The stock indexes held up reasonably well considering the potential reversal signals in the dollar and the metals but there are some hints that we could be at the start of a market reversal across the board.

Market Stats

The day started positive and the indexes shot higher out of the gate, which lasted about 30 minutes and then the sellers took over. While the stock indexes all finished in the red, it was a minor profit-taking day for them. The metals did not fare quite as well as gold and silver got slammed, losing -5% and -6% for the day. There charts look kind of ugly. Was it just an end-of-month profit taking? That's certainly a possibility, in which case tomorrow should be positive and considering new-month money tends to float the market higher in the first two days of the month, there's a good possibility we'll see some buying come back in tomorrow. We'll review the charts to show what to watch for in case the buyers don't come rushing back in.

The big news this morning was the ECB's 2nd and likely final LTRO -- the lending to banks to help them with their "liquidity concerns." OK, we all know what the money is really for -- the ECB wants the banks to use the money to buy government debt, which the ECB will use as collateral for the loans. The only question I have is what happens when the collateral becomes less because governments can't pay it. Will the ECB demand more collateral? Of course no one wants to discuss this right now; the market is just happy to see the banks get more money, hoping much of it will end up in the financial markets to drive prices higher.

As John had noted, "The European Central Bank on Wednesday allotted a larger-than-expected 529.5 billion euros ($713.4 billion) in loans to euro-zone banks in its second and possibly last three-year long-term refinancing operation at 1% interest. This was on the high end of the estimated range (300-600) and over 800 banks participated. In December, the ECB loaned 489 (Euro) to 523 banks. So, in a two-month time span the European Central Bank has electronically created over 1 TRILLION euro in new money. This is the European version of 'quantitative easing'."

The Fed has not indicated it will be offering any further monetary incentives (QE), which supposedly prompted some of today's selling, and that leaves the market wanting for more right now. There's a question about how much of the LTRO money will even be used by the banks for buying government debt so we don't know what the effect will be on future bond auctions. One concern by many is what happens now that the central banks are done with their monetary easing programs (at least for now). QE1 ended in March 2010 and the market sold off sharply from April to July (including May's flash crash). QE2 ended in July 2011 and the market sold off sharply in August.

Most assets are purchased during the QE program and when the flow of funds stopped those assets were sold off. With the LTRO program, the ECB has been accepting the government bonds as collateral and many of the banks were therefore buying the bonds in advance of each LTRO to use as collateral for the loans. This leaves many wondering if the demand for government bonds will wane from here. If it does we'll see yields on government bonds start to rise back up. We'll keep a close eye on them for some clues in this regard.

The other question about money supply, and whether or not it's helping the markets, is the fact the growth of money is in fact slowing. The first two charts below show the increase in the Monetary Base and M1 Money Stock. In fact the growth of the money is significant and it's what has most people believing we're heading for a significant bout of inflation and that that's why you want to own gold and other precious metals.

Adjusted Monetary Base and M1 Money Stock, charts courtesy St. Louis Fed

I'm not an economist and I only have a basic understanding of all this monetary stuff but the important point as I understand it is to remember it's all about the velocity of money. This measures how money is being leveraged in the financial system, not just how much money is sitting in bank accounts. A lot of money in bank accounts doesn't do diddly for the economy since it's money that's not working. And as you can see in the two charts below, the velocity of money and the Money Multiplier have been declining since 2009. This is why I keep referring to the Fed as leading the horse to water (giving the banks money) but unable to get the horse to drink (force the banks to lend out the money). Will the ECB be any more successful? If these are slowing down then inflation is not going to be a problem; deflation is the problem that the Fed is worried about. I think the gold bugs are early in their inflation worries. And the slowdown in the velocity of money growth is a precursor to another recession.

Velocity and M1 Mutliplier, charts courtesy St. Louis Fed

Other than hoping there will be more money in the system to drive stock prices higher, the biggest driver of stock prices is sentiment (hope vs. fear). When people are feeling good, optimistic and bullish about the future they'll buy stocks and not really care what the current price is. They believe prices will continue to rally. And just the opposite is of course true when people are feeling worried, angry and pessimistic about the future. This will be reflected in a desire to be safe (have you noticed the number of articles and TV shows about "preppers" -- those who are preparing for tough times ahead?) and drawing back to the safety of friends and family. As a side note, watch for the decline of the desire to be part of a larger social online presence. I think we'll see a decline in Facebook before it even goes public, if in fact it does go public.

So when people are crawling back into their shells the stock market will reflect the change with a decline. There are simply fewer people interested in buying and more people interested in selling and going to cash and/or bonds. Many people believe the DOW is the wrong index to watch since it's only 30 stocks and after all, how could only 30 stocks possibly represent the stock market? Surely it's an antiquated measurement. It's a bit like the argument we heard leading up to the top in 2000 when there was a "new paradigm" to explain the lofty price levels for tech stocks. All of this misses the main point, I believe, that sentiment drives stock prices, not that one stock is better or worse than another.

Which index is reported by all news organizations? Right, the DOW. Which index do you think has the most sway over people's emotions when it comes to the stock market? Right again, the DOW. It's one of the best sentiment indicators we've got and the bullish sentiment since last October has shown itself in the DOW (and the others of course). If and when the DOW turns back down we'll start to get a sense of how people are feeling about the stock market and their hopes and dreams about the future. So with that, let's start with the DOW's charts and see what it's telling us.

The DOW's weekly chart shows how the bounce off the October low ran into the broken uptrend line from July 2009 through the July/August 2010 lows. After pulling back in November it again ran back up to the trend line and has been held down by it since first testing it in late January. The DOW does this a lot -- it snuggles up against a broken uptrend like this and somewhat relentlessly pushes up underneath it for a while before suddenly letting go. I expect it will do the same and we're just waiting for it to let do. We've got a weekly bearish divergence against the February and May 2011 highs.

Dow Industrials, INDU, Weekly chart

The daily chart below shows how the DOW continues to get pinched further up its rising wedge from December. The small daily candles prior to today's are hard to pick out in the price action for the past week. You can see a little more closely how the broken uptrend line from July 2009 - July/August 2010 has been holding the DOW down since October and each rally attempt since January 26th. This is a market that is simply holding up instead of rallying. The bears have not been able to do squat but the bulls can hardly crow about February's rally of less than 200 points for the entire month. The break of its uptrend line on RSI is a warning. The bearish divergence at the new highs since February 9th is a warning. The steep drop in the metals today is a warning. Will the bulls heed these warnings? Probably not, as evidenced by the dip buyers jumping back in this morning (and then getting hurt in the afternoon selloff). Caveat emptor.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 13,150
- bearish below 12,830

Moving in closer to look at the rising wedge pattern, the chart below shows how choppy (overlapping highs and lows within the move up) it's been since the January 13th low. The choppy rise is indicative of an ending pattern as smart money distributes inventory to the mass of retail traders looking to buy into the rally. This causes a battle between the sellers and buyers as inventory is liquidated. With the anemic volume it's taking longer for the process than we'd normally see. Hence the whopping 200-point rally in a month. The bearish divergence since the February 21st high adds to the bearish divergence on the daily and weekly charts. This rally is about to be toast. A drop below Monday's low near 12882 will be a time to stick a fork in it and call it done. In the meantime you can see the uptrend line from January 13th is still holding and that keeps the bulls alive for another day.

Dow Industrials, INDU, 60-min chart

Volume kicked up a notch today, coming in stronger than we've seen the selling and then reversal on February 15-16. Selling on higher volume is of course not what the bulls want to see. You can see the little red spike in today's volume on the SPY chart below.

SPX/SPY have very similar patterns as the DOW but unlike the DOW they were able to achieve their price projections for two equal legs up from October, at 1376.55 for SPX and 138.19 for SPY (the DOW's projection is at 13111). This morning's high for SPY was 138.19 -- close enough for government work? Me thinks a few computers had that value plugged in and triggered a sell signal as soon as it was hit, resulting in an immediate selloff this morning. It was also one more test of the top of its rising wedge pattern. At this point I think it's a low-risk short against this morning's high.

SPDR S&P 500, SPY, Daily chart

Key Levels for SPX:
- bullish above 1378 (maybe)
- bearish below 1355

The rally in SPX has been very choppy and hasn't made it easy to use a lot of my technical tools, including trend lines. But an interesting look at two up-channels from January, shown on the chart below, provides some guidance. Channels to do a great job identifying the ebb and flow of buying and selling, measuring sentiment in the process. The blue up-channel from January 3rd (the lighter blue line is parallel to the line along the January 3-26 highs) shows price holding that channel but the new highs have been weaker and weaker. Drawing another trend line along the highs since January 26th and attaching a parallel to the January 30th low gives us a shallower up-channel, the mid line of which (light green dotted line) has been supporting price. By these channels the bulls have done nothing wrong yet so the upside needs to continue to be respected. A break below Monday's low near 1355 would be a better sell signal but then I'll be watching for support at the bottom of the green channel, currently near 1345. A break below that channel would be stronger confirmation that an important high is in place.

S&P 500, SPX, 60-min chart

NDX ran into the trend line along the highs from December 5th and February 15th and the mid line of its tight up-channel from December. On its daily chart it's just a little red candle with no hint of a breakdown. It needs to break its uptrend line from December 19th, near today's low at 2614, and then 2580 to confirm the break before the bears can claim any victory. In the meantime, upside potential is to about 2662 where on Friday the trend line along the highs crosses the top of a parallel up-channel from October.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2665
- bearish below 2580

AAPL is of course a huge driver behind where NDX will head from here. And AAPL might have finished its rally today. It achieved a Fib price target at 543.10 (with a high of 547.61) where the 5th wave of the move up from January 24th is 162% of the 1st wave. On the weekly chart I have a slightly higher projection at 557.58 (where the 5th wave of the move up from January 2009 would be equal to the 1st wave). Today's candle is a doji near that 543 price target. It's a setup for a reversal so that's what I'm watching for. A gap down tomorrow would leave an evening star reversal but that remains to be seen. If it happens it will be a strong reversal signal and I think from there we'd see the risk-off trade start to take precedence over the risk-on trade.

Apple, Inc., AAPL, daily chart

For those of you who use EW, I've also labeled the waves on MACD on AAPL's chart above to show how you can use MACD to help confirm the count. Because the 5th wave of the move up from November extended (typical in a blow-off move) I wouldn't expect it to show bearish divergence against the January 9th high but within the 5th wave the final 5th wave does show bearish divergence against the 3rd wave on February 15th. If the high is in we should soon see a break of the uptrend lines on RSI and MACD to help confirm.

In prior updates on AAPL I've shown why the coming high for AAPL could be a significant one. The completion of this rally leg from November is likely to be the completion of the rally leg from 1997. That means a very large multi-year pullback correction. Seeing AAPL lose half its value over the new couple of years is a distinct possibility, as hard as it is to believe that right now (I thought the same thing for strong semiconductor stocks in 2000).

Going back to the NDX chart, the longer-term pattern is shown on its monthly chart below and how it ties in with the potential for a much larger correction in AAPL. The sharp selloff in 2000-2002 has been followed by a large almost 10-year A-B-C correction and NDX has just now hit the top of a parallel up-channel for the correction. The impulsive decline followed by a 3-wave correction will be followed by another impulsive decline. That's just EW; it's the way it works. It means we'll see NDX drop below its 2002 low before it finishes its correction to the previous bull market. As noted on the chart, a return to the start of a parabolic move is a very typical retracement and that would mean back to the 1994 low, which is near 350. I'm just sayin'...

Nasdaq-100, NDX, Monthly chart

The RUT has been hanging just under the 833.91 upside target (for two equal legs up from October) since reaching 833.02 on February 3rd. For an entire month the RUT has gone nowhere while waiting for the other indexes to reach their upside projections. The bullish interpretation is that the month-long consolidation is bullish, especially with the oscillators working off their overbought conditions. MACD returning to the zero line and turning back up would be potentially very bullish, especially if it can stay above 800 in the process. But a bullish consolidation pattern that fails would likely fail hard so we'll let price lead the way on this one.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 834
- bearish below 800

Is housing still overvalued? That is of course one of the many arguments between those who believe the bear market has more to go vs. those who believe the market is in a new bull market since the 2009 low. The recent report from Case-Shiller shows home prices at the bottom of the consolidation zone that prices have been in since bottoming in 2009. The big question when looking at the chart below is whether the 3-year consolidation is a bottoming pattern or just a pause in a larger correction. Considering the potential for another bear market leg down, especially a significant one as shown on the NDX monthly chart above, I'm thinking we'll get another leg down in home prices.

S&P/Case-Shiller Home Price Indices, chart courtesy Joe Weisenthal

In a typical a-b-c correction to a rally the a-wave and c-wave are equal. So what if the 3-year consolidation in home prices is the b-wave? The a-wave (the drop from 2007 to 2009) was about 75 points. Another 75-point drop would take the index back down to 75, near the 1994 low, which was the starting point for the parabolic climb in home prices. Sounds a little familiar, no? It also sounds too scary to be true but that's the potential from here. At that point anyone with a mortgage will be underwater and we'll all essentially be renters since mortgage payments will simply be a replacement for a rent payment. As I tell my kids, their homes are theirs as long as they continue the payments and don't worry about what the actual value of the home is. It's not an investment, it's a home. But for baby boomers looking for their home equity to be their retirement nest egg, they may be in for a very rude awakening (if not already).

The middle class has most of their wealth in the value of their homes. Most are not ready for retirement when it comes to money in the banks. Most retirement funds are woefully underfunded (just like companies having underfunded pension accounts). But with the drop in home prices there are now about a third of mortgage holders currently underwater -- they owe more than the house is worth. Combined with a net job loss and shrinking wages and benefits over the past ten years we've got a shrinking ability to help the economy. With consumer spending being about 70% of GDP it's becoming increasingly difficult to depend on the consumer.

The Fed is fully aware of the problem with the consumer and telling us they're going to keep interest rates low through 2014 was a strongly negative statement. The stock market of course cheered about having cheap money around for a longer period of time. But it was in fact not good news about the economy.

And now we've got a housing market that doesn't look to improve anytime soon. Many look at shrinking inventories and inventory-to-sales ratios as good news. But they're not considering the fact that there's a huge shadow inventory of homes that the banks are sitting on. Many people haven't paid a mortgage in 2-3 years. How long do you think that will continue? There are about 3 million units currently vacant. Add another 5 million units either in foreclosure or have seriously delinquent mortgages.

Now we've got younger people looking at what's happening in the housing market, and the job market (lack of job security) and they're just as happy to keep renting. Children are moving back into their parents' homes and parents are moving in with their children. So we've got an excess supply that will become even bigger and a shrinking demand. It's simply not a pretty picture for the housing market over the next few years. In light of all this it becomes a little less difficult to see how we could get another leg down in the chart above.

We've had a big negative divergence between the DOW and Transports since the February 3rd high and while the DOW has snuck a little higher each day the TRAN has been consolidating near its low. Once again a lot of people are saying "it's different this time" but it's always different this time when we see divergence at market highs. Don't believe it. The TRAN is a clear bearish warning, especially since it hasn't been able to get away from its 50-dma and the bottom of a parallel up-channel from December. The consolidation following the February decline looks like a bearish continuation pattern.

Transportation Index, TRAN, Daily chart

The dollar had a bullish day today, which kicked the gold and silver bulls in the teeth. The Fed inaction in providing additional monetary stimulus had some dollar shorts running for cover. The dollar has a bullish engulfing candlestick, engulfing the previous 3 days and half way into last Thursday's decline. There's a good chance we've seen the low for the dollar but that won't be clearer until the dollar is able to break its downtrend line from January, currently near 79.50, and more definitely with a break above its February 16th high at 80.24. In the meantime there is still downside potential to the bottom of its descending wedge pattern and uptrend line from August 2011, which cross at the 62% retracement of its October-January rally (77.60) on March 6th.

U.S. Dollar contract, DX, Daily chart

While the dollar "bounced" gold and silver bugs got "crushed." Gold was down more than -$90 (-5.1%) while silver dropped -$2.50 (-6.8%). That was a serious whack that was a bit surprising considering the stock market experienced only a minor pullback and the dollar didn't skyrocket back to the upside. By the way, the move in the metals is a huge warning flag for the stock market.

As I had pointed out last Wednesday, gold had again pushed up to its broken uptrend line from October 2008 and then tried to push above it on Thursday but pulled back into the close. After pulling back a little it tried again yesterday and came within 60 cents of achieving the projection at 1793.30 for equality in a possible A-B-C correction pattern off the September low) that I had mentioned was the upside target for gold. Following the new attempt to get above the broken uptrend line, with bearish divergence against the February 3rd high, it sold off hard today. It was a classic setup for the bears has I had been posting. Yesterday made for a great short with a tight stop just above 1793.30. All that rally effort since January 25th gone in one day. Mind blowing.

Gold continuous contract, GC, Daily chart

Gold dropped right down to possible support at its 38% retracement of the December-February rally (1690) and closed near its uptrend line from January-September 2011 so it's a good place for a bounce (maybe first down to its 50 or 200-dma, at 1680 and 1670, resp.) but I would look at the bounce as an opportunity to lighten up on long positions and think about playing the short side (or hedge your longer-term hold position). For longer-term gold bugs, I think there will be a "golden" buying opportunity down around 1400.

The silver chart is a good example of why you should be checking your charts with both the log and arithmetic price scales. The chart below is with the arithmetic scale and had a lot of silver bulls scrambling to buy more (and shorts were screaming to get out) when its downtrend line from April-August 2011, near 35.70, was broken. There should have been some caution as it hit the top of a parallel up-channel, but that up-channel is based on the EW count (from the 2nd and 4th waves and a parallel attached to the 3rd wave) and not many people draw their channels this way. However, the rally also stopped near the 62% retracement of the April-September decline (37.35) and was therefore potential resistance until proven otherwise.

Silver continuous contract, SI, Daily chart, arithmetic price scale

This morning silver gapped up and made a quick dash higher, pulling in more bulls while spitting out some more shorts. But had the silver bulls checked their chart with the log price scale they would have tempered their buying after seeing price close at the downtrend line. Between that downtrend line, the top of its up-channel and the 62% retracement it was begging to be sold off, which is exactly what happened. Based on the 5-wave count for silver's rally from late December I think we'll see at least a larger pullback to correct that rally. The larger A-B-C correction off the September low says the next move will be a drop below the September low on its way down to a downside target near 12.

Silver continuous contract, SI, Daily chart, log price scale

Oil hit its high last Friday and at 109.95 was only 8 cents shy of an upside target at 110.08 where the 2nd a-b-c of the double zigzag wave count up from October is 62% of the 1st a-b-c (the x-wave between them is the November-December pullback). The decline on Monday and Tuesday put it back below the broken uptrend line from February 2009, leaving a head-fake breakout. If oil consolidates above its January 4th high at 103.74 it will hold the potential for another rally leg above 110. But an overlap of the high at 103.74 would suggest the rally is over and below 100 would confirm it.

Oil continuous contract, CL, Daily chart

We'll have quite a few economic reports tomorrow morning and then auto/truck sales in the afternoon. Economic reports have been causing little blips in the market (so beware of the times of their release if day trading) but the market is largely ignoring economic reports and is more intent on what the central banks are doing and how the European countries are doing with their debt issues. Headlines from overseas will continue to move this market more.

Economic reports, summary and Key Trading Levels

With the bullish reversal in the dollar and the hammering the metals got today there is a good chance today was a key reversal day for the markets. The bond market has been chopping sideways for a long time so there's no direction from the bond market right now. Watching the dollar should continue to provide more clues.

Today's profit taking in the stock market and more so in the metals may have been just an end-of-month allocation program associated with the dollar carry trade (many banks are using borrowed money for the carry trade). If so we should see a resumption of the rally in those asset classes the rest of this week. Certainly the metals could use a little relief rally tomorrow. The stock indexes are still close enough to their highs to easily make new highs if some buying comes in. But the volume was higher today on a down day and there continues to be a lack of interest in buying at these highs. There is the potential, as shown on the charts, that we're going to see the stock market start back down from here.

Once we get a decent pullback started we'll get some clues as to whether it's going to be the start of a strong decline or instead just a choppy pullback before heading higher again into April/May. We can't know that until we see the pattern for the pullback and that's what I hope to be able to see by this time next week. In the meantime, trade carefully, good luck and 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