Market Stats

This morning's economic reports included the MBA Mortgage Index (declined some more, -5.6%) and the Durable Goods Orders (DGO). The good news is that the DGO was up +2.5% which was better than what the market was expecting (+1.8%) and an improvement over February's number (revised up from -0.6% to +0.7%). The only worrisome news, as related to the chart below, is that the recovery highs are declining in magnitude. This supports the general view that the economy is still growing but at a slower pace, which of course begs the question about why the stock market is still rallying but of course understand there's often a disconnect between Wall Street and Main Street and that's certainly true right now.

Durable Goods Orders, chart courtesy

When excluding transportation orders the DGO was still better than expected, up +1.3% vs. the forecast for +1.2%. What was healthy was business demand which showed a +3.7% increase for capital goods while nondefense-related orders were up +3.2% (defense capital goods were up +7.5%). The bottom line is that the report supports an expected decent GDP number for the 1st quarter, which will be announced tomorrow (the advance report). If the GDP number surprises to the downside, which some think could happen, it could spark trouble for the market (since the rally has gotten way ahead of the economy).

The Fed is of course very aware of the GDP numbers before their official release and you can bet it was all part of their discussion as they wrapped up the FOMC meeting. The FOMC announcement had no surprises -- rates are being held low and the $600B bond-buying program will end as scheduled on June 30. They did make a note of inflation ticking higher but still consider it "transitory". The economy is proceeding at a "moderate pace" but the jobs market is still a "concern". They've kept the "extended period" language the same when it comes to the low rate (contrary to what many of the other countries' central banks are doing). The vote was again unanimous.

The only reference to what will follow QE2 is a statement saying the Fed will maintain the flexibility to "adjust" its holdings of Treasuries and mortgage-backed securities as needed. In other words, as paper becomes due they could simply buy it back so that their balance sheet remains bloated rather than allow too much paper to hit the market too soon.

The stock market got a little lift following the FOMC announcement with an expectation the Bernanke will continue to support the stock market. Interestingly, the indexes ran up near potentially important resistance levels, which I'll get to with the charts, just before the press conference, setting up a sell-the-news reaction. So all eyes turned towards Bernanke for his 2:15 PM press conference but just prior to the conference the Fed released an update to their economic forecast for 2011 and 2012 in which they raised their forecast for inflation while cutting their outlook for GDP, although they do see some improvement for the job market. Bernanke then covered the same material in his presentation at the beginning of the press conference.

The Fed is now looking for GDP of 3.1%-3.3%, down slightly from their previous forecast for 3.4%-3.9%. Bernanke acknowledged that they're expecting to see Q1 GDP below 2% (the advance number will be released tomorrow) but again feels the decline will be "transitory" (he likes that word and used it many times) and the rest of the year will tick back up. They expect growth between 3.5%-4.2% in 2012 and 2013.

The projection for inflation is now 1.3%-1.6% for 2011 (excluding food and energy), vs. an earlier projection for 1.0%-1.3%. The Personal Consumption Expenditure (PCE) inflation measure is expected to increase 2.1%-2.8%, up from their January view that we'd see 1.3%-1.7%. They expect inflation to subside once the "transitory" spike in commodities reverses and for 2012 they're expecting 1.3%-1.6%.

Most of the speculation about the reason for the press conference was an effort by the Fed to sell its program to the public. The feeling was that Wall Street already knew what the Fed was up to but Main Street disagrees and Bernanke's trying to get people on board with his program. This is obviously an effort to control the political process, i.e., the Congress members who have been getting an earful from their constituents.

From my perspective, in listening to Bernanke, he successfully danced around the questions and merely reiterated the points we've already heard before. Basically he assured us that the Fed is "watching carefully" for any changes in the economy and inflation and is ready to act when necessary. When asked to defend the Fed's QE2 program he referred to the increase in the stock market and reduction in volatility. His reference to the "financial market" was typically in reference to the stock market. He did not address the question about why the bond market sold off instead of rallying as expected (resulting in higher rates vs. where they were last fall). In my view he was not asked any tough questions.

To the question about continuing a QE program, since he feels QE2 was so successful, Bernanke did say they have to balance their inflation concerns with a desire to continue supporting the financial market with additional money. As he stated, if inflation becomes "unanchored" they will be forced to start some tightening so as not to worsen the employment situation. He said the trade-offs are becoming "less attractive at this point." He mentioned that job growth will be hampered if inflation gets too high. As I listened I got the distinct impression (listening between the lines) that Bernanke was very clear about worrying more about causing inflation than helping the markets if they continue QE. We'll find out soon enough if the market agrees the Fed may soon take away the punch bowl.

For a more humorous take on Bernanke's press conference, here's Todd Harrison's (Minyanville) take on it: What you heard is not what I meant

Following the press conference the market pushed higher again and I wouldn't be a bit surprised if it was "helped" higher so that Bernanke's first-ever press conference was an unmitigated success. Some early after-market reactions were that Bernanke was a smooth talker (rehearsed well) but that he didn't own up to the problems that the Fed's easy-money policies are creating. Many are saying he's in denial about the inflation problem. As always, it's the day after that's more important than the day of so we'll see how Thursday and Friday look before making any predictions based on today's market reaction.

We'll start tonight's charts off with SPX to show that it reached its price target area at 1353-1355 (and a little more). This is the area I was watching before the February high but at 1344 it missed reaching it by about 10 points. For a reminder why this area is potentially important, there's a Fib projection just shy of 1353 which is where the 2nd leg of the rally from March 2009 (the leg up from July 2010) is 62% of the 1st leg up (the March 2009-April 2010 rally). Then there's another relationship between the legs of the rally from November where the 2nd leg would also be 62% of the 1st leg up at 1354.38. So the 1353-1354 is a strong Fib area that could make for a top right here now that it's been tagged.

S&P 500, SPX, Weekly chart

I'm projecting the rally to proceed a little further (after a pullback) but that's just a guess at the moment based on the price pattern for the move up from March. On the chart above I show a price projection at 1389.81 that's based on two equal legs up from July 2010 with the midpoint being the November pullback. The bulls have some work to do in order to negate the bearish divergence at the current high vs. the February high.

The other reason the 1354-1355 area is potentially important comes from the Gann Square of Nine chart, which I've shown before (it's a little hard to read the numbers from squishing the chart some), that's shown below. The two levels of interest are 1347 and 1354-1355, highlighted at the bottom of the chart. The first is opposite the October 2007 high at 1576 and October 2002 low at 768. The price consolidation yesterday and this morning centered around 1347. The second number is opposite 666-667 and is the more important Gann level at the moment because it relates to the March 2009 low from which we've rallied. Why these numbers "vibrate" off each other is the big unknown to me but they do. Therefore I pay attention when reached. Today's high was 1357.49 and it closed at 1355.66.

Gann Square of Nine chart

The SPX daily chart below shows the 1354.38 Fib projection so we'll find out whether or not it's going to be an important level. The rally from April 18th has brought it back up to the mid line of its parallel up-channel from July and that's another reason why it could run into trouble here. Obviously a continuation of the rally tomorrow would be bullish and would have many looking for 1400 sooner rather than later. If we start a choppy corrective sideways/down correction it should be followed by another, and likely final, leg higher into May (probably into opex week). But if the pullback develops into a sharp impulsive decline, especially if it breaks below 1331 it would begin to support the idea that the current high is a more important one. A break back below the 50-dma, coming up to 1317, would be a strongly bearish signal. So it's bullish until it's not but don't get complacent here.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1354
- bearish below 1331 (potentially choppy in between)

An uptrend line from April 18th, shown on the 60-min chart below, should provide a good clue when the leg up has finished. Currently near 1350 and then 1358 by the close, that line needs to be defended by the bulls. Once it breaks we'll then get some clues by how sharp vs. corrective the decline becomes. There are a couple of things that have me thinking today's high will result in a pullback (or maybe after a minor new high tomorrow morning) and the wave count is one (looks complete) and the Fib projection at 1357.91 was missed by only 42 cents (it's where the 3rd through 5th waves equals the 1st wave, a common relationship when the 1st wave extends). There's another way to count the move up and a Fib relationship points to 1256.02 so the 1257 area is potentially important and a reason why we could see an immediate reversal tomorrow.

S&P 500, SPX, 60-min chart

On the Market Monitor we've been tracking the NTS traders vs. the RTH traders. NTS stands for Nocturnal Trading System (John Gray developed) and it requires you to buy ES (S&P emini contract) at the 16:15 close each day, hold it overnight and then sell it at the 9:30 open. RTH is Regular Trading Hours and it means you buy the ES contract at the 9:30 open each day and sell it at the 16:15 close. I've been tracking the two since the March 16th close at ES 1253.50.

Today was the first day that an RTH trader made it into the black, but through yesterday and last night the NTS trader has blown away the RTH trader by making 95 points while the RTH trader was down 1.75 points. At $50/contract, trading just one contract, the NTS trader is +$4750 for his efforts while the RTH trader is now in the black by $225 today. At today's closing price of 1352.00 the rally from March 16th is +98.50 points, 95 of which came from the overnight session. Pretty phenomenal what has been accomplished during the overnight sessions to make this rally possible. There are currently 11 unfilled gaps in the rally from July 2010.

The DOW is looking a little stronger than SPX at the moment and could be headed for a price projection at 12766 where the move up from July 2010 will have two equal legs up (two equal a-b-c moves separated by the November pullback). It's bullish above 12650 and would be more bullish above 12766 but it looks ready for a pullback and like SPX we'll have to see what kind of pullback pattern develops in order to help figure out the probable move into May.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,650
- bearish below 12,250

At 2870.80 the Nasdaq COMPQ made a new high above its October 2007 high at 2851.61 and had the headlines reporting the Nasdaq making the highest high since 2000 (which isn't quite true since it hit a high of 2892.36 in January 2001. Nevertheless, it makes for a good headline to keep the sheeple feeling bullish about the stock market.

Interestingly the big cap tech index, NDX, had already exceeded its October 2007 high back in January (and using that high as support in pullbacks) but has not come as close to the January 2001 high as the COMPQ. I've drawn a rising wedge within the larger rising wedge defined by the broken uptrend line from 1990-2002 at the top and uptrend line from March 2009 at the bottom. The smaller rising wedge pattern is just a guess at the moment and we need additional price action to help confirm or negate it. It could rally from here to the top upper trend line near 2460 but that would be more like a blow-off move from here.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2404
- bearish below 2320

The RUT's short-term pattern for the rally from April 18th has a projection at 857-858 for the conclusion of it and today's push into the close accomplished that. It's therefore a setup for an immediate reversal tomorrow. But as shown on its daily chart below, it could be headed for the trend line along the highs since February, currently near 870, which fits as the top of a rising wedge pattern. The wave count for its rally from January would then count as complete (it can actually be considered complete at any time now and does not need to reach the top of its wedge pattern. But as with the others, it will be the form of the next pullback that gives us clues as to whether an important top is in, wherever that top will be.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 870
- bearish below 830 (potentially choppy in between)

The NYSE came within 2 points of achieving a potentially important Fib projection for its rally from March at 8621. If it continues above 8625 (and holds above) it will be bullish but the setup is for a reversal back down from here.

NYSE Composite Index, NYSE, Daily chart

While the NYSE makes new price highs there's another measure of strength of the rally (part of the market breadth measurements) that shows it weakening instead of getting stronger. The peaks in the number of new 52-week highs have been declining since the one back in November. It means the rally is happening on the backs of fewer and fewer stocks and that's usually a good sign of topping rather than being in the middle of a strong move higher.

NYSE vs. New 52-week Highs, Daily chart

Another index that's been diverging the past week is the 10-year yield, TNX. It has been moving very closely to the stock market and the divergence is a warning that something is changing. Either bonds and stocks will start to rally and decline together (they've been counter-cyclical as money has rotated from one to the other, causing TNX to stay in synch with the stock market) or TNX has been warning us that the latest rally is not "real". Certainly the manufacturing of the stock market rally in just the overnight sessions is reason to be suspicious as well.

As noted in last week's newsletter, price action following the bearish engulfing candle on the weekly chart continues to support the probability for a further decline. The daily chart shows the possibility for a bounce setting up (maybe if both bonds and stocks sell off together?) and the 50-dma near 3.44% would be a resistance level to watch in that case. But TNX doesn't turn bullish until and unless it can get back above 3.62% and in the meantime I'm looking for it to work its way down towards 3.04% where it will retrace 50% of the October 2010-February 2011 rally. And if TNX continues lower (bonds rallying) I suspect that will put some negative pressure on stocks. With funds just about fully invested, any buying in one usually comes from the selling of something else (it could be commodities).

10-year Treasury Yield, TNX, Weekly chart

As mentioned in last week's newsletter, I was looking for a bounce in the banking index off the bottom of its down-channel and 200-dma and the past two days have gone a long way towards making that happen (it was looking iffy for a couple of days). The rally in the broader market certainly helped so it's questionable how much more bounce there will be if the broader market starts back down. If the market and/or banks continue the rally we could see the BIX back up near 147 before it heads back down. But it's already looking short-term overbought so we can probably expect a pullback and potentially something more bearish.

Banking index, BIX, Daily chart

The TRAN followed the bullish path back up to the top of its expanding triangle and RSI is back up to overbought. The setup is for a reversal back down from here.

Transportation Index, TRAN, Daily chart

The U.S. dollar is still in search of its bottom. It's looking down but just can't see it. I've changed the way I'm looking at the longer-term pattern for the dollar and as the weekly chart below shows, I think the dollar is in a large A-B-C bounce off the March 2008 low (70.70). The current decline since June 2010 should be the completion of wave B which will be followed by a wave-C rally into 2012. If the dollar bottoms around 73-ish it would then have an upside projection to almost 91. There is a Fib projection at 73.36 (where the 2nd leg of the decline from June 2010 would be equal to 62% of the 1st leg down) and the bottom of a parallel down-channel for the pullback from 2009 is near 73. Today's low was 73.26 so it's there.

U.S. Dollar contract, DX, Weekly chart

If the dollar breaks below 73 then it could be headed for 70 and that would obviously keep a bid under commodities (and the "transitory" inflation in commodities will continue). With the DSI (Daily Sentiment Index from down around 95% bears it's hard to believe there are many sellers left out there (plus the bullish divergence on the daily and weekly charts points to a slowing of the momentum in the selling). If the dollar starts to rally off support here it will probably be strong as the short covering starts. That would put some downward pressure on commodities and make Bernanke look like a hero.

If the dollar starts to rally we will see an unwinding of the dollar carry-trade (sell other assets and buy back the dollar). That's why a dollar rally would put downside pressure on stocks and commodities. It's no coincidence that we could be looking at topping signals for the stock market as well as the commodities market.

The commodities index (CRB) is at an important Fib retracement level -- it has retraced 62% of its 2008-2009 decline, at 369.37. Monday's high was 369.08 and this follows the previous test on April 11th when it hit 368.96 and it's showing bearish divergence against the April 11th high. The weekly chart also shows the bearish divergence since the March 7th high. The break of the uptrend line on RSI in March also warns us that the rally is close to finishing. So I see a topping pattern for the commodities index coinciding with a bottoming pattern for the dollar.

Commodities Index, CRB, Weekly chart

Gold has rallied up to the top of its rising wedge that it's been in since 2009 and the top of its parallel up-channel that it's been in since 1999-2000. Being overbought on a daily, weekly, monthly, quarterly and yearly basis leaves little doubt in my mind that gold is topping. I suppose there is always the possibility that gold will rocket higher in a blow-off move but betting on that happening would be a risky trade in my opinion. I see an EW count that looks complete with price up against the tops of its channel and wedge and I'm thinking we'll see a decline from here.

Gold continuous contract, GC, Weekly chart

Silver has been a fun one to watch if only because it's got so many people excited about it and we don't get to watch too many parabolic moves in real time. It's also fun to hear so many people explain why it's not a parabolic rally, why it has much further to run and why "it's different this time". While it can certainly run higher I think it's a very risky trade at this point to bet on the long side of silver. Clearly shorts have been fried to crispy critters so that's a dangerous game too when trying to game the top of a parabolic move but it's possible we've seen the first chink in the bull's silver armor.

The updated weekly chart shows price still in its parabolic climb and hasn't threatened to break it yet. The arc as drawn on the chart is currently near $42 so that's an area of support if it pulls back in a correction. The wave count for its rally, like that for gold, shows a completed pattern and therefore the current spinning top doji candlestick, if it finishes the week this way, will be a potentially important topping pattern. Weekly RSI is now above 90, which has marked previous spike highs in silver.

Silver continuous contract, SI, Weekly chart

The daily chart below shows a long-legged doji candlestick on Monday when it shot above the top of its channel from January (during the Sunday overnight session) and then closed back inside the channel. That created a sell signal which was confirmed with Tuesday's red candle. It remains to be seen whether we'll see just a pullback and then continue higher (dashed line) or if a stronger selloff begins. Today's high bounce brought it right back up to the top of its channel for a potential retest before breaking down. A break below $42 would be a break of its up-channel from January and that would be an important signal that we've probably seen the high for silver. I expect the decline to be fast and strong.

Silver continuous contract, SI, Daily chart

Oil's daily chart below shows it bouncing back up to the trend line along the highs from June 2009 and with continuing bearish divergence. I was looking for it to hit its Fib target at 114.99 in early April (for two equal legs up from January 2009) so that level is still in play. But if it breaks below this morning's low at 110.71 that would be an indication that the leg up from April 13th has finished, which in turn should complete its larger rally pattern.

Oil continuous contract, CL, Daily chart

The potential mover in tomorrow's economic reports is the advance reading on GDP. It's expected to be less than 2% according to Bernanke's press conference today and has it coming in at 0.5%. A low number could create a negative reaction in the market now that the Fed has made it clearer that they will not implement QE3. Bad news could be treated as bad news now.

Economic reports, summary and Key Trading Levels

The stock market has put a lot of points on the board since the March 16th low but almost all of them have come from the overnight rallies in the futures, causing the cash market to then play catch-up. But the rally has produced lots of bearish divergences and is therefore warning us that it could be finishing. As the indexes are pressing up against potential resistance levels there is the risk that today's rally was a last hurrah for Uncle Benny -- a sendoff if you will for a job well done.

We all know a rally (and decline) can continue for much longer than we think possible and that's clearly a possibility here. It won't take much of a rally to break resistance and there are a lot of traders now looking for SPX 1400 now that it's broken above 1344, which many view as a break of the neckline of an inverse H&S pattern. Remember my speculating that it could set a bull trap, sucking in the bulls on the break higher and spitting at the bears at the top (typical). This afternoon's rally looked like short covering. We've been gapping up for the past month so beware of a change in behavior if we start gapping down.

But as mentioned earlier, if we do get a pullback but it's a choppy sideways/down correction then I think the chances are good for another leg up into May opex. Consider that possibility if you can't tolerate any further rally -- chase the move down and stop yourself out once it goes against you again. You can always get back in but you can't get losses back if you goes against you in another rally and we hit expiration at the highs.

It might get a little whippy out there so be careful. Good luck and I'll be back with you next Wednesday.

Key Levels for SPX:
- bullish above 1354
- bearish below 1331 (potentially choppy in between)

Key Levels for DOW:
- bullish above 12,650
- bearish below 12,250

Key Levels for NDX:
- bullish above 2404
- bearish below 2320

Key Levels for RUT:
- bullish above 870
- bearish below 830 (potentially choppy in between)

Keene H. Little, CMT