Market Stats

I'm filling in for Jim tonight as he got called away today. I unfortunately had an afternoon appointment that I had to keep so I apologize for the delay in tonight's somewhat shortened report. I'll be back with you tomorrow night as well and I'll get all charts updated that were missed tonight.

We got a nice start to the new year once we got past the weekend and the fears of Iran blowing up oil tankers and terrorists terrorizing New Year's partiers. Now we're down to just worrying about Iran blowing up tankers or an aircraft carrier -- they've warned us that they're done warning us and that our carriers are no longer wanted in the Persian Gulf, which means they've farted in our general direction (hat tip to Monty Python).

The rally was attributed to good economic news but in reality the economic news did not warrant a 30+ point rally in the S&P futures, which opened at 6:00 AM. A report out of China about their PMI (Purchasing Managers Index) climbing from 49.7 to 56.0 certainly helped alleviate some fears about China slowing down but the ISM Index for the U.S. climbing to 53.9 from 52.7 was not exactly a barn burner. Germany reported a decline in its unemployment numbers but around the Christmas holiday that's not a surprise.

It's more than likely we saw some relief as we started the new year. Nothing bad happened, Europe didn't sink into the Atlantic ocean, oil tankers are still steaming through the Straits of Hormuz and the relief resulted in a rally in the euro and a drop in the dollar and that had stocks and commodities rallying. The bond market participated somewhat by selling off but bond yields have not broken through resistance. And speaking of yields, the Italian 10-year bond yield continues to flirt with 7%. The TED spread remains near its recent highs. It was, however, a day for the stock market to celebrate and that's exactly what it did.

Whether the stock market rally had a helping hand from "someone", knowing the importance of sentiment and how a good start to the year could help entice more buyers to step in, or it's just new-month money hitting the tape, we'll know more in a couple of days. Today's rally brought the indexes up to resistance and some price targets so it's just as likely we'll see a 1 to 2-day rally create a much more lasting market top.

The commodity stocks also got a nice bounce today but it's creating a divergence with the BDI (Baltic Dry Index), which has declined significantly over the past 3 weeks, from about 1850 to 1624 (-12%). BDI can be volatile but it's usually fairly strong at this time of year as shipments are booked now for deliveries into the 1st and 2nd quarters. The recent sharp decline is NOT a good sign and it's been a fairly reliable predictor of falling economic activity.

If the BDI continues to fall sharply, it will be a strong warning sign that the commodity stock rally may not be sustainable. And the broader stock market rally would suffer as well. There are some fundamental reasons why the stock market rally could be running on fumes at this point. The European debt problems and recession-causing austerity measures are like icing on the cake. The stock market is doing its best to ignore bad news but will not likely ignore it for much longer.

The new 52 week lows in the Chinese and Indian stock markets is one reason for the sharp drop in the BDI over the past 3 weeks. As we continue to watch the Chinese, their recent easing of interest rates was greeted by a new leg down in the Shanghai stock market and a move down and then sideways in the BDI. This is the opposite of what occurred when China eased in 2009 and the BDI and Shanghai market took off like a rocket. There were high expectations that the Chinese easing of rates would boost their production and shipments. Now traders aren't so sure lower rates can help (sound familiar?). The recent steep decline in commodities prices are saying that demand is falling and the decline in the Shanghai and Australian markets are confirming it. At least those are the clouds on the horizon right now and we're waiting to see if a storm starts to kick up.

Continue to watch the euro as well. If we now see the euro drop back down (it only has a 3-wave bounce correction off last week's low at this point) we could see a quick reversal of today's attempt to rally the stock and commodity markets.

Starting with the weekly chart of SPX, today's rally pushed it above resistance at its 50-week MA near 1267. The next line of resistance is its broken H&S neckline near 1300. A little below that line is a Fib target near 1293. The bounce off the October 4th low fits as a double zigzag wave count, which means two a-b-c bounces with a an a-b-c pullback between them (labeled W-X-Y). The first a-b-c bounce is the October rally, followed by the x-wave pullback in November and then the second a-b-c bounce from the low on November 25th. There is often a Fib relationship between these two a-b-c moves and the 2nd bounce (wave-Y) is 62% of the 1st bounce (wave W) at 1293.32. Slightly higher above the broken H&S neckline is the 78.6% retracement of the May-October decline, near 1307. So we've got a 1293-1307 upside target zone for this week.

S&P 500, SPX, Weekly chart

The importance of the bounce pattern off the October low is that it is a corrective wave structure that follows the impulsive (5-wave) decline from May into the October low. That impulsive decline sets the trend and the correction since October confirms we'll get another leg down (at least equal to the May-October decline) and that's the reason I'm looking for a top to the bounce rather than the start of something more bullish this week. The daily chart shows a little more clearly how the bounce pattern is labeled and where the upside projections are located. A drop below last Wednesday's low near 1248 would confirm the bounce pattern has completed.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish potential to 1293-1310
- bearish below 1248

For the final leg up in the double zigzag, which is wave-c in the move up from December 19th, the chart below shows the 5-wave count for it. There is the possibility the rally completed at this morning's high. A drop below Friday afternoon's low at 1257 would confirm the bounce has finished but until that happens I think we'll see the market work its way a little higher and my best guess is that we're going to see the completion of a rising wedge pattern. A pullback tomorrow morning followed by a 3-wave move up, as depicted, could have SPX achieving 1293 if not 1300.

S&P 500, SPX, 60-min chart

Interestingly, the DOW pushed right up to resistance this morning, at the cross of its May-July downtrend line and its broken H&S neckline, near 12480. So regardless of my efforts to pinpoint the upside target from EW patterns and Fib projections, sometimes trend lines are the easiest and most accurate way of identifying support and resistance. And that resistance is at 12480 and could mark the high for the DOW's bounce. Trying to get cute and figure out whether the DOW has another 100 points of upside potential is immediately dwarfed by the downside risk of thousands of points. Consider that in your own risk assessment when evaluating your portfolio and trades from here.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish potential to 12,620
- bearish below 12,213

NDX popped up to its Fib projection at 2328 where the 2nd leg of the bounce off the November low is 62% of the 1st leg up. It can certainly press higher and retest its December 5th high at 2343 and perhaps even up to its downtrend line from July near 2390, but again, the downside risk is in my opinion greater than the upside potential. What would be very bearish here would be a gap down tomorrow, which would leave an evening star reversal at resistance. Get short if that happens.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2343
- bearish below 2277

The RUT has now made it up to the bottom of a Fib confluence zone at 759-769 (and its 200-dma is in the middle near 762) with today's high of 759.37. The RUT popped up to the 62% projection for the 2nd leg up from November, at 759.27, and formed a shooting star at that resistance level. A red candle tomorrow would not look so good, especially if it closes today's gap. For the move up from October, the 2nd a-b-c of the double zigzag would be 62% of the 1st a-b-c at 769.83. The 62% retracement of the May-October decline is at 766.63. And as mentioned, the 200-dma is near 762. So clearly the RUT is running into resistance and we need to be aware that there is the potential for a 1 to 2-day rally this week, which might have already finished, that sets up the top of the bounce before starting a strong decline for the rest of the month.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 770
- bearish below 740

Two things we'll want to watch carefully for confirmation, or not, of the stock market's rally is what the bond market and the dollar are doing. The bond market sold off today, driving yields higher, which is supportive of the stock market. But TNX, the 10-year yield, popped up to its downtrend line from July and stopped, near 1.96%, which is also where it declining 20-dma is located. Today's candle is a dragonfly doji at resistance, which again will look bearish if followed by a red candle tomorrow.

10-year Yield, TNX, Daily chart

The dollar's decline today broke below the bottom of its up-channel from October. If I draw an uptrend line from October 27th through the December 8th low it closed right on that line today, which is also where its 20-dma is located. A rally tomorrow is needed to keep the dollar bulls in control otherwise we could be looking for a drop to 78.85 before setting up the next rally (or not). If the dollar continues lower tomorrow we should get another leg up in the stock market, and vice versa.

U.S. Dollar contract, DX, Daily chart

The other thing to keep a close eye on is the banking sector, which reacts quickly to any whiff of trouble from Europe. Today's rally took BKX right up to its downtrend line from February and pulled back a little. If it's able to push a little higher, watch for possible resistance at 41.80 where it will have two equal legs up from November. If the downtrend line holds, the next leg down should be a strong one.

KBW Bank index, BKX, Daily chart

The next chart comes courtesy Joe Weisenthal and Chart of the Day (from last week). He charted several banks for 2010 to show how well (NOT) they did. I also attached his table below the chart. Pretty dismal performance from this sector and that's WITH the Fed's help. Many of them wouldn't be with us today if we let the market decide who gets to stay and who gets to go.

Banks' performance in 2010, chart and data courtesy Joe Weisenthal

This is what Weisenthal had to say about the banks:

" The S&P is back in positive territory for the year. But some sectors did better than others.

"The financial sector in particular took a beating and rightfully so. Banks face increased regulations, the loss of revenue driving fees, and compressed net interest margins thanks to a flattening yield curve, which was the aim of the Fed's Operation Twist. On top of this, many banks are exposed, directly or indirectly, to risky European sovereign debt. And worst of all, they face a slowing global economy.

"The hardest-hit big bank is Lloyd's Banking Group, which has seen shares decline more than 61% on depressed investment banking revenue amid a weak United Kingdom macro-picture. Bank of America trails only slightly, down 59.5% year-to-date. Reuters recently reported that the bank may have to sell additional assets to buffer itself.

"Take a look at how some of the biggest financial institutions in the world stack up:

"Here's a quick rundown of the declines through trading this afternoon:
Bank of America: -59.45%
Citi: -43.63%
Goldman Sachs: -45.89%
JPMorgan: -21.28%
Morgan Stanley: -44.22%
Barclays: -33.31%
Lloyds: -61.22%
UBS: -28.42%
Deutsche Bank: -27.01%
BNP Paribas: -36.29%
Societe Generale: -58.49%"

I'll get the rest of my normal charts updated tomorrow. The TRAN is another chart high on my watch list as it tried to break recent highs but pulled back and closed at them instead.

Economic reports were light today and will be light tomorrow as well. Factory orders for November are expected to show some improvement over October but such delayed data is not likely to be market moving. Thursday's jobs numbers and especially Friday's payrolls report will be the market movers.

Economic reports, summary and Key Trading Levels

I've talked about turn dates and we're now at the last one -- January 2nd, which is a Gann Square of Nine date and a cycle turn date. This being the first trading day after January 2nd it's possible today's high was the final one for the rally. It's another reason to be careful about the long side (since we've clearly rallied into this turn date). But those are guides and we have to let price itself tell us when it's done. The market is bullish as long as prices do not drop below last Wednesday's lows (December 28th). A drop below Friday's highs would be a warning that the rally has completed, in which case it would be time to look to short bounces after that.

Upside potential is dwarfed by downside risk and a rally this week is I believe a gift to the bears and those bulls who take advantage of the opportunity to exit long positions at top dollar. If we've got much higher to go we'll know it once we get through the multiple levels of resistance just overhead but first those resistance levels need to break. And if they don't break, and considering the downside potential is well below the October lows, it continues to be a great time to trim your long position and/or get hedged. Short players will soon be major winners.

Good luck and I'll be back with you tomorrow.

Key Levels for SPX:
- bullish potential to 1293-1310
- bearish below 1248

Key Levels for DOW:
- bullish potential to 12,620
- bearish below 12,213

Key Levels for NDX:
- bullish above 2343
- bearish below 2277

Key Levels for RUT:
- bullish above 770
- bearish below 740

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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