Following last Friday's high we've seen just a slow pullback that's holding uptrend support so the bulls are holding hands (hoofs) and not letting the bears through yet.

Market Stats

The DOW closed at 13593 last week and 13578 today. The high and low for the week so far are 13626 (today) and 13517 (Monday). That's a little more than 100 points in 3 days of trading and closing within 15 points of Friday's close. Need I say more?

At least the bulls are doing what they need to do in order to keep the bears away. Uptrend lines/channels are holding (although there's a hint of trouble into today's close) and there remains good potential for more highs. We've got visible support levels that will tell us when the bull's grip may be slipping but in the meantime we remain in a just-buy-the-dip market.

There was very little in the way of economic reports today, not that it matters since the market is essentially ignoring them all anyway. The Fed has blessed the market with more money (lots of it) and after the Thursday/Friday rally it appears to now be fully priced in. Since Friday we've seen a very slow pullback as some minor profit takes place but nothing bearish yet. As long as the steepest up-channels, for the rally from September 4th, continue to hold it keeps the bulls in charge (but the RUT first and now the other indexes are hinting of trouble).

The mood of the market is clearly bullish and it's why economic reports, which are pointing to a global economic slowdown, and other geopolitical news are not having an impact. That's bullish -- it's not the news that matters, it's the reaction to the news and as long as that continues we have to look at the market as bullish. There are plenty of technical indicators to tell us the market could (and should) be topping but when we have massive intervention with more money we have to remain cognizant of these technical indicators getting "stretched" before they matter.

This morning's economic reports, largely ignored again, were housing related. Housing starts for August were marginally better than July's but less than expected. Building permits were a little better than expected but lower than July's. And existing home sales (not closes) were stronger than July's and better than expected. Now if the people buying can all get mortgages that would be a good thing. I wonder how many home sales are repeats (where the previous sale fell through). Interestingly, home builders' stocks have been strong this year, breaking up out of a 4-year base. I'm thinking it's one big A-B-C bounce off the 2008 low but for now it's been a strong rally. A strong recovery in the housing market should be good for our economy (Buzz is certainly hoping that will be the case).

While the housing market has been improving, even if it's just for this year, we're not seeing it spill over into the economy. The manufacturing indexes and durable goods orders have not been improving; in fact they've been getting worse. So there's a disconnect at the moment between the improvement in housing and the rest of the economy and either the rest of the economy is going to improve or housing is going to turn back down. Based on the longer-term price pattern off the 2008 low I believe the home builders might be able to hold up through the rest of this year but will turn back down in 2013, potentially to new lows below the 2008 lows.

The market didn't pay much attention to it but last night the Bank of Japan (BOJ) announced an increase in their monetary stimulus program (I've lost track of how many times they've done this over the past 20+ years). They're attempting to keep up with the U.S. and Europe with their monetary easing programs. By devaluing the dollar and euro it makes the yen more valuable, making it more difficult (expensive) for Japan to export its products, which Japan is dependent on. They need to devalue the yen in order to keep up with the Jones' of the world as we all race to the bottom in devaluing currencies. This race to devalue one's own currency to remain competitive is going to end in tears for everyone but where and when the end game will be is anyone's guess.

On the subject of Japan and their never-ending monetary stimulus program, it's important to remember it's not the same for the U.S. or Europe. Many see what Japan has accomplished with the continuous monetary easing programs and believe we all can do the same thing. It hurts productivity and it will come to a bad ending at some point but for now let's party! The big difference is that Japan has been able to borrow its citizens' savings to keep the lights on. They've been able to do this by borrowing this supply of funds at very low interest rates. But what happens when they're forced to go outside to borrow?

As we're seeing with the PIIGS countries in Europe, when borrowing becomes excessive and bond holders worry about getting paid back they'll demand higher yields on their money to compensate for the risk. The higher interest rates are killing the countries having to borrow so much and that's why the ECB is stepping in and hoping to drive yields back down so that the countries can buy (literally and figuratively) more time to get their financial houses in order. It remains to be seen whether or not those countries needing to borrow from the ECB can live with the stringent borrowing conditions.

The demographics in Japan, as in most of the developed countries, are not favorable for additional savings from the citizens. Their population is aging and couples are not having enough children to replace themselves. As their aging population retires they switch from net savers to net consumers of savings. The Japanese government faces higher costs to care for their aging population and will have less domestically produced money to borrow. This will force them to go outside to borrow and that will be the beginning of the end game for them, starting possibly as early as 2013.

Once interest rates double, triple, quadruple and quintuple for Japan's borrowing they will not be able to create enough money (monetary stimulus) without sparking hyper inflation. And we all know how that goes. NO country in history has ever inflated their way out of debt. None. It's a perfect record. The only way out of excessive debt is to pay it down or write it off (default). Japan has led the way in QE (following their real estate bubble/crash in the late 1980s/early 1990s) and they will be the first to lead the way into bankruptcy (unless the PIIGS go first but Japan has a much larger economy and it will be a significant wake-up call for the U.S. and Europe).

When Japan started experiencing their financial crisis in the early 1990s we (the U.S.) urged them to let banks fail and not to support irresponsible financial behavior. It only sucks the private economy dry of investment capital and doesn't fix the underlying problem (bad debts). Japan chose to ignore that advice, deciding instead the political costs (from a recession/depression) would be too heavy. Politicians are people and they like their cushy jobs and do what they can (spend other people's money) to hold onto their jobs.

Now the U.S. and Europe are doing exactly the opposite of what we advised Japan to do and instead we are following Japan's path toward currency debasement and a slowing economy (for exactly the same political reasons). But we will likely accelerate the path Japan has taken because we've never had the high savings rate, trade surplus or government surplus that Japan had. We've started in the hole and will reach the bottom a lot faster than it has taken Japan.

Japan's stock market remains almost 77% below its peak hit on December 29, 1989, at 38957, and has been dropping back down toward its 2003 and 2009 lows (7055 in 2009). Following its 2007 high is dropped sharply into the 2009 low and has been trading sideways since then (bear flag pattern). The pattern points lower which means even after 22 years it still hasn't found a bottom.

Nikkei 225 index, 1970-present

Looking at the Nikkei 225 index for the past year, the chart below shows the peak in late March, the impulsive decline into the June 4th low followed by an overlapping corrective bounce. An impulsive decline followed by a corrective bounce will be followed by another impulsive decline. The question here is how high the bounce might get before turning back down. It has retraced 50% of the March-June decline but could make it a little higher to the top of a rising wedge pattern, and maybe up to its 62% retracement at 9400 (currently trading near 9200). It's not bearish until it breaks below the September 4th low near 8600 but keep in mind that the bounce pattern is not bullish (yet). The only way to negate this bearish pattern is for the Nikkei to rally strongly from here and get above 9400 and not look back.

Nikkei 225 index, Daily chart

I'm going to start off the review of the rest of the charts with a look at the big index, the Total Stock Market index (which used to be the Wilshire 5000) since it should be a good reflection of THE stock market. Looking at a weekly chart, squeezed so we can see the rally off the March 2009 low, at first glance it's clearly bullish as price is well contained in a parallel up-channel. There's even another parallel up-channel for the rally off the October 2011 low and between the two channels, the tops of which cross near 17500 in January 2013, there's a lot more upside potential. With a lot of newly created money from all the central banks of the world, this upside potential must be respected by bears, whether or not you believe the market belongs up there. Excess liquidity may be looking for a home and as long as investors aren't worried about the risk they'll continue to pour into the stock markets.

Total Stock Market index, DWC, Weekly chart

While the up-channels keep DWC looking bullish there are a couple of reasons why I remain longer-term bearish the market and think that we could be very close to a final high, if not already there. First is the pattern of the bounce off the March 2009 low -- with the overlapping highs and lows it's a corrective pattern (not impulsive, which sets the trend), which is labeled as a triple zigzag wave count (W-X-Y-X-Z). It is a correction to the previous decline (2007-2009) and will therefore be retraced. Second, there are some Fibonacci price relationships between the moves up and DWC is approaching a potentially important one. I have three different price projections to show the wave relationships and the first is between the two rally legs into the April 2010 and February 2011 highs, with the 2nd leg being 62% of the 1st. Then the 3rd leg up (starting from October 2011 into the April 2012 high) is equal to the 2nd leg. The 4th leg up (from June 4th) would be 62% of the 3rd at 15516 and the high so far (last Friday) is 15391. If this upper level is tagged in the next week (or into the end of the month) and then rolls over it would be potentially bearish. If 15516 is exceeded then we could be looking for a higher rally to the next price projection at 16945 or the 17500 area.

The daily chart of DWC is shown below and focuses on the price action since the April high. There's another Fibonacci level here that could be important -- the 127% extension of a previous move is often a reversal level. In this case the 127% extension of the April-June decline is at 15360, which was slightly exceeded last Friday (with a high at 15391). This is also the area where it hit the tops of three parallel up-channels for the rally from June, the steepest being for the leg up from September 4th. The risk for bulls is that the top might already be in place and the slow pullback is lulling them into a false sense of security. But it takes a drop below 14900 before the bearish case can be confirmed.

Total Stock Market index, DWC, Daily chart

SPX looks like a carbon copy (remember those -- the pieces of paper that were used to transfer a copy of what you wrote to the page underneath) of DWC. The only thing added is the price projection at 1459 where the 5th wave of the move up from July 24th is equal to the 1st wave, which is where price is now trying to hold as support.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1475
- bearish below 1429

As mentioned at the beginning of this report, a little bit of selling into the close looked potentially ominous for tomorrow. SPX was holding its uptrend line from September 5th on repeated tests yesterday and today but broke it into the close (the line is near 1464 at today's close). If we get further selling tomorrow and SPX drops below Tuesday's low near 1456 I'll be looking first for potential support at a downside projection at 1446.77, which is where the pullback from Friday would have two equal legs down (for a possible a-b-c pullback before pressing higher again). It takes a drop below 1439 to gives us the first signal that we've probably seen the top of the rally.

S&P 500, SPX, 60-min chart

Different index, same picture as DWC and SPX. For the DOW though, notice that it's finding support at the broken trend line along the highs from May 2011, currently near 13540. Like SPX, the DOW broke its uptrend line from September 5th into the close today so a quick recovery tomorrow would leave just a head-fake break (bear trap) while a continuation lower would first target 13491 (two equal legs down from Friday) and then possibly 13400. Below 13325 would spell trouble for the bulls, although the uptrend channels will need to be respected by the bears.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 13,653
- bearish below 13,325

NDX has a different pattern than the blue chips and DWC. Ideally I'd like to see it hold its uptrend line from July 24th, near 2840, and give us one more high, possibly up to about 2900. That would complete a 5-wave move up from September 4th which would in turn complete a 5-wave move up from July 12th and that would complete the A-B-C bounce off the June 4th low. The target zone of 2873-2891 is still a good one and today's high at 2871 put it a little shy of it. It remains bullish until 2775 is broken.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2891
- bearish below 2775

At Friday's high at 868.50 the RUT tagged a price projection at 867.83 for two equal legs up from June 4th, which works out well to complete two a-b-c's up from June (double zigzag). But if the bulls aren't quite finished, but close, another minor new high to about 874 would have the RUT tagging its trend line along the highs from July 2007 across its May 2011 high. Above that level would be a bullish breakout (if it holds above).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 869
- bearish below 839

With the Fed declaring war on bond yields it was interesting to note how yields spiked up following last Thursday's QE3 announcement. There were probably a couple of factors in play: one, the promise to buy $40B in mortgage-backed securities (MBS) meant less Fed money for buying Treasuries (less demand so price goes down, yields go up); and two, the prospect for QE3 to infinity and beyond (Bernanke should now be called Buzz Lightyear) means higher inflation, which is when bond holders demand higher yields to compensate for higher inflation. I consider the bond market a whole lot smarter than the stock market and what bonds do from here will tell us plenty about how well the Fed is succeeding.

Since last week's update on the 10-year yield (TNX), it rallied on Thursday and Friday above the August high, closed above its 200-dma on Friday but then dropped back down below it this week, leaving a bearish divergence at the new high. It might push to a minor new high, near 1.95%, but at this point it's not looking more bullish than that.

Last week's rally in yields had the 30-year (TYX) peaking at 2.984% but it too has come back down and today TYX is trading near where it was before Buzz announced his new program, near 2.97%. Today TYX closed Thursday's gap up (as did TNX) so it will be important what happens from here.

On a longer time frame, Friday's high for TYX tagged the mid line of the long-term down-channel from 1994. Bullishly it has climbed above its 50-week MA, which had stopped the rally attempt in March, currently at 2.977%. If it manages to hold this MA on a back test and pushes higher it will be bullish (although I'd want to see it above 3.2% to get me more bullish on yields). The bounce off the July low is a 3-wave correction so far and a drop below 2.66% would tell us to expect new lows for yields.

30-year Yield, TYX, Weekly chart

The daily chart below shows a downtrend line from June 30, 2011, which was broken last Thursday (it broke above its 200-dma at the same time so it was doubly bullish). If TYX is to remain bullish the pullback should find support at its broken downtrend line and 200-dma, at 2.93%-2.94%. Today's low was 2.953%. As can clearly be seen, the bounce off the July low is a 3-wave move and the a-b-c bounce should lead to lower lows if the larger pattern, calling for a low near 1.6% early next year, is correct. Certainly Buzz would like to see rates that low -- loans of all types would be cheaper, the government will be able to lock in super low rates on its massive debt and investors will be chased out of bonds into other higher-risk assets, such as the stock market (that's the theory anyway). But if TYX rallies above 3.2% it will be a sign that the Fed is losing control of inflation and that would be a scary development (because I don't think the Fed really cares about inflation and certainly won't be able to stop it even if they did care -- remember, inflation wipes out debts over time).

30-year Yield, TYX, Daily chart

One look at the TRAN and it's obvious there's a real battle going on and it's been going on for the past year. It made a high of 5067 in October 2011 and here we are today, within 36 points of that level at 5103. Other than the one-day break of the bottom of its triangle on September 5th, which was more than recovered the next day, the boundaries are being respected by traders, including today when it bounced off the uptrend line from June 4th. Play the break, whichever way it goes, but watch the head-fake breaks.

Transportation Index, TRAN, Daily chart

The U.S. dollar has been in an even larger sideways triangle than the TRAN. Since the low in 2008 it has been whipping up and down and traders are as unsure about the dollar as they are about anything. A normally dull currency market has been anything but. The dollar has been in an up-channel since its May 2011 low and depending on where the bottom of the channel is drawn from (the August or October 2011 low) it has pulled back to the bottom of the channel. At the same time it has pulled back to a broken downtrend line from June 2010 through its January 2012 high. If the dollar is to remain bullish it should start to find its bullish legs again and start rallying from here or from only slightly lower. Below 78 will turn the dollar more bearish, which would be an indication that the Fed is getting overly aggressive with its dollar debasement program, which in turn will drive inflation higher.

U.S. Dollar contract, DX, Weekly chart

Gold bugs believe the dollar is heading for the basement and have been buying in anticipation of much higher prices (above 2000). But first we'll need to see if the dollar bounces off support and if gold pulls back from resistance. Gold's broken uptrend line from October 2008, which I've been showing for the past couple of weeks, and the 62% retracement of its 2011 decline (at 1771), is where gold has currently stalled. It takes an impulsive decline from here, as with the stock market, to indicate gold is going to leave a bearish kiss goodbye following the back test, so it's too early to tell which way it will go from here. But the bearish setup is here so if you're long gold, tighten your stops if you're a trader (vs. longer-term buy and holder).

Gold continuous contract, GC, Weekly chart

Oil has lost a bunch of points in the past 3 days. Its weekly chart is showing a strong weekly reversal (bearish engulfing candlestick, engulfing the past 5 weeks and working on retracing the 6th week). Last week's update showed the potential for the bounce to reach 101-102 but Friday's 100.42 was the best it could do. I am counting the June-September rally as a correction to the March-June decline and then head lower again and that's what I'm depicting on its chart. Oil and the stock market trade more in synch than not and therefore oil's decline is a bearish heads up for the stock market.

Oil continuous contract, CL, Weekly chart

With oil's dramatic reversal I've been watching the broader commodities complex and as shown with the CRB index, commodities have taken a serious hit this week. And this is without the dollar rallying. If the dollar bounces off support and starts to rally it could put commodities in the hurt locker. This may be in fact a heads up that inflation worries are overblown and that the Fed in fact won't be able to accomplish what they hope to. Keep in mind that the money supply can only expand through bank lending (the fractional reserve system). If money supply continues to shrink, it will increase the value of the dollar and that will drive the prices of commodities lower. The stock market would be sure to follow. It's an interesting development here and clearly deserves careful monitoring over the next week or two to see if this week is a one-week divergence or the start of new trend. At the moment CRB has dropped to price-level support near 308 so we'll have to watch to see if that's a strong support level or not.

Commodities index, CRB, Daily chart

Reports that we'll get overnight, which could affect the market's open, are the Chinese manufacturing index, European PMI data and Spain's bond sales. Last month's China's manufacturing index dropped solidly into contraction territory with the drop from 49.3 to 47.8. The Shanghai index is already flirting with the 2009 low and a further drop could spook our markets. Europe is sliding into a recession so disappointing PMI numbers could cause additional worries (or not, since the ECB is there to rescue everyone from everything). Spain will try to sell more 10-year bonds early in the morning and last month's auction saw weak demand, causing the yield to rise above 7%. That prompted the ECB's bailout plan so we'll see what happens tomorrow. Then our Philly Fed manufacturing data will be released at 10:00, along with the Leading Indicators, and the number is expected to improve slightly but remain in contraction territory. How long the stock market can continue to ignore bad economic data is anyone's guess.

Economic reports and Summary

Finally, from a sentiment perspective there's reason to be cautious about the market's bullish prospects. We all know the market is overbought and overloved right now, but we also know that can continue for a long time. The spread between bulls and bears has widened again to the point (30 percentage points) where the excessive bullish sentiment has gotten bulls into trouble. Another measure of bullish sentiment is the number of calls purchased vs. the number of puts, which is measured by the ISEE. The chart below shows the peaks in the call/put ratio on September 7th, 13th and 14th. Whenever this index gets above 150 it's a time for caution (too much bullishness) and the close on Friday, at 205 (which was the low for the day), showed an excess of bullish enthusiasm even greater than at the March high (the RUT peaked the day following the ISEE peak on March 26th and the rest of the indexes peaked 5 days later. It doesn't mean the rally is toast right here right now (although that's possible) but it does mean bulls need to at least be cautious. Bears still need to be patient.

ISEE index, Daily chart

Keep in mind that we could see a strong effort to keep the market up until the end of the month/quarter as fund managers work to improve their score. But the flip side of that is we could see selling pick up significantly if fund managers start to believe the market is not going to hold up and they go for protection (selling) rather than hoping for more upside. Holding up into the end of the month is not a given.

Use the key levels to help guide your trading and good luck during the rest of opex and let's hope we start to see at least a little more excitement in the market and get something tradable. I'll be back with you next Wednesday and we'll see what the charts are telling us then.

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