Market Stats

The market has gone into a holding pattern since last Friday while it waits for word from the EU leaders as to what the next grand plan will be. The market just wants to know that more money will be created so that the hopium injections will continue. Most reasonable people know this will all end in tears but we also know that the market is short-sighted and at this point most are simply hoping for an end-of-year rally. And they just might get it. But we're at a risky spot and the year-end rally would actually have a better chance, imo, if we first get a pullback, which is not something the market wants to do right now.

The market is showing some bearish non-confirmation at the moment, something often seen at market tops. At the moment we're seeing more money rotate into the safety of the bluest of the blue chips, which is a defensive move (it's easier to sell out of the big caps without moving the price negatively). This of course makes sense when you think about the upcoming announcement from the EU leaders as to what their next can-kicking plan is going to be. So in this case I'm not sure we can place as much emphasis on the DOW's outperformance to the upside.

But with the DOW up for the past three days while NDX and RUT have closed down for the past two days with lower highs, it could be our warning that a bigger selloff is coming. Even the TRAN is not keeping up with the DOW's new highs, which is a Dow Theory non-confirmation at the moment. These are all just warning signs and we need to get past this weekend to see what shakes out of Europe's trees.

One possibility is for a spike to the upside on "good" news that finishes the rally off the November 25th low. The final leg of the rally is often on a news-related spike and in the current price pattern it would actually set up an excellent shorting opportunity. That's one reason why I mentioned above that a year-end rally would have a better chance of success if we first pull back some.

With all the shenanigans between the central banks and one plan after another to solve the debt problem, the bottom line is each plan is designed to make more money available to loan to the debtor nations. We hear of some austerity measures but they're like the ones we get from our Congress -- excitement over a savings of $100B but it's a drop in the bucket compared to the debt we're racking up each month. There are 1000 billion in a trillion and it recently came to light that the Fed has injected $7.7T into the banking system, and it's still not enough. We in the U.S. continue to accumulate debt to the tune of trillions each year. Saving $100B and spending $1000B is not a way to get out of debt. And European countries are in worse shape than the U.S.

Now the central banks are conniving ways to make more money available so that it can be loaned to the nations who can't even pay back the debt they now have. Germany has been fighting the allowance of the ECB to create money to buy sovereign debt. While most economists, and certainly most European economists, are Keynesians (spend more money and create more debt in order to help the economy, you know, spend your way out debt). Germany is more of the Austrian economic theory that states the market forces will fix the problem. If a nation is in too much debt the bond market will force them to pay it off rather than accumulate more. Germany has a relatively recent history with creating too much money as a way to pay off debt and they're not going down that road again. My hat's off to Angela Merkel for standing her ground on this. So what's a central banker to do? I received a note from John Gray with an assessment from a friend. I thought it was worth passing along:

"I don't think direct payment to Greece will happen....however, QE2.5 has been in effect ever since the so-called end of QE2. Now with the currency "swap" between euro-land and the US, we have QE3, actually SUPER QE3. The swap will be with newly created money on BOTH sides and is an attempt to avoid the stigma of direct injection as the dollars are fed into Europe and Euros are fed back to the Fed.

"This is money laundering at the central bank level. The slimy cool thing is it uses the derivatives market to tie all countries using, or pegging, their currencies to the either the dollar or the Euro into co-operative easing, rather than the competitive easing of recent history [the competitive race to the bottom in devaluing currencies]. Since none of the problems are actually addressed, in fact they are made worse with the addition of ever more debt, the cheap money will flow into the usual targets (stock market, commodities, precious metals)....thus we get a useful "Santa Claus' rally in the markets. The key is to enjoy the ride, but not be in the way when the train comes off the tracks. Note that none of the "targets" are actually worth more in absolute terms, but are only worth more in terms of the digital confetti (dollars, euros, puffnicks, funny money) created for the swaps."

It's an interesting perspective and one that easily fits with the central bankers' desire to inflate the market so that everyone feels good. It's also of course a way to get money into the bankers' hands (keep in mind that all the central banks are private banks looking out only for themselves and at taxpayer expense). The banksters will continue to do this and rape the public for as long as the public remains ignorant of what they're doing.

There are high expectations by most traders for a rally into year-end (Santa Claus rally) and as I'll show on the charts there is a price pattern that full supports that idea. Even Tom DeMark was out earlier in the week giving his projection for a rally into year-end (more on his forecast in a bit). The seasonal bias is clearly in favor of the bulls. Of course the bullish bias for the year, this being the 3rd presidential year, hasn't exactly panned out well for the bulls (S&P closed 2010 at 1257.64 and today's close was 1261, up a whopping 3 points) but I guess a flat year is better than a losing year.

The one worrisome thing for me is that this market has not been kind to those who have joined the majority in their expectations. When too many line up on the same side of the boat it invariably tips over and spills the majority into the frigid waters.

Bulls All Lined Up on One Side

However, we can't trade on hunches and right now it's only a hunch that bulls might be in trouble this month. In the meantime I'll stick with the charts and price patterns to help provide the clues needed to discern whether or not a rally or a decline is the higher-probability move. At the moment I think the higher-probability move will be a year-end rally but only if we first get a pullback into next week (presumably on less than good news from the EU leaders). I'm on the same side of the boat as everyone else but I'm wearing my poopy suit (Navy icy-water survival suit) and a big life preserver in case of tipping. The downside risk is too great to get complacent about the long side here.

Fully supporting the bull's belief is Tom DeMark's forecast. For those who don't know him, he's most famous for his DeMark indicators which include Sequential and Countdown indicators (he uses 9 and 13 trading days, using some proprietary rules for how he counts the days to identify potential reversals). In his interview with Bloomberg, which you can watch here: DeMark interview, he talks about SPX making it to 1330-1345 by December 21st. He has made some very good calls this year and therefore his current forecast is not to be ignored.

Before I get into the charts and show what I believe is the bullish setup into the end of the month, including Tom DeMark's input, I want to show a chart I came across today from Tom McClellan that shows the Fed's POMO activities for the rest of the year. There is not a direct one-for-one correlation but typically when POMO operations decline there's been less money for the market to enjoy and the market has declined. The POMO schedule towards the end of the month is for a sharp withdrawal and that could tie in with a high in the stock market that's close to DeMark's December 21st forecast (which is also the winter solstice).

S&P 500 vs. Fed POMO, chart courtesy Tom McClellan

Onto the charts, the SPX weekly chart shows it has rallied up to its 50-week MA (close to the 200-dma) but doesn't have much in the way of resistance between here and the previous high and broken H&S neckline near 1293. If the bulls get real excited this month and Europe saves the world we could see the rally that DeMark is looking for, whether from here or after a pullback first, and hit the downtrend line from 2007. Towards the end of the month the downtrend line will be near 1332.

S&P 500, SPX, Weekly chart

On the daily chart below I'm showing a pullback to 1226 where it would likely find support at its 20 and 50-dma's. From there another rally leg equal to the one up from November 25th would target 1335. This is of course speculation but it would be a very nice way to finish the rally and accomplish DeMark's projection. As for completion dates, I like a turn window that runs from DeMark's December 21st to an important Bradley Model turn date on December 28th. In between is a new moon on December 24th. BTW, the full moon is on December 10th, which is Saturday and that makes it possible we'll see Friday or Monday be a turn date for the current rally.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1270
- bearish below 1192

Not shown on the daily chart is a Fib price projection to 1293 where the 2nd leg of the bounce off the October 4th low would be 62% of the 1st leg up. The fact that this correlates well with the broken H&S neckline makes for a very interesting setup if it rallies from here up to there and rolls back over (excellent shorting opportunity if that sets up), especially if it gets hit on Friday or Monday. I would be looking very hard at that setup to put on a sizeable short position.

The 120-min chart below shows how price has been oscillating around the uptrend line from November 1st, which was the bottom of the previous sideways triangle that everyone was watching after the October 27th high. It closed just above that line today. And note that this morning's low found support at the broken downtrend line from October 27th, the top of the triangle. Only marginally higher, near 1270, is the downtrend line from July. It's going to be tough resistance unless it can gap over it (the favorite tactic in this market). A drop below 1255 should indicate we're going to get at least the pullback.

S&P 500, SPX, 120-min chart

Considering all the overnight activity that's been going on, which has created a very gappy market for the U.S., it's worth looking at the S&P 500 emini futures (ES) for some additional clues. Similar to SPX of course is the fact that ES has been struggling at its 200-dma, near 1260, and its downtrend line from July, which has been tagged the past three days, including last night, and it's where it closed today. The 62% retracement of the May-October decline, near 1257, is another resistance level that's it's been cycling around. Between the 62% retracement, the 200-dma and the downtrend line we've got strong resistance at 1257-1266. Today's RTH (regular trading hours) high was 1267, thanks to a late-afternoon spike up. Notice the "topping tails" on the candles since Friday, which would have been repeated today had it not been for the late-day spike back up. This is a common topping pattern and when seen at resistance it needs to be paid attention to.

S&P 500 emini future contract, ES, Daily chart

On the ES chart above I'm showing the same idea for a pullback in the coming week and then a final rally leg into the end of the month. There is strong Fib correlation at ES 1220 area so I'm showing a pullback to that level. The 50% retracement of the May-October decline is at 1220.75. The 50% retracement of the November decline is at 1218.50. The 38% retracement of the rally off the November 25th low is at 1222. From 1220 we'd have two equal legs up to the 1308 area, which is the 78.6% retracement of the May-October decline and its downtrend line from May. This gives us a different projection than the cash index so I'll continue to watch both (assuming we'll get the rally as depicted). An overnight rally in the next couple of days to 1284.25 that is not matched during the RTH session could signal a top was put in.

The ES 120-min all-hours chart shows a few trend lines/channels that it's been bouncing around. The overall choppy pattern could be creating a rolling top, which is a typical topping pattern. A break below 1240 would indicate at least a larger pullback is underway. In the meantime it's still holding inside both up-channels

S&P 500 emini future contract, ES, 120-min chart

A slightly different idea for a bounce into year-end is shown on the DOW's chart below. A deeper pullback into a low on December 21st (calling for a negative opex week next week) could see the DOW tagging its uptrend line from October 4th, near 11630, before heading back up into early January. There's even a cycle turn date that's looking for a high at the end of January so this pattern has potential. But once again, if the market rallies from here and the DOW tags its Fib projection at 12393 (call it 12400), where the 2nd leg of its bounce off the October low would achieve 62% of the 1st leg up, and its broken H&S neckline and its downtrend line from May, I could be forgiven for jumping all over that one to get big time short.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,258
- bearish below 11,500

NDX has been weaker than the blue chips and it's been struggling with the uptrend lines from the low on October 20th. Today's pullback found support at its 50 and 200-dma's, both near 2291, so as long as they hold we could get another leg up for its rally. The risk, shown on the NDX chart, is that the decline could really kick into gear if it starts back down from here (presumably on disappointing news from the EU leaders).

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2343
- bearish below 2211

The RUT's rally carried it above its downtrend line from July and has been holding above the line (only a brief spike below it this morning). As long as the RUT stays above 735 it will remain bullish with an upside target at 767-770 where there are 3 reasons why bears will be waiting to pounce. Its 200-dma, 62% retracement of the May-October decline and the 62% projection for the 2nd leg of the bounce off the October low are all located there. A rally from here to there in the next couple of days would be a sweet setup for the bears. Otherwise a pullback first and then a rally up to that level later this month is another possibility (as well as the more bearish one calling for the next leg down to start from here).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 753
- bearish below 692

Bonds have not been providing much in the way of direction since November 1st. Prices have chopped sideways and only sold off relatively little while the stock market went nuts last week (reacting more to the dollar). The price pattern for bonds is just a guess at the moment so I'm waiting for more price action to help determine their next move.

The banks have been very strong off the November 25th low (lots of short covering), which in turn greatly aided the stock market rally (follow the money). There's a lot of hope that Europe will solve its debt problems and that will protect the banks. We'll see about that. BIX has bullish broken its downtrend line from February but will soon test the top of a parallel up-channel for its bounce off the August low, currently near 129. Resistance levels from here include its October 27th high at 130.31, its 200-dma at 130.86 and the top of a wider up-channel near 133.60. Following the choppy price action since August, the sharp thrust up from November 25th is an ending leg to the correction, not the start of something bigger to the upside. Use the current rally to get rid of any long exposure to the banks since it will be your last best time to do so.

S&P Banks index, BIX, Daily chart

As mentioned earlier, the Trannies have not kept up with the DOW the past two days, which is a short-term bearish non-confirmation. The TRAN has stalled at its October high but is being supported by both its 200-dma and short-term downtrend line from October 27th. Its broken downtrend line from July is a little lower, near 4885 and then right below that is its 20-dma at 4838. So there are plenty of support levels that the bears need to break and there's an upside Fib target at 5222 that's still beckoning.

Transportation Index, TRAN, Daily chart

The dollar dropped from November 25th to a low on November 30th, which helped spark the equity rally, but since then the dollar has done nothing while equities pushed a little higher. Bonds haven't done much and the dollar hasn't done much since November 30th, which leaves stocks hanging out there buy themselves somewhat. Not a good place to be if you're looking for higher equity prices. You'd really like to see the dollar break support near 78.30 (slightly below last night's low), and especially below its 50-dma at 77.90, to kick off another equity rally. In the meantime the dollar remains inside a parallel up-channel with some significant upside potential. It will react to any news out of Europe on Friday or this weekend.

U.S. Dollar contract, DX, Daily chart

Gold continues to consolidate in a tighter range and some are looking at a sideways triangle pattern since the August/September highs and viewing it as a bullish continuation pattern. I think gold's triangle pattern will have the same bullish success that equities had out of their sideways triangle patterns off the October 27th highs -- zip to none, zilch, nada. First of all, price has gone too deep into the triangle, getting very close to the apex now. These triangle patterns are typically effective if price breaks out between 50% and 75% of the distance from the start of the triangle to the apex. That meant a breakout in November. If anything, a breakout this late in the triangle will usually be a head-fake break so in this case we could see a quick pop out the top, trap some bulls, and then reverse and break down instead. A drop below yesterday's low at 1705.70 would be a bearish heads up and a breakdown would be confirmed with a drop below 1670. The downside target for now is 1421.50 for two equal legs down from August.

Gold continuous contract, GC, Daily chart

We could be very close to a breakdown in gold if the short-term wave count is correct. I'm showing a 5-wave decline from last Friday to yesterday's low, followed by a 3-wave correction. Ideally gold will make it up to 1754.80 overnight to achieve two equal legs up and hit its 78.6% retracement (a very common retracement level lately, for stocks too). From there we should see a strong selloff. But the minimum requirements for the bounce have been met with the c-wave of the a-b-c bounce off yesterday's low achieving 62% of the a-wave and a 62% retracement of the 5-wave move down.

Gold continuous contract, GC, 120-min chart

Silver is in a very similar position as gold except it's weaker. If you prefer trading silver it should move down in concert with gold.

Oil's bounce back up from November 25th has been struggling with its broken uptrend line from February 2009, which it tagged again today at its high of 101.94. The bearish divergence says any further press higher is likely not going to hold. A break below its uptrend line through the November 25th low and its 20-dma, both near 98.85, should be the kickoff to the next leg down for oil.

Oil continuous contract, CL, Daily chart

As a reminder for where I think oil is headed in the coming year, I think we'll get another leg down for its pullback from the 2008 high. Another equal leg down would target 64.25, which would also be a 62% retracement of its 2009-2011 rally. You can see how well oil trades its Fibs. If the 2nd leg achieves 162% of the 1st leg down we get a downside target near 40, which is also the location of its 1998-2008 uptrend line (log price scale). The January 2009 low was 33.20. If you're a longer-term bull don't shoot the messenger -- I'm just telling you what the charts are telling me. Besides, if you like oil at 100 you'll love it at 40. ;-)

Oil continuous contract, CL, Weekly chart

It's been a quiet week for economic reports and that continues tomorrow and Friday. Besides, the last thing this market is paying any attention to is economic and earnings reports. It's all about Europe and the currencies. That will change and the deterioration in earnings will matter when it matters, probably not until after Christmas.

Economic reports, summary and Key Trading Levels

The Fed helped engineer an even bigger bailout by providing some cover for the other central banks to help create money to buy sovereign debt. After all, the Fed has proven they're a master at doing this. It reminds me of the E*Trade baby -- "here watch I just created a trillion dollars while throwing up all over myself and then just gave it to my banking buddies in Europe and they gave me some crappy sovereign debt in return. Is this cool or what?"

The stock market loves a bank bailout with the hope that and all the newly created money will flow into stocks and other assets. The trouble is, each time the Fed has lowered the swap rate to entice more borrowing, the stock market spiked up and then sold off quickly to below where the Fed tried to juice the market. That means a fast return back to he November 25th lows (and then much lower if that happens). Fixing a nation with a debt problem with more debt is not the solution. It might help with liquidity, which is a problem as more and more people and institutions remove their money from banks, but it will not help the solvency problem. The impact from the central bankers' attempts will be less and less effective until we soon reach the point where they will have no credibility whatsoever. It's all part of the bear market process.

So be careful trusting this rally. As shown on tonight's charts, backed up by people like Tom DeMark, I certainly see the potential for a year-end rally. But that rally has a better chance, I think, if we first get a pullback into next week. If the market rallies from here and hits the target levels shown on the charts, exit longs and get short, with a sizeable position. I think it will be that bearish if it happens. For now Santa is singing ho-ho-ho but I see a bear sneaking up behind him with a big cookie to stuff down Santa's throat and then replace him with a fat lady who's warming up her vocal cords.

Good luck as we head into opex week. Beware the head-fake move tomorrow and/or Friday and I'll be back with you next Wednesday.

Key Levels for SPX:
- bullish above 1270
- bearish below 1192

Key Levels for DOW:
- bullish above 12,258
- bearish below 11,500

Key Levels for NDX:
- bullish above 2343
- bearish below 2211

Key Levels for RUT:
- bullish above 753
- bearish below 692

Keene H. Little, CMT

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