The bulls have done nothing wrong yet but there are signs they might be ready for a longer rest. Tonight's review will also look at the longer-term tech indexes to show why this could be an important top.

Market Stats

The morning, and most of the day, was very quiet. The only economic report of possible significance was the Existing Home Sales report, which dropped slightly by -0.9% to 4.59M units. That was slightly below January's 4.63M, which had been revised higher from 4.57M, and roughly in line with expectations.

Most traders appear to have moved to the sidelines following the large rally since October and especially December. Normally the multi-year highs would bring in the buying crowds but they've been suspiciously absent. It's the lack of participation that has many pundits believing it's an unloved rally and therefore deserving of more. I wonder if it's a lack of participation from "normal" buyers and more from the extra liquidity provided by the central banks to the other banks who are more or less looking for a place to park their money. It's just enough to keep the bears away but not enough to spark a rally with stronger volume. Volume remains pathetic in the rallies.

There have been many arguments about the strength of our economy, the global economies, whether or not the high government debts will be a drag on economies and how all these things will affect growth, or contraction, in the coming year(s). Goldman Sachs' Peter Oppenheimer and Mathew Walterspiler came out today with a very bullish projection, which can be read here: The Long Good Buy; the Case for Equities, arguing that the stock market is dirt cheap right here, even after the rally from 2009. They argue the coming decade will be the best decade since 1980, based primarily on the fall in dividend yields of bonds. I could argue GS is selling their book, literally to the retail traders at the top of the market but that would be just being cynical and I'm sure it's totally underserved by GS (cough).

I remain unconvinced and in fact I'm a longer-term bear. I know this comes as no surprise to any of you and tonight I'll show you some charts (which I believe over GS' prognostications to the contrary) that keep me in the bear's camp. I will be the first to admit I did not expect such a strong rally off the 2009 low, let alone last October's low. Bullishness has held on much longer than I thought and lots of free money from the central banks has created far more liquidity than I could have imagined. But I think it has only delayed the coming correction, not abolished it. But I'll let the charts speak for themselves in a bit.

Short term we're dealing with most people thinking the market needs at least a pullback correction before it continues higher. But most are also reluctant to sell stocks and lock in gains, afraid there's more to be had to the upside. Look at AAPL. We're all looking for the data that helps support or challenge the idea that the economy is going to grow this year. Almost all economists on record state that we will see growth in the U.S. and that's keeping investors from selling (they're in for the long haul). The economists are nearly unanimous and anytime they get this much in agreement it's been a safe bet to go against them. We'll check back at the end of the year to see how well they did. The one organization I trust more is the ECRI (Economic Cycle Research Institute).

The ECRI was interviewed on Bloomberg last Thursday and they are unwavering on their position against the majority of the economists in calling for a drop back into a recession this year. The indicators that ECRI monitors, some private, some public, have convinced them that they need to stick to their call for a recession. Their numbers show lower growth for the last quarter of 2011 than the 3% cited by most economists. They've seen growth flatlined around 1-1/2% for the last three quarters. They see the same thing in sales growth while personal income and industrial production have dropped to their lowest reading since early 2010. Payroll growth has been positive but as they've noted, growth in employment has always been a lagging indicator, often peaking well into a recession. They make the specific point that "the hope is that jobs growth will increase consumption in coming months, but in fact jobs growth follows consumption ... There are many instances in which job growth precedes a recession."

The ECRI's Weekly Leading Index (WLI) remains in a cyclical downturn and in early March it reached a low not seen since July 2009. That's not the kind of negative outlook we're hearing from the majority of economists (who are notoriously wrong at the major turns). Part of the problem with the measurements used by most economists is the use of seasonal adjustments, which has badly skewed the data to the upside according to the ECRI. The big positive for the WLI, that they note, is the rally in risk assets, namely the stock market. But even with the massive worldwide liquidity injections the WLI "has hardly been swayed from its recessionary trajectory. In spite of the efforts of monetary policy makers, actual U.S. economic growth has slowed, while WLI growth has barely budged from a two-and-a-half-year low."

The ECRI concluded their March 15th update with this: "The bigger question is, can unprecedented, concerted global monetary policy action repeal the business cycle? The objective coincident and leading indexes that we have always monitored are still telling us that it cannot." I'll remind readers that a typical market decline in a recession is about 40% and that could be conservative based on what I see setting up on the charts.

With the help of a few high-powered stocks, most notably AAPL, the techs have been leading the way higher and held up reasonably well today (until AAPL got hit with a sell program near the end of the day) so I'll start tonight's review with the tech indexes. I'll show some longer-term charts in a bit since we've got a potential multi-year setup in front of us that all traders need to pay attention to. When the music stops for the techs we can be sure the other indexes have already been scrambling for the chairs in this game that often resembles musical chairs.

Starting with a weekly chart of NDX, the long-term broken uptrend line from 1990-2002, which is where the February 2011 rally stopped, is now about 20 points away, near 2770. That's the upside objective on the weekly chart but negated if NDX drops below 2600).

Nasdaq-100, NDX, Weekly chart

On the NDX daily chart I've been showing upside potential to 2748.76, where the c-wave of an A-B-C bounce off the October low would achieve 162% of the a-wave, and then 2767.52, where the 5th wave of wave C (the leg up from November) would be equal to the 1st wave (and virtually on top of the 1990-2002 trend line). The first target was achieved today with a high at 2752.46 and that should have us alert to the possibility the rally can be considered complete at any time now. A drop below the trend line along the highs from February 15th, which it climbed above on March 13th, would signal the top is probably in place. So a drop below 2723 would be a bearish heads up and below 2660 would be a break of its uptrend line from December and confirmation the high is in place.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2770
- bearish below 2660

One of the reasons why I think today's high may have finished the NDX rally is based on what I see on its 60-min chart, shown below. The megaphone pattern from March 15th is a reversal pattern when found at the top of a rally. The 5-wave move inside the expanding wedge says the move is complete. Notice too that once the uptrend line from March 6th was broken yesterday it became resistance yesterday afternoon and today. The selloff at the end of the day leaves a bearish kiss goodbye. The high would be confirmed with a drop below 2711.

Nasdaq-100, NDX, 60-min chart

Now to the big picture and another reminder about why I remain a longer-term bear and why I've been consistent in my warnings not to get too comfortable with this rally. Riding out what you think will be just a pullback, something to add long positions to, could be very damaging to your account over the next couple of years. I don't want to scare you (well, I lie, I do want to scare the diehard bulls into seeing a pattern that tells them to be afraid, be very afraid), but monthly charts of NDX and the COMPQ show potentially very bearish setups for the coming years. Keep in mind that if I'm correct you'll have an opportunity to make more money more quickly than you're likely to see again in your life time as a trader.

Keep in mind that in addition to the very real possibility we're heading back into a recession, none of the fundamental issues with the banking system have been fixed and in fact have only become worse on a global basis (because of too much debt, credit and banks' leveraging everything in sight). These fundamental issues must and will be addressed by the market, even though governments are fighting it all the way. The chart of the Nikkei index from 1990 bears this out -- for two decades each multi-year rally attempt has been followed by new lows. I expect we could see the same thing for our market, since we're following the Japanese model. So with that let's look at the NDX monthly chart from the 2000 high.

The sharp spike down from 2000 to 2002, which is impulsive, has been followed by a 3-wave (a-b-c) correction. The 10-year 2002-2012 rally fits as a correction and nothing more bullish than that. An impulsive decline followed by a 3-wave correction will be followed by another impulsive decline. That's basic EW. NDX is now very close to achieving a 50% retracement of its 2000-2002 decline, at 2805, and is at the top of a parallel up-channel for the bounce. It's a good setup for the reversal. As noted on the chart, two equal legs down (in percentage terms, not points) targets the 460 area. The start of the parabolic rally in 1994, which is often completely retraced, would have NDX dropping down to 350 so the 460 area is actually conservative (smile).

Nasdaq-100, NDX, Monthly chart

Now let's look at the Nasdaq Composite for an even longer-term view (I have QChart data for NDX only back to 1990). Obviously it looks the same as the NDX pattern with the sharp decline off the 2000 high, which was a 78% decline, followed by an a-b-c correction of that decline. A 50% retracement would have the COMPQ tagging 3120, about 30 points above today's high. Two equal legs for the a-b-c bounce off the 2002 low is at 3018. Today's high was 3090, about 30 points (1%) shy of the target level. Price is also up against longer-term trend lines, from 1973 and 1983. The uptrend line from 1973 had supported the 2002 low and has been resistance since it broke in 2008. In fact this is the 3rd time it's being tested and a common reversal setup is "3 drives to a high/low". The other trend line is the one along the highs from 1983 to 1993, which acted as support from 2004 to 2008. Once it broke in August 2008 it was quickly retested and then led to the crash lower. Now with this test of the two broken trend lines we can see the rate-of-change indicator at the bottom showing a very significant bearish divergence. This is a setup the bulls should be very fearful about.

Nasdaq Composite, COMPQ, Monthly chart

OK, now that I've finished my public service announcement let's move on to the other charts. SPX reached its price projection at 1407-1408, where the 5th wave of the move up from November is equal to 62% of the 1st wave and the two legs up from July 2010 are equal (completing a possible corrective wave structure for the rally from 2009). It made it a little higher and tagged its 2006-2008 H&S neckline near 1414, which was Monday's high. It's a good setup for a reversal but with a further upside target to 1448 next month, it takes a break below 1365 to confirm the high is in place.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1414
- bearish below 1365

The DOW has the same pattern as SPX but is weaker and has not made it up to the price projection at 13369 where the 5th wave of its rally from November would be 62% of the 1st wave. If it can hold above 13100 and head higher it should be able to accomplish that objective. Otherwise a drop below 12900 would tell us the high is already in place.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 13,400
- bearish below 12,900

Like SPX, the RUT did achieve its target price at 838.90 where its 5th wave is 62% of the 1st wave in the leg up from November. The quick dash above resistance in the 832-834 area (since February 3rd) on Monday was followed by a gap back down below that line of resistance, leaving Monday's rally a head-fake breakout and a bull trap. It tried again to get above resistance but failed to hold. It's now trying to hold above its October-November uptrend line, tested at today's low near 827, and a break of it would be a bearish heads up. Below 821 would be a stronger signal the top is in place.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 839
- bearish below 821

Moving over to the bond market, there's an interesting dynamic that could set up with the Fed. As we all know, the Fed has been very interested in seeing the stock market rise so as to produce a "wealth effect". He has often cited the performance of the small cap index as a sign of a strong stock market and growing economy. I have no doubt the Fed has helped both the tech and small cap markets through well timed purchases (through their banks' trading desks). While talking up the stock market they've had the luxury of seeing the stock market rally from last October's low while Treasury rates stayed low. But that looks to be changing as the bond market has been selling off (so yields have been rallying) and that could change the Fed's actions.

The Fed is much more concerned about the bond market than the stock market. They want a higher stock market for the perceived health of the economy (we've all heard pundits say the economy is getting better because the stock market is higher) but they NEED Treasury rates to stay low. Even their Operation Twist, where they're rolling out short-term debt into longer-term debt, is dependent upon low long-term rates. Only in this way can they monetize the debt into longer maturities and then enable the government to pay it down over time with the aid of inflation (which makes the debt nut worth less).

Since the start of February, and especially the past two weeks, bond yields have increased quickly and it probably has the attention of the Fed. They will be doing what they can to increase demand for bonds so as to keep rates down. One way they can do that is by talking down the stock market, which puts them into a little bit of a bind. They obviously don't want the stock market to drop but more importantly they can't tolerate rising yields. With this situation we've been hearing recently the Fed putting out the word that they're worried about the economy. It's a great way to let some air out of the stock market and have that money rotate into the bond market.

In the end I don't think the Fed has nearly as much control over either the bond or stock market as many believe but they certainly do have some control over how traders feel about the markets. Ultimately market forces, which are beyond the Fed's control, will dictate what happens in both markets. For the shorter term, if I've got the correct interpretation of the pattern for the 10-year yield, we could see it continue to trade sideways for several more months.

The chart of the 10-year yield (TNX) shows a large ascending triangle pattern that could play out for another several months. It fits as a bearish continuation pattern since price dropped into it from the February 2011 high. This calls for a drop down to about 1.9% by about May and then another leg up into the summer to complete the triangle. One other possibility (shown with the light red dashed line) calls for a pullback correction over the next few weeks and then another high near 2.51%, perhaps by the end of April, before starting another leg down into the end of the year. A rally above 2.51% would have me thinking more bullishly about yields.

10-year Yield, TNX, Daily chart

Looking at bond prices, using the 20+ year Treasury ETF (TLT), it supports the idea that bonds are getting ready to rally out of a 3-wave pullback from October (rather than run sideways for several more months). In the larger pattern, following the rally from April 2010 to the October 2011 high, the 3-wave pullback from October could be a 4th wave correction, which calls for a rally from here to new highs above the October high at 125.03. Two equal legs down from October is at 108.81 and that remains a downside target if the current small bounce fails. But the double bottom with the October low might hold here. The move down from December achieved two equal legs down at 109.74 with Monday's low at 109.69 so it's a very good setup to start the next rally leg, which would be confirmed with a rally above the February low at 114.62. Otherwise, a small bounce and then a drop to 108.81 would be the next move to watch for a setup to get long TLT.

20+ Year Treasury ETF, TLT, Daily chart

The banks have been on a tear since their March 6th lows and BKX has made it to the top of two parallel up-channels, one from October and a steeper one from November (last week's chart was using the arithmetic price scale and this week's is using the log price scale, which requires manually drawing the top lines of the channels to get them parallel). The up-channel from November is for the c-wave of an A-B-C bounce off the October low. Like NDX, the c-wave achieved 162% of the a-wave at 50.43 with a high so far (Monday) at 50.69. It's a very good setup for the completion of the 5-wave move up from November to complete the 3-wave correction off the October low. Any strong selling from here would give it the look of a reversal but it takes a drop below 45 to confirm the top is in place.

KBW Bank index, BKX, Daily chart

The Transports got a bigger bounce off the March 6th low than I had anticipated. It even made it back above the broken uptrend line from October through its February 23rd low but then dropped back below it yesterday and only managed to bounce back up to it today. Considering the failure again just below the price projection near 5394 (Monday's high was 5390), with bearish divergence, it remains a bearish setup for the TRAN. That 5394 projection is for two equal a-b-c moves, the first from the August low and the second from the November low (for a double zigzag wave count). A drop back below the March 6th low near 5029 would confirm the double top.

Transportation Index, TRAN, Daily chart

The dollar's corrective pullback pattern from March 14th and bounce off last night's low looks like a setup for a continuation higher. The pullback found support at its 50-dma Monday and yesterday and then its 20-dma at the pre-market low this morning. Today's rally broke the downtrend line for its pullback from the 14th and has me thinking it's ready for its next rally leg, which should be a strong one that exceeds the January high.

U.S. Dollar contract, DX, Daily chart

Gold's bounces continue to look like corrections instead of the beginning of a stronger rally and as long as that continues I'll keep looking for lower lows. It's currently consolidating on top of its 50-week MA near 1656 so a break of that level should see gold drop down to its broken downtrend line from August-November 2011, near 1608. A drop below 1600 would confirm it's likely headed to 1400 (not in a straight line of course). It takes a rally above 1718 to negate the bearish price pattern.

Gold continuous contract, GC, Weekly chart

Silver's weekly pattern looks similar to gold's but on a slightly stretched time frame. The bearish wave count calls for a drop down to the 20 area by early summer but a break above 36.50 would negate the bearish pattern.

Silver continuous contract, SI, Weekly chart

Oil's short-term pattern remains unclear. I could argue equally strongly for another leg up to test its May 2011 high near 115 as I could for a drop from here that breaks its uptrend line from October, currently near 105. A drop below the 103 and the November and January highs would strongly suggest the next leg down for oil has begun.

Oil continuous contract, CL, Daily chart

One other energy commodity that's been getting some press lately, especially with the excess supply coming onto the market through all the recent drilling activity in shale deposits, is natural gas. I was asked for my thoughts on this so I thought I'd add it to tonight's review. Several months ago I showed this weekly chart and pointed out a downside target at 2.13, which is where an A-B-C move down from January 2010 would have two equal legs down. I thought we might see a low around April based on that projection crossing the bottom of a parallel down-channel for the decline. The longer-term wave count and the shorter-term wave count are now in alignment and pointing to the need for one more minor new low to finish the decline and the 2.13 projection continues to look good. The end of March or the beginning of April looks like good timing for its low. I don't know what kind of rally to expect but I am expecting a tradable bottom soon.

Natural Gas continuous contract, CL, Weekly chart

The unemployment claims, Housing Price Index and Leading Indicators are on deck for tomorrow morning's economic reports but we shouldn't see much of a market reaction. Friday's New Home Sales is expected to remain flat so the market will remain quiet as far as any jolts from economic reports.

Economic reports, summary and Key Trading Levels

The indexes achieved some potentially important price targets this week and the wave pattern suggests this could be a very important high being put in (here or slightly higher). It's a time for caution for both sides since we could be putting in a top but we have no confirmation for the bears to start loading up on short positions. A break of the key levels on the charts would be the first signal for the bears to get a little more active (after rubbing the sleepy eyes following their months of hibernation).

It's a great time for bulls to pull their stops up tighter and maximize profits on long positions. The longer-term charts of the tech indexes were shown tonight in an attempt to disabuse you of the idea that you should hold through a pullback with the assumption that the market will rally higher this year. I don't think it will happen as I believe the highs being put in now (here or a little higher) will be the highs for the year. Keep in mind that March is an important turn month and this could be one of the most important, like the March 2000 high.

Stay loose, manage risk tightly and remember that flat is a position until we see how the coming week plays out. Good luck, trade safe 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