market has certainly had a wall or worry to climb or as Art Cashin likes to call it, a stair of worries. The one concern I have is the steepness of the rally but with a lack of underlying strength. Bear market rallies are known for their steepness but lack of staying power. As Art Cashin likes to say, and I'm paraphrasing, manipulated bull rallies climb the stairs of worry as they ascend into the heavens but they take the express elevator down to hell (thanks to Steve for the reminder on that -- it's a great way to look at these rallies). One look under the hood of the market is a way of drawing the curtain back to see who the Wizard of Oz really is. The Oz is proclaiming loudly that the market is headed higher but unfortunately he's not getting the level of participation required to give it a firmer footing.

Many are scratching their heads over this rally wondering why. Why are so many feeling so bullish when the world around us is crashing? Jeff Cooper's morning article said it best: "Once again, as the Final Four days into Quarter End and their insouciant buy programs slam dunk concerns about revolutions, tsunamis, earthquakes, radioactive leaks, famines, Portugal's government blowing up, the political tip of the iceberg in Wisconsin, a million fish washed up on the shores of California -- what's freakin' next? Locusts, pestilence?"

What a wall it's been the last couple of weeks. Makes you wonder what's going to happen if good news starts breaking out all over. There's also an effort by many to simply look past any bad news and instead focus on the good stuff. In the "if it's bad news we don't want to hear it" category, this was reported in the L.A. Times on Monday:

For five years now, the Discover credit-card people have been putting out a monthly survey of 750 randomly selected small businesses, asking them questions about the economy, their sales, the business climate and other issues. Lately, of course, the results have been pretty depressing. This month's survey, for example, shows that two-thirds of small-business owners say it's 'very likely' or 'somewhat likely' that they will have to use personal funds to keep their companies afloat. But the bigger indicator may be a little note tacked onto the end of this month's report: The company plans to stop doing the survey altogether, as of right now. Discover's PR company, Burson-Marsteller, refuses to say why the survey will be discontinued or to make anyone at the company available for comment. Spokeswoman Emily Il, a brand marketing rep for Burson-Marsteller, would say only that "the company decided to allocate its marketing dollars elsewhere." Ouch. -- Sharon Bernstein

We of course have the cheerleaders on TV, with CNBC being the loudest cheerleaders out there. With the resumption of the rally off the March 16th low the market pundits are tripping over themselves to get in front of the camera again to tell us the market is headed higher this year with S&P projections to 1400-1500 and higher. The last time they were this loud was at the February high. They all got kind of quiet after the February high. Now that we're testing those highs in the DOW they're all back out in force. I can be forgiven for saying "burn me once, shame on you, burn me twice, shame on me." When the majority say something about the market it's very common to have the majority wrong and with the weakness of the current rally I'm thinking the bullish majority are wrong again. But as always, we'll let the charts tell us when they're wrong and until then we've got to go with the flow which is up.

The futures market rallied strong overnight but had started a small pullback in the pre-market hours. When the economic reports came out there wasn't much attention paid to them. Even the ADP employment report, which showed 201K jobs added, indicating the Friday report should be strong, barely registered a blip in the futures. If anything there was a little bit of a pullback on the news. Is the market baking into the cake a high number for Friday, possibly setting up a sell-the-news reaction? Considering the low-volume, low-market-breadth rally we've seen into the end of the month/quarter I'd say there's a decent chance of a negative reaction. But that's just speculation from here. I'll have to see how it's setting up in front of Friday morning's report.

Total volume today was at least a little stronger than it's been the past few days but still only about on par with last week's low-volume numbers. The lack of volume in the rally, along with weak market breadth numbers, is a strong indication that this is the final leg of the rally. Looking for where it might end will probably work out better for you than to look to buy the next big dip.

Starting tonight's charts with a look at the SPX weekly chart, I've drawn a parallel up-channel for the leg up from July, based off the uptrend line from March 2009-July 2010. The rally highs since July 2010 were all held back by the top of this channel. With the top of the channel currently near 1410 it certainly makes for a good upside projection (in agreement with our cheerleading pundits). But before it can get to 1400 it will hit the mid line of the channel which is near 1335 tomorrow (shown more clearly in the daily chart next). This will be channel resistance until proven otherwise so keep an eye on that level.

S&P 500, SPX, Weekly chart

The price projection at 1352.67 is the projection we were watching as the market rallied higher in February. That's where the 2nd leg of the a-b-c bounce off the March 2009 low would achieve 62% of the 1st leg, a very common wave relationship. I was anticipating a rally to that or to 1354 which is opposite 666 (the March 2009 low) on the Gann Square of Nine chart. So if 1335-ish doesn't hold SPX down then I think the 1353-1354 target is a good one. There are some cycle studies pointing to the first week of April as a turn window so a rally to this upper level next week would be a nice little rally for the bulls but I wouldn't get complacent about it since it would be a very good setup for the bears.

It was obviously bullish once SPX rallied above its 50-dma near 1307 and above its downtrend line from February. The pullback on Tuesday morning found support at both and was a very good setup to go long with a tight stop just below. Today's rally had SPX testing its March 3rd high at 1332.28 (missing it by about 50 cents). On the daily chart below you can see the mid line of the parallel up-channel from the July low was also nearly tested, which is near 1335 tomorrow. There's further upside potential to 1353-1354, as mentioned above, but be careful here -- the rally has fulfilled the pattern requirements to be considered complete at any time now. A drop back below 1305 would tell us the leg up from March is finished and the potential is for a quick decline back below 1250.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1335
- bearish below 1305

Looking at a shorter-term pattern, the 60-min chart below shows a rising wedge for the rally off the March 16th low. The weak volume and market breadth for this rally supports the bearish interpretation of this pattern. These typically go longer than you think so stick with the upside until it breaks down, which would be confirmed with a break below 1305, Tuesday morning's low. We might find SPX topping out between the March 3rd and February 18th highs (1332-1344). And keep in mind that bearish rising wedges tend to get completely retraced faster than it took for the rally. As we head towards April opex in two weeks this will be an important consideration if you're in long positions and can't tolerate a decline that might not recover.

S&P 500, SPX, 60-min chart

I'm continuing to keep my eye on a possible analogue between the 1987 top and the current one. I've made notes on the charts below but basically what I'm watching are time and price behavior. Following the break below the 20 and 50-dma's in September, the bounce into the October 1987 high had recovered back above the 20 and 50-dma's and had the majority pointing to new highs for the year. This should look and sound familiar to what's happening this month. But once price broke back below those moving averages the bottom fell out. Those averages are currently at 1303 and 1307 and the key level shown above is at 1305. Take a decline below these numbers seriously

S&P 500 Analogue between 1987 and today, Daily charts

From a time perspective, the October 1987 high was 28 trading days following the August high. Adding 28 trading days from February 18th is tomorrow, March 31st. Is it coincidence that it's at the end of the month/quarter and right before the job numbers Friday morning? Does make one want to say hmm... I'm not predicting anything here but it does warrant caution if it follows through to the downside next week.

The DOW has had a relatively strong rally since the March 16th low and is the first to make it back up to its February high at 12391 (it was 8 points shy of that level today). If it can push marginally higher tomorrow it will test its broken uptrend line from August-November-January near 12405. It doesn't have to stop there but it will be resistance until proven otherwise.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,400
- bearish below 12,170

If the DOW rolls back over from here it will leave a negative divergence against the February high, which of course is the hallmark of a double-top pattern. The downside projection from it, if it breaks the March 16th low, is the distance from the twin peaks to the valley (836 points) measured down from the valley floor, which would give us a downside target of 10719 (below the November low). That's just a number to think about if the market starts back down.

In the meantime, if the bulls keep doing what they're doing, there's upside potential to the top of the DOW's channel, near 12700. For the rally from March 16th it has a similar rising wedge pattern as shown for SPX. Upside potential for this pattern is just shy of 12500 if it remains inside the wedge until Friday (the uptrend line is currently near 12320 so that level needs to hold if the market pulls back a little tomorrow morning (we'll probably get another overnight rally in the futures again if the pattern holds).

Bullishly the NDX pushed above resistance at yesterday's close, which is where the downtrend line from February and the short-term uptrend line from January intersected. Now the rally needs to hold because today's candle can be interpreted as a bearish hanging man. A drop back below this morning's low at 2326.79 would be at least short-term bearish. Below Tuesday's low near 2291 would be confirmed bearish. In the meantime there is upside potential to at least the March 3rd high near 2376.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2376
- bearish below 2291

The SOX remains weaker than the broader market and the tech indexes and that should be worrisome to the bulls. This index often pays attention to its 50-dma and it was tested today near 445. Slightly higher is its downtrend line from February and short-term uptrend line from January, both near 447. The setup is for a reversal from here and if it starts to head south I doubt it will leave the tech indexes behind. A push above 447 would be more supportive of a broader market rally.

Semiconductor index, SOX, Daily chart

One of today's headlines was "Russell 2000 hits its highest level since October 2007". It was the first of the major indexes to make a new high for the year. That's obviously bullish, especially when put into the context of fund managers wanting to be long the small caps for a continuation of the rally. From a contrarian sense, when I review this with the other bullish sentiment data that I watch, this is one more bullish sentiment that could get fund managers into trouble. Or at least the risk is high for this index if all of a sudden they want out of the small caps. In that case there's a high likelihood that the RUT will easily outperform to the downside as well. But for now it's bullish although it's now up against its broken uptrend line from August-January. A drop from here would leave a bearish kiss goodbye and the wave count says this is the last leg of the rally from July 2010. Note the bearish divergence at the new high so far. If the bulls can press it higher it should be able to test its October 2007 high at 852.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 842
- bearish below 818

There's another reason a turn back down tomorrow could be bearish, which I'm showing on its 60-min chart below. I've got a few price projections based on the individual legs up and the fact that the rallies and pullbacks adhered to these projections tells me there's a natural rhythm to the move. The last projection just shy of 839 was achieved into the close so any pullback tomorrow morning could lead to something bigger. A break below the parallel up-channel, currently near 828 would be a strong indication the rally leg has finished. But it remains bullish until that happens and as shown with the dashed line, a rally to the top of the channel near 852 on Friday would coincide with a test of the October 2007 high.

Russell-2000, RUT, 60-min chart

One relationship that has remained very much in synch is that between the 10-year yield (TNX) and the stock market. This makes sense when you think about money rotation -- as it rotates out of bonds and into stocks the bond prices will decline (yields rise) as the stocks rise. Today's rally in the stock market was not accompanied by a rise in TNX. There will always be one-day blips but it's a cause for concern, especially knowing the stock market is likely more under the influence of end-of-month/quarter shenanigans rather than actual buying interest for more fundamental reasons (which is what makes this week's stock market rally suspect).

An important test for bonds is coming tomorrow as the Treasury will need to settle about $61B in new paper. The amount of money needed by the primary dealers to pay for that will have to come from somewhere and it could be the stock market (either Thursday or Friday). If the stock market hiccups following the Friday payroll numbers the selling could become even more intense if stocks need to be sold to provide the buying capital for the new paper. That's not a given but I see it as a risk.

TNX has bounced back up to the neckline of a potential H&S topping pattern, similar to what the stock market was showing before the strong rally back up from the March 16th low. If TNX rallies above 3.63% and breaks its downtrend line from 2007 then we'll have a much more serious bond decline in progress and that would be potentially bullish for stocks. But the pattern is set up for a reversal back down in TNX (rally in bonds) and that would likely be accompanied by a stock market decline as well. So keep an eye on TNX over the coming week.

10-year Yield, TNX, Daily chart

There's some evidence that the big banks are losing money in the first quarter. They've been accumulating cash in their accounts with the Fed at a rate unseen since the 2008 crisis. What do they know or what are they afraid of? Are they preparing to take massive write-downs on bad loans? It's anyone's guess but if they do report worse than expected results for Q1 it could put a wet blanket over the market. And perhaps that's why the financials have been underperforming the broader market. Remember that banks were early to top out in 2007 and the banking indexes have not made a new high since April 2010 and are nowhere near testing their March 3rd highs, let alone their February highs. This sector continues to be a longer-term bearish signal for the broader market.

The BIX continues to chop around its H&S neckline near 148.30. I've drawn a little sideways triangle for its price action since the March 16th low but that's just a guess right now. It would be a bearish continuation pattern in this configuration but it could chop up and down for another week or two before dropping out of it. I also see the possibility for a quick move up to its 50-dma near 152 before heading back down. A rally above 154.43 would be more bullish and a drop below 148.29 would confirm the next leg down is in progress.

Banking index, BIX, Daily chart

Like the DOW the TRAN tested it February high today but pulled back, leaving a bearish shooting start at resistance and a negative divergence against its February high. The only way to negate this is for both price and the oscillators to make new highs. Some are saying we'll have a Dow Theory buy signal if both the DOW Industrials and the TRAN make new highs for the year. But we've been on a buy signal so it's not like we'd get another one. Since the late November low in the DOW was never confirmed by the TRAN we did not get a Dow Theory sell signal, keeping us on a buy signal. At the moment we have a bearish signal on the TRAN's daily chart so we'll see if there's any downside follow through tomorrow. Below the high on March 21st near 5175 would say the bounce is over.

Transportation Index, TRAN, Daily chart

The U.S. dollar broke out of its bullish descending wedge pattern last Friday but it's hardly been a bullish move since then. It doesn't seem to want to let go of its downtrend line from January. I'm expecting the rally to continue and a break above 77.40 would likely be followed by a strong rally. In the meantime it could slide down its broken downtrend line for a bit before rallying.

U.S. Dollar contract, DX, Daily chart

There are some fundamental reasons why I believe gold has topped or is very close to topping and should see a significant pullback. But rather than reiterate it all, this is an article written by James Debevec on Minyanville, who I think did a good job summarizing why he believes gold is strongly overvalued (as he says, the second-most overvalued since 1791). It makes for good reading, especially if your bullish the yellow metal and have bought into all of the reasons why gold should head for $4000 next. Gold is overvalued

The price pattern for gold at the moment is messy. If gold tries to rally again, keep an eye on the trend line along the highs since November, which stopped the last two rally attempts in March and is currently near 1452. A break of its uptrend line from January, near 1409, would be a sell signal, which would be confirmed with a break below 1380. The significant bearish divergence at the March high suggests a break lower.

Gold continuous contract, GC, Daily chart

Oil and gold look very similar, including the double top so far in March, with bearish divergence. The weekly chart points to the possibility for a rally to about 115 but it first needs to break the March highs and the trend line along the highs from 2009. So far the bearish divergence suggests that's going to be difficult. Once oil breaks down it should head below 80 over the next few months.

Oil continuous contract, CL, Daily chart

Thursday morning we'll get the normal unemployment numbers and as shown in the table below, it's expected to show a decline in first-time claims. The Chicago PMI and Factory Orders, both out after the opening bell, could move the market, especially if they drop more than the already expected decline from the previous month. The big question is which way -- a strong economic report could get traders worried about the Fed taking away their punch bowl whereas a weak report could have traders rejoicing at the likelihood for the Fed to at least continue providing liquidity through June.

So your guess is as good as mine how the market will react to any economic reports, including Friday's payroll numbers. I'm hoping the charts will show a higher-odds setup into tomorrow's close. The bottom line is that this market has been propped up and I suspect there are more than a few fund managers hovering over their sell buttons. Sell first, ask questions later is going to be the typical response out of this market (Monday afternoon may have been just a taste of things to come).

Economic reports, summary and Key Trading Levels

In recent weeks I've laid out my arguments and charts, along with some historical references, for why I believe the market is closer to a top than the start of another major rally leg (I consider a rally to and above 1400 another major leg up). I thought the February high was going to be the end of the rally but as is typical with this market, we always seem to get a test of the high (often with a marginal new high) before breaking lower. A review of previous major highs will show you the pattern.

The wave pattern now counts best as having us in the final 5th wave of the rally from July, even with most of the indexes not yet making new annual highs, which in turn will complete the a-b-c bounce off the March 2009 low. Looking for a top is I believe the better and safer course of action from here.

The final 5th wave should be the weakest wave up and the low volume, weak market breadth and overly bullish sentiment combine to make for a high-odds completion very soon. The fact the majority of the rally has occurred in the overnight futures has made it a little scary when thinking about the big air pocket below us right now. With the market propped up on fluff it's more vulnerable to the downside than usual. I believe the market has set itself up for failure and disappointment. We've seen downside volume ahead of upside volume and when the selling starts it's likely to be fast and furious as fund managers hit the exit all at once. A no-bid scenario is probably not far off.

Countering this bearish expectation is the knowledge that April is typically a bullish month. So the seasonal factors tell us to hang in there for a few more weeks at least (perhaps through opex). Certainly we've got an uptrend that needs to be respected and buying the dips is clearly working. I think the safest way to play the market for the next few days at least (to get through next Monday and beyond the first two trading days of the month and past an April 4th turn date), is to day trade it. I'd want to be very cautious about holding long positions overnight if they're new purchases. If you have some cushion below you then you can give it some wiggle room. But new purchases have the risk of being bought at the top of this move and the exit could be a painful one.

There a few cycle studies pointing to the first week of April as a potentially important turn window. Since we're rallying into this turn window one must assume it will mark a high rather than a low. This combined with the 1987 analogue that I reviewed above has me watching very closely for signs of completion to the rally. The wave counts, cycle studies, weakness of the rally and end of month/quarter right in front of Friday's jobs numbers is particularly interesting. It elevates the risk to those holding long positions so think about how you want to protect your positions while staying long to participate in any further upside. I do believe the upside potential is dwarfed by the downside risk but it's your call how you want to proceed from here.

Good luck as we finish out the quarter and start a new month on Friday. I'll be back with you next Wednesday.

Key Levels for SPX:
- bullish above 1335
- bearish below 1305

Key Levels for DOW:
- bullish above 12,400
- bearish below 12,170

Key Levels for NDX:
- bullish above 2376
- bearish below 2291

Key Levels for RUT:
- bullish above 842
- bearish below 818

Keene H. Little, CMT