Worry over what is happening in Europe knocked stock markets back down and once again the U.S. market spent most of the day clawing its way back from deep in the hole but closed in the red again.

Market Stats

The European markets have given back the attempted recovery off Monday's gap down and a late-day rally helped erase some of the losses they were seeing. The FTSE looks weaker than the other markets, possibly from not getting as much "help" as the German DAX and French CAC. That's pure speculation on my part of course because we all know the governments are not trying to consciously manipulate the market (cough).

The latest development in Greece has the markets worried about what will happen to the EU and euro if/when Greece leaves. The fact that they're going to leave is really not in question. It's the timing and how disruptive it will be that everyone is worried about. Markets hate worry. In Greece their leftist leader, Alexis Tsipras, is attempting to form a coalition government around his anti-bailout part Syriza. He is opposed to the bailout terms of the EU and IMF and has every intention to tell both to go pack sand. If Greece snubs the EU and IMF then the country will never get another dime from them and will default on their current loans (hard default this time, nothing like the last "controlled" default).

Greece has lots of practice and experience defaulting on loans so this is by no means something new to them. The big difference this time of course is the fact that they're tied to all the other European countries and the euro. They can't simply default and debase the currency this time, which is why they will have to return to the Drachma. It's the process by which all this happens is what has everyone worried. And of course the bigger worries are what's happening in Spain and potentially soon France. Greece is pulling on the thread that will unravel the cloth covering the problems.

If Tsipras is unable to form a coalition government in Greece he could still create enough support to block the terms of the bailout. And if no coalition government is formed they could be facing another round of elections in June. In the meantime it's going to be difficult to know what the potential outcome will be and what the effect will be on the markets. A worried market is a bear's market.

France could potentially become a bigger problem for the EU if Hollande carries through on his promises to tax more, spend more and borrow more. The failure of France and Germany to get along in the future could be a problem and while many believe Hollande is more talk and less action (as in indecisive) he could still cause the market a lot of uncertainty.

Spain made more news today after it partly nationalized its Bankia bank (with a 45% ownership now), starting the process of nationalizing the over-indebted banks and getting them "off" the EU's books and make Spain's taxpayers responsible for the bad loans.

Both Tuesday and Wednesday started off in the hole and quickly dug it deeper before starting to climb back up. The pattern of morning selling followed by a rally into the afternoon continues. Each day's rally attempt wasn't enough to reverse the loss but at least the losses weren't as bad as it was looking the past two mornings. The question now is whether the bounce attempts can lead to something bigger to the upside or if instead the bullish attempts will simply lead to a break in the dike, to be followed by the flood waters.

I'll start tonight's review with the DOW's charts and looking at its weekly chart below you can see the shelf of support near 12700 that is being tested again. The early-March and early-April lows have now been followed by early-May lows (is there something about the early part of the months that the market doesn't like?) and formed a shelf of support just above 12700. Clearly a break below 12700 would be bearish. In the meantime the bulls are hoping for repeat performances as March and April with new highs before the month is out. It's like the morning selloff and afternoon rallies scaled up on a monthly basis.

Dow Industrials, INDU, Weekly chart

The DOW broke its uptrend line from November-April on Tuesday, solidifying the break of its 20- and 50-dma's on Monday. There was a string of 5 days of selling from the April 2nd high and today marked the 5th day of selling, dropping it to the same level as the April low. It's a good setup for a bounce and as depicted, a back test of its broken uptrend line and its 20- and 50-dma's, all near 13055 by the end of the week, would be a very good setup for the bears. It would be too good and price will probably not make it that high or it won't stop there. But that's the setup you want to watch for a short entry.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 13,250
- bearish below 12,748

The DOW was the only index to make a new high on May 1st and I'm counting it as the completion of a rising wedge pattern for the 5th wave of the move up from November. It's not a clean count, especially on the other indexes, and that's why I can't be clear yet as to whether or not we're going to get a new high into the end of the month. But if we get the bounce and then new lows as depicted (in bold red) then the count will be verified. If we get the rally into June as depicted (dashed green) then obviously the decline from May 1st was the completion of an a-b-c correction off the March high. A rally above 13250 would be a solid indication the bulls are back in control. Between 13050 and 13250 would be a no-man's land and stay bearish below 13050.

For SPX I'm still using the April 2nd high as THE high but it doesn't match up with the DOW and that bothers me. So the May 1st high is either THE high for both or the b-wave of an a-b-c correction off the March high. We'll have to sort it out later. In the meantime, SPX broke a neckline that many have been watching as the H&S neckline from the March low. It's currently near 1373 so watch for the possibility of a back test and failure at that level. The bold blue line I have on my chart could be a more accurate H&S neckline, which runs from the February-March lows and was tested yesterday and today. If too many are thinking the higher neckline is the correct one then we could see a rally above it to nab all the stops on shorts, perhaps tag its 20- and 50-dma's near 1385, and then head back down. A bounce followed by a break of today's low would be potentially very bearish and as depicted, lead to a fast drop down to its 200-dma near 1280.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1394
- bearish below 1343

Yesterday SPX had broken out of its down-channel from May 1st but then got slammed back down this morning and almost made it back down to the bottom of the channel. But as with yesterday morning's low, we continued to see bullish divergence on the oscillators as the selling momentum was waning. Depending on how I count the squiggles in the move down from May 1st I can count either yesterday's low or today's low as the completion of a 5-wave move down, which is what has me looking for a bounce. I'm showing an expectation for a choppy bounce into Friday, perhaps Monday, for a back test of the broken uptrend line from November, which will be near 1390 on Monday. Or the bounce could finish near the 38% retracement and the possible H&S neckline mentioned above, near 1373. Corrections are always hard to figure out in real time so just stay aware that the bearish setup is for a strong decline to follow so be careful chasing it higher.

S&P 500, SPX, 30-min chart

Institutional fund managers tend to use longer-term trading signals and the 50- and 200-dma's are useful for identifying intermediate and longer-term trends. That's why the break of the 50-dma is a warning signal for fund managers. Another tool they use is the Point & Figure chart, which is based only on price levels and not time. With SPX hitting 1350 it has now created a sell signal on its P&F chart and the two signals could have fund managers looking to lighten their exposure, using rallies to sell into. SPX needs to print 1380 to put it back onto a column of Xs and 1420 to negate the sell signal. The preliminary bearish price objective (which will drop lower if more Os are added to the current column) is 1280, which "coincidentally" is where the 200-dma will be soon.

SPX P&F chart

I'm still looking at the NDX pattern as potentially bullish here. The a-b-c pullback from April 2nd fits as a 4th wave correction in the move up from November and needs another rally leg to finish the 5th wave. It could be on the same path as the blue chips but for now I'm using the NDX chart to track this possibility. It says look for a new high into the end of the month before setting up for the next big decline. But a bounce followed by new lows for the current decline, as with the blue chips, would put this index on a sell signal as well.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2720
- bearish below 2587

Looking through the components of the NDX, I'm not finding a lot of support for a new high for NDX. Last week I showed the INTC chart and how it looks like it made a top at the crossing of important trend lines. AAPL looks to have lost its way and I can't figure out if it wants to rally or drop further (I suspect many other AAPL traders are wondering the same thing). But AMZN looks like a good setup for another leg up to finish the 5th wave of the move up from April 16th. It could be just a test of its April 30th high (slightly more or even a truncation) but it would look best with at least a try and then the next big decline will be due. So AMZN, and not many others, does support NDX making a new high.

Amazon.com, AMZN, Daily chart

The RUT has one of the clearest H&S patterns from February's left shoulder. The neckline near 785 is very clear and it's also clear it's been well defended the past two days. A bounce and break below 785 would clearly be bearish and a break below the October high near 770 would confirm the pullback is not a 4th wave in the move up from October (the same signal we've already gotten from the FTSE and DAX, discussed further below). A rally above 820 would have me looking for a new high.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 820
- bearish below 770

If we take our cues from the European markets then we're in trouble. Spain's index has already broken its March 2009 low. But that's Spain, what would you expect, right? But the FTSE is looking very weak as well and today it broke its 200-dma. It has also broken below its October 2011 high, which it did in early April and then tried twice to recover back above it before dropping hard this week, leaving a failed retest of the neckline and now a break of its 200-dma. This one has BEAR written all over it.

London Times Financial index, FTSE, Daily chart

OK, so the FTSE is weak. Surely the strong German economy means its stock market is holding up. Well, yes and no. It's holding up better but it too has broken its October 2011 high (this week). It has not yet closed below that level but the fact that it has broken that high is significant from an EW perspective. If the October high was wave 1 in a bullish 5-wave move up then the pullback from the March high would be a 4th wave correction. But the 4th wave cannot overlap the 1st wave and therefore it's not a 4th wave. The move up from September is therefore a confirmed 3-wave correction of the previous decline, labeled A-B-C on its chart below.

German DAX Composite index, DAX, Daily chart

On the DAX chart the c-wave, which is the leg up from November, is a clear 5-wave move, which completed the c-wave. It made the March high a good shorting opportunity for this index and the decline to the April 23rd low is the 1st wave down in a new decline. The bounce to the April 2nd high is the 2nd wave correction and the decline to today's low is the 1st of the 3rd wave. Once the next smaller bounce finishes it will set up the 3rd of a 3rd wave decline, something you'll want to trade if you trade this index. It should lead to a strong decline and if the DAX gets hit hard I can only imagine what the others will do.

A comparison of the DAX and SPX shows the high correlation between the two markets. This year SPX has been holding up better than most markets, especially since March (including against emerging markets), and the chart below is a good example of how you're NOT diversified just because you're in an international index. I strongly suspect SPX will follow the DAX lower and not the other way around.

DAX vs. SPX, 2010-present, Daily chart

Now that I've gone all bearish on you, let me show you another chart that is at least short-term bullish (although very short term). Following up on my last update on the home builders, the index had a nice rally today (+2.5%), with a bullish engulfing candlestick, and it looks good for a new high to complete a 5-wave move up from April 10th, which in turn will complete a 5-wave move up from October, which in turn will complete the A-B-C bounce correction off its November 2008 low. The 360 area continues to look good for a high although only a test of its high near 350 is a distinct possibility. Once this little leg up is finished you'll want to get bearish the home builders. This index unfortunately has a big move down ahead of it (not right away but into 2013).

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

The TRAN has had me baffled for a couple of months now. We didn't get a clear wave count to the top in mid-March and we've had nothing but sideways chop since then. The sideways consolidation since the early February high can certainly be viewed as bullish -- the leg up into the sideways triangle pattern would typically be followed by another rally leg out of the pattern. That possibility still needs to be respected, no matter how bearish I or others get. It might be good for just another back test of its broken uptrend line from November but it would still be a bullish break to a new high. Therefore a rally above 5400 would be bullish and very likely for the broader market as well. But if price breaks down from the triangle, the bottom of which is currently near 5115 (only about 30 points lower) and stays below it (watch for a head-fake break and then rally back up inside, which would create a buy signal) then we'd have a failed bullish pattern and failed patterns tend to fail hard. So we need to wait for price to lead the way here.

Transportation Index, TRAN, Daily chart

The dollar reached its downtrend line from January today and looks ready for at least a pullback before breaking resistance. If the sideways triangle pattern is correct we should see a drop back down toward the bottom of the pattern before the next rally leg begins. If the dollar does pull back as projected it would help the stock market.

U.S. Dollar contract, DX, Daily chart

Another sideways triangle, this one for gold, was pointing to lower prices and once it broke it dropped hard. I'm showing a drop to its broken August-November downtrend line near 1560 before bouncing and then continuing lower. But that's just a guess at the moment, especially since it's been in such a choppy price pattern. But a larger 5-wave move down from its May 1st high is what I'm expecting (for the stock market as well).

Gold continuous contract, GC, Daily chart

Oil is struggling to hold onto its 200-dma (96.32) and the price projection at 96.58 for two equal legs down from March 1st. It's possible an a-b-c move down from March 1st is now complete and oil will start another rally leg. At the moment I consider that a lower probability. More likely we see oil get a bounce off support and then continue lower.

Oil continuous contract, CL, Daily chart

There's nothing market moving in tomorrow's economic reports. Friday's PPI and Michigan Sentiment numbers have the potential to move the market. It's been a quiet week for economics (giving the market more reason to react to European news).

Economic reports, summary and Key Trading Levels

While the charts look very bearish at the moment, there remains the possibility we'll get at least one more new high before the market will be in more serious trouble. We know the central banks have been busy and we know money from overseas could prop up the U.S. market a little longer. We're in that position where upside potential is probably dwarfed by downside risk. Following a bounce correction to the decline from May 1st there is a potentially very bearish setup for a strong leg down and then stair-step lower into the end of the month. In other words, if the market breaks down following a bounce correction there is not going to be a back test to let captured bulls off the train. Therefore any bounce this week should have those with long positions protecting themselves with stops beneath today's lows.

We'll be in a potentially bullish window until early June so the bulls need to take advantage of it here. The flip side is that there is a potentially dangerous window between May 12th and the first few days of June (some Gann time windows) where if the market is going to have a mini crash it's going to be in this window. We've got opex week next week and as I've said many times before, it's generally a bullish week but when it's not it tends to be very bearish. Both sides need to be especially cautious into next week.

My current recommendation is to look to short the bounces, keep your stops relatively close (preferably using closing prices for your stops since the HFTs run havoc on intraday stops) and try to get positioned for what could be a big move down. The DAX chart shown tonight is one of the better setups showing the bearish wave count that's setting up.

Good luck and I'll be back with you next Wednesday of opex, a day we should have a very good idea as to whether or not we can expect higher prices into the end of the month or if instead we're already heading hard down.

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