The market has been hoping the Fed is close to another monetary easing program (QE3) but worried there won't be any more for now. Today the market found out no QE3 for now.

Market Stats

With a few Federal Reserve governors out recently talking about the need for further monetary easing there were many market participants hoping the FOMC minutes, released today at 2:00 PM, would show the Fed seriously considering it and perhaps getting ready to implement it. But the Fed disappointed those who were holding out hope and the market sold off following the release of the minutes. But now that that's behind us we can worry about more mundane things like earnings.

The FOMC minutes showed there were a few members that wanted to see some further monetary easing now rather than later but there were no definitive signs in the minutes that would lead one to believe that another QE program is right around the corner. There were the usual hints that the Fed, yawn, stands ready to provide further stimulation when it's needed. Yea, right, whatever. What the market feared came true and it sold on the news. I liked the way Todd Harrison at Minyanville summed it up:

"Investors are conditioned to expect central banks to toss good money after bad at the overcapacity in debt, leverage, housing, and labor. It will work until it doesn't with all roads leading to debt deflation. This may sound familiar: it's very much a continuation of themes long discussed in Minyanville. Alas, those conditions are cumulative; there isn't an instance in history when a problem was solved by accelerating the actions that caused the problem in the first place."

I've often cited the fact that history shows us a perfect record in this regard -- never once has a country inflated its way out of debt. Not one time. But I guess Bernanke & Co. believe it's different this time and that they know better. Arrogance with a capital 'A'.

So the market sold off after the disappointing FOMC minutes but the selling wasn't intense and we even got a bounce back up into the close. The market finished down but it had been down all day (NYA finished in the green and SPX finished flat). The techs bore the brunt of most of the selling today as various tech indexes were weak.

As you can see by the numbers in the table above, market breadth was very neutral. It's possible the market is washed out on a short-term basis.

Even though I can't think of a reason why the stock market should rally, as I'll show in tonight's charts, there remains a good chance we'll see one into the end of this month. While that doesn't make sense for a lot of reasons (no monetary easing, poor earnings, slowing global economy, European debt issues...shall I continue?), the price pattern supports the possibility. But the bounce that started off this afternoon's low must see some follow through to the upside on Thursday otherwise the bulls could be in a precarious predicament.

In addition to the economy, poor earnings, European debt problems, etc., there's another thing that's a negative for the stock market and that's the weakness in commodity prices. It's common for commodity moves to forecast the coming move in the stock market since they react to more fundamental issues than the stock market (which is much more emotionally driven, especially hope and fear). When we compare the charts of the stock market (SPX) and the commodity index (I'm using the DJ UBS Commodity Total Return index, the closest thing I could find to the CRB index on where I can do the kind of comparison shown below), you can see the tight correlation between the two, most of the time. When they diverge it's a warning of an impending change, usually in the stock market.

S&P 500 vs. DJ UBS Commodity Total Return index, Daily chart

There was a small divergence between the two indexes back at the April 2010 high, which was followed by a swift decline into July (remember May's flash crash?) and then they got back in synch with another climb into 2011. Since late 2011 the two indexes have been diverging and remain wide apart. Either commodity prices are going to rally or stock prices are going to decline. Care to guess which is the likely scenario? Note that commodities have been in a consistent downtrend since the May 2011 high while SPX pushed to a new high in 2012. That's what you call a rally on hopium and drug (Fed) money. The drug withdrawal is likely to be painful. The rally spike this past month has a lot to do with agricultural products that are being hurt by the hot dry conditions in the middle section of the country. Corn alone is up about +40% in the past month.

Looking at the CRB index, which looks slightly different from the DJAIGT index above, there is price-level resistance near 293, which is where it's currently banging its head. If both stocks and commodities rally a little higher this month I'll be watching resistance for the CRB near 307 (downtrend line from April and its 50-week MA).

CRB index, Daily chart

The bounce off the June 4th low for the stock market might have finished last week but at the moment I see the potential for another rally leg up to the SPX 1400 area, shown on its weekly chart below. There's even a chance there will be a new high in our future, potentially up to the 1450 area in August but at the moment I'm thinking there's potential only for a higher bounce from here but only to a lower high than April's and then tumble lower into the end of the year. From a weekly perspective, below 1290 would be trouble for the market and below 1266 would confirm last week's high was the completion of the bounce off the October 2011 low.

S&P 500, SPX, Weekly chart

Zooming in on the move down and back up since the April high, we've got a 5-wave move down from April followed by a 3-wave (or something more corrective and complex) bounce off the June 4th low. The bounce is clearly an overlapping pattern and that makes it a corrective pattern. The 5-wave move down means we'll get at least another leg down to equal (and probably exceed) the size of the April-June decline. The one thing that's not clear yet is whether or not the bounce pattern off the June low will get one more leg up to complete the correction. As long as SPX holds above 1335 I'm leaning toward one more rally into the end of the month, with an upside target near 1400. The 1335 level is where it has its uptrend line from June 4th, its 50-dma and price-level support from previous highs and lows. Above 1362 would confirm the likelihood of a higher bounce but below 1335 would turn 1335 support into resistance.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1362
- bearish below 1335

The rally off the June 4th low is shown on the chart below and the multitude of 3-wave moves and overlapping highs and lows is what makes the bounce a correction to the April-June decline rather than something more bullish. If it were to press to a new high above April's it would be considered an ending pattern inside a rising wedge, which will show all kinds of bearish divergence. But so far the bulls passed the first test by defending 1335 and above 1352 would be the first sign the bulls are going to push us higher (which would leave this afternoon's post-FOMC-minutes selloff a bear trap, in which case look for a gap up on Thursday). We'll find out quickly from here which way the market will likely head for the rest of this month.

S&P 500, SPX, 60-min chart

The DOW looks a little more bearish at the moment because it has now broken both its 50-dma, near 12655, and its uptrend line from June 4th, near 12630. In fact it broke its uptrend line this afternoon and then bounced back up to it into the close but then pulled back from it. If it leaves a bearish kiss goodbye tomorrow morning with a further decline it's going to look bad for the bulls. A break below its June 29th low near 12450 and its 200-dma near 12443 would be a notch on the bear's gun.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,830
- bearish below 12,450

NDX has a shallower uptrend line from June 4th and hasn't tested it, which will be near 2539 Thursday morning. It has marginally broken both its 20- and 50-dma's, near 2585 and 2576, resp. The bulls need a quick recovery Thursday and they can't let its uptrend line break. If the bears drive the market lower and NDX drops below 2539 look for support near 2510. Slightly lower will be its 200-dma, near 2490. Below all that support would obviously mean trouble for the bulls.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2630
- bearish below 2536 and more bearish below 2510

AAPL will continue to be a good stock to watch for clues as to what the market sentiment is. This is a risk-on, risk-off stock and where it goes NDX is sure to follow (and the broader market). While I feel there's a good chance for the broader market to rally into the end of the month, I do not get the same impression from AAPL and that's worrying me. It has a nice a-b-c bounce off its May 18th low and achieved two equal legs up at 618.45 yesterday. (There's a higher target at 625.45 if I use the June 11th high as the end of wave-a instead of the May 31st high, which is what I'm currently using). At the same time it hit the top of a parallel up-channel for the bounce off the May 18th low so there's a good possibility AAPL is finished bouncing. Watch this one closely.

Apple Inc, AAPL, Daily chart

The RUT's strong rally last week has given it a little more room to drop before its pattern turns bearish. The 20-dma near 785 and the bottom of a parallel up-channel near 784 should provide support if it drops a little lower on Thursday. And then there's the 50-dma and uptrend line from June 4th, both near 777, that would be the next potential support level. Below 788 would be trouble and below 775 would be much more bearish. If it rallies from here I'll be looking for an upside target at least to 830.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 811
- bearish below 788

Looking at one more major index, the Total Market index shows a clean corrective count for the bounce off the June 4th low and two price projections practically on top of each other. For the double zigzag wave count, which as a reminder consists of two a-b-c's separated by an x-wave, the two a-b-c's would equal each other at 14644 and the 2nd a-b-c (the move up from June 25th) would have two equal legs up at 14653. The bounce off the June 4th low is a 2nd wave correction to the 1st wave down (April-June) and an 88.6% retracement of the decline is at 14707 so we've got an upside target zone of roughly 14650-14700. Note that the smaller 2nd wave correction in the move down from April also retraced 88.6% of the initial decline so the larger-degree 2nd wave could end up being a fractal of the first bounce. But the bullish case would be in danger if it drops below today's low and it would be busted with a decline below 13687.

DJ Total Market index, DWC, Daily chart

Relating to Treasury yields, I received a question earlier in the week: "Keene, one of the analyst talking head types on CNBC vacationing in Europe last week said the people there firmly believe the Eurozone will collapse by end of year and he thinks there will be a rush of money to US treasuries driving the 10 year yield below 1.0% from its current 1.5-1.6% range. What do you think and will that drive mortgages even lower if it happens? Keep up the good work. Wayne"

I've been showing the potential for just a minor new low for TNX, perhaps 1.36%, to complete a 5-wave move down from March, which could then set up the start of a larger rally in yields (selling in bonds). So that potential will be watched carefully as TNX heads back down (it's been down 6 out of the last 6 sessions although it actually recovered today to breakeven).

But I too have been wondering about the possibility for sub-1% and I clearly see that potential on the monthly chart, especially if scared money runs into Treasuries if the global stock markets take a big hit. As deflationary worries take front and center we could see bond yields collapse with stock prices. The bottom of a long-term parallel down-channel (from the last high in 1994) and the bottom of a descending wedge from 2010 intersect just below 1% in September/October, the typical time to find a bottom in the stock market (for at least a bounce back up to correct the longer-term decline).

10-year Yield, TNX, Monthly chart

Two equal legs down from 2007 for TNX, for the final a-b-c decline from 1994, would complete a triple zigzag wave count. The final c-wave, which is the move down from 2010, is looking like a typical ending diagonal (descending wedge) and a throw-under finish from panic buying in bonds could see TNX spike down to that 0.735% projection. If the 10- and 30-years yields continue to drop lower then yes, so too will mortgage rates. I've been renting since I sold my last house in 2002 and I'm waiting until I can lock in 2% before I buy a house. ;-)

The dollar has pushed marginally above its June 1st high and could continue rallying at least up to its trend line along the highs from last October and January, currently near 85. But the larger pattern and bearish divergence have me thinking we might see the dollar chop sideways in a large sideways triangle pattern into August before it will be ready for its next rally leg. It's just an idea for now but a turn back down from here would support the idea.

U.S. Dollar contract, DX, Daily chart

Gold has been chopping up and down for about two months now and it's hard to say who's going to win the tug of war here. I think gold will head lower and stay inside its two down-channels shown on its weekly chart below. It means gold should start selling off from here. Back above last week's high at 1610.60 would likely mean a trip up to its 50-week MA and downtrend line from August 2011, near 1685 in August. If the bearish wave count and channels are correct we should see gold down below 1400 by September.

Gold continuous contract, GC, Weekly chart

Since mid-June I thought we'd see a new low for oil and then a bounce into July/August to retrace some portion of the decline from March. So far that has played out and now I'm wondering if it will be a quick a-b-c bounce or a little more drawn out. I'm showing the possibility (dashed line) for a quick bounce up to its 200-dma, 62% retracement and a price projection for two equal legs up from June, all in the 96 area. But a further pullback first could set it up for a lower bounce to the 93 area in August before it will be ready to sell off. I suspect oil will trade similarly to stocks.

Oil continuous contract, CL, Daily chart

Thursday will be relatively quiet as far as economic reports go. There are no major reports expected from overseas either. So the market will be left on its own, possibly reacting to some more earnings reports but they've been largely ignored as well. If most of the bad news has been priced in we could see a rally despite any bad earnings reports. As always, it's not the news itself but instead the reaction to the news that counts.

Economic reports, summary and Key Trading Levels

Heading into the end of the day I thought we had a good setup for a market rally and had recommended being long into tomorrow. We'll find out quickly whether or not that was a good or bad call. At least risk is tight -- any new lows below Wednesday's could be trouble and I would not want to hang around long if that happens.

Everything says the market should sell off from here so if it doesn't then it's talking to us. The price pattern says there's a good chance for a rally in spite of the bad news all around. Again, it's what price does that matters to us, not what news is being reported. If the market continues to sell off from here you'll want to be short but keep your stop relatively close until it drops enough to give yourself some breathing room. If the market rallies and gives us a 5-wave move up from this afternoon's low I'll be looking at a pullback as another buying opportunity. The market is at an important level and we'll know very soon what the rest of the month will probably look like.

The next day or two tend to be a little more volatile as we head for the start of opex week next week. Keep that in mind since there could be a few head-fake moves directly ahead.

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