AAPL's rally gave NDX its best day of the year and Bernanke didn't spoil the party. Now all the bulls need to do is get some follow through to the upside.

Market Stats

It was all about AAPL today, or at least this morning, and clearly AAPL's earnings report after the bell yesterday had traders giddy with excitement today. It caused many analysts to immediately raise their price targets for the stock and Goldman Sachs' previous $750 estimate is so yesterday. Now they're saying $850. Do I hear $950? How about an even $1000? The Cheerleading Network of Buffoons and Clowns was doing its best to entice more traders to buy the market this morning and now with so many pundits calling the pullback from the April high complete, and new highs ahead, I can't help but wonder if we've seen too dramatic a shift back to the bullish side of the boat. Many were out today with new calls for SPX 1500.

AAPL's huge gain, finishing +8.9% at 610, gave the tech indexes a big boost. NDX had its best day of the year with today's +2.7% for the day. While some might believe all we need to know is how many iPads and iPhones are flying off the shelf, one could be forgiven for believing durable goods orders is a more important metric for the health of the economy. I know this is blasphemous talk, thinking the broader economy might be more important than AAPL, since it's clear that many market participants feel that AAPL IS the economy. Therefore the bad durable goods report today was ignored.

But in case you care (wink), the durable goods report was another sign of a slowing economy. While February was revised higher, from +1.9% to +2.4%, it didn't help soften the -4.2% for March. The estimates from economists were for about -1.5%. The always-volatile transportation part of the number is what dragged it down the most and removing that component left the Durable Goods-ex Transportation down "only" -1.1%, which follows February's -1.8% (revised lower from -1.9%). No matter how you slice it, the number is not good and following other recent economic reports it's another signal of a slowing economy.

While the market has been focused on Europe's woes it's not just Europe slowing down -- the U.S. has been right behind it. Britain has made it official now -- it entered a double-dip recession last quarter for the first time since the 1970s. Friday's Q1 GDP report for the U.S. is not expected to change much from Q4's 3.0% so any disappointment there could have a negative effect on the market.

Once the initial rally was over this morning (by 10:00 AM) the market went on hold while waiting for word from the Mount this afternoon. Everyone knows the Fed's rate is not going to change, which it didn't (still at 0.25%), but the market is still wanting more money coursing through its veins and the best source of that, for a very long time now, has been the Fed (with other global central banks, especially the ECB, helping greatly). The global markets are all now dependent on more money coming into the system to help push prices higher. Without the demand for stocks, helped by the new money coming into the market, the prices will not be able to hold up.

This afternoon's speech by Bernanke had the market spinning and turning a couple of times as hope and fears about what the Fed will and will not do caused the market to gyrate around his words. Still amazes me that the market is so much more interested in what the Fed will do instead of what the economy is doing and how much trouble the financial system is in. But we all know we're not dealing with a logical market (an oxymoron) and it will never be. Human beings drive this ship and we're not exactly logical when it comes to money.

This update from John pretty much says it all (and why the market jerked up and down with each thing Bernanke said):

"Europe has made substantial progress, but they are going to have to do more".
"Inflation will moderate later this year".
"FOMC is comfortable with 2014 guidance"
"Making progress on too-big-to-fail"
"Balance sheet tools are still on the table"
"Fed prepared to do more if appropriate"
"Housing is a headwind to recovery"
"Jobless rate will come down gradually"

We of course heard nothing that we haven't heard multiple times before. It's Bernanke doing only what he can do at this point -- jawbone the market higher. He's hoping he can say soothing things and keep the market propped up long enough to give the economy a chance to recover before the market realizes who the financial wizard is behind the curtain (and that he's not wearing any clothes). I do wonder many times if he still really believes his own, um, words.

While Bernanke has been attempting to jawbone the market higher with soothing words and promises of more to come, the Fed has actually been slowly letting some air out of the balloon. It's a bit like distracting your child while the doctor gives him his vaccination. The chart below shows the money supply has peaked and is slowly turning down (note that SGS stands for Shadow Government Statistics from shadowstats.com). Some of this has to do with the slowing in the velocity of money (lower lending by banks decreases the velocity of the growth) but we also know the Fed has been injecting less (the Operation Twist is not growing their balance sheet). The question of course is whether the Fed will try something more to boost the money supply (print more money), which may or may not be effective if people and businesses withdraw into their cocoons and borrow even less.

It should be noted that the money supply continues to increase as long as the line is above zero. The chart above is from shadowstats.com and they've been tracking the components of M3 since the Fed stopped reporting it in 2006. When the line starts to tip over above zero it simply means the growth of money has slowed down.

The stock market isn't all about how much money is being created or destroyed but credit is the lifeblood of the financial system and what the Fed is trying to do is keep that lifeblood flowing. A fiat-based currency system only works as long as people have faith in the system. Lose the faith and you lose the system and that's what was so worrying about the financial collapse back in 2008. The Fed and other central governments will do and say anything to prevent that from happening again.

But human nature is a fickle thing and the mood of people appears to be swinging back towards more pessimism than optimism about the economy. While the Fed has programs to address monetary issues they can't do much about these mood swings. If the economy continues to slow down and borrowing continues to contract we'll see that reflected in the stock market. We continue to see evidence of this in the housing market where banks are unwilling to lend to anyone without a pristine credit record (which means only those who don't need to borrow are the ones eligible to borrow). The housing market continues to suffer from a combination of banks' tightened lending standards and people's unwillingness to take on more than they can afford (unwilling to take on additional risks).

This process will take time to heal and while I very much look forward to what's on the other side of this period, we still have a few more years to stay cautious about the market and stay in a trading frame of mind. That affects more what you do with longer-term investments like your retirement plans but as traders we will look to trade both directions and that gives us an advantage over most stock market participants.

So let's see what the next trading opportunities look like. I'll start off with the DOW's charts tonight since I want to show what could be happening from a short-term bullish perspective. Keep in mind that I will show why you'll want to short this market tomorrow if it pushes a little higher but to keep the bears in check (cautious) I'll show what the choppy pattern we've seen this month could mean.

The weekly chart of the DOW shows a leg up into the middle of May for a minor new high, potentially back up to the broken uptrend line from July 2009, which has stopped the rally repeatedly since first testing it in October. Between that line and the middle of an up-channel from December we could see the DOW press up to the 13400 area before finishing its rally. For a longer perspective, the a-b-c rally from last year's lows should complete the larger rally from 2009 and set up the next major bear market leg down.

Dow Industrials, INDU, Weekly chart

Price action since the April 10th low has been very choppy (3-wave moves) with no follow through in either direction. It's either a correction to the initial leg down from April 2nd (as I'll point out on the SPX charts) or it's going to be a rising wedge pattern for the final 5th wave of the move up from November, which is what I'm depicting on the DOW's chart. It will be a mess to trade (as it has been for the past two weeks) but in another 2-3 weeks it would set up one of the best shorting opportunities you'll have in this market. There's clearly some upside potential by this pattern but it pales in comparison to the downside risk and this market could let go at any time (usually starting with something that happens overseas). But for the moment the DOW stays bullish until it drops below Monday's low near 12845

Dow Industrials, INDU, Daily chart

Key Levels for SPX:
- bullish above 13,270
- bearish below 12,845

Zooming on what the rising wedge might look like, the chart below shows a typical pattern, which is full of 3-wave moves but a total of 5-waves to complete it. It means day trading only until this is either proven or disproven. Some of that day trading will mean holding a position overnight to capture the move but then get out once the early-morning move completes (such as buying Tuesday's close and covering at this morning's open). I'm projecting the choppy rise higher into May's opex but clearly that's just speculation at the moment. The pattern will of course be updated each day to reflect actual price moves.

Dow Industrials, INDU, 60-min chart

Compare the SPX 60-min chart below with the DOW's chart above. Instead of projecting a move higher into the 3rd week of May I'm expecting the market to roll over following the current rally. This is based on an a-b-c bounce pattern off the April 10th low. Two equal legs up projects to 1294.16. The c-wave, which is the leg up from Monday, needs to be a 5-wave move and that's how I've got it labeled so far. This afternoon's rally was choppy as it moved higher and therefore has the potential to be the entire 5th wave (with only a minor new high above this morning's 3rd-wave high). Ideally I'd like to see a move up to 1397-1400 to set up the short play (or at least 1394) and that's what I'll be watching for on Thursday. But I had suggested entering a small short position at today's close because of the possibility we'll see an immediate reversal lower from here. The bearish wave count here calls for a sharp selloff into May (at least 60 SPX points and probably 100).

S&P 500, SPX, 60-min chart

The SPX daily chart below is a bit crowded with trend lines and moving averages but I'm trying to show both the DOW possibility (rising wedge with an upside target at 1429 -- the Gann target) and the more bearish possibility. The sideways consolidation following the April 2-10 decline looks like a bear flag continuation pattern and a drop to its 200-dma, near 1274, is the bearish potential from here. A break below Monday's low (for all indexes) would likely lead to much stronger selling.

S&P 500, SPX, Daily chart

Key Levels for DOW:
- bullish above 1400
- bearish below 1358

Other the DOW's potential bullish pattern, I've been looking at the NDX as potentially bullish as well. The choppy pullback from its April 3rd high has looked more like a bull flag than something more bearish. I've seen enough of these corrective pullbacks lead to a sudden break lower so remains a distinct possibility here. What the NDX does here at resistance at the top of its flag pattern and its 20-dma, both near 2718 on Thursday (about 7 points higher than today's high), will tell us plenty. A break above would clearly be bullish whereas a deep retracement would be worrisome. A break below Monday's low near 2629 would be bearish and below 2600 would be a breakdown from a bullish pattern and a failed pattern tends to fail hard.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2740
- bearish below 2600

The RUT is more like SPX than any of the other indexes and at the moment that's bearish and could be tie-breaker index for us. Between its 20-and 50-dma's and a downtrend line from May 27th, it takes a rally above 825 to get me bullish the small caps. Two equal legs for an a-b-c bounce off the April 10th low points to 817.86. I'm sure it's only coincidental (wink) that it would close its April 9th gap at 817.91. If it pushes up to that level by tomorrow afternoon that's also where the downtrend line from March 27th will be located. That would be a very sweet setup for a short play since you could keep your stop relatively tight (near 820, although keep in mind that a 62% retracement of the April decline is at 823.33).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 825
- bearish below 785

Following up on last week's daily chart of the 10-year yield, TNX, the weekly chart below gives a longer-term perspective of what I think is playing out in bonds. TNX rose slightly today but gave back a bunch of the day's gain following Bernanke's talk, as bonds rallied in anticipation of the bond-buying program being reinstated. Considering support is now very close -- its uptrend line from September is now near 1.86% -- I suspect the bond market will soon sell off (yields rise) when it worries that the Fed may not buy enough longer-term debt (through an extension of their Operation Twist program). That's just speculation at this point but the pattern calls for at least a bounce off support. What can't be known yet, assuming we'll see a bounce off support, is whether the bounce will only be up to its downtrend line from April 2011 (and 50-week MA) before heading lower or up to the top of its ascending triangle pattern before dropping to new low later this year. Longer term I think Bernanke is going to get his wish for lower rates.

10-year Yield, TNX, Weekly chart

SPX is more heavily influenced by the financials than is the DOW and therefore it's not surprising to see the bank indexes looking more like SPX than the DOW. The sideways consolidation since April 10th looks like a sideways consolidation before heading lower. Currently BKX is battling between its 20-dma above, which it tested again today, and its 50-dma below, which held Monday's close. The bears need to see BKX below 46.70.

KBW Bank index, BKX, Daily chart

The TRAN is not presenting a clear picture at the moment. Last week's back test and failure at its broken uptrend line from October was bearish but it doesn't mean it can't try it again (light red dashed line). The choppy price action leaves the door open to a push higher (for a possible triple top) or a decline right from here.

Transportation Index, TRAN, Daily chart

The dollar continues to chop its way lower and that continues to have me leaning toward the upside but now that it's broken its uptrend line from October-April I wonder if it will drop to its next uptrend line from August-October, near 78.75, before starting the next leg up. I suspect the dollar and stock market will continue to trade inversely and therefore I'll be looking for confirmation between the two for direction.

U.S. Dollar contract, DX, Daily chart

The metals have been just as choppy as the dollar and it makes it difficult to figure out the next move. I've tried to capture the moves with trend lines and it's a bit like herding wild cats. So far gold remains below its downtrend line from February 29th, which it tested yesterday and today. It's also below its 20-dma near 1650. If it climbs above 1650 I'll be watching for the possibility of one more touch of the top of a sideways triangle, near 1665, before heading lower. A rally above 1670 would be at least short-term bullish. If it starts to drop lower from here I'll be looking for at least a drop to the 1575 area.

Gold continuous contract, GC, Daily chart

What a surprise, oil has also been in a very choppy pattern. It seems no one feels strongly enough about these commodities to get them to establish a trend. Oil needs to get above 105 to break resistance at its 50-dma and downtrend line from March 1st. A drop below last week's low would likely be followed with a drop down to the bottom of its down-channel, currently near 98.70.

Oil continuous contract, CL, Daily chart

Is it time to finally take a nibble on the long side of natural gas? It had dropped a little lower than I thought it would but the bullish descending wedge since the end of February, with the accompanying bullish divergence, says the bounce off last week's low is probably the start of at least a bigger bounce. But so far the bounce is only a 3-wave move with two equal legs up at 2.09 (today's high). If the bounce develops into a 5-wave move I'd look to buy the next pullback to a higher low. A break above 2.15 should also be a good signal the bottom is in for now. UNG is an ETF you can use to play NG but use it more for trading, not longer-term buy and hold.

Natural gas continuous contract, NG, Daily chart

Tomorrow will be quiet as far as economic reports. The pending home sales might jostle the market if it comes in much different than expected but so far the market is not paying much attention to housing. As for the unemployment claims, not many trust the government's data anyway. From overseas tonight we'll get Germany's CPI numbers, the EU's report on economic sentiment (a broad measure of consumer and business sentiment) and the Bank of Japan's policy announcement.

Economic reports, summary and Key Trading Levels

Following AAPL's big rally this morning, which basically happened after hours yesterday and pre-market this morning, it went dead flat after a small pullback in the morning. In other words there was no follow-on buying to what appears to be mostly short covering. All the calls for $850 didn't seem to get more wannabe bulls off the bench to take another swing at the AAPL. That's not encouraging.

The broader averages at least got a little more buying into the close but because it was choppy as it rose marginally higher it actually looked more like an ending pattern to the upside. That interpretation calls for at least a pullback Thursday morning before heading higher. More bearishly it calls for the resumption of selling and the bearish pattern calls for hard selling into May so be careful about buying a pullback.

If the market does press marginally higher Thursday morning it would do a nice job completing the leg up from Monday and that in turn would set up a very good opportunity for the bears. As per the SPX chart, look for a rally to 1394-1400 to set up the short play. But this market has been hiding its intentions well and as per the DOW's chart I see the possibility for a choppy climb higher into mid-May at least. The bottom line is that I see much more downside potential from here but it doesn't mean go short, close your eyes and hope for the best. Risk management, proper stop management, position size, etc. are all very important right now. It's far better to not be in a trade that you wish you were in than to be in a trade that you wish you were not.

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