Market Stats

The market started slightly in the hole this morning after the European markets saw no follow through to yesterday's rally. But the selling lasted about an hour and a bottom was found by 10:30. That was followed by a very low-volume effort to push the market back up and I can't help but get the feeling the market is being propped up while big money tries to sell into it. With the low volume there's not much they can do. The absence of traders is deafening.

There weren't any economic reports of interest although what did come out this morning helped depress the market. The MBA Mortgage Index dropped -3.7%, slightly more than expected, and the Factory Orders rose +1.8%, less than the +2.1% that the market expected. The +1.8% was an improvement over October's -0.4% but with such old data it's hard to gauge its importance.

Microsoft (MSFT) and Intel (INTC) both had good days today, each up +2.4% for the day. MSFT is now challenging its September and October highs near 27.50. Even Cisco (CSCO) rallied strong out of the hole this morning. There seems to be an interest in getting money into the big-cap tech stocks, which had NDX outperforming the NASDAQ, closing in the green while the NAZ was marginally in the red. Is it a defensive move when we see the DOW and NDX in the green while the smaller stocks and indexes, such as the RUT, in the red? One could certainly make that argument but it's also true that a bullish tech sector is bullish for the rest of the market, as long as the rest of the market follows. We shall see.

Yesterday's trading volume was at least greater than the previous 5 trading days but it was nothing to write home about. Two things: first, most of the volume occurred during the selling phases of yesterday's consolidation following the gap up (especially since the gap up was also the high of the day); second, the volume was still below the declining peaks in volume that we've seen since August. And then today's heaviest volume occurred in the morning session when the market was selling off.

The bounce back up in the afternoon, even into positive territory, had very little volume behind it and the day's volume was about what the average was for the last week of December, which was very light. There's just no oomph behind the rally. The stock market can certainly push higher but it would be nicer to see some more volume behind it otherwise it looks like it's being propped up and it only requires one leg to be kicked out from under it to watch it then tumble lower.

As we start a new year, it's interesting to go back and look at last year to see which investments would have worked out well, which can be seen in the chart below. We know it didn't work out great being invested in the S&P but at least it didn't lose you money. If you reinvested dividends you made a little bit. But then you lost it due to inflation. So it was truly a breakeven year. But it could have been worse -- had you invested in the emerging market, as so many pundits recommended last year, you're down -18.3%. Copper, which is a sign of strength in a global economy, was down -23.1%. A rallying dollar had a lot to do with that as well. But gold bulls were rewarded with a +8.9% gain. Too bad silver, which is another economic strength indicator, was down -10.1%. The best investments were boring bonds, with the 10-year Treasuries up another +16.7%. Treasuries have whipped SPX's butt since 1999.

Returns on Assets for 2011, chart courtesy Joe Weisenthal

As Weisenthal stated, "Between QE2 ending and the US credit rating getting downgraded, most bond experts thought Treasuries would collapse. But the exact opposite happened." For the coming year I think Treasuries will again be at the top of the list but we'll be watching during the year to see if that changes. The utility sector also did well last year, especially with dividends reinvested. But I think they too will suffer in the coming year. I think the dollar will do well whereas the euro will not. Stocks and commodities in general will not be good places to park your money. If I'm right about the dollar and bonds, that's where you want your money invested for 2012 -- T-Bills and cash. It's the investment of choice that I've been suggesting for some time now.

Obviously there's not much of a change to the charts I posted last night but we'll see how today's action fits into where prices might be headed for the rest of the week. Starting with the DOW tonight, its weekly chart shows upside potential to the downtrend line from 2007 through the May 2011 high, currently near 12620, but just below that, near 12500, is its broken H&S neckline from last year's topping pattern, which held back October's rally. Once the leg up from December 19th completes it should lead to the start of the 3rd wave decline in the move down from last May.

Dow Industrials, INDU, Weekly chart

The bounce off the October low has created a rising wedge pattern and the completion of the short-term pattern looks like it will complete either at the 12500 (or 12600 level if the final leg up extends, although the lack of volume is going to make that difficult). A drop back below yesterday's low near 12213 would signify the top is in place. But until then, the bulls remain in charge, even if they appear to be running out of ammo (volume and market breadth).

Dow Industrials, INDU, Daily chart

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

The DOW clung to the bottom of its parallel up-channel from December 19th today and could chop its way higher into the end of the week, especially if it's able to get above 12500. The short-term wave count is sloppy and therefore subject to different interpretations. Therefore, using the trend lines and channel offers the best guide right now. While a break down below 12213 would confirm the top is in place, a break below this morning's low near 12337 would be a bearish heads up that there's no more upside. So follow it up and be ready to short against resistance with a tight stop or short the breakdown. I don't see it from here, but a rally above 12600 that holds above would definitely be a bullish move and a time to abandon the short side.

Dow Industrials, INDU, 60-min chart

SPX still has upside potential to a Fib target at 1293, which would also be a retest of its October high. If the bulls can run with the ball and get SPX above 1310 it would be bullish. But until then I see upside potential to 1293-1307. A break below this morning's low at 1268 would be a bearish heads up and then confirmation of a high in place would be a break below last week's low near 1248.

S&P 500, SPX, Daily chart

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

The NDX was the stronger index today but is still struggling with its Fib projection at 2328.47, where the 2nd leg of the rally from the end of November is 62% of the 1st leg. Further upside potential is to its downtrend line from July, near 2390, but if it closes yesterday's gap it will be bearish and a top will be confirmed with a drop below last week's low near 2262.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2343
- bearish below 2262

One index that's worth watching to see if it will help or hurt the tech indexes is the semiconductor index (SOX). The semiconductors are in everything these days and therefore the demand for semiconductors, reflected in the price of the index, is a good indicator of economic strength. At the moment the SOX is struggling with its downtrend line from February 2011 (again), its sixth week of trying to get over the line since first hitting it in October. Clearly it would be bullish if it breaks through, currently at yesterday's high at 374.90. Otherwise the bearish wave count calls for lower prices and it could go much lower if the H&S pattern is correct.

Semiconductor index, SOX, Weekly chart

The RUT was weak today and that's never a good sign when you're hoping for a January rally. Typically money runs into the small caps in expectation of the January rally. The long-legged doji at Fib resistance (and just below its 200-dma) is bearish. There's still some upside potential to 770 but having reached the bottom of the 760-770 resistance band, and with a completed wave count, it's a time to be cautious about the upside and be thinking about shorting candidates.

Russell-2000, RUT, Daily chart

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

Updating last night's chart of TNX, the 10-year yield, shows a bullish break of its downtrend line from July. But TYX has made it up to the top of a parallel down-channel while TNX is testing its 50-dma. There is the possibility that resistance will hold and both start heading lower from here, especially if the stock market is finishing its rally. If TNX makes it above its 50-dma at 2.02% and its December 23rd high at 2.037% it would be a bullish move (bearish for bond prices).

10-year Yield, TNX, Daily chart

While on yields, it will be important to watch what happens in Europe. The amount of debt that must be rolled over (plus new debt) in just the first quarter of this year is staggering. The amount for the year is in the trillions of dollars (and even more for the U.S. and Japan, which is almost $6T just between us). That's a lot of liquidity that will be drained from the market simply to support the bond market. And fear about repayments of those bonds is what has the central banks very worried -- a rise in yields will kill any austerity efforts for those countries in significant trouble, such as Italy, Spain, Portugal and of course Greece. A further slowing in their economies will simply make it that much more difficult to pay back the bonds. The ECB might eventually resort to issuing Euro Bonds (if Germany relents), which could spike the stock market in hopes that it will fix the problem but we of course know that the debt still needs to get repaid (it would be just another can-kicking exercise but the stock market likes the kicking-the-can game).

One measure of concern about the risk here is the TED spread, which is a measure of the spread between the 3-month LIBOR and the 3-month Treasury. This measure tells us how much concern the banks have in lending money to each other -- the greater the concern the higher the LIBOR (London Interbank Offered Rate). When the TED spread widens it means a loss of faith in the credit market. With enough loss of faith the credit market starts to screech to a grinding halt and the stock market reflects the slowdown by selling off.

So when we look at what's been happening with the TED spread since August, when the Europeans problems really began to flare up, we see that it has climbed above its high in the summer of 2010. That summer saw the largest pullback in the stock market since the March 2009 low but then the TED spread began to shrink again and the stock market rallied into 2011. Now the TED spread is higher but the stock market has decided to ignore it. One of them is wrong and I suspect it will be the stock market doing the reversing, not the other way around.

TED Spread vs. S&P 500, 2009-2012

Another comparison that's pointing to potential trouble for the U.S. stock market is the Shanghai Composite index. I discussed the slowing BDI (Baltic Dry Index) yesterday and much of that slowing is due to the slowdown in China, which is reflected in their stock market. Most everyone acknowledges the point that a slowdown in China will likely mean a global slowdown. But that point has not yet registered in the U.S. stock market. Many think we can stand alone and avoid a recession. While I suppose it's possible we have to ask ourselves what we think the odds are of that happening. And if we do to start to slow down again (and many economic measures say it's already happening) why isn't the stock market predicting it? Isn't it supposed to look out six months and predict what the economy is going to do? Or is the market being held up with lots of hopium that the Fed will somehow save us? Hopium-induced rallies lead to market crashes so be careful what you hope for.

When we compare the Shanghai index (SSEC) to the S&P 500 over the past year we see a fairly significant disconnect since October. While SSEC has sunk to new lows below the June 2010 low (interestingly, matching the TED spread climbing above its June 2010 high), the U.S. stock market has turned a blind eye towards the problems and tried to bravely push higher.

Shanghai Composite Index, SSEC, vs. S&P 500, Weekly chart

If China is slowing down and the global economy slows down, one metal that should reflect that is copper. And the stock market should therefore closely correlate with what copper is doing. The weekly chart below shows the comparison since the beginning of 2009. It shows a very tight correlation until the recent separation following the October low in the stock market. Hope has created a rally in the stock market while copper has at best traded sideways but a little lower. The stock market rally from the end of November is not in agreement with what copper is telling us.

S&P 500 vs. Copper (using the ETF JJC for comparison), Weekly chart

Maybe the stock market is right and demand will return but we've got a slowing BDI (lower shipments to Europe from China is already well documented), a declining SSEC, a drop in the price of copper while the stock market has rallied on hope that more money will make the debt problem go away (or that all the extra liquidity will make it into the stock market again). By the way, note the declining volume on SPX since August/October. I think I'll place my bets with the few remaining stock market bears, especially since the little sideways triangle formation on copper is a bearish continuation pattern.

The KBW bank index again tested its downtrend line today, after stopping at it yesterday. If it's able to push through then I'll be watching to see how it does around 41.80 where it will two equal legs up from November. If it turns back down and drops below support near 38.80 and last week's low, it will indicate the top of the bounce is in place.

KBW Bank index, BKX, Daily chart

Yesterday the TRAN popped above the line across the highs since October but then closed at the line, near 5067. Today it dropped back below the line, which is not a good sign for those hoping for a breakout, but at least it pushed marginally back above the line this afternoon. Not shown on its chart are Fib relationships between the waves that were achieved yesterday, right down to the small 5-wave move up from December 14th. For the c-wave of an a-b-c move up from November 25th, the 5th wave of it finished just shy of its 5151.50 target where the 5th wave equals the 1st wave (yesterday’s high was 5149.35, close enough for government work).

While it looks like a bullish ascending wedge pattern since October I think yesterday’s and today's rally attempt will set a bull trap. A break below the December 28th low, near 4950, would be bearish while a break above yesterday’s high, near 5150, would be bullish. We’ll let price lead the way but so far it’s a very good setup for a reversal.

Transportation Index, TRAN, Daily chart

The dollar has a sloppy pattern for its rally and about the only good thing I can say about is that it's holding its up-channel from October. It almost broke down yesterday and this morning but is still holding on. A break below yesterday's low near 79.80 would be bearish, which could lead to just a small pullback or the start of something bigger to the downside. Without knowing for sure what could be playing out, if long the dollar now I'd simply get flat. As a dollar bull, one thing that's making me very nervous is the large increase in commercial shorts in the dollar and longs in the euro. I don't like being on the other side of commercial traders. The up-channel says stick with the long side but not if it breaks below 79.80.

U.S. Dollar contract, DX, Daily chart

If the dollar does break down it could give stocks and commodities a boost so that's why we want to watch it carefully from here. Trade each chart on its own merits but stay aware of the intermarket relationships. While the dollar is in an up-channel gold is in a down-channel since November. It is nearing strong resistance at the top of its down-channel, its broken uptrend line from January-September, its 200-dma and its 20-dma and its 38% retracement of the November-December decline, all coinciding around 1631. It could turn around and south from there or just pull back before heading higher in a bigger bounce pattern, which is what I'm depicting. Shorting gold against 1631 would be a good trade and then we'll have to see what develops to the downside.

Gold continuous contract, GC, Daily chart

Silver is in a similar pattern as gold and has tagged its 20-dma at 29.78. You can see how silver reacts to this MA and today it pulled back from it. It could start heading lower from here or just pull back as part of a larger a-b-c bounce before heading lower again.

Silver continuous contract, SI, Daily chart

Oil made it up to resistance at its broken uptrend line from February 2009, which acted as resistance in November and early December. Today's spinning top doji could be the middle candle of a reversal pattern, which needs a red candle on Thursday. Otherwise there is upside potential to about 110.

Oil continuous contract, CL, Daily chart

I discussed copper earlier and showed a comparison of it to SPX and mentioned it looks to be in a bearish sideways triangle continuation pattern. Looking at just its chart, using the futures contract this time, I've labeled the triangle pattern and the a-b-c-d-e wave count, if correct, says the end of the pattern is now (possibly after one more push higher. The next move should be lower but it would be at least short-term bullish above its December 2nd high at 3.67, especially if the dollar is sinking at the same time.

Copper continuous contract, HG, Daily chart

We're getting into the employment numbers tomorrow and especially Friday. We could clearly get something that's market moving although which direction it will move is of course the big question. Be careful if in positions that you feel are at risk of hurting too much if the market moves against you.

Economic reports, summary and Key Trading Levels

The wave counts for the indexes are looking very close to completion, if not already complete for some. At this point it's looking like this week's rally might set a bull trap. We know this market does not like to make smooth changes in direction but instead catch traders off guard (or off sides) with large gaps in the morning. A large gap down any day now would likely be a kickoff to a more significant decline. In other words, don't look for a gap fill.

Volume and market breadth are conspiring against the bulls here and therefore the higher the market presses from here, unless both volume and breadth improve dramatically, the more thin air it will be breathing and will soon collapse. Be ready for it -- follow this up, looking to short resistance with a tight stop or short a breakdown (preferably after a bounce so that you can control your risk. We hit a Gann/cycle turn date yesterday (actually January 2nd) and the next two turn dates are January 11th (minor Bradley date) and then January 28th. So that means the market could hold up until the end of January. I don't see it but it remains a possibility (or maybe it will be a turn date for a high bounce after the top is in).

One last note comes from Jeff Cooper who reminded his readers that we're entering the "terrible 2's". Anyone who has raised little kids knows all about the terrible 2's (as a side note, teach your little ones sign language, starting at less than a year old, and by the time they're in their 2's and still unable to talk, they will be able to communicate what they want and their frustration levels, and yours, will be significantly reduced). Cooper noted that 1932, 1962, 1982 and 2002 were terrible 2's and now we're entering 2012. Silly? Perhaps. And perhaps not.

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

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 2262

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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