Market Stats

One would think another promise from Greece for a new and improved debt restructuring agreement would not have much of an impact on the markets. But hope springs eternal and the European market rallied on the news. The banks saw a bigger relief rally and that all spilled over into the U.S. market, which started with another gap up following the higher futures. Pundits were out saying the rally was because of improving economic numbers out of China but I looked at their numbers and it all falls in the noise category. It's just more hope that this time, for sure, the rally is based on something more than hype.

The bottom line is this market can continue to rally on nothing more than money streaming in from the efforts by the world's central banks to keep the financial system propped up. We saw the same thing happen from about September 2010 into February 2011 when the market seemed to slowly melt up higher each day with nary a pullback and plenty of reasons to believe the market would roll over at any moment. With the stealth QE effort we could be seeing the same thing and in fact there is ample evidence of a liquidity push by the central banks. That money typically makes it into stocks and commodities, which is what the Fed wants (they're hoping to create a "wealth effect" that inspires people to spend more money).

Today's economic reports were uninspiring. The ADP employment report was a disappointment. December's number was revised lower from +325K down to +292K. January came in at +170K which was less than the 200K that had been expected. The market didn't care.

The ISM index was also revised lower from 53.9 down to 53.1 and while January's number was a little higher at 54.1 it was less than expected. The market didn't care.

At least construction spending was up -- it was revised higher from +0.4% in November to +1.2% and ticked slightly higher to +1.5% in December vs. expectations for +0.4%. This report was at 10:00 AM and the market had already gapped up long before then. Economic reports or lousy earnings reports, such as AMZN's, just don't matter right now. The only thing that seems to matter is whether or not Greece is going to make it, which has a significant impact on the banks (decent relief rally in them today).

Very little has changed from last week as the market remains propped up but hasn't made much headway (it has gone mostly sideways since January 19th. So I'll update a few charts to show what I'm watching.

This being the first of a new month there is the possibility that new-month money was simply being put to work today but the fact that the rally wasn't able to add anything to the gap up (the day finished with a doji), even that reason would be a stretch. Today's trading volume was again low, as it was for all of January. As can be seen on the SPY daily chart below, the pattern of declining volume has continued. The 10-dma of volume shows a lower average for January than the first part of December (the first half of December was the period of selling). Since the market started rallying from the December 19th low the volume dropped off significantly. This can certainly continue but it's not a healthy way to build a rally. It makes it look too much like it's propped up on fluff. Today's bounce took SPY back up to its broken downtrend line from 2007-2011 and its broken uptrend line from December 19th. A pullback from both leaves a little bearish kiss goodbye. Now we'll see if the bears can do anything with that. They've been a wimpy group since mid December.

SPDR S&P 500, SPY, Daily chart

As for the wave count for the bounce, there are a few possibilities noted on the chart above and I'm looking at two different major counts. One considers the August-January rally a large B-wave correction that will be followed with a C-wave down (below the October low). The other considers the October-January (February?) rally to be a 2nd wave correction that will be followed by a 3rd wave down (to well below the October low). Both point lower once this bounce has finished and I'm simply trying to figure out where and when it will finish. If we're to get just an a-b-c move up from November to complete the bounce pattern, last week's high should be the finish (possibly one more minor new high this week). If the rally from November will be a 5-wave move then we'll get a pullback into early-mid February and then a final rally into the latter part of February to complete the correction to last year's decline. A break below the uptrend line from October, confirmed with a break below the December 7th high at 127.26 (SPX equivalent level is 1267), would tell us the high is in place and the bears are in control.

Last week the DOW had made it up to its broken uptrend line from July 2009 through the July 2010 low, at 12842, which was 34 points shy of its May 2011 high. Depending on the wave count used I see potential to 12912 by the end of the week or early next week. But it too tested its broken uptrend line from November-December and pulled back slightly. Perhaps it will walk up underneath this trend line before finally topping out. A break below its 20-dma, at 12550, and Monday's low, at 12529, would be a bearish heads up for a drop down to at least its uptrend line from October, currently near 12320. It takes a drop below the December 7th low near 12257 to confirm a high is in place. In the meantime continue to give the bulls the benefit of the doubt for as long as the bears remain AWOL.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish to 12912
- bearish below 12,257

NDX left a little spinning top doji at the top of a parallel up-channel for the move up from November and is sitting marginally above its trend line along the highs from February and July 2011, which could be the top of a very large rising wedge pattern from 2009 and today's small throw-over could be the finishing touch. A drop below Monday's low near 2423 would be the first indication of trouble for the rally. Based off the wave structure I've got two projections that land right on top of each other near 2320 and therefore that remains an upside target for now.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish to 2520
- bearish below 2423

The RUT has rallied up to the top of a parallel up-channel for the leg up from December 19th. As with the other indexes, if the pattern calls for a 3-wave move up from November to complete the correction to last year's decline then there is the potential we'll see a very important high either here or only marginally higher. If the pattern calls for a 5-wave up then we'll get a choppy pullback and then another leg up later this month to finish it off. For now, the bulls are not in trouble until the RUT breaks below 787.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish to 834
- bearish below 787

Last week I showed the possibility that the TRAN would continue higher to a price projection at 5394 where a complex corrective pattern would have two equal legs up from its August low. At the same level this week is a trend line along the highs since early December. Today's high at 5374 fell short by 20 points. We'll know in hindsight whether that was close enough or if it will push marginally higher to tag that level (or higher).

Transportation Index, TRAN, Daily chart

The banks got a good boost out of the gate this morning as hope for a Greek debt settlement solves all the financial woes in the world. BKX found support this week at the cross of its 20 and 200-dma's, near 42.50 on Monday. If Monday's low completed a 4th wave correction within the rally from November then a new high should be next. I'm showing a projection to 45 where it would hit a Fib projection and its 2009-2010 broken H&S neckline. But a drop back below Monday's low near 42 would be more immediately bearish.

KBW Bank index, BKX, Daily chart

The dollar has remained inside a narrow down-channel since its January 13th high and almost broken out of it during overnight trading. But it dropped sharply back down into an early-morning low and that was also likely in reaction to what's going on in Europe. I see a little more downside potential to a projection at 78.21 where an a-b-c pullback from January 13th would have two equal legs down. A 50% retracement of the October-January rally at 78.45 could also offer support. Once the current pullback finishes I'm expecting the dollar to resume its rally and it could be very strong, which won't be kind to stock and commodity bulls.

U.S. Dollar contract, DX, Daily chart

As the dollar has pulled back in a steep and narrow down-channel, gold has rallied in a relatively narrow up-channel since its December 28th low. It's pushing up along the top of its channel, currently near 1762 (near its early-December highs) but gold is now back up to its broken uptrend line from October 2008 (tested yesterday and today). It has also retraced 78.6% of the November-December decline so if the bearish count is correct we should see gold reverse here and start down in a stronger decline. Being overbought up against resistance it would be a tough argument to say it's going higher from here. The bearish setup calls for the start of a strong decline into February/March.

Gold continuous contract, GC, Daily chart

Like gold, silver is in a narrow up-channel since its December 29th low and tested the bottom of it at the overnight low. It too has retraced 78.6% of its October-December decline and has run into resistance at its broken up-trend line from October. There is a Fib price projection at 34.39 where the 2nd leg of the bounce off the December low would be 162% of the 1st leg up so another push up to a minor new high could finish off its bounce correction. The bearish setup is the same as gold -- looking for a strong decline as the next big move.

Silver continuous contract, SI, Daily chart

Oil has a bit of a sloppy pattern and I had been thinking it would push up to a minor new high above November's and January's, perhaps up to about 105 for another test of its broken uptrend line from February 2009, shown below on its weekly chart. Now I'm not so sure. Oil broke its uptrend line from October on January 20th, bounced back up to test it last week and today it dropped below the January lows. The choppy pullback from early January supports the idea that another leg up is coming but so far it's acting weak and another break below its 50-week MA at 96.48, shown below, as well as its 200-dma at 95, could spell trouble for oil bulls (and stock market bulls since a decline in oil is generally regarded as a bearish sign about the economy).

Oil continuous contract, CL, Weekly chart

The market should not be affected by tomorrow's economic reports and could go on hold as it waits for Friday's Payrolls reports.

Economic reports, summary and Key Trading Levels

While there is the possibility we'll see the stock market float higher for weeks to come, similar to what it did in the fall of 2010, as QE money makes it into the markets, it can only be guessed what impact that will have. Right now the charts continue to flash warning signs. Overbought can stay overbought and light volume can continue to push the market higher as long as the sellers stay away. My concern is that this market is one "boo!" away from tanking and the exit door will not be wide enough to prevent bulls from being trampled to death. Both sides need to stay cautious and longs should simply follow this higher with stops. The risk is that your stop could be left high and dry if we get a big gap down.

Jeff Cooper loves to play with Gann price and time cycles as well as other number relationships. He's looking for a turn in the market to match up with 10 and 50-year cycles in February and I remember him discussing this back in December, thinking there's no way the market can hold up that long. Silly me.

Cooper often cites reversal levels based on previous lows or highs. For example, was it merely coincidence that last week's high at 1333.47 was only off by 11 cents from being exactly double the number at the March 2009 low (666.79)?

Now Cooper notes the October 9, 2007 high was at SPX 1576 and 1576 days from that high falls on February 3rd (Friday). Will it be just coincidence if we put in a major bounce high this week, especially with the 10 and 50-year cycles hitting? Food for thought while we watch and wait to see what happens.

This market is consuming a lot of buying power just to maintain even. The multiple gaps to the upside actually leaves the market more vulnerable to the downside since they leave air pockets. One piece of bad news from overseas (such as Greece not getting an agreement with the bond holders after all, which will trigger a chain reaction in defaults and CDS claims on banks) could leave a very nasty surprise for the open in the U.S. So be careful out there. I'll be back with you next Wednesday.

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