Market Stats

While the news out of Europe, on a daily basis and actually hourly basis, continues to spike the stock market and the EUR/USD currency markets (but interestingly, not so much the bond market), what's most surprising is that the news is still driving the market as much as it is. In the end it all comes to the same point of recognition anyway. It seems the only thing the market cares about is how much pain will be felt now vs. dragging it out over time. And apparently dragging it out over time is a bullish thing. In so many ways the markets are worse than little kids.

It's been a wild week so far and it's been based almost exclusively on news out of Europe. I don't know any traders who aren't exhausted by all this nonsense and would like nothing more than to see a market that gets back to "normal". You know, the kind that trades on funnymentals instead of whether or not Greece or Italy is going to prostate themselves in front of the bond market and commit seppuku (hari-kari). As George pointed out to me, Monday's rally on "good" news on Sunday about EU's delay in identifying the bailout plan (but that there would still be one) was as if the news headline read "Scientist says asteroid that is to hit earth tomorrow has been delayed until Friday. Market rallies on good news!"

Yea I know, pretty silly idea. Is the reaction to Europe any less silly? We all know the outcome and the only thing that is not certain is the details of how the countries are going to go belly up. Is a slow death or quick death really that important to the market? Apparently yes when you watch price action. Traders are clearly anxious to buy the market and want in on the slightest hint of "positive" news (that the asteroid hit has been delayed for another week). Or bears are clearly anxious to get out of the way on the good news. In any case, the market's antics is making it particularly difficult for you and I to get a trade that can stick for more than 4 hours.

The buying pressure last week and this week is very likely end-of-month related. Many mutual fund managers are probably in a can't-lose position -- many are already underperforming the market (typically 75% of them), which is itself barely positive for the year, and therefore they are looking to buy every little dip and hope for a couple of percentage points higher into the end of the month. A 3% or 4% gain in their accounts this year, vs. zero or negative, could mean the difference between a bonus or no job. If you were spending other people's money you might make the same decision. Just look what our political leaders are doing with OPM. Oops, how did that political comment get in there? Fundamentals? Who cares! A dip? I'm in. Roll the dice -- heads I win, tails my investors lose.

Before the U.S. markets opened, the German Bundestag gave Merkel the authority she needed to negotiate in Brussels today. That sent the EUR and the EU markets higher on the news, which also spiked U.S. equity futures heading into the opening bell. The U.S. dollar tanked on the news. The tight and contra-moves between the dollar and equities continues almost to the tick.

But as soon as the market received a news flash about a deadlock (Greek debt write down between banks and EU), which was reportedly released by an unofficial EU source, the short-lived lift to the EUR came to a screeching halt as the markets realized these talks are likely to go nowhere as they are still at an impasse over Greek bond-holder haircuts. The dollar had a very wild ride this morning following all these news flashes, first diving to a minor new low for its decline from October 4th (hmm, no new high in equities to match, what could that mean...), followed by a strong spike above this week's price consolidation range and then by the end of the day it was back down inside this week's range, as if nothing had happened. So if you're feeling whipped by this market, blame it on the dollar which can be blamed on the on-off switch in Europe. Some politician keeps flipping it, wondering what it's connected to.

Another story that China is back in the picture buoyed stocks as well. "The market is rallying on the story that China will buy bonds issued by the EFSF (European Financial Stability Facility)," Peter Boockvar, equity strategist at Miller Tabak, said in emailed comments, citing the Irish Times newspaper. Didn't the rumor-ists try that one last week as well? When all else fails just say China will buy everyone's bad debt. Yea, that's it. They have lots of money.

Two economic reports might have had some sway over the market today but like earnings reports as well, the market cares much more about what Europe is going to do about its debt crisis. The Durable Goods report showed orders fell -0.8% in September, primarily due to a drop in auto and commercial aircraft sales. The number was worse than the -0.1% in August but better than the expected -1.0%. Transportation orders were down -7.5% so excluding transportation the number was +1.7%. Since durable goods shipments are part of GDP, this is not going to help.

New Home sales was also reported this morning and at an annualized 313K the number was +5.7% better than the 295K in August and better than expected. The bad news is that the number is still -0.9% below last year's. The median selling price declined -3.1% to $204.4K, the lowest level since October 2010. The good news is that inventory dropped slightly to 6.2 months from 6.6 months at the present sales pace. It's now at the same level it was in April 2010.

Other than the mood swings in the stock market, we're of course seeing generally poor moods in the populace. Yesterday's consumer sentiment is the lowest it's been since March 2009 and yet the stock market is closer to its highs than its lows. What happens if/when the stock market really declines? The OWS (Occupy Wall Street) group of protesters may be only the beginning of a real and significant backlash by the people.

Peter Brandt, an astute market trader, made some comments about the OWS crowd, saying their efforts to "occupy" should not be taken lightly. Most such protests are initially regarded as a bunch of misfits and malcontents, including the way the protests and then riots in the 1960's started. Few would argue the significant changes that resulted from those years of turmoil. Much of the initial gathering of protesters back then were just as un-united in their message as today's protesters. But as we've seen around the world recently, protest movements have a way of catching fire.

Brandt showed a chart of average salaries in New York City for those working in the financial markets vs. the average salaries of all other sectors, starting in 1981 (the start of the secular bull market). The OWS group of course senses or knows this and that's one of their chief complaints. The split between the haves and have-nots hasn't been this wide since the 1930's and it's the cause of social upheaval, sometimes even leading to major wars.

Financial vs. Other Private Sector Salaries in NYC, chart courtesy Peter Brandt

As Brandt went on to say, "An interesting figure we don't have is the largess the government (federal, state, local) sector has bestowed upon itself. Once the Occupiers realize how their elected officials have joined ranks with the fat cats then the halls of power will become crowded with protesters." As part of the social upheaval that's coming, which is part of the secular bear market cycle (the last one being the 1960-1970's), this movement is likely to build up a lot more energy than we've seen so far. The times they are a changin'.

The collective mood of the people, which includes we traders, will affect everything and most especially the market. Other than concerns about what's happening in Europe most are very interested in what's happening with the earnings picture, with hopes that strong earnings points to a strengthening economy and therefore a reason to buy the stock market. John Hussman is another astute market observer and I think it's important to read part of his October 17th update to his readers:

"From my perspective, Wall Street's "relief" about the economy, and its willingness to set aside recession concerns, is a mistake born of confusion between leading indicators and lagging ones. Leading evidence is not only clear, but on a statistical basis is essentially certain that the U.S. economy, and indeed, the global economy, faces an oncoming recession. As Lakshman Achuthan notes on the basis of ECRI's own (and historically reliable) set of indicators, " 'We've entered a vicious cycle, and it's too late: a recession can't be averted.' Likewise, lagging evidence is largely clear that the economy was not yet in a recession as of, say, August or September. The error that investors are inviting here is to treat lagging indicators as if they are leading ones.

"In my view, the likelihood is very thin that the economy will avoid a recession, that Greece will avoid default, or that Europe will deal seamlessly with the financial strains of a banking system that is more than twice as leveraged as the U.S. banking system was before the 2008-2009 crisis.[Emphasis mine]

"The common practice of valuing the stock market based on 'forward operating earnings times arbitrary P/E multiple' is not only misguided -- it's an utterly disappointing display of Wall Street's willingness to dumb-down the investment process. As investors have discovered through more than a decade of zero returns, the constant abandonment of intellectual effort comes at a cost over the long-term. This is a good opportunity for investors to review their tolerance for significant losses. My impression is that this may be the best opportunity to reduce risk that investors are likely to see for a while."

Right now the trading crowd in excessively bullish, at least as measured by the CBOE U.S. equity put/call ratio. As the chart below shows, the ratio has hit lows seen at previous market highs. In fact the recent low of 0.53, indicating twice as many calls vs. puts are being purchased, hasn't been this low since February. This is not a level I'd want to be a buyer. But that's me.

CBOE U.S. Equity Put/Call Ratio, chart courtesy

Tonight I'll take a look at the SPX charts from the weekly on down to the 15-minute. This bugger of a market is a challenge to figure out so here goes. This week's candle is so far a spinning top doji and if left this way it would signal a potential reversal signal. But there's plenty of time for it to change. Bullishly it's holding above the 1226-1228 area (20-week MA and 62% retracement of the 2007-2009 decline. If the bulls can hang on into the month and push it higher I see upside potential to 1268, the 50-week MA and broken H&S neckline.

S&P 500, SPX, Weekly chart

If you'll remember, I've recently shown a comparison of the 2007 and 2011 tops. The H&S neckline in 2007, which actually started from the high prior to the H&S pattern, in May 2006, was broken January 2008 and then a minor new low in March 2008 was followed by a rally back up to the broken neckline in May 2008. That bounce set up one of the best shorting opportunities of one's trading career.

Now look at the weekly chart above and notice the same pattern. The trend line starting from the high prior to the H&S top (in April 2010) became the H&S neckline that broke in August. Now we're seeing a bounce back up to the neckline near 1268. Bears could be excused for salivating over a repeat performance to 2008. It can be argued that this time will be different but with a financial system that is more vulnerable than it was in 2008 (by a wide margin) I'll argue that it will different all right -- it will be much worse. The downside potential for those who want to ride the short side could be significant.

The daily chart below shows a potential rising wedge pattern for the climb off the October 4th low. SPX broke below the bottom of the wedge yesterday but climbed back up to it. The bulls need to push it higher in order to keep the pattern alive for at least one more new high. Other than the 1268 upside target shown on the weekly chart, the 200-dma near 1274 is a strong magnet for the bulls. But a drop back below today's low could be trouble.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1275
- bearish below 1197

There are a couple of different ways to count the October 12-20 sideways consolidation and I'm showing just two in the chart below. The most immediate bearish count calls Monday's high the end of the rally and today's bounce back up to the broken uptrend line from October 4th as the bearish kiss in waiting (needs to drop immediately tomorrow and below 1221 to confirm the bearish setup). Based on the pattern of the pullback from Monday's high, which looks corrective, I'm thinking the market will push higher and the top of its wedge pattern coincides with the 200-dma near 1274 tomorrow.

S&P 500, SPX, 120-min chart

We're inside a turn window this week (new moon today, Bradley turn date on Friday) so considering we've rallied into the turn it would make sense to see a turn down. That makes the possible bearish setup with a back test of the broken uptrend line intriguing. Another possibility is for just a pullback tomorrow and then another and final push higher into Friday, as shown below. The bounce off this morning's low is a 3-wave move and took on a rising wedge look to it. It was not able to hold above the broken uptrend line into the close so unless the market gaps up Thursday morning we could see at least a pullback. Below 1225 would signal trouble for the bulls and below 1221, today's low, it would be lights out for now for the bulls.

S&P 500, SPX, 15-min chart

An interesting thought occurred to me this week when I was reading one of Jeff Cooper's pieces. He often refers to patterns that he calls "as above, so below", meaning something that happened at the top is often mirrored at the bottom. When looking at the SPY chart (since it's cleaner than my SPX chart), I've drawn in horizontal lines at the August low and high. The October low broke below the bottom by 2.84 points, leaving a throw-under as it spun around and rallied from there, leaving a bear trap. A similar break above the upper line would take SPY to 126.35 (Monday's high was 125.80) and a drop back below the line could conceivably leave a throw-over finish and a bull trap. Was Monday's high close enough? The same numbers used on SPX work out to a high for SPX at 1257.48, right on top of its 62% retracement at 1257.58 (the high was 1256.55).

S&P 500 ETF, SPY, Daily chart

The DOW supports the same pattern as SPX but has already hit major resistance at its 62% retracement of its May-October decline, at 11935. And only slightly higher is its 200-dma at 11968 (Monday's high was 11941. The top of its rising wedge pattern is near 12060. There's further upside potential to about 12500 (two equal legs up from October 4th)if something really positive happens in Europe and blows the bears out of the water.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,050
- bearish below 11,390

The red wave count below shows a count for the top on Monday. In order for it to work we need to see the DOW back below yesterday's low near 11682. That would strongly suggest the rally is over and start shorting the bounces. But the green count looks preferable at this point and it needs one more high to complete a 5-wave move up from the low on October 18th. The 5th wave would equal the 1st at 12039. The 5-wave move is for wave C of an A-B-C bounce off the October 4th low and wave C would equal 62% of wave A (common relationship) near 12050. So there's nice correlation there for the completion of the rally. If the DOW makes it up to that level and rolls back over I'd be looking to short it with a sizeable position, using a new high for my stop (keep risk tight until the trade works -- with a break back below 11900). This would be adequately be called the next MOAP (Mother Of All Puts), which we haven't had for a while (July).

Dow Industrials, INDU, 60-min chart

After leading to the upside the techs have been weaker lately, especially the big cap techs. The generals are being taken out and shot unceremoniously. It won't be long before the rest of the soldiers scatter. After trying for the 3rd time since September to get back above the broken uptrend line from 2009, leaving a bearish divergence in the process, NDX is looking like it's ready for at least a larger pullback. It found support at its 200-dma today so another test of it, near 2295, will probably not hold. Assuming it continues lower (which might not happen until it gets a higher bounce if the broader market holds up for another day or more), we'll then have to wait for clues as to whether we should be looking for just a pullback before heading higher into December or for a more significant decline into the end of the year.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2390
- bearish below 2291

On Monday the RUT hit strong resistance near 735 -- the 50% retracement of its May-October decline, the August 31st high and its 20-week MA. I would have been truly impressed if it been able to get through that wall on its first try after such a strong run from the October 4th low. So far the bulls will say they like the fact that it's consolidating just below that resistance. The bears will say it's in a topping pattern at resistance. Flip a coin. If it breaks higher, and not just marginally higher as the DOW and SPX are pointing to (and NDX for that matter), it could run up to the 62% retracement near 766 and its 200-dma near 779. I don't see either of those being reached but price is the final arbiter. As with the others, a break below today's low would be trouble for the bulls. Below 680 would confirm the leg up from October finished.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 735
- bearish below 680

There's an old parallel down-channel on TNX that runs from April 2011, the bottom of which was broken in August when the stock market sold off. When a parallel down-channel like this is broken, the bottom of it often becomes resistance on a bounce back up to it (same in reverse -- it becomes support on a pullback to the top of a broken up-channel). Tuesday's quick spike up at the open was a test of the bottom of its broken down-channel and yesterday's candle was a bearish outside down reversal (higher high, lower low and close lower). A new high above yesterday's high at 2.257% would negate the bearish candle but until then we have a setup for at least a pullback in TNX and the buying in the bonds would be negative for the stock market, although the rally attempt in the stock market since October 18th has not been matched by one in TNX so there's a small disconnect at the moment (there's more of a connection between the dollar and equities).

10-year Yield, TNX, Daily chart

The longer-term chart of yields, looking at the 30-year monthly chart below, shows TYX at an important spot at the moment. From its October low it has bounced back up to the mid line of its down-channel. With the thought that money may soon run back into the perceived safety of Treasuries and with the Fed's efforts to roll out to longer-dated maturities in an effort to hold rates low, we could be looking at much lower rates in the coming year. I think the drop this year below the mid line of the channel, as it did in 2008, is telling us lower yields are directly ahead. The end of the bond market bubble may have to wait another couple of years.

30-year Yield, TYX, Monthly chart

Considering the new home sales report this morning and the fact that I haven't shown the home construction index in a while, I thought it would be a good time to review where it's at. I know a lot of people are looking for a bottom in this beaten-down sector. I'm not. There is a good-fitting a-b-c bounce pattern off the August low where the b-wave dropped a little lower on October 4th to the 127% extension of the a-wave (the first leg of the bounce in August), which is common for what's called an expanded flat a-b-c correction. In that kind of correction it's also common to see the c-wave reach a 162% projection of the a-wave, which for this index pointed to 225.65, shown on the chart below. Monday's high was 226.19. Probably just a coincidence (wink). If it pushes a little higher, two equal legs up for the rally off the October 4th low points to 230.50. Notice too that the index is struggling at the bottom of its broken down-channel from January. Probably just another coincidence. This index has lower to go if the wave count is correct and could eventually be below 100 before a bottom is found.

DJ Home Construction index, DJUSHB, Daily chart

The Transportation index has the same potential pattern as the housing index -- an expanded flat a-b-c correction off the August low. These expanded flat corrections typically have a sharp c-wave that catches most traders off guard. The rally from October 4th fits the bill. The 162% projection for the c-wave is at 4878, which was tagged on Monday. We could still get a minor new high if the broader market rallies, and the DOW best of all supports that possibility, but indexes like the TRAN suggest we've already seen the high.

Transportation Index, TRAN, Daily chart

With the dollar and equities hooked together but pulling in opposite directions we need to keep a close eye on the dollar. As can be seen on its chart below, it has been finding support this week at its 200-dma and 62% retracement of its August-October rally. It hasn't been a ball of fire off those two support levels near 75.87 and 75.94 but nor has support broken (this morning's spike low on the European news was 75.88). The pattern of candles on the daily chart are called bottoming tails and is one sign it should be putting in a bottom here. If true and the dollar starts the next rally leg, which should be strong, equities will get punished.

U.S. Dollar contract, DX, Daily chart

Gold's pattern since its September low continues to look like a correction of its September selloff. Whether it stops here, at its 50-dma at 1740 or the top of a bull flag pattern near 1765 (two equal legs up) is the big question in my mind. Getting another leg down is my expectation once this leg up finishes, which looks like it will coincide with the stock market (because of the dollar's next move).

Gold continuous contract, GC, Daily chart

Oil has had a strong rally with the stock market and broke out of its down-channel from May, indicating the May-October leg down completed. I drew in a parallel line to the down-channel the same distance as the mid line of the channel (this channeling method is often effective in showing where the next level of resistance will be. Monday's rally stopped just short of the new channel line. But more importantly it stopped just shy of its 50% retracement of the May-October decline and its 200-dma, at 94.89 and 94.79, respectively (Monday's high was 94.65). It's a good setup for a reversal back down but obviously it will be bullish if it continues higher above 94.90.

Oil continuous contract, CL, Daily chart

Tomorrow we will get the unemployment claims numbers, GDP and Pending Home Sales. The GDP might be a market mover if European news doesn't trump everything again.

Economic reports, summary and Key Trading Levels

The price pattern looks like it's in the last stages of topping if Monday's high wasn't the top. A minor new high by Friday looks like a good possibility. There was a new moon today (typically identified with market highs) and a Bradley turn date on Friday so this week fits well for a turn. The end of the month run could end anytime now that fund managers can use the T+3 trade window to still claim stocks held in their portfolio.

The significance of the top that gets put in here, assuming it will be this week, is that it could set us up for the next big decline, one that takes us down below the July 2010 lows (SPX 935-950 target). Alternatively, if the year is going to hold up, we'll get just a larger pullback into November before heading back up into December. Considering the risk potential I would want to at least hedge my long positions if the key levels noted on the indexes start breaking.

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

Key Levels for SPX:
- bullish above 1275
- bearish below 1197

Key Levels for DOW:
- bullish above 12,050
- bearish below 11,390

Key Levels for NDX:
- bullish above 2390
- bearish below 2291

Key Levels for RUT:
- bullish above 735
- bearish below 680

Keene H. Little, CMT