The market was short-term oversold and a bounce was to be expected. We'll soon find out if it was just a dead cat bounce or the start of something that will take us to new highs.

Market Stats

The European and U.S. stock markets got a little relief today and the U.S. market held onto most of the gains in the overnight session. The European markets saw some relief on the words from the ECB when they hinted (that's all it seems to take any more to get the bears running for cover) that it might resume its bond purchases as a way to help keep Spain's yields from rising any further. It at least helped relieve the recent rise in Spain's and Italy's bond yields with each falling a little today. We saw a swing out of U.S. bonds, where the 10-year yield had dropped back below 2% for the first time in a month, and into the Spanish and Italian bonds. Whether that will last is anyone's guess.

There will of course be many rumors about the ECB and their effort to support the various European countries' debts. There was an interesting article in MarketWatch today (The Bundesbank will stamp out this rally) that discussed the ECB's effort to create enough money to bail out the banks. The problem for Germany is that they're seeing all the newly-created money flooding into Germany's real estate market, pumping up prices. This of course scares the Germans, no strangers to the problems of runaway inflation.

As the article mentions, while the German central banks doesn't directly control the ECB they do have enough power to say "halten!" If they put up enough of a fight it could make it very difficult for Mario Draghi, the ECB president, to continue support the markets the way he's been doing for the past few months. Most people recognize that a large part of the reason for the strong 1st quarter rally is because of the flooding of the markets with 1 trillion euros ($1.3T). The back-door QE program of theirs, through the LTRO (Long-Term Refinancing Operation), has been a huge boost to the stock markets. Draghi would lover to be able to keep that program going but Germany will not allow it to spill over into their country as inflation.

Combine the difficulty the ECB could have in continuing their unrelenting effort to prop up the European banks with the huge appetite for bailout funds by Spain and Italy and you have the makings for a very difficult environment. Those who kept saying Greece doesn't matter, or that the European problem wouldn't be a problem once Greece was solved, haven't been paying attention. Europe is a huge problem and we'll learn some valuable lessons from them since the U.S. will be next.

It's all part of the massive deleveraging process we need to get through in order to get to the other side. The reason it's dragging out as long as it is has to do with the central banks fighting it every step of the way. In the process the economies continue to slow down and the tax-and-spend politicians (and Keynesian economists such as Paul Krugman) want to spend more rather than cut costs and get our debt under control. John Mauldin had a good 10-minute interview on Bloomberg in which he shared his view about Spain, the ECB and debt issue. It's a good interview: Only ECB Can Bail Out Spain

Interestingly, all the money that has poured into banks' coffers, combined with the rise in the stock market that has made so many feel better, has resulted in another sign that things have returned to "normal" -- banks have returned to preying on the weak. An article in today's NY Times, titled Big banks woo subprime borrowers again, discussed how banks are willing to extend credit to risky clients but the authors asked "is that good or bad?" The article mentions one woman as an example, Annette Alejandro, who "just emerged from bankruptcy and doesn't have a job, and her car was repossessed last year. Still, after spending her days job hunting, she returns to her apartment in Brooklyn where, in disbelief, she sorts through the piles of credit card and auto loan offers that have come in the mail.

'Even I wouldn't make a loan to me at this point,' Ms. Alejandro said. Some former banking regulators said they worried that this kind of lending, even in its early stages, signaled a potentially dangerous return to the same risky lending that helped fuel the credit crisis. 'It's clear that we are returning to business as usual,' said Mark T. Williams, a former Federal Reserve bank examiner."

For some reason my son gets a lot of bank solicitations that come to my address and I can attest to the huge increase in solicitations in the past few months. I think I've been able to get myself off the mailing lists by returning massive amounts of ripped-up papers in the postage-paid return envelopes. I figure if they're going to waste my time sending me garbage I'll just send it, and then some, back to them on their dime (or whatever postage fee they have to pay). I'm seeing many more advertisements for bank credit cards and it's all very indicative of a return to what got us into so much trouble in the first place.

Another example comes from an OIN reader. Joe mentioned to me that a neighbor, who is a car salesman, told him "the banks are financing car deals like they were financing houses from 2000 to 2006-2007 before it turned. He says he can take a guy with bad credit, who can only afford a $200-$300/month payment and get him a loan with a $500-$600 payment. He says it usually ends up as a repo in a short period of time, just like houses now."

Have you also noticed the number of "no-money-down" advertisements for furniture, beds, etc., just like pre-crisis? But I understand the reason the banks are back to their bad habits. The first is that they're trying to get back lost business as a way to fatten their returns. But I think a second and more important reason is because the Fed is insisting that banks increase their loans. Credit cards and auto loans are a good way to increase the loans to consumers, especially to financially unsophisticated consumers (I believe that's the politically correct term) who will be more than happy to run up their debt. And then what? Repackage the credit card and auto loan portfolios of all these riskier loans and sell them as a AAA-rated security to hedge funds? If investors buy any repackaged products from the banks in the future they deserve to lose their money. They might as well go buy Greek debt (ouch).

But back to the reason for the banks' return to lending to risky consumers -- this pool of borrowers was cut off after the banking crisis and are now a source that can help the banks lend out more money. The Fed has been trying to expand the money supply with its printing press but the only way for that to work is for the velocity of money to increase and that's through the fractional reserve banking system. They lend out more than 90% of their money and thereby expand the growth of money. Without that the Fed remains powerless to fight deflation. What they've been battling is a consumer/business climate where borrowing is way down. In the above article it mentioned that Ms. Alejandro is throwing away all the credit card applications. She recognizes that she can't take on more debt. This is just a small example of why the Fed continues to push on a string and his anti-depression efforts will not work like his academic books say they should.

Nevertheless, it's an interesting development in the banking industry to see what they're up to. And the timing, again, is very likely at or near a major stock market high. The feeling of most people is that we've put the scary times of 2008 behind us. The recovery off the 2008/9 lows has most thinking we'll see new highs whereas very few believe we'll see the market drop below the 2008/9 lows. They could be right but I can't help but wonder if too many are once again on the same side of the boat.

We're also seeing price action in a few stocks that is reminiscent of 1999-2000. AAPL going to $1000? Just replace AAPL with QCOM in 2000. PCLN hitting $750, up from $45 in 2008 (it dropped down to almost $6 in 2001). Who knows, maybe it will test its 1999 high near $1000 (but I doubt it). And while we're on the subject of European countries and inflated tech stocks, here's a little factoid I came across today -- AAPL is currently worth about the same as all the companies in Spain, Portugal and Greece combined, nearly $590B.

These high-flying tech stocks have become the momentum stocks of today (along with a few others) as the HF traders use the high-volume, high-priced stocks for their trading games. But keep in mind that the HFTs look for movement to the downside as well. They don't care which direction it goes -- they'll help push it fast in the direction of least resistance. And down could be the next direction that gets carried away. After yesterday's price action in PCLN I suggested shorting this morning. I'll show a chart after discussing the tech indexes below.

The pullback into the March 29th low followed by the jab higher into the April 2nd high ended up being a bull trap. It was looking like we were going to start the 2nd quarter off with a bang just like the 1st quarter. We had most pundits out calling for a rally that would challenge the 2007 high at 1576. Having never been an insider I can only guess what these analysts are doing but it seems they, collectively, really do get most bullish at tops (just like the retail crowd they're talking to) or they're trying to get the retail crowd to become stronger buyers so that they take the inventory off the hands of the firms these analysts work for.

The cynical part of me says the analysts are simply mouthpieces for their firms, hence they get most bearish at bottoms and most bullish at tops. This is so that the retail traders puke at the bottoms, handing off their inventory to the firms at rock-bottom prices and then flip sides at the tops. It's the retail crowd that can't stomach the idea of buying low and selling high.

But one of the problems this time around is that there might not be many retail traders to take the inventory from the big trading firms. Retail traders left the market in droves following the 2008 crash and many have not returned. We see it in the low-volume trading numbers. Usually at the tops the retail crowd is finally convinced to reenter the market, just in time to take the inventory from the big trading firms. But without the retail crowd who can these firms sell to? It helps explain, perhaps, why the selling has been mostly absent in the past few months. Many baby boomers, the ones with big piles of cash to invest, are more interested in protecting what they have, especially since their home nest egg has cracked and is leaking badly.

Without the printing presses of the central banks there would likely be much less buying and very few to sell to. That raises an interesting dilemma -- what happens if the central banks, especially the ECB right now, cut back on their money-printing schemes and the market can't find buyers. Does tulip mania ring a bell? When the selling starts and there are no buyers it creates a void underneath the market. Short interest is very low. This is of course all conjecture but it's meant to raise an awareness of just how vulnerable the market could be, even though it looks so strong at the moment. It's quite possible we'll see another flash crash in the not-too-distant future.

But enough scare talk, let's see what the charts are telling us. Starting with the NYSE charts tonight, the weekly chart shows the bearish setup following the March 19th high (noting that it was unable to make a new high on April 2nd, the same with the RUT, TRAN and few other sectors). The March 19th high was a test of the downtrend line from 2007-2011. Last week it broke its uptrend line from October-November. Yesterday's low was a break of its October high at 7864, which confirms the bounce as a likely 3-wave (a-b-c) correction that should now be complete. Following the 3-wave rally off the 2009 low the NYSE had a 1st wave down from last May into the October low. That's been followed by a smaller 3-wave correction for the 2nd wave, which should now be followed by a 3rd wave down. Notice that the previous 3rd wave is the strong decline in 2008 and the next 3rd wave should be stronger (since it will be part of the large c-wave vs. the a-wave decline in 2007-2009).

NYSE Composite, NYA, Weekly chart

Zooming in on the a-b-c bounce off the October low, the c-wave has the requisite 5-wave move up from November. So the setup was very good at the March 19th high to complete the correction. The A-B-C achieved equality (two equal legs up) at 8347 and the 5th wave of wave-C achieved 62% of the 1st wave at 8330, with both targets coinciding at the 2007-2011 downtrend line. This has been followed by a break of the uptrend line from October and the 20 and 50-dma's. The bulls could always come roaring back but for now this has to be viewed as bearish, which means bounces are to be shorted.

NYSE Composite, NYA, Daily chart

While the picture looks bearish and the bulls now have to prove themselves, there is one possible pattern that supports another rally leg. The trend lines are close on the SPX daily chart below but I'm showing the October-November uptrend line is in green and the other one near it (blue) is parallel to the one across the highs from December to the April 2nd high. It's possible, from an EW perspective, that yesterday's low marks the completion of a 4th wave in the move up from November. The parallel line identifies where the 4th wave will typically find support and so far it has. For this reason I'm saying a break below 1350 would confirm the decline is the start of something bigger to the downside. In the meantime we need to respect the potential for another leg up into the end of the month or early May (for a possible repeat of May 2008). For tomorrow, watch for the possibility for another leg up in the morning to complete an a-b-c bounce off Tuesday's low. Two equal legs up would be at 1384.40 so a rally up to that level that fails to make it any further would be a shorting opportunity for the next leg down. Short-term trades are still required while we wait for the bigger pattern to clear up.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1400
- confirmed bearish wave count below 1350

The DOW's chart shows the bullish wave count idea I mentioned for SPX. If the current pullback is completing a 4th wave correction and the 5th wave of the move up from November is to achieve equality with the 1st wave then we get an upside projection to 13736. Until the spigots at the ECB get turned down there just might be enough money pouring into the markets to float them higher, no matter what the fundamentals say (or I should say despite what the fundamentals say). However, I think the bullish scenario must rally from here. Any bounce that is followed by a turn back down, with a break below 12700, would seriously dent the bullish probability. It's a game of odds and break below 12700 would strongly tilt the odds in favor of the bears. As with SPX, an a-b-c bounce off Tuesday's low would have two equal legs up at 12925 so a failure there would be a short play setup and a continuation higher should see at least 13K and potentially higher. We need to respect the upside potential but be looking at bounce failures as shorting opportunities. Keep your stops tight for now (better to get stopped out of trade that would have worked nicely than to stay with a trade that goes strongly against you).

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 13,100
- bearish below 12,700

I'm showing the same bullish potential for NDX as for the DOW above but with less upside potential. The other indexes have met their Fib time window (centering on April 5th), where the rally from 2009 is 62% of the time it took for the 2002-2007 rally, but the same time projection for NDX is on April 19th (opex Thursday) because it has a later high in October 2007. A back test of its broken uptrend line from December by April 19th would have it rallying up to 2820, which would meet the minimum expectations for the 5th wave of the move up from November where it would be 62% of the 1st wave (at 2807). But as with the DOW, any bounce that's followed by a drop below yesterday's low would increase the odds in favor of the bears.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2750
- bearish below 2688

I had mentioned earlier I'd take a look at the Priceline (PCLN) chart because it could tell us plenty about where the market is heading next. Like the other big cap techs that are the momentum players at the moment (AAPL, AMZN, GOOG, etc.), they provide us with a good sentiment indicator. When they stop driving higher I think it would be telling us the market is in trouble. AAPL tried to rally again today but only managed a quick bounce and then started to sell off, closing in the red.

After yesterday's bearish engulfing candlestick (key reversal day as an outside down day) I had recommended this morning that traders look to short this morning's bounce. It turned out to be a good trade, so far, as PCLN also closed lower. This morning's bounce was a test of its broken uptrend line from February followed by a kiss goodbye and selloff. Support is not far away though -- its 20-dma will be near 720 tomorrow and the bottom of its parallel up-channel from January is near 713. It remains bullish inside its up-channel and if the major indexes are looking at a new high into the end of the month you can bet PCLN will be there with them. But a break below 700 would be a good indication its rally is finished and that would be a good clue for the bears to start lining up their shorting candidates for a deeper decline., PCLN, Daily chart

The RUT has a good intraday pattern to use as an example of what I'll be watching for. Whether it's bullish or bearish from here we might see a whippy market so be careful trading into next week. The bearish wave count calls for another leg up tomorrow and two equal legs up would be near 805, which would be a test of the top of a parallel down-channel for the decline from the end of March. A 5th wave for the move down from March 27th would then equal the 1st wave near 781, which would then set up a rally into the end of opex week (maintaining the typically bullish week). The bullish wave count calls for a rally above 805 to perhaps the 820 area before pulling back next week and then resuming its rally toward the end of the week. This is just speculation but the moves would be typical for each expectation.

Russell-2000, RUT, 60-min chart

Key Levels for RUT:
- bullish above 805
- more bearish below 780

Treasury yields have dropped back down from their March 19th highs as I had expected. I don't see any evidence that suggests they'll break below the December lows but instead will likely stay trapped in a trading range into the summer before breaking down. Bernanke's silence on QE3 prospects, in spite of the bad Payroll number, is also what I expected from him. As I had mentioned a couple of weeks ago, I figured he's not going to talk stock prices any higher because he wants money running into the bond market in an effort to keep yields down. He likes the stock market to be high but he needs bond prices to stay high. He'll sacrifice the stock market to the bond market if forced to choose.

The banking indexes look very similar to the broader averages. Bullishly the BIX found support at its uptrend line from November-March and is still above its 50-dma. The relative strength in the banks is bullish and the correction from March 19th easily fits as an a-b-c pullback that will be followed by another stab higher into the end of the month. Look for a move up to 165 if that happens. A break below yesterday's low would be a confirmed break of its uptrend line and that would have it looking more bearish.

S&P Banks index, BIX, Daily chart

A clear 3-wave move down from mid-March can be seen on the TRAN's chart below, leaving open the possibility it's only an a-b-c correction before pressing higher, even it will be for just another test of the previous highs and its broken uptrend line from October-March. A drop below yesterday's low would likely target its 200-dma at 4950 as the next stop.

Transportation Index, TRAN, Daily chart

Since its April 5th high the U.S. dollar has been chopping up and down in what looks to be a bull flag pattern, using its 20-dma for support. I continue to expect the dollar to rally higher and could start at any time. A rally in the dollar is likely to put downward pressure on the stock and commodity markets.

U.S. Dollar contract, DX, Daily chart

While the dollar has been in its choppy pullback for the past week it gold has bounced off its April 4th low and was stopped yesterday at its downtrend line from February 29th, which is only slightly above its 20-dma. Today it formed a doji at its downtrend line, which is potentially a reversal pattern in the making. If gold is in a larger bounce pattern off its December low I see the possibility for another leg up to match the December-February rally. A bullish descending wedge can be seen with the August-November downtrend line as the bottom of the wedge. A drop down for another back test of that broken downtrend line later this month would be an interesting setup for a long trade but only if the dollar looks like it might not rally strong.

Gold continuous contract, GC, Daily chart

Oil's pattern continues to support either side's argument. The choppy pullback from early March, and finding support at the bottom of a parallel up-channel from November-December, suggests oil is heading higher from here. But as with the stock indexes, a break below yesterday's low at 100.68 would suggest a move at least down to its 200-dma near 95.80.

Oil continuous contract, CL, Daily chart

This morning's economic reports were light and one was the Treasury Budget (speaking of all the debt woes around the world). The Treasury reported that its monthly budget deficit rose to $198.2B, which was more than $10B above February's deficit. But don't worry, with the Fed purchasing more than 60% of the government's debt with money that's growing on the trees in their back yard, it's not a problem (cough). The Fed's March Beige Book, which was released this afternoon, made the employment picture look a little better for last month than did the BLS jobs report that came out last Friday. The Fed believes that the economy grew at a "modest to moderate pace from mid-February through late March."

Tomorrow we'll get the usual unemployment numbers and the PPI numbers. Any upside surprise in the inflation numbers could spook the market because it would only enforce the idea that the Fed will back away from any further easing.

Economic reports, summary and Key Trading Levels

The technical damage to the charts is not severe enough yet to conclude the bulls are finished. As I showed, there's plenty of evidence to suggest we could get another rally leg into the end of the month or early May (setting up a repeat performance as 2008). But that bullish potential requires a rally from here without looking back.

The bearish pattern calls for either an immediate turn back down tomorrow or at most one more leg up for a larger a-b-c bounce before heading lower. A drop below Tuesday's lows would shift the odds strongly in favor of the bears (meaning it would be likely THE high is in place). As shown on the RUT's chart tonight, another drop back down might only make a minor new low before getting a larger bounce into next week but that pattern would strongly suggest the bounce will be an outstanding shorting opportunity (perhaps by the end of next week). SPX might find support in the 1340-1350 area if it hasn't put in a low yet.

It remains a market that needs to be traded but I think we're now close to knowing whether some swing/position trades will work. Stay patient and look for day trading opportunities instead of any big moves yet. By this time next week we should have a very good sense for what will happen into the end of the month. In the meantime, 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