The stock market is starting to send some distress signals and today's bounce, on lower volume, is not the kind of help the bulls were hoping for. The rest of the week has some dangerous shoals to get through.

Market Stats

Following yesterday's strong decline, the strongest in both points and breadth this year, it was natural for the market to get a reactionary bounce today and it obliged. The big question of course is whether the bounce is correcting the decline or if the decline was just a great buying opportunity (again). Today's price action leaves a big question market in that regard. What's not helping the bulls is the fact that yesterday's decline was on stronger volume while today's rally was on lighter volume. The bulls need to see that pattern reversed.

Yesterday's decline was in part worry over Greece (of course) and how successful it will be in getting the private investors on board for the debt swap. We'll get the answer to that question just before the end of trading tomorrow (just in time for a possible reaction to it and the payrolls numbers Friday morning). Another concern is China's slowing in growth. They ratcheted down their growth again and even though it's still at a robust 7.5% projection it's worrying a lot of people because it's below 8% and that could be trouble for their economy. The other worry is that they might be saying 7.5% now but fully recognizing that it's probably going to be less than 5%. But if they said that now it could really roil the markets. So each month we might hear of another downward revision.

The concern about China is its ability to absorb any slowdown in Europe, the U.S. and other Asian countries. They do not have the domestic demand to absorb their excess capacity and for China it's growth at any cost that they're after. They know they will have a huge civil unrest problem if they start losing jobs and not as much is able to flow to the poorer rural areas (just west of the much more affluent coast).

There's also a big problem with China's real estate market. And as we've seen in Japan, the U.S. and Europe, a declining real estate market is bad news for the countries' economies. China has experienced a bubble in real estate prices and the outcome is very clear what's next. The chart below shows the decline in real estate price growth over the past year for 70 major cities, especially in the 4th quarter. This is a story that has been repeated globally and it's a bad omen for China. When China slows down we'll see less demand for resources which will have a depressing effect on them. You can see the slowdown in the rising MoM changes (green) and the increase in the declining MoM changes (red). It's looking like 2012 could see all 70 major cities experiencing a decline in real estate prices.

Chinese Home Price Month-over-Month Changes in 2011, chart courtesy Michael McDonough, Bloomberg

As I've shown in the past, the Shanghai Composite index (SSEC) has been in decline since 2009 and as the weekly chart below shows, it looks like it might be rolling over again from yet another lower high. Notice the BDI (Baltic Dry Index) still below the January 2011 low (fewer shipments from China to the rest of the world and slowing deliveries of resources to China). Notice too the divergence between the TRAN (line behind the DOW's candlesticks in the top chart). The transporters have been indicating a slowing economy for a while but the only thing the stock market has been interested in is more drug money from the Fed. But the TRAN and two bottom charts are telling us it's all going to catch up with us and probably soon.


All of this is simply a reminder why economic news from China is carefully followed now. They are an 800-lb gorilla in the global economic equation and while the stock market has been ignoring the news from China, as it heads higher without seeming to care about what's going on around it (except for what the Fed and ECB are up to), it's setting itself up for a nasty surprise.

The market was also fully aware of AAPL's big day in the news and waited anxiously for the 1:00 PM EST announcement of its new products. All in all, the announcement was a bust and the market barely reacted to the news. The rest of the afternoon was spent doing more of the same consolidation and finished about where it was at 1:00. Now we wait for the next catalyst.

Other than the MBA Mortgage Index report before the bell, which the market largely ignores, the ADP report kicked off this morning's economic reports. The report showed the private sector employment increased by 216K jobs in February, which was an increase over January's 173K (January was revised higher by 3K). Expectations were for 218K so it came in slightly less than expected. Most of the jobs were added in the service sector with some improvement in the manufacturing sector. The market barely reacted to the report and I think many were just happy to see the futures up before the bell and glad the report did not disappoint.

The productivity report showed a slight improvement, from January's +0.7% to February's +0.9% but Unit Labor Costs climbed from Q4's +1.2% of Q1's +2.8% so there are some mixed signals from those numbers. Consumer credit climbed a little higher, from $16.3B to $17.8B in January so the additional spending is good for the economy but the added credit burden is not good for people. Start adding in higher energy costs and higher credit payments and we'll soon have a consumer maxed out. Remember, there are no more home equity piggy banks to break open in the event of an emergency.

As for the market's bigger picture, we've entered an interesting time window this week. Tuesday, March 06, 2012 was the 3rd anniversary of the March 2009 low and almost 12 years from the March 24, 2000 high (for SPX). One could argue the February 29th high was really March 1st had it not been a leap year and some indexes did make their last high in March (NDX on March 2nd) so was that it or will we get one more new high this week? And will a March high stand the test of time?

The month of March has been important in many years in the past century and certainly in the past decade. Following the March 2000 high there was a rally off the March 2001 low, a strong decline off the March 2002 high and of course the strong rally off the March 2003 low. There wasn't much significant happening around the March time frame from 2004 to 2006 but then the March 2007 low led to the July/October 2007 highs. The low in March 2008 led to the May 2008 high before tumbling lower into the March 2009 low. Not much happened in March 2010 but the March 2011 low led to the May 2011 high. Now we're at a high in March 2012 and previous March highs have not been kind to the market.

The March 2000 high was a Fibonacci 144 months ago and there are a couple of other Fibonacci relationships since the March 2000 high. A Fibonacci 34 weeks from March 2000 was January 2003, between the October 2002 and March 2003 lows. A Fibonacci 55 weeks followed the March 2003 low to the October 2007 high. And now the 144 months from the March 2000 high. Mr. Fibonacci (real name Leonardo Pisano) has been busy in this market.

Sam Hale is a long-time trader who posted the following timing information to a trader group that I work with. He considers it fun to contemplate and I consider a rather important timing observation. Time cycles are very common in the market and one cycle can be divided in half to see sub cycles. As he observed, using SPY prices, "The 'natural rhythms' hitting this coming week [March 5-9] begin with 11, 22, 44 and 88-week intervals of reversals in the trading pattern. The up-move from (101.13) July 1, 2010 low to the May 2, 2011 peak (137.18) was 44 weeks. From that peak to the week of March 5-9 will be 44 weeks, or 88 weeks from the July 2010 low. From the May 2, 2011 peak to the (107.43) low on October 4, 2011 low (107.43) was 22 weeks and it will be 22 weeks from that low this coming week. Plus, this coming week will be 11 weeks from the December 19 low."

Sam went on with a bunch of Fib relationships between various high and low dates and made the observation that many more date relationships point to the first week of March as a potentially very important week. He has been trading for more than 50 years and as he said, "The timing of this post is so that we may experience in real time how this targeted pivotal week in SPY turns out. It certainly could be a 'non-event' as sometimes happens but, over time, I've found it paid handsomely to be keenly alert for opportunities during such periods."

For example, here are some more time relationships that Sam pointed out:

"The major up-move from the (77.07) low of October 10, 2002 to the (157.52) peak on October 11, 2007, which was THE interim low between the 2000 and 2007 peaks, lasted 261 weeks. 261 X 2.382 = 622. From the (155.75) peak of 2000 to last week's high (12 YEARS later) was 622 weeks."

Sam then took that 261 weeks and multiplied by another Fib relationship, the square root of .618 and adding 1 to it. We get 261 x 1.786 = 466.2 weeks and the time from March 24, 2000 to the March 6, 2009 low was 467 weeks.

There are 60 weeks between the March 2009 low and April 2010 high. Multiply 60 by 1.618 and you get 97, which added to the April 2010 high gives us this week.

There are 186 weeks from the October 2007 high to the May 2011 high. Multiply that by .236 (.618 cubed) and you get 44, which added to the May 2011 high gives us this week.

There were more such relationships but you get the picture -- they point to this week as a major turn window so that's one reason we need to pay attention to the possibility. Many will discount these kinds of time relationships but Gann was especially fond of them. He always felt time was much more important than price. In other words, no matter how high or low the market went, when it was time to turn, it turned. Again, that's the potential and what we're looking for is evidence in the price action.

As I'll review with the charts, we're at the point where it's safer to assume every top from here is going to be THE top. Considering the downside risk vs. the upside potential from here I think it's a safer assumption than to instead assume we've still got a lot more bull market ahead of us. The volume and breadth simply do not support the bulls here.

Jeff Cooper recently updated his minyans to point out that the market often plays out in threes. He also referenced the 144 months from March 2000 and the 3 tests of the high since then (2007, 2011 and now 2012). The October 2007 high was 3 months after the July 2007 high. Take that 3 and multiply by 3 and you get 9 months, which is the time separation between the May 2011 high and the February 2012 high for SPX. I know, just more mumbo number jumbo stuff but you'd be amazed how these tend to play out in the market.

Yesterday was a 90% down day (more than 90% down volume vs. 10% up volume) and at the beginning of a decline it's often the kickoff signal, or at least a warning of one. Another minor new high with bearish divergence would be a setup only the bears could love. At the end of a decline a 90% down day is often the capitulation finish. But following the kind of strong kickoff we had yesterday it's common to get a day or two reaction against that move, which in this case is a bounce and today the market obliged in that regard. Now the big question, especially in light of this week being a potentially important timing window, is whether or not yesterday's 90% down day was in fact the kickoff to the next bear market leg down.

I'm going to focus on the RUT tonight since it's a very good index that reflects market sentiment and could be a good canary to keep an eye on. The weekly chart below shows price had bounced up to its broken uptrend line from 2009-2010 and the projection at 833.91 (missed by 89 cents on February 3rd) for two equal legs up from October. The 3-wave bounce off the October low is a correction to the 5-wave move down from May 2011. A 5-wave move down followed by a 3-wave correction calls for another 5-wave move down (with a downside target below at 566 or lower). The only question is whether or not we'll get another push higher (dashed line) before completing the correction.

Russell-2000, RUT, Weekly chart

The daily chart below shows the 3-wave bounce off the October low and the uptrend line from October-November is where yesterday's decline found support. Today's little bounce is a recovery back above its 50-dma at 793 so a break below yesterday's low at 785.41 would be a break of its uptrend line and confirmed break of its 50-dma, which would then target its 200-dma near 754. It takes a rally back above 815 to negate the bearish pattern.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 815
- bearish below 785

The RUT's P&F (Point & Figure) chart shows a quadruple bottom breakdown following Friday's close below 810, putting it on a P&F sell signal for the first time since December. The bearish price objective out of its pattern is currently 745 but the bearish column has not completed yet. A lot of institutions use these P&F charts so it's important to watch what they're watching.

RUT P&F chart

The bearish price objective is derived from counting the number of boxes in the current reversal column, which is 8 so far. Multiply by the box size (5 points) and then times 2/3 of the reversal amount, which as can be seen toward the top left is a 3-box reversal chart. So we've got 6 x 5 x 2/3 x 3 = 80 points and then subtract that from the top of the reversal column (825). That gives us 825 - 60 = 745. (The formula uses the full reversal amount, not 2/3, when calculating the bullish price objective). That price objective will drop if the current column drops lower. It takes a print at 805 from here to give us a 3-box reversal and complete the bearish column and give us the bearish price objective. It would have to print 835 (new high) to put the chart back on a buy signal.

As noted on the chart, the previous buy signal was a double-top breakout at 750, which was a column of 8, so 8 x 5 x 3 = 120, added to the low of the column at 715 gave a bullish price objective at 835, which was missed by a little more than a point in February.

Moving in closer, the decline from February 3rd is very sloppy and subjective to different wave count ideas but I'm showing my best guess for a bearish wave count. It calls for the RUT to stair-step lower into next week before it will be ready for a larger bounce correction into the end of the month. I'm depicting a drop to about 765 to complete a larger-degree 1st wave down but obviously that will change depending on how the decline, if it declines, develops from here. I'll be updating this each day to see if it remains a good gauge of market sentiment.

Russell-2000, RUT, 60-min chart

The DOW also found support yesterday at its uptrend line from October-November. The May 2011 high at 12876 may prove to be resistance again but we won't know if the bulls have taken the reins back until they can get the DOW back above 12920, in which case I'd look for a move up to the 13111 target, maybe a little higher to the top of its rising wedge pattern. A drop below 12500, even if followed by a larger bounce into the end of the month (as per the RUT chart), would make it much more certain that THE high is in place.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 13,150 with a bullish heads up above 12920
- bearish below 12,500

While it's possible today's bounce is all we'll see, especially by the RUT's wave count, the bounce pattern in the blue chips looks like a small 5-wave move up, as shown on the DOW's 10-min chart below. This wave count calls for a pullback Thursday morning and then another leg up to create at least a larger bounce correction to the decline from last week. If it plays out as depicted, calculate where the bounce would achieve two equal legs up (or the 2nd leg might only achieve 62% of the 1st leg up) to see if it rolls over from there. That would be an excellent shorting opportunity if it did.

Dow Industrials, INDU, 10-min chart

Depending on whether I look at the SPX daily chart with the log price scale (shown below) or the arithmetic price scale, it changes the location of the uptrend line from November. With the arithmetic scale SPX used that uptrend line for support. As you can see below, the log scale shows the uptrend line broke Tuesday and now could act as resistance, which will be near its 20-dma tomorrow at 1359. If it tests that level and then rolls over from there, short it. A rally above 1365 would put the bulls back in control.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1365
- bearish below 1323

On Tuesday NDX broke below the bottom of its shallow up-channel from mid February and found support at its 20-dma (as can be seen with the little doji on its daily chart below). Today's bounce brought it back up to the bottom of that little up-channel, which acted as resistance. It also retraced 50% of its decline from Friday. So it's a good setup for the resumption of selling and its pattern, unlike the others, supports the idea for a strong decline from here. Because of the mixed messages from the various indexes I think it means caution on both sides and don't get stuck on expecting one direction from here (but realize the downside risk, especially in front of opex).

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2635
- bearish below 2550

I haven't updated the picture of Treasury yields in a while because there hasn't been much to update. There still isn't but I thought it was time to show at least the big picture (for those of you trying to figure out what to do with some of your investment/refinancing decisions). The weekly chart of the 30-year (TYX) shows how I think it's going to play out this year, which is based on the pattern of the decline from February 2009. The sideways triangle consolidation (if it continues to play out as depicted) fits as a 4th wave correction, which points to another leg down (5th wave) into the latter part of this year. As long as TYX stays below 3.46% I'll be looking for a drop below 2.50% but I see further consolidation (perhaps into April/May) before starting down. All the talk about yields heading higher because of inflation is still too early in my opinion.

30-year Yield, TYX, Daily chart

As shown earlier, the TRAN has been negatively diverging from the rest of the market since its February 3rd high (just like the RUT, which often looks more like the TRAN than the other indexes). As our economic canary the TRAN has fallen off its perch after screaming at us to get out of the market. Yesterday it broke below its December 5th high near 5067. This is important in its wave count for the leg up from November because, as with the other indexes, I've been showing the possibility for just a 4th wave pullback and then another new high into April. By overlapping its December 5th high, which would be a 1st wave, it has negated that bullish wave count (the 4th wave cannot overlap the 1st wave). This strongly suggests the February 3rd high was THE high and that the other indexes will follow it lower. It's certainly possible that the TRAN will pull back and then make a new high anyway, in some other kind of wave pattern, but that would be pure guesswork from here and I have no reason to believe that will happen. For now the pullback is in a nice parallel down-channel so use it as a guide. It would obviously be more bearish if price drops out the bottom of the channel.

Transportation Index, TRAN, Daily chart

The dollar broke its downtrend line from January on Monday and then did a little pullback to test the line before blasting higher on Tuesday. It has stalled at its 50-dma and could pull back again for another test of its broken downtrend line. Its rally from the low on February 29th can be counted as a 5-wave move up, which calls for a deeper pullback before heading higher. If we do get a deeper pullback, as depicted, it should be good for a bigger bounce in the stock market.

U.S. Dollar contract, DX, Daily chart

Gold tried to hold its uptrend line from January-September 2011 since February 29th but was unable to yesterday. It is now bouncing between support at its 200-dma (near 1675) and resistance at its 50-dma (near 1692). It's also struggling with resistance at its 38% retracement of its December-February rally, at 1690. Gold bulls need to drive gold above 1730 to put it back into the bull's hands otherwise I'm expecting gold to keep heading lower from here (the downside objective this year is first to 1400 and then probably lower).

Gold continuous contract, GC, Daily chart

Silver is in the same boat (that's tipping over) as gold. After being rejected by its downtrend line from April-August 2011 on February 28-29, it broke down from its parallel up-channel from January and then yesterday it broke its uptrend line from October 2008 - August 2010. Today it bounced back up to this latter trend line so a drop back down from here would leave a bearish kiss goodbye. If the bounce makes it a little higher I would expect it to have trouble with its 20-dma at 34.30 and its 200-dma at 34.92, maybe even the bottom of its up-channel near 35.20 if it can make it up that high. A rally above 35.70 would tell us the bulls have everything back under control.

Silver continuous contract, SI, Daily chart

On February 24th and again on March 1st oil (WTI) tried to get above the price projection at 110.08, which is a Fib relationship between the waves in the bounce pattern off the October low. The 2nd attempt left a large bearish divergence and was an excellent shorting opportunity. It's currently finding support at its 20-dma at 105 and I see the possibility for another attempt to reach the top of a rising wedge pattern, near 111.60 in another two weeks (so a slow choppy climb up to that level). That's just a guess at the moment and any rally above 111 right now would have to be considered bullish. Otherwise the larger pattern calls for a complete retracement of the bounce off the October low (and if the rising wedge pattern is correct the retracement will happen quickly -- maybe two months or less).

Oil continuous contract, CL, Daily chart

Tomorrow morning will be quiet as far as economic reports go. Friday will be busy, especially with the payrolls numbers.

Economic reports, summary and Key Trading Levels

We've got a couple of things coming up tomorrow and Friday that will have an impact on the markets. The Greek private sector bond swap is expected to close tomorrow at 3:00 PM EST. Officials from the International Institute of Finance (IIF) member banks and pension funds believe participation will be above the minimum threshold of 50% to get a deal done. For a completely voluntary agreement, 90% of creditors need to agree to the deal. The market could be on pins and needles waiting for that and then the payrolls numbers Friday morning.

The ECB will also release its rates decision tomorrow before the bell but there are no worries about what they'll say. It is widely believed there will be no policy changes after lending about a trillion euros to European banks via the LTRO 1 and 2.

Another potential impact will come from the sun. There are huge solar flares and all the cosmic and other rays heading for us. These have been known to affect everything from communications to people's behavior. There have been major highs and lows in the stock market around these events. Most think the earth will only get a glancing blow so take it for what it's worth.

We've got futures rolling over tomorrow and the Thursday prior to opex can be a lot more volatile than surrounding days as traders start squaring their options positions. Adding up all the pieces for the remaining two days this week, combined with the price action we've seen so far, along with the timing window discussed above, it could make for a wild and wooly end to the week.

The market is giving off sell signals but not necessarily confirmed. There remains some upside potential but it is dwarfed by downside risk. Time and price have come together for a potentially important high, such as THE high, for the stock market. I think it's prudent at this point to consider any new high, last week's or the coming week, as THE high and worry more about protecting profits on long positions rather than adding to them.

Bears can start nibbling but we need to wait for some confirming signals (such as more patterns like the TRAN's and RUT's) before getting more aggressive on the downside. Because of the mixed messages from the various indexes I think it means both sides need to remain cautious and don't get stuck on expecting one direction from here (but realize the downside risk here, especially in front of opex).

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