Between the end of April and the first two trading days of May traders have been taken for a ride as the market tries to figure out if things are getting better or worse.

Market Stats

The morning started off as a continuation of the decline off Tuesday morning's high but the selling dried up after the first hour and we spent the rest of the day in a slow-motion climb back up. Unfortunately (for bulls) the climb looks like a correction of Tuesday's decline, which points to at least another leg down. Following another leg down is when we'll start to find out whether or not there's at least one more rally leg left in this market.

The two economic reports of importance this morning were not very encouraging about our economy. The ADP Employment report before the bell and the Factory Orders at 10:00 AM were both disappointing. The ADP report showed employment gains of only 119K, the lowest number since last September and lower than even the most bearish estimates. Most economists were expecting 170K-180K so it was a big miss.

As a comparison, the average employment gain for the 1st quarter was about 200K. Service jobs (generally the lower paying jobs) increased by 123K, while manufacturing jobs (the higher paying jobs) decreased 4K, the first decline this year. Currently we have some conflicting data between growth in the manufacturing sector and a reduction in jobs. ADP also lowered their growth number for March from 209K to 201K.

Analysts started to ratchet down their expectations for Friday's Payroll report, with most still looking for a higher number than what we got in March (120K). Most are still estimating about 140K-160K but many were out saying "we can't ignore today's headline number."

Factory orders declined -1.5% but that was slightly less than expected so it was "less bad." Combined with the continuing bad news out of Europe (e.g., the EU unemployment rate is at an all-time high of 10.1%) and its economic slowdown there's plenty of concern that the U.S. is not going to be able to stand alone in holding off a double-dip recession. The argument about that is of course reflected in the stock market so let's take a look at what the charts are predicting.

I'll use the RUT to start off tonight's review of the charts since it has an interesting pattern for us to watch over the next couple of weeks. Starting with the weekly chart I'll then zoom in to the 10-min chart to show who to watch over the coming week. At the March 27th high the RUT made a nice finish to an a-b-c bounce off the October low, which fits as a correction to the 5-wave decline in 2011. The March high left a small bearish divergence against the February high. So it's a good setup for the bears to take over from here but so far they haven't been able to do much. The 775-885 area is a strong price-level support zone and until that breaks there remains bullish potential for a break to a new high, either directly from here or after another pullback to the 775-785 area.

Russell-2000, RUT, Weekly chart

On the RUT's daily chart below I've identified a potential H&S topping pattern with the left shoulder in February, head at the end of March and the current bounce being the right shoulder. Using the EW counts it's a good example of how different technical tools can be used to identify the same thing. The top of the 3rd wave of the move up from November is the left shoulder, the head is the 5th wave (top) and then starting back down we've got a 1st wave down and 2nd wave bounce, which is the right shoulder. If the bounce proceeds to a new high it will invalidate both the H&S topping pattern and the bearish wave count that calls for a 3rd wave down. It's the strongest move of the five and that's why the downside objective out of a H&S top matches up with the longer leg down than the 1st wave. At any rate, the RUT found support at its 20-dma today, near 807, so a break of that should usher in more selling. Whether or not that will lead to a break of support at 775-785 we'll have to wait and see.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 830
- bearish below 785

The bounce off the April 10th low is shown on the chart below and it's either finished, as an a-b-c correction at Tuesday's high, or there will be another leg up to finish a rising wedge pattern (which needs the 5th wave to complete it). I say a rising wedge because of the corrective moves inside it, something often seen for the final 5th wave when a move has gone too far too fast. So respect the upside for a little more but understand the downside risk is more than the upside potential here.

Russell-2000, RUT, 60-min chart

I'll keep the bullish potential for the market on the DOW's chart until price tells me it's wrong (with a break below the April 23rd low, which for the DOW is near 12845). Its rising wedge pattern ideally needs another leg down to match the leg down from Tuesday morning to this morning (for a 3-wave pullback) and then another leg up, potentially to the 13500 area next week to finish its rally from November, which in turn would complete a 3-wave bounce off the October low.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 13,000
- bearish below 12,845

The DOW is the only major index, so far, to make a new high above its April 2nd high and that negates the wave count that calls the bounce off the April 10th low a 2nd wave correction (as labeled on the RUT's chart for example). That means Tuesday's high was either a 3rd wave as labeled on the DOW's daily chart (calling for a completion of the 4th wave pullback and then the 5th wave up into next week) or it was a b-wave high in a larger a-b-c pullback, which is what the light red dashed line depicts on the DOW's chart above.

If the DOW drops from here, two equal legs down would be at 13130 (a little higher if we get an early-morning pop before it starts back down) so watch that level for a possible turn back up into a new high into next week. Otherwise we could see a drop down to trendline support near 13K, shown on the chart below. The sharp drop on Tuesday followed by a choppy bounce back up today, especially with the DOW tucked under its broken uptrend line from April 23rd is a good indication it should head lower. A recovery back above 13300 would be a more immediately bullish indication (if it holds above and is not another head fake).

Dow Industrials, INDU, 30-min chart

I'm keeping the bullish expectation on the SPX chart below (rising wedge pattern, calling for a new high into next week following the current pullback) in order to keep the two blue-chip indexes in synch. As already mentioned, it could be a large a-b-c pullback in progress and we could see SPX drop down to the 1300 area before it will be ready to rally again (that larger pattern would call for a new rally leg into June, one which could see SPX rally up to the 1500 area). As I mentioned yesterday, the bears should wish for a pullback to about 1385 (two equal legs down and its 20- and 50-dmas, which are now crossing) and then another rally leg into next week. That would give them a very good setup for a longer-term shorting opportunity.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1385
- bearish below 1370

The SPX 60-min chart below shows a potential H&S topping pattern (once again you can see the 3-4-5 wave count to the top, followed by the 1-2-3 wave count back down) and the downside objective out of it is to about 1372, which coincides with closing the gap up on April 25th, so it's an interesting correlation there. But first it will need to drop below 1380 to get past a potential a-b-c pullback with two equal legs down and then its uptrend line from November. If a 5-wave move down develops as depicted (bold red), it will be followed by a bounce correction but then lower again so it would be a more bearish move.

S&P 500, SPX, 60-min chart

NDX still remains in a somewhat different pattern from the others but I don't see anything yet to negate the potential for a move higher to the 2821 target by next week. So far its holding inside its up-channel from December (following the 2-day breakdown last week) and above its 20- and 50-dma's (with the 50-dma being the lower one near 2696. As long as NDX can hold above 2696 it remains bullish otherwise it will become a nail biter for the bulls.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2756
- bearish below 2630

I was flipping through a bunch of charts in the NDX and the INTC chart jumped out and grabbed my eyeballs since we could be seeing it topping here and now. And if that's true then I have to wonder what's in store for the NDX (especially since AAPL has been a no-show lately and looks weak). INTC has rallied up to its broken uptrend line from September and the trend line along the highs since October. Both of these trend lines have been respected by traders multiple times, which means they're important lines. A back test followed by a drop back down would leave a bearish kiss goodbye. This one is worth watching for the rest of the week.

Intel Corp, INTC, Daily chart

Another reason for concern about the techs is the upcoming IPO for Facebook. As Jeff Cooper commented, who writes market commentary at Minyanville, all major tops in recent memory have coincided with big IPO and Facebook is the biggest ever. As Cooper noted, "It may suck the last life and cash out of portfolios at a time when a pronounced internal divergence and cycles point to a possible significant top."

And another sign of IPO craze, an article in Sunday's NY Times talks about the Tech.bomb II, coming to a theater near you: Tech bubble. What caught my eye in the article was this quote: "Mark-to-mystery was developed as a large part of the last bubble, but it's gotten a lot worse this time around." Between the financial house of cards (we're more at risk today than back in 2007) and now stories like these about the new IPO craze it should certainly scare people out of the market. Instead the latest COT figures show the small speculator is the only group that is net long S&P futures (large spec and commercials have moved to net short).

And AAPL's weakness is certainly not encouraging for tech bulls. As a sentiment indicator AAPL is starting to rot. Just when we were hearing new price projections to $850 (do I hear $950?) it's not looking good for the mighty AAPL. And when you look at the chart below, from Doug Kass, comparing AAPL's run-up to GOOG's run-up into its 2007 high (the last major market high just before the economy last collapsed), it does cause one to go hmmm... AAPL's price spike is looking suspiciously like a blow-off top.

AAPL 2012 vs. GOOG 2007, chart courtesy Doug Kass

Bonds and stocks maintained their typical inverse relationship through this week's gyrations, which had the appearance of some large reallocation programs hitting on the 1st of the month, which didn't hold and we saw reversals of the reversals. The selling and then buying in the bond market had the 10-year yield whipping up and down but as the chart below shows, it remains on track to test the bottom of a potential ascending triangle pattern, the bottom of which is the uptrend line from last September.

10-year Yield, TNX, Daily chart

I've left the TNX projections on the chart, made back in January, because it helps confirm that the potential triangle pattern could continue to play out into the summer, which is looking for another move up to the top of the triangle in late June (renewed inflation worries?) to complete the consolidation since September. That pattern then calls for a decline to new lows into the end of the year. The more bearish possibility (for yields, so bullish for bond prices) is shown with the light red dashed line, which calls for just a bounce off support, near 1.87%, topping out later this month and then a strong decline to follow into the summer. That would be an interesting development because stocks could follow the moves in TNX.

One index I've been keeping my eye on for a while is the home construction index. Its health will tell us plenty about the housing market and the strong rally from October would have one believe that the housing market might have seen a bottom. I've long believed we'll see another leg down and unfortunately for homeowners and homebuilders the weekly chart tells me that's what we should expect. Following the strong decline from 2005 into the November 2008 low, which was an 88% loss, we've got a 3-wave bounce into the current high. The very choppy leg up from November 2008 into the high in April 2010 says that will get completely retraced. That rally leg turned out to be wave-A of a larger A-B-C correction to the 2005-2008 decline and as I'm showing on the chart, it's getting close to the top of a parallel up-channel from 2008 and its projection at 368.77 where wave C = A. That would be an ideal achievement before it starts back down.

DJ U.S. Home Construction index, DJUSHB, Weekly chart

At 342 the home construction index has now achieved a 21.4% retracement of the 2005-2008 decline, a level that's considered the minimum that should be achieved before the larger trend (down) continues. I show a little more upside potential but the risk from here is for the home builders to start back down at any time. If the construction index is to achieve another equal leg down, in percentage terms, as the 2005-2008 decline (to accomplish a large A-B-C pullback from 2005) it would target 44 for the next decline over the next few years. That would be painful and it would mean the housing market in the U.S. is a long way from finding a bottom, something which I believe is true (sorry homeowners).

The U.S dollar held support at its uptrend line from August-October and got a sharp bounce back up today, breaking out of its narrow down-channel from April 16th. The next resistance level is near 78.51 where it will test its downtrend line from March 15th and its 20- and 50-dma's, which are about to cross. The larger pattern says resistance should break and then whether or not it continues in a sideways triangle through the rest of this month or breaks out to the upside remains to be seen. The dollar remains bullish now above Tuesday's low at 78.66.

U.S. Dollar contract, DX, Daily chart

Gold's sideways triangle pattern should now be finished (with a little throw-over above the top on Tuesday, leaving a bull trap. The downside objective is to at least 1514 but turns at least short-term bullish above 1676.

Gold continuous contract, GC, Daily chart

Oil has been doing its own thing and could continue higher but if the dollar rallies that could be a difficult move for oil bulls to accomplish. Hitting 106.06 on Tuesday (with a high at 106.43) achieved two equal legs up for the bounce off the April 10th low and as labeled on my chart, that might have completed a b-wave bounce in what will be a larger a-b-c pullback from the March high. A likely downside target if it drops from here will be its 200-dma near 96 and then potentially lower from there. Oil tends to track the stock market so keep in mind that when analysts say high oil prices are bad for the stock market they obviously haven't looked at a chart. If anything, stock market bulls should root for high oil prices. At any rate, if stocks start heading down from here, it's also a good setup for oil to start heading lower.

Oil continuous contract, CL, Daily chart

The low natural gas prices have claimed another victim as a large natural gas hedge fund was forced to close its doors, which unfortunately may be happening at the bottom of a recovery in natural gas prices. Last week I showed the setup for a bottom and said a break above $2.15 should be a good sign a bottom is in and we got that. Today NG pulled back but only to its 50-dma at 2.23. As long as that holds I'd stay bullish NG here, at least up to the top of its down-channel from last June, currently near 2.69. Even if playing the ETF, UNG, I like to keep an eye on the underlying.

Natural Gas contract, NG, Daily chart

With the poorer than expected ADP jobs report and the worsening unemployment numbers the past few weeks there could be a nasty reaction if the unemployment claims number tomorrow comes close to the 400K level. That's not what's expected but then again, nor was the disappointing ADP number. The ISM Services report at 10:00 AM could be a market mover and a small rally into it could see the reversal back down at 10:00 that I was showing on tonight's charts (something to keep in mind as a possibility).

Economic reports, summary and Key Trading Levels

One last chart that perhaps will tell us whether or not the setup we have here is for a market high now or within the next few days. Important market highs tend to occur around full moons and the next one is this Friday, May 4th. I've also heard some cycle guys talking about a turn date on May 8th. The sell-in-May guideline sounds like a good one to me.

SPX MPTS, Daily chart

There's a little more upside potential for the market into next week but as I see it that should be it and then there's a big downside move ahead of us. We could see another down day before we get another leg up into next week. But as a guide, I'd want to see SPX 1380 hold in order for the "one more new high" scenario to hold. Otherwise we could see the start of a bigger decline from right here. Watch for a possible small bounce first thing Thursday morning and I'd look to short it for a day trade that could turn into something more (swing trade).

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