Market Stats

More worries about the Greek debt situation, and the increasing probability of a default (hard, soft, managed, restructured or whatever they're going to call it), spooked the stock market again and Tuesday's strong rally was completely given back, and then some. Stock market participants are likely feeling a bit whipsawed this week, not uncommon during opex week.

Today marked the 3rd 90% downside day since the June 1st high, where more than 90% of the trading volume was on the downside. There has not been an intervening 90% up day in June, not even yesterday. Without any follow through to the upside following yesterday's rally it's clear the bears still rule. This is a market that gets a direction going and the momentum high-frequency traders (HFT) take over. Those who want to get in on the move (or out of a position going the wrong way) are typically forced to chase the market if the one-day reversals, like yesterday, were not taken advantage of. Today's start with a big gap down, following yesterday's strong rally, forced traders to chase it lower this morning.

Equity futures had steadily declined last night and then tanked on this morning's economic reports, specifically the Empire Manufacturing index. The index fell below zero for the first time since November and dropped nearly 20 points from May. The -7.8 reading was a huge disappointment from the expected to +10 (and down from 11.9). Future expectations also dropped, indicating deterioration in optimism about the future.

The other disappointing number was the CPI data which showed inflation climbing uncomfortably high -- the core rate increased by 0.3% (3.6% annualized). This is going to force the Fed to back off on juicing the monetary system with too much liquidity which is causing an inflationary problem. To the market this means no more QE and without their drug money the market is worried about withdrawals.

Topping off the negative reports was the fact that the home-builder index dropped another 3 points to 13, the lowest it's been in 9 months. This is not a surprise but certainly adds to the depressed feeling about the economy. If the Fed's herculean effort to lift the economy has failed, what else is there to try? Lower interest rates? Been there, done that. Shove huge quantities of money out of helicopter into the monetary system? Yea, did that one too. Have the government spend trillions of dollars to prime the economic pump? Hmm, we have the debt to show that's been done too. You mean we might have to deal with the consequences of an overheated credit market from years past. Perish the thought!

All things considered, I think it was positive that the market didn't sell off even more today. And considering it was another 90% downside day, I find it interesting that we're seeing bullish divergences on the intraday charts. So as bearish as the market looks at the moment, I'm thinking it might not be a good idea to press your bets to the downside. Not yet anyway.

Tonight I'm going to start with one of the bigger indexes, the NYSE Composite index (NYA) as a way of filtering out some possible manipulations in the smaller indexes. Even the S&P 500 index, with its SPY ETF, can be influenced by trading in a couple of the bigger stocks. The weekly chart below shows price has dropped down to the uptrend line from March 2009 through the July 2010 low. I'm using the arithmetic price scale on this chart and in a bit I'll show the comparison to the log scale chart (to try to help answer some questions about when to use which one). Between the 62% retracement of the 2007-2009 decline, at 8016.70 and the uptrend line near 7930, there is potential support to the current decline. The daily oscillators are oversold and the weekly RSI is just about there. If the market drops lower we should see the NYSE head for support at its 50-week MA near 7800.

NYSE Composite, NYA, Weekly chart

If the market gets a bounce from here into the end of the month/quarter I see the potential for a rally to 8200, possibly back up to the June 1st high, which would do a good job building a right shoulder to a potential H&S topping pattern from February. Without a breakdown yet (uptrend line from March 2009 still holding) there is of course the possibility for a new high into the fall. I have no idea why the stock market would get that bullish but one never knows with this market. I think the higher-odds probabilities from here are either a hard selloff (dare I say crash?) or a bounce into that will be a good shorting opportunity. If we do get a bounce into the end of the month, the daily chart below shows the possibility for a rally up to the downtrend line from June 1st, perhaps up to the 8200 area before rolling back over for a stronger selloff in July.

NYSE Composite, NYA, Daily chart

I am often asked how to decide when to use the log price scale vs. the arithmetic price scale when evaluating trend lines, especially on the longer-term trend lines. My answer is always the same -- both. Using trend lines is an art, as with most technical tools. There are always differing opinions about how to draw them (from highs and lows, closing prices, most of the points, etc.) and then adding the log vs. arithmetic scale into the mix only confuses a lot of people and they give up on them. Especially with my use of EW (Elliott Wave) analysis, I find trend lines, and parallel channels off those trend lines, to be one of the more important technical indicators. One look at my charts and that becomes abundantly obvious.

So when it comes to which price scale to use, you should always check it both ways to see where price support/resistance might come into play. A perfect example is the uptrend line from March 2009, as shown on the two NYSE charts below. Using the log scale, which is the preferred choice for longer-term trend lines, the NYSE broke its uptrend line in May (perhaps our indication that the uptrend has in fact completed). It then bounced back up to it on May 31st and failed from there. It was a classic failure at a broken trend line -- kiss goodbye and a very good shorting opportunity. It's one of my favorite setups.

NYSE weekly, Log vs. Arithmetic Price Scale, weekly charts

The bottom chart of the two above is the same trend line with the arithmetic price scale. I would expect it to be support, especially since so many traders use the arithmetic price scale and forget to use the log scale (or the other way around). So check them both and plan your trades around them. If the market declines further, it will be a break of both uptrend lines, leaving very little doubt that the rally from March 2009 has finished.

Once SPX dropped below the trend line along the lows since May 5th, that trend line has been resistance, including to yesterday's rally. After almost touching its uptrend line from March 2009 through the July 2010 low, SPX closed on an internal trend line from the November high through the March low, which also supported yesterday's decline. At the moment price is trapped between trend lines and could bounce up and down between them for another few days, in which case I'll be looking for a breakdown out of the consolidation pattern (bold red price path). A break above Tuesday's high near 1292 should lead to a move up to at least 1305 and potentially up to its 50-dma by the end of the month if we get the bigger bounce. Otherwise a breakdown has the potential to drop down to 1200 (potentially Much lower if the market sees some capitulation selling kick into gear).

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1320
- stay bearish below 1295

There's another downtrend line in play and that's the one from June 1st through yesterday's high, which is where today's decline is trying to plant a bottom. The bullish divergence at the new lows since June 6th hints of a bullish reversal rather than a crash. Might we see another reversal of a reversal of a reversal tomorrow and rally back up towards 1290? If it does rally and breaks above the trend line along the lows from May 5th, which stopped each rally attempt since June 7th, the market will be talking to us and it will be bullish. How high would then be the next question but it would be time for bears to stand aside until the air clears.

S&P 500, SPX, 60-min chart

The DOW's picture looks the same as SPX. The same uptrend lines on the DOW's chart shows price hit its uptrend line from March 2009 through the July 2010 low and could be ready for a bounce back up. I'm showing a slightly different possibility on the DOW though -- a continuation lower to the uptrend line through the August 2010 low, near 11800, followed by a sideways/up consolidation into next week and then a continuation lower into early July. If the DOW can get back above the trend line along the lows since May 5th, near 12070, we could see a move up to at least 12200 by the end of the month. A break below its 200-dma at 11716 would likely lead to a faster break towards 11450 if not 11200.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,200
- stay bearish below 12,000

NDX remains the weaker index -- it looks like it's in a stronger decline with weaker bounces than the blue chips and has now closed below its 200-dma (after bouncing off it on Monday). A price projection near 2181, where the 2nd leg of the decline from May 2nd will be 162% of the 1st leg down, could be the downside target, especially since it lines up with the uptrend line from March 2009 through the July 2010 low. There's lower potential to about 2130 if the market is hit with stronger selling. Bounce potential from here is to the top of a parallel down-channel near 2250. If the bounce is a sideways/up kind of move we'll have a good setup for another leg down.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2300
- stay bearish below 2270

The RUT's decline today held above Monday's and yesterday's lows, making for an inside day. It's holding above both its 200-dma at 771.35 and its uptrend line from March 2009 through the July 2010 low, near 765. Unless the RUT drops below 760, which would be a clear break of support, including its January and March lows, it's looking like the RUT is setting up for a bigger bounce/consolidation.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 800
- stay bearish below 800

Last week I showed a chart comparing the decline in SPX vs. the (non)rise in VIX, which was a bearish sign from a contrarian perspective. The VIX is finally starting to rise a little although it's hard to tell how much of that might be opex related. But the bulls want to see the VIX spike higher to indicate true fear has reentered the market. At the moment, considering how much the stock market has declined from May 2nd (almost 8% high to today's low), VIX has not registered enough fear and raises the possibility that we're going to see a stronger selloff to get the bulls to do some capitulatation.

SPX vs. VIX, Daily chart

The one potentially positive outcome from the recent VIX spike above 20 (21.66 high) is that it has popped above its Bollinger Band (2 standard deviations above its 20-dma) at 20.64 today. That sets up a potential "buy" signal for the stock market if the VIX drops back into its BB. But if the market sells off harder from here we'll see the VIX spike much higher. Keep in mind that a capitulation selloff could be an intraday event with a v-bottom reversal so if you're playing the short side and we get a hard selloff, be ready to cover and enjoy the fruits of your trade.

The bond market had been just as frenetic in the past week as the stock market. Yesterday's sharp decline in bond prices was followed by a sharp rally today. Perhaps the stock market has been acting so schizophrenic because of the bond market. I squeezed the daily chart of TLT below to show the 3-wave move up from February in relationship to the sharp decline from last August. It looks like a bear flag pattern and suggests another move lower in bonds (bold red path). But the sharp moves up and down since the high on June 1st is either a topping pattern or a consolidation prior to moving higher. Above 98 would be bullish (but watch for resistance near 98.76, the 50% retracement of the August-February decline) and a break below the 50-dma at 94.40 would be bearish (confirmed bearish with a break below 92). Watch out for chop in the meantime.

20+ Year Treasury ETF, TLT, Daily chart

The bond market has essentially consolidated sideways since mid May and since that time the stock market has sold off sharply, especially from its June 1st high. The selling in the stock market may have money rotating into the bond market which could be what's kept it holding closer to its recent highs. And if the stock market continues to sell off, especially if it sells off hard, we could see more money run into the perceived safety of Treasuries (just in time if the Fed is backing away). Therefore the green path higher on the chart is a good possibility. The bond market is in a tough position to figure out right now and that's making it more difficult to figure out what the stock market will do next.

Banks have been under a lot of pressure in the last year because of the threat of defaults and what it will do to their balance sheets. Many of them are carrying inventory at full value but everyone knows it's a joke and without a real estate recovery it's only a matter of time before much of this inventory will have to be written down. In fact many of these asset values have already been written down as short sales are completed and defaults are processed, both of which force the bank to recognize the loss (the difference between the actual value and the mark-to-model prices they were carrying). It's one reason why banks have dragged their feet in foreclosing on a house or completing a short sale -- it forces them to recognize the loss on their books. The whole mess has created a continuing downward pressure on banks' stock prices.

Analysts such as Meredith Whitney, have gone on record saying municipal defaults will add to banks' woes. In addition to municipalities defaulting on these loans, due to lower tax receipts, there's another borrower in the municipal loan category that's actually a bigger problem. Private entities are able to borrow money for projects that are theoretically designed to boost economic development. They are called conduit bonds and you can probably see a loop hole developing here.

Municipal bonds pay lower yields because the interest paid on them is tax free. These private entities like conduits because it means they can borrow at lower rates. Borrowers also don't have to provide as much financial disclosure information as they would for a taxable corporate bond. Municipalities like them because they're not on the hook to repay the bonds but earn fees for their service and reap the benefits from an economic boost from the spending.

So you know what's coming next and you're right -- defaults on these conduits, which fit in the municipal bond fund category, are skyrocketing. Conduits account for about 20% of all the municipal bonds and yet they account for about 70% of the muni defaults. About $84B of these conduit bonds were issued last year and it's growing fast. Large corporations, such as United Airlines and General Motors, who could borrow from the normal corporate bond market, have been using conduits. It's costing the U.S. government tens of billions of dollars in lost tax revenue (which means it's another way the government is supporting failing corporations).

The spike in defaults in municipal bonds, primarily due to these private entities, is causing a rise in costs for cities and states who need to borrow. Conduits used for building low-income housing, healthcare facilities and industrial-development projects have seen the higher default rates. Regulators are starting to pay attention to the problem and hopefully it will be corrected before the problem becomes worse (we can only hope), which would only make it more difficult for communities to sell bonds and cover their capital requirements.

The whole mess just adds to the pressure that banks are under. They did not need yet another category of loans facing increased risk of default. It makes me wonder how many creative ways the financial market can come up with new "financial engineering" models that are designed to fail.

The banks have been leading the way lower since last year and they continue to act weak. But this week the banks held up better than the broader averages. Following the bounce off a double bottom between last Wednesday and Monday, today's pullback held the bottom of a parallel down-channel that price had been in until dropping below it in early June and then bounced back above it on Monday. If BIX heads from new lows from here, the steepening downtrend lines since February point to a waterfall decline coming. But at the moment it looks like we should see another leg up for its bounce, in which case the first resistance level will be the mid line of the down-channel from February and the broken uptrend line from August-November, both of which cross near 48.

KBW Bank index, BKX, Daily chart

The Transportation index has bounced off its uptrend line from March 2009 through the August 2010 low, currently near 5050. As noted on its weekly chart below, if it can bounce higher in the next couple of weeks it could develop the right shoulder of a H&S top with a downside projection from there down to 4500 if the neckline then breaks. The bulls need to bounce the TRAN from here otherwise a break below 5000 could be an important break.

Transportation Index, TRAN, Weekly chart

The U.S. dollar bolted higher today and that certainly added to the downside pressure in the stock market, as well as the commodity market. The dollar is now not far from the 38% retracement of the November-May decline, which crosses the downtrend line from June 2010 near 76. If the bullish wave count is correct we should see the dollar break above 76 and head of its 200-dma before pulling back again, possibly for a retest of its broken downtrend line before heading much higher into the summer months.

U.S. Dollar contract, DX, Daily chart

Commodities took a big hit today with the dollar rallying. The bounce in the commodity index to 352 last week (50% retracement of the early-May decline) has been followed by the start of another leg down, one which should drop to the 200-dma near 327 before much of a bounce.

Commodity index, CRB, Daily chart

Gold bounced off its low on Monday and could be heading for either a new high or just a correction of its decline before heading lower again. It has strong support at its uptrend line from March (tested this morning at 1514.50) and its 50-dma, both near 1511. If gold drops below 1510 I think it will be a strong sell signal for a decline that should take it down to near 1400 before much of a bounce. But if the gold bulls are not done yet, a move up to 1575, possibly as high as 1600, should put the finishing touches on its long-term rally.

Gold continuous contract, GC, Daily chart

Silver appears to be marking time while waiting for gold to decide what it's going to do. If gold runs to a new high we could see silver make another attempt at a slightly higher high within its sideways trading range since early May. It could rally up to the 38.30 area to finish a sideways triangle pattern or it could fail at the underside of the broken uptrend line from May 12th, near 36.50. The sideways consolidation continues to support the downside projection shown on the chart -- there will be some bumps along the way (200-dma rising toward 31 and the uptrend line from 2008, near 25) but I think a good downside target will be near 21.

Silver continuous contract, SI, Daily chart

Jim has made a very good point recently about the true price of oil being the Brent crude prices since it's the one that better represents the light sweet crude price. But most everyone still refers to "oil" as the West Texas crude oil (WTI) and that's what I've got all my longer-term charts on so that's what I'll continue to follow.

Crude inventories fell 3.4M barrels according to the latest EIA (Energy Information Administration) reports, vs. an expected drop of 1.9M barrels. Gasoline inventories were up about 600K barrels. Before the report came out oil took a nose dive from the 11:00 AM high, following the string of poor economic numbers, which indicates the economy is slowing down at a high rate of speed. This will of course dampen demand for oil, especially WTI and its price is reflecting that. With the dollar's spike up today, that also added to the selling pressure in oil.

Today's drop in oil had it breaking a shelf of support near 96 and May's previous lows. The pattern that I've been showing the past few weeks calls for another leg down following the early-May decline and it looks like it's in progress. Two equal legs down targets 82.24. A H&S topping pattern since the left shoulder in March, with the neckline at 96, targets 77 for the decline. That would put it near the long-term uptrend line from 1998-2002 (log scale). I'd certainly be a buyer down there but not here. Notice MACD rolling back over from the zero line, typically a strong sell signal.

Oil continuous contract, CL, Daily chart

Other than the usual Thursday unemployment numbers, the housing starts and permits could affect the start of the day's trading if it surprises either way. Otherwise the Philly Fed index, out at 10:00 AM may have an impact although the market has been pricing in a slowdown, especially after this morning's Empire Manufacturing disappointment.

Economic reports, summary and Key Trading Levels

The stock market is whipping up and down as the bulls and bears duke it out for control. The volatile price action is typical bottoming (and topping) price action and considering the support levels that are being tested I'd say there's a good chance we'll see a strong bounce develop, one that could take us into the end of the month/quarter.

Slightly lower are additional support levels so if the bullish divergences continue to accompany new market lows I'd say support will hold. The risk, and it could be significant, is for a very strong selloff from here (possibly a market crash as we're in the window with a couple of strong down cycles through this month). If money managers start to sense a stronger panic-driven selloff they could add to the selling pressure to get out before losing more money before month end.

Being long the market right now is too risky -- I see much more downside risk than upside potential. Cash is good. If you like playing the short side, there should be a good opportunity in the next week or two if we get a decent bounce going. If the market instead starts to break down quickly and slices through support, jump in but beware of the intraday v-bottom.

Good luck through the rest of opex week and I'll be back with you next Wednesday.

Key Levels for SPX:
- bullish above 1320
- stay bearish below 1295

Key Levels for DOW:
- bullish above 12,200
- stay bearish below 12,000

Key Levels for NDX:
- bullish above 2300
- stay bearish below 2270

Key Levels for RUT:
- bullish above 800
- stay bearish below 800

Keene H. Little, CMT