The stock market has now been down 10 out of the past 11 days. It's time for a bounce or a crash and we'll soon know which it will be.

Market Stats

The day started out in great shape with a gap up to start the trading but unfortunately there was no follow through and after about 30 minutes of trading the market then sank back down for the rest of the day, closing at the low. Very disheartening for the bulls. The one consolation, if the bulls can take advantage of the setup, is the fact that a market that closes at its low after a succession of down days (10 out of 11 down so far with only a slightly positive day last Thursday), often sees an immediate reversal the following morning. I call them little capitulation days where those who want/need to sell do so into the close and there are no more sellers the following morning.

But speaking of capitulation, this market is far from it. The market's decline has the appearance of a lack of buying rather than stronger selling interest. The price pattern for the past few days has been choppy and we're seeing bullish divergences on the charts. The short-term pattern looks like a bullish descending wedge with the bullish divergence supporting the interpretation. The flip side is that because strong sellers haven't joined in yet, and because the market is getting oversold, it makes for a dangerous market -- one spark that sets off selling could tank this market in a big way. It's always important to keep in mind that crashes come out of oversold, not overbought, conditions. That's not a forecast but just a warning. A strong decline out of the gate tomorrow would not be something where you'd want to be looking to buy the dip.

Worries about European problems waned somewhat today, especially after France was able to auction off all their bonds this morning. The demand-supply ratio ticked higher so there was some relief that yields were not going to be heading immediately higher. Interestingly, Japan's central bank was unable to get its hands on enough bonds to further its monetary stimulus program, something that hasn't happened to any central banks yet. Japan is the elephant in the living room that no one wants to discuss but their fiscal house is in terrible shape. They've had a long history of domestic demand for bonds because the Japanese save a higher percentage of their income than most other countries. But as their population ages and more people cash in bonds rather than buy them it will force Japan to go outside to sell its bonds. And when that happens they'll see their yields jump considerably higher. It's going to be a very painful time for Japan but everyone has been so focused across the other pond to watch how Europe unfolds.

Not helping the bulls today, which deflated part of Europe's rally as well, was the ECB announcement that they would not continue to support the Greek banks' need for more cash. Without a believable recapitalization plan from the Greeks the ECB is effectively washing their hands of the problem and leaving them to figure out where they're going to get the money they need. Essentially the ECB is telling Greece "here's your hat, there's the door." The market knows this is coming of course but it's scary nonetheless and sold off on more worries. As for the loans to the EU members? Poof! Deflation gets another helping hand with more debt destruction. Needless to say, that would not be a "controlled bankruptcy" like the last event.

The European banks and private investors in Greece's sovereign debt would of course take massive losses. Many banks, including those on the hook for insurance against loss (credit derivative swaps, such as the one JPM just lost a boatload of money on), will take a major hit and there's no telling where the last domino is located. A butterfly flapping its wings in Africa causing a typhoon in Asia indeed. And of course the market is also worried about Spain, and even France, now that they're pushing back against austerity and wanting more growth (which comes from more borrowing). People, including most Americans, just don't get the bigger picture -- growth through borrowing is all smoke and mirrors and when the smoke clears and the mirrors break it's not going to be a pretty sight to see who's standing there naked.

Back in the beginning of the year we received results of the banks' stress test by the Fed. Most got an A+ with a couple showing they could be in trouble if the economy takes a turn for the worse and unemployment climbs higher. Most banks were thought to be well capitalized and could tolerate another credit contraction. The problem was, and still is, the Fed wants the banks to succeed and wants (needs) the public to believe the banks are in great shape. Therefore the grades given to the banks probably had demonstrated a severe case of grade inflation.

Any problems that we hear about for the banks in the next few months will be explained away with statements similar to what we were hearing about the problems with the subprime loans leading to the 2007 market high and the loss just experienced by JPM. Large bank losses will be explained away with the flip of the hand as if to say it's nothing. It was a fluke, a rogue trader, there's plenty of profit to absorb that "small" loss, etc. I suspect the trading losses and "snafus" will start to snowball from here. BTW, you know what snafu stands for, yes? Situation Normal, All F*** Up. One could say it's an adequate description of the global banking system.

Many are now worried about the cockroach theory -- where there's one, there are many. Having been bitten once, following the 2008 market crash, which was due to the collapse in the banking industry, many fund managers are much more aware that the first crack in the newly rebuilt dike might be JPM's "poorly managed" trade. How many "poorly managed" trades are out there, especially in banks that do not have the level of risk management that JPM supposedly has? Is JPM's position so large that it's going to take a lot more losses to clear out the problem? If so then I suspect JPM will be trying to assure all of us that the problem was a one-off and that it's contained. Believe them at your own risk since we all know what their agenda is and it's not to protect you and me.

There was nothing exciting in this morning's economic news. Housing starts and permits came in roughly in line with estimates, with starts a little better than expected but permits came in a little lighter than expected. Industrial production rose +1.1%, which was a nice improvement over the -0.6% in March (which was revised lower from the originally reported 0%). It was also better than expectations for +0.5%.

In the afternoon we got to see the FOMC minutes but nothing unexpected and the market barely registered a blip higher on the release, which was immediately sold and the market continued to chop its way lower into the close.

With a market that looks to be symptomatic of a buyer's strike rather than a selling panic, tonight's charts may be pointing to a coming bounce. The choppy descent since last week gives us what looks like descending wedges for an ending pattern to the selling. At least that's the potential. There is of course a much more bearish interpretation that I'll review as well. We haven't seen much in the way of breadth indicators to tell us a bottom is in. In fact the lack of strong selling could mean there are much lower lows straight ahead as sellers start to panic. Certainly the market can keep heading lower from the mere lack of buying. And the market is at its most vulnerable point when it gets oversold but with no indications of capitulation so we've got a few things to look for over the next couple of days.

I'll start off tonight's review of the charts with the NDX to show a bullish chart pattern that is looking for a new high into June. I've been using the NDX chart to point to this bullish possibility and nothing has changed in the past week to negate the potential. For that matter nothing has changed to negate the more bearish potential either. Stuck here in the middle with you. I'll point out what to watch for over the next week so that we can let the market provide the needed clues.

The NDX weekly chart shows a parallel up-channel from the March 2009 low, the top of which was nearly tagged at the March/April highs. There's also a parallel up-channel from the October 2011 low, the top of which was also hit. The crossing of the tops of those two channels near 2805, the 50% retracement of the 2000-2002 decline, made for a good setup for a reversal. It didn't quite get there (the high was near 2795. Now the decline has dropped NDX to the bottom of its shorter-term up-channel (from October) and the mid line of its longer-term up-channel, making for a good place to bounce.

Nasdaq-100, NDX, Weekly chart

I've been using NDX to show the potential for one more rally leg into June to make a final high for the rally from 2009. If that's going to happen this would be a logical place to launch the rally. The only way for this to be negated for NDX would be either drop below the October high at 2412 or a bounce from here that retraces some Fib portion of the decline from April and then drops to new lows for this move down.

The daily chart below shows the shorter-term up-channel from October and a possible descending wedge pattern for the decline to the bottom of the channel. The decline from April can be counted as an a-b-c pullback for the 4th wave correction within the rally from October. This pattern suggests getting long for a big rally into June. But as I'll show with the other charts (and with the light red dashed line on the NDX chart), we might get just a bounce before continuing much lower into June. It will be the next bounce (assuming we'll get one) that will provide the clues as to what June might look like.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2700
- bearish below 2550

Even though SPX made a lower high on May 1st, whereas the DOW made a marginal new high, I'm counting the move up from April 10th as a rising wedge to a truncated high for the final wave of the rally from October. You can see the same potential a-b-c pullback pattern as shown for NDX and that's clearly a good possibility for SPX and some of the other indexes as well (not NYSE, which I'll show in a bit). But the break below the neckline on May 8th and subsequent back test failures last Thursday and Friday, followed by the break below horizontal support near 1337 is bearish. Because I'm seeing some potential reversal setups elsewhere (I'll review with their charts), it's possible today's gravestone doji is a reversal in the making. Otherwise look for a move down to the bottom of its up-channel from October, near 1304. The bearish wave count calls for a bounce up to its broken neckline and 50-dma before the end of this month and then hard down into June.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1390
- bearish below 1300

The 60-min chart below shows the descending wedge that has formed for the decline since last Friday's high. This is an ending pattern and the bullish divergence at the new lows supports the bullish interpretation of the pattern. But the bulls better take advantage of it quickly otherwise a drop out the bottom of the wedge would be more bearish.

S&P 500, SPX, 60-min chart

The DOW's M-top pattern has been confirmed with the break of the neckline near 12680, which failed to hold on a back test today. Once again, today's gravestone doji is a reversal candlestick pattern if it's followed by a white candle tomorrow. It has the same descending wedge pattern as SPX and therefore it's a good setup for a reversal. Calling all bulls. But the bearish price pattern calls for only a multi-day bounce to correct the leg down from May 1st before selling off harder into June. Bulls would obviously prefer to see the NDX pattern, calling for the new highs into June. BTW, the Democratic-presidential-election-year pattern also calls for a strong rally into June. I do not underestimate the potential for it. Not yet.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 13,100
- bearish below 12,570

Of the four indexes I usually cover, the RUT is the closest to violating the bullish wave count looking for a new high into June. An overlap of the October high is not allowed by EW rules (4th wave cannot overlap the end of the 1st wave) so that makes 769.46 VERY important for the bulls to defend. Break that level and the most I'll be looking for is a bounce before heading lower again. It could be a high bounce while one of the other indexes, such as NDX, makes a new high, as it did back in October 2007. Today's low at 771.97 doesn't leave much wiggle room here -- it must immediately rally tomorrow or else we'll have confirmation of the bearish wave count.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 812
- bearish below 770

Now for the bad news for the bulls. The one index that has been consistently weaker than the other broader averages is the NYSE. It failed to make a new high in April and then put in another lower high on May 1st. Similar to what was discussed with the RUT's chart, an a-b-c pullback from March, for a 4th wave correction within the move up from October, required the NYA to stay above its October high near 7864. But it broke below that level on April 10th (minor break and then bounced into May 1st high) and then broke it more significantly last week. This overlap of the October high negates the possibility for a 5th wave up for the rally from October. This index has been warning us of a deeper pullback at a minimum and now today's close below its 200-dma near 7615 is another alarm bell. It could have a quick recovery, like it did off the April 10th break of the October low, but it's another warning shot across the bow of the USS Bullship. On its chart I'm showing an idea for a relatively low bounce/consolidation before heading lower to complete a 5-wave move down from March.

NYSE Composite index, NYA, Daily chart

For a different look at bonds this week, the 20+ year Treasury ETF, TLT, is showing an interesting setup here. It has rallied in a 5-wave move up from its March 19th low and once a 5-wave rally is completed it will need to pull back and correct that rally before continuing higher. It is now overbought on a daily basis (not that it can't stay overbought) at the same time it's hitting its downtrend line from October. I expect that line to be broken but it's resistance until proven otherwise (with a break above and then at most a pullback to test it for support) and this is a good place to look for a multi-week pullback. Whether we will get that from here or not will soon become obvious and if it does pull back it will very likely be accompanied by a bounce in the stock market as allocation programs help the reversals in both.

20+ Year Treasury ETF, TLT, Daily chart

The first bearish sign for BKX this week was the break below 45.36, which is where the decline from March achieved two equal legs down (for a potential a-b-c pullback from March). It's also where the November 2009 - September 2010 neckline is located. That neckline was broken in August of last year, recovered in March (following a choppy consolidation around the line in February) and now has been broken again. This tilts the wave pattern toward the bears. The next level of support will be near 43.70 where price stalled in January and then found support in February and early March. Stronger support will be its 200-dma and uptrend line from October-November, near 41.85. If the lower level is achieved it will also be a break of its October high at 42.27, further confirming that THE high is in place. The bearish pattern would then suggest a consolidation/bounce off the 200-dma before breaking it and heading lower into June (similar to the pattern shown on the NYSE chart).

KBW Bank index, BKX, Daily chart

I had been expecting the dollar to consolidate in a large sideways pattern into June before it was ready for a bigger rally but this week's rally sort of blew that expectation out of the water. The first leg of its bounce off the February low looks more like a 3-wave move up into the March 15th high and therefore doesn't fit well for a 1st wave. And now the overnight high at 81.74 was only 4 cents above the projection for two equal legs up from February, making it look like the completion of an a-b-c bounce (right to the top of a parallel up-channel from February). That pattern suggests another leg down to match the January-February decline (essentially back down to the 78 area).

U.S. Dollar contract, DX, Daily chart

If the dollar's A-B-C bounce off the February low is correct, which calls for a decline from here back down to about 78, it's going to support the idea that the stock market is completing an A-B-C pullback from March/April and will now start another rally leg to a new high into June. Needless to say, this would frustrate a lot of stock market bears and needs to be seriously considered until we get some proof otherwise (a bounce in the stock market that corrects the decline from May 1st and then a break to a new low, and vice versa for the dollar). Could the short-term bearish pattern in the dollar predicting the ECB is about to announce a plan to save the banks, which would boost the euro, tank the dollar and boost the European and U.S. stock markets? News breaks after the pattern sets up so it's a possibility.

Following gold's decline there are now only about 10% of the traders who feel bullish about this safe haven (according to DSI). I was a lonely bear on gold not long ago but now it's starting to feel a little crowded in the room. Gold has nearly achieved its downside target at 1514.30, where it would have two equal legs down for an A-B-C decline from the end of February. It has also dropped back down to its broken August-November downtrend line and is oversold. It's possible that's all the pullback we're going to see for gold and a new rally leg will launch from here. I'm thinking gold has much lower to go but I can't argue with the inflationists is the ECB and Fed come out with yet another bailout plan. It won't last but as traders we have to trade what the market gives us. For now I'm looking for at least a bounce in gold.

Gold continuous contract, GC, Daily chart

Silver also achieved two equal legs down from its February 29th high, at 26.80 (today's low was 26.73. At its low it hit its uptrend line form October 2008. If it doesn't bounce here I'd be very surprised. What kind of bounce develops will then provide some clues as to what the next big move might be. But for now I'd be a buyer of silver too.

Silver continuous contract, SI, Daily chart

Oil's recent plunge has dropped it down to support near 92.70. A 50% retracement of its October-March rally is at 92.75. Horizontal price-level support is near 92.60. A slightly lower price projection to 90.46 could be achieved before it's ready for a bigger bounce but if the dollar reverses and the metals (and stock market) start a rally I think there's a good chance oil will follow along.

Oil continuous contract, CL, Daily chart

Tomorrow's economic reports include the usual employment claims numbers and then after the opening bell we'll get the Philly Fed and Leading Indicators. If the Philly Fed surprises to the upside, as the Empire index did on Tuesday, and if the market is in a better mood in the morning, maybe we'll see the market celebrate a good number. The market has been pretty much focused on news coming out of Europe so it's tough to say whether any local reports will have much of an impact.

Economic reports, summary and Key Trading Levels

We've got good setups for reversals and if the setups are good we should see immediate reversals Thursday morning. If the stock market rallies it should not give it back this time. We're due for at least a multi-day correction of the decline. The flip side is dangerous for the market since a breakdown from here will likely accelerate, as in a crash. We've got a bullish setup and when setups fail they tend to fail hard.

As shown on the NDX chart, and supported by the other charts, it remains possible for a strong rally into June that takes the indexes (except NYSE, as discussed) to new highs into June. Bears take heed since most technical analysts that I read are no longer looking for new highs for the market. Many are looking for a bounce but very few are looking for new market highs. I will admit to leaning bearish and will be looking at a bounce into next week (assuming we'll get one) as first a shorting opportunity (depending on how the bounce pattern plays out).

If a bounce gets started tomorrow I would look to buy pullbacks, using today's low as your stop (or Thursday morning's low if it's a quick one that's reversed). The setup is good for the long side but be careful of potential chop and whipsaw. Each day I'll be evaluating the form of the bounce to see if and when it will be time to short it.

Good luck with the rest of opex 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