Market Stats

The stock market has rallied on hope that Europe was going to get serious about fixing its debt problems. By fixing, the market of course had been hoping for more debt to solve the debt problem (huh?). All the king's horses, and all the Fed's money, can't seem to put Humpty together again. Shattered confidence shows up as selling as market participants become more concerned that the problems are going to get worse before they get better (and they will get better but fixing the problems is going to be either painful or more painful).

The lack of progress in Europe is showing up in Italian bond yields again. The ECB has been attempting to hold yields down by buying their bonds and then selling them in the secondary market. The ECB has already borrowed $50B from the Fed since the new swap agreement between central banks was implemented and quite likely is using the money in an attempt to support the weaker European countries and their bond auctions. As you can in the chart below, they're losing the battle.

Italian Government Bonds

I drew in red lines to indicate what was resistance turned into support when the ECB drove yields back down in their attempt to support their bond auctions. Bond yields are on their way back up (closing at 6.88% today) and the bond spread between the Italian and German bonds is widening again. Italy also has to pay higher yields to sell their 5-year notes -- today's sales hit a euro-era high of 6.47%. This is of course a reflection of the bond market's concern about the EU leaders' failure to create a better plan to make a plan and can only agree that they need to hold more meetings in order to develop that better plan.

In the meantime we're to trust the ECB and EU leaders that they know what they're doing. The bond market is in effect saying "Yea, I don't think so." And speaking of lack of trust, the LIBOR rate is at a 52-week high, which says banks don't trust each other either and want higher rates to compensate for added risks. The TED spread is also at its highs. If you want to know what's really happening in the world of finance, keep your ears and eyes open to what the bond market is doing. The stock market is like a spoiled child that gets lost easily. The one area of strength in bonds is the U.S. Treasury market, which is perceived as less risky. U.S. Treasury rates have dropped this week

Speaking of U.S. Treasuries, the 30-year yield, TYX, lost support of its 20 and 50-dma's today, which had been supporting it since the beginning of this month. It now looks like it will head down to at least retest the October 4th low at 2.69%. Its price pattern leaves me guessing a bit as to where it might be headed next but as long as it stays below its downtrend line from October 27th (coinciding with stock indexes) it will remain bearish (bullish for bond prices). It takes a rally above Tuesday's high at 3.1% to turn the pattern at least short-term bullish.

30-Year Treasury Yield, TYX, Daily chart

The negative reaction to the Fed's doing-nothing-more policy announcement yesterday continued into today. There was an effort to lift equity futures overnight but that was lost after the European markets opened. Traders are clearly not happy with the Fed's FOMC announcement yesterday. They're disappointed that the Fed did not signal that they're ready to start a larger QE program. One thing to keep in mind about the Fed is that they are not proactive; they're reactive. And if you look at the past when they've made decisions to "help" the stock market, um, I mean the economy it's been when the stock market has taken a real hit. The Fed then rushes to the rescue with another bailout plan.

What the Fed has been doing lately is attempting to jawbone the market higher with statements about having the ability to implement further quantitative easing (such as purchasing more mortgage-backed securities) as a way to thwart the negative reactions to what's happening in Europe. But without the stock market in serious trouble it remains highly unlikely the Fed will use that tool now and risk not having more when it's really needed. Therefore it should have come as no surprise that the Fed didn't change a thing with yesterday's FOMC announcement.

I came across a very interesting piece by John Hussman who had this to say about the market and financial institutions and the dependence on Fed handouts:

"Frankly, I am concerned that Wall Street is becoming little more than a glorified crack house. Day after day, the sole focus of Wall Street is on more sugar, stronger sugar, Big Bazookas of sugar, unlimited sugar, and anything that will get somebody to deliver the sugar faster. This is like offering a lollipop to quiet down a 2-year old throwing a tantrum, and expecting that the result will be fewer tantrums.

"What we have increasingly observed over the past decade is nothing but the gradual destruction of the ability of the financial markets to allocate capital for the benefit of future growth. By preventing the natural discipline of the markets to impose losses on poor stewards of capital, and to impose interest rates high enough to force debtors to allocate the capital usefully, the world's policy makers are increasingly wrecking the prospects for long-term economic growth. The world's standard of living (what we can consume for the work we do) is intimately tied to its productivity (what we can produce for the work we do). That productivity requires our scarce savings to be allocated to productive physical capital, and to productive human capital (primarily education).

"Nietzsche famously said 'What does not kill me makes me stronger.' The corollary is 'What constantly rescues me makes me weaker.' The world will only stop looking for bailouts when policy makers stop handing them out."

Me thinks we'll be waiting a while for the Fed to stop trying to hand out more goodies to their banker buddies, probably when the Federal Reserve is abolished. The Fed clearly has some significant issues to worry about, not the least of which is Europe and the contagion that could spread to U.S. financial institutions. We already know the Fed will do everything it can, including stealing the American public blind, to help support the banksters. Their efforts to support the collapsing financial structure are far from over and every time the stock market thinks Mighty Mouse is here again, it will rally on hopium. It's the market we have and need to try to predict.

The other thing the Fed has to worry about is of course the economy and the job picture. But I think even they recognize there's not much more they can do about that. And now compounding the problem is China. It's bad enough with Europe sliding into a recession (already in a recession probably, especially with the required austerity programs to slow their spending) but with China's economy hitting the wall we could see another global slowdown and clearly that will not help the financial situation. Gauging the Chinese economy through their stock market, the Shanghai Composite index, we've already got our answer and it's bearish.

Shanghai Composite index, $SSEC, Daily chart

As noted on the chart above, yesterday's decline broke below the October low, which itself was a test of the July 2010 low. The October rally had many thinking it made a successful double bottom. Today's decline put an exclamation point on yesterday's break of both its July 2010 and October 2011 lows. In the chart I show a comparison of SPX to the Shanghai index ($SSEC on Note the similar pattern of the price movements and note the exaggerated bounce in SPX off the October low and how it has held up better than SSEC.

So, does the SSEC come bouncing back up to join SPX or will it be the other way around? Considering the lack-of-substance rally in the U.S. (and European) markets, I strongly believe SPX will follow SSEC, not the other way around. The only question is when -- SPX could head for new lows this month or it might hold up (even rally) into the end of the month and start down in earnest in January.

And with that let's get into what our market looks like. Following last week's candlestick at the 50-week MA, which looks a bit like a spinning top doji, this week's big red candle is not encouraging for the bulls. A little lower now is its 20-week MA, near 1200. The bearish price path calls for the next bear market leg down, one which should take it much lower next quarter. But the bullish price path (dashed green line), calling for an end-of-year rally is not dead yet. We could still get an upside surprise and need to trade accordingly.

S&P 500, SPX, Weekly chart

The daily chart below is getting busy with a bunch of trend lines, Fibs, etc. but until the price pattern clears up some more, we've got to consider the bullish and bearish possibilities with price paths and targets for each. If SPX finds support at or above 1200 there is still the possibility for another rally leg. If another rally leg is launched from 1200, two equal legs up from November 25th would target 1307, which is also the 78.6% retracement of the May-October decline and it would be back up to the broken H&S neckline. For now I'm saying stay bearish below 1226, its 50-dma, but don't turn aggressively bullish until it gets above 1250. In the meantime we could see the market work its way lower and for SPX to break its uptrend line from October 4th before the end of the month and then use it to back test in early January.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1250
- stay bearish below 1226

This morning SPX dropped below a trend line along its lows since December 2nd and then back tested it this afternoon, leaving a bearish kiss goodbye. At the moment I'm thinking we might see a little lower or a choppy sideways consolidation before dropping lower again. The bearish wave count calls for the market to stair-step its way lower into early next week before setting up at least a larger bounce. If SPX drops lower tomorrow, and gets below 1200, watch for support at its uptrend line from October 4th, near 1190 at the end of the day. A rally above Monday's low, near 1227, would be the first bullish sign (especially since it would also be back above its 20 and 50-dma's) since it would be the first indication that a tradable bottom is in.

S&P 500, SPX, 30-min chart

While SPX has broken its 20 and 50-dma's, the DOW has only broken its 20-dma but continues to hold its 50-dma at 11774 (today's low is 11786). The bearish price pattern calls for a continuation lower with a break of its uptrend line from October 4th early next week and then a bounce into the end of the year (not the kind of Santa Claus rally most were hoping for). Following the bounce we should see a strong selloff in January. The bullish wave count, which is looking a little less probable at this point but remains a possibility, is for the 50-dma (or near it) to hold and then start the next rally leg. Fib projections and trend lines point to 12400-12500 for an upside target if the bulls take the reins away from the bears. The first thing the bulls need to do is get the DOW back above 12150 although a push above 12K would be a bullish heads up.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,150
- bearish below 11,940

NDX would close its November 30th gap at 2211.55 so a break below 2200 would be more bearish than what we're seeing so far. In the meantime we should see support in the 2200-2210 area but the bearish wave pattern calls for just a small bounce before heading lower again next week, potentially down to its uptrend line from July 2010, near 2150 by the end of the month, before a bigger bounce to correct the decline from this month's high. The bullish pattern says we're going to get the end-of-year rally, which could conceivably drive it up to its downtrend line from July and achieve two equal legs up near 2390 (2nd leg starting from about 2200). I have no idea what could drive the bulls into a feeding frenzy like that but we've seen stranger things happen in this market. Above 2275 would have me looking to trade the long side.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2275
- bearish below 2200

The bearish pattern for the RUT calls for it to stair-step its way lower into next week and get down to 685 (78.6% retracement of the rally off the November low) before a larger bounce into the end of the month. The bounce could take the RUT back up to the 720 area before heading much lower in January. The bullish wave count calls for another rally leg and two equal legs up from November 25th would be to the 770 area (if the 2nd leg starts from 785), which is also a Fib projection for the 2nd leg of the rally off the October 4th low, and it would be near its 200-dma. A rally above 726 would have me thinking more bullishly but for the moment I think the bears are in charge.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 726
- stay bearish below 720

The banks held up well today and I'm not sure why. There wasn't any especially good news for them but there seems to be some support. And that support has been somewhat evident this month as it has pulled back from last week's highs in what looks like a corrective pattern. That points to another rally leg and if the banks rally, the broader market will rally. Follow the money. BIX is holding its 20 and 50-dma's, both near 121, and closed marginally in the green at 122.48. It's also holding at its broken downtrend line from February, which it broke above on December 5th. It could bounce back up from here and into the end of the month with an attempt to hit the top of a parallel up-channel from August (bear flag pattern) and its 200-dma near 130.

S&P Banks index, BIX, Daily chart

The TRAN is showing weakness by breaking back below its downtrend line from July, leaving a head-fake break above it this month. It has also now closed both its 20 and 50-dma's. The break of the 50-dma's, while below the 200-dma's, is what catches fund managers' attention and causes them to think more about selling rather than worrying about missing any upside move. Of course, as wicked as this market is, it would be typical for the breaks of these important moving averages to be reversed to the upside, catching both the bears and bulls flat footed. Watch the uptrend line, near today's low (4750), for support (or not).

Transportation Index, TRAN, Daily chart

Depending on which charting package you're using you'll see either the December 2011 contract prices (as QCharts is still using and is reflected in the chart below) or the March 2012 contract which should be the front-month contract now. But for analysis purposes, I'm using the December contract. The dollar made a strong move above its downtrend line from October 4th and added to those gains today. The broken downtrend line and the bottom of its up-channel from October 27th cross near 79.55 next Wednesday so as long as either line holds a pullback, the dollar should head higher. That would of course continue the downward pressure on stocks and commodities.

U.S. Dollar contract, DX, Daily chart

When gold decides to break down it doesn't waste any time. The break of its uptrend line from September has been followed by three days of heavy liquidation. Most were looking at the sideways triangle and licking their chops to get long. As discussed last week, I thought just the opposite. It has now dropped to support in the 1535-1568 area, starting with the Fib projection near 1568 (2nd leg of decline from August is 62% of the 1st leg down). That was reached today. Then there's an uptrend line from October 2008 (arithmetic price scale) that's near 1559. For the move down from November 8th, the 2nd leg down would be 162% of the 1st leg down near 1545. And then there's the September 26th low at 1535. That's a lot of support for the bears to bust through and I believe it will hold for a bounce/consolidation before breaking lower. Gold stays bearish below 1670, potentially bullish above 1670 and then clearly bullish back above 1761. In the meantime I expect to see gold work its way lower into January.

Gold continuous contract, GC, Daily chart

It's the same pattern for silver although surprisingly (to me), not quite as strong a selloff. Usually silver leads as it's more volatile. Silver had been showing relative weakness and now it's showing relative strength. Not sure what to make of that at the moment. Silver should work its way down to its uptrend line from October 2008, near 25 (arithmetic price scale), with lower potential.

Silver continuous contract, SI, Daily chart

Last Thursday oil had broken its uptrend line from October 4th. It then consolidated for a couple of days and then spiked up yesterday and tagged its broken uptrend line. It then fell away, leaving a bearish kiss goodbye. That was a beauty of a setup to short oil and today's decline shows why. It closed below its 200-dma for the first time since breaking back above it on November 7th. It did hold at its 50-dma and 50% retracement of its May-October decline, at 94.89. It should be good for at least a little consolidation before dropping lower again. Oil bears would be in potential trouble if oil gets back above 98.

Oil continuous contract, CL, Daily chart

There wasn't much in the way of economic reports today but tomorrow will be a lot busier. Other than the weekly unemployment claims, the PPI data (not much, if any, of a change is expected) and the Empire Manufacturing index (which is expected to improve) will be released before the bell. After the opening bell we'll get Industrial Production, Capacity Utilization and the Philly Fed numbers, which could bounce the market if there are no negative surprises.

Economic reports, summary and Key Trading Levels

I've often heard that the market will rally if only given the chance (stop with the negative European news, etc.). The reason given is because of so much cash on the sidelines. I've argued that cash as a percent of total assets in mutual funds is actually at an historically low point, one that has correlated with major stock market highs. But let's say there's lots of cash in other institutions and traders just waiting to get put to work. It still doesn't matter. Rather than lots of cash being available what matters is sentiment. Bear markets come from bearish sentiment, which is what creates recessions. Tom McClellan recently posted his take on the cash vs. sentiment issue and I thought it was worth passing along as food for thought:

"Please let me correct a couple of definitional items.

"The first point is that when mutual funds (or any other entities) hold cash, they don't actually hold real cash. They hold representations of cash, in the form of money market assets, short term commercial paper, etc. If anyone wanted to "cash" out of their cash position, they would have to go to a bank that had "cash" cash, and convince the bank to accept the representation of cash in exchange for that real cash.

"Second, stock prices do not get driven up by cash in the same way that a 747 gets aloft through the consumption of jet fuel. Stock prices are really just exchange rates, defining how much of one asset you can get when you exchange it for another asset. Changes in those exchange rates come about not through the consumption of cash, but through changes in the beliefs of the people involved. Having said that, the amount of cash that is laying around can have an effect on those beliefs, but the cash itself is not what does the work of moving prices. Changing beliefs is what does that.

"When I give seminars, I like to survey the crowd with a trick question. I ask them to estimate the total amount of money in the New York Stock Exchange. I let them offer guesses, usually involving a lot of zeroes, but the real answer is that you only need one zero to answer that question. There is no money in the stock market*. Any time you put money into the stock market, that money immediately comes out the other side and into the "pocket" of the guy who sold you those shares. You only think you have money in your stock market investments (or other assets). You don't. What you have is confidence that you can get money from someone who has it, in exchange for those assets. When that confidence changes, so does the exchange rate.

"*Actually, there may be a few quarters in the Coke machine that get left there overnight."

It's what two traders think the current value is -- that's what drives prices. And every time the market gets another injection of hopium we have inflated values on the expectation that things will get better and then deflated values when we worry that things are going to get worse. It doesn't matter how much "cash" the Fed prints; the only thing that matters is what we think things are worth. It's a very interesting perspective to keep in mind.

As for my expectations for the market, we are now near the time where the bulls need to have some higher expectations and like these low prices. If SPX finds support at or above 1200 there is still a chance, even if it's dwindling, for an end-of-year rally. The Santa Claus rally doesn't normally start until just before Christmas.

One bearish warning comes from the VIX, which had been dropping for the past 3 days even while the market dropped. We were seeing a lot of bullish complacency and while opex can skew the results of VIX, making the readings unreliable, it was a warning that the decline could get worse. Yesterday the VIX dropped below the bottom of its Bollinger Band and today it bounced back inside the band. The last time that happened was on October 27th, which was a market high. This time it could point to an accelerated move lower in the market so keep that possibility in mind.

Helping the bears is the bearish price pattern that suggests even if we do get a bounce into the end of the year, it will be an outstanding opportunity to short it. We'll evaluate the patterns some more next week and in the meantime be careful through the rest of opex week. There's a good chance the market will start quieting down (consolidating) for the rest of the week, which by the way would be a bearish continuation pattern. The bulls need to do more than let this market consolidate.

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

Key Levels for SPX:
- bullish above 1250
- stay bearish below 1226

Key Levels for DOW:
- bullish above 12,150
- bearish below 11,940

Key Levels for NDX:
- bullish above 2275
- bearish below 2200

Key Levels for RUT:
- bullish above 726
- stay bearish below 720

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

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