While there are plenty of warnings about a potential top forming in the stock market, the bulls have done nothing wrong and maintain control of the tape. Following AAPL's earnings, that might change.

Market Stats

IBM gapped up this morning and gave the DOW a kick start to new highs. NDX was able to break through resistance near 2750 by gapping over it, thanks to GOOG's strong response to earnings. But other sectors, including the banks, pulled SPX and the RUT down in the morning. But in a very familiar pattern now, the dip was another good buying opportunity and all but the RUT closed in the green.

While there are plenty of warning signs about danger ahead, the market continues to perform well. The dips continue to be bought and there are no signs yet that the bulls are finished (weakening maybe, but not finished). The trend is clearly up and that's the direction traders should be looking. The only caution here is that the move up is extended and weakening while the VIX is down in the mud, which has not been a good setup for longer-term investing. This market can be traded higher but if you're looking for a good investment I suspect you'll get a better buying opportunity than what you'll find right here. If AAPL trades lower tomorrow then we might get the start of a larger pullback correction in the broader market.

No economic reports of significance were reported today and the day started off relatively calm. There was a little selloff in the morning but after the first hour the buyers came back in and started buying, conditioned to the idea that that's what works. The DOW and SPX were pushed to their highs in the afternoon while NDX chopped sideways, leaving a star doji for the day (dangerous in light of it possibly becoming an evening star if it gaps down tomorrow), and the RUT dropped into the close after a failed rally attempt in the afternoon. It was a mildly bullish day but it was also a continuation of a fractured market and that's always a worrisome sign.

The market was essentially on hold in front of AAPL's earnings after the bell and there wasn't much in the way of news to move the market. Thankfully it has become quiet on the political front (enjoy it while it lasts). So we'll just jump right into tonight's charts to see what's up (or down).

It's always a good idea to now and then step back and look at the big picture to see what might be happening, which I did with the DOW's charts last week, to show the long-term uptrend line starting from the 1971-1972 highs. Starting tonight's chart review with a monthly view of SPX, you can see a similar uptrend line that's currently in play. The uptrend line from 1994 through the 2002 low (and the higher low in March 2003) was broken in 2008 and has been back tested several times since April-May 2011. The most recent back tests were the September-October 2012 highs and the line is currently near 1502. SPX is also up against the top of its parallel down-channel, defined by the trend line along the lows from 2002-2009 and attaching a parallel line to the 2007 high. From a monthly perspective now is not a good time to be initiating any new long plays (unless you can watch during the day). Note the deteriorating rate-of-change (ROC) indicator since the April 2010 high -- this is the slowing momentum that should not be present if we were in the middle of a new bull run. But it does fit as a cyclical bull within a secular bear and a reason to be thinking "trading," not "investing."

S&P 500, SPX, Monthly chart

As I had pointed out last week, the pattern from the 2000 high is very similar to the pattern the market saw in the last bear market (1966-1982), which calls for another leg down and if it's like the leg down in 1973-1974 it's going to be the strongest decline of the secular bear. A trend line along the lows since 2002 points to a drop to below 600 and if the Fibonacci relationship between the declines continues to hold then the next decline will be down to about 550. If that sounds scary, keep in mind that it's very common for parabolic rallies to be completely retraced and that would mean back down to the 1994 low near 440. That's not a prediction but it does speak to the risk of getting too complacent about holding through the next "pullback."

The weekly chart below shows a closer view of how close price is to the uptrend line from 1994-2002 (1502) and the top of its parallel down-channel from 2007 (1490). The uptrend line from March 2009 drawn through the August 2011 low (arguably the better low to use rather than the October 2011 low) is where SPX has been pushing up against since January 2nd and is currently slightly above it at 1488. A trend line along the highs from April-October (using the October high to match the DOW) is at 1499. That's a lot of trendline resistance around 1500 and along with the century-level resistance it could be a tough nut for the bulls to crack. Maybe first a pullback to gather some strength (shake out the weak holders, pull in some shorts and leave some buying power available).

S&P 500, SPX, Weekly chart

Today's candle is a small spinning top doji, which could fit as part of a reversal pattern but only if it's followed by a red candle on Thursday. The fact that the little doji is at some potentially strong trend lines makes it a little more of a bearish setup. Today's close was at the top of its parallel up-channel from November, near 1495, and that adds one more reason why it could be tough to make much further progress. The market is overbought on all time frames so the next pullback correction will likely be stronger than most are expecting. Note the bearish divergence on the weekly MACD above, starting from the April 2012 high, which further confirms the bearish divergence on the monthly chart.

The price projections shown on the chart below are additional price levels to watch. For the move up from December 31st the 2nd leg is 62% of the 1st leg at 1494.79, which was achieved with today's high at 1496.13. If there's a throw-over above the trend lines I'd watch 1502.76, which is where it would have two equal legs up from November. That's close to the 127% extension of the previous decline (October-November), at 1505.67. Based on all this (trend lines and Fibs), I think the 1494-1503 area is going to be a brick wall that even the strongest bulls are not going to be able to blow down (but it would obviously be bullish if they can do it). Today's high hit the lower end of the brick wall so we could find out tomorrow whether or not there's more that the bulls can give.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1490
- bearish below 1463

The 60-min chart below shows the rally from December 31st. I'm looking at it as a 3-wave move (as part of the larger corrective move up from November). The Fib relationship mentioned above, with the 2nd leg of the rally (from January 8th) being 62% of the 1st leg up, is potentially important here. The 2nd leg completed a 5-wave move up at today's high and based on that I made a projection that we'd probably see a selloff on Thursday, prompted by a disappointing reaction to AAPL's earnings. AAPL spiked up and down following its earnings but it has obviously disappointed traders since it is trading much lower in the after-hours session.

S&P 500, SPX, 60-min chart

If SPX drops below 1481 it would be a break below its shallow parallel up-channel from January 8th, which would indicate the 5-wave move did in fact complete at Wednesday's high. It would be more bearish below the January 4th high near 1468 since it would leave a 3-wave move up from December 31st and confirm the high is in place. Further proof of a high would be an impulsive move down but if it pulls back correctively I'll be looking for another new high, especially if the pullback holds above 1481.

While talking about AAPL, which is going to be one of the big drivers on Thursday, its daily chart left me flipping a coin into the close. It's the SPX pattern above that had me commenting during the day that it was looking like AAPL will disappoint and sell off. We'll obviously know more after tomorrow's open but at the moment it's looking like we might get the selloff. Its daily chart below is one where I've been pointing to a very bearish wave count that calls for a strong selloff on the break of its H&S neckline, currently near 497. Last week's break turned into a head-fake; or is the head fake the bounce back above the neckline? Its downtrend line from September crosses a short-term broken uptrend line from December 17th near 524 tomorrow, which is also where the bounce off the January 15th low would have two equal legs. It's important to note that the bounce is only a 3-wave move so far and a drop below last Friday's low near 496 would leave a correction to its decline and leave the downtrend intact. In after-hours trading AAPL traded as low as 457.30 before closing near 462. Near 450 it would test its uptrend line from 2003-2009.

Apple Inc., AAPL, Daily chart

I've been talking about how bullish investors, fund managers, analysts and trading advisory newsletters have become and why, from a contrarian perspective, it makes it a dangerous time for bulls. Combined with a low VIX reading it shows a universal belief in the upside and no worries about the downside. That's typically when investors should be worried. But it's a cycle that keeps repeating and forever will. All of the bullish projections we're hearing now are sounding a lot like what we heard in 2007 and even last fall. Caveat emptor.

A couple of different measures of bullishness in the market are shown on the chart below. It shows the NYSE's rally and the associated bullish percent (how many stocks are on a P&F buy signal, shown in the top panel) and the number of stocks above their 200-dma (bottom panel). When the BP climbs above 70% it's another sign of how overbought the market is. When the number of stocks above their 200-dma climbs above 80% it also is another sign of how overbought the market is. Both indicators are overbought and at levels of previous important market highs (even if that high only led to a pullback before heading higher again). It's not a timing tool but it is fair warning. Now is not the time to turn uber bullish, which is what is happening to many.

NYSE vs. Bullish Percent and Stocks Above 200-dma, Daily chart

Here's my public service announcement -- don't be one of the sheeple being called in for slaughter here. Ignore the siren call to get long and be more interested in protecting your long positions and thinking about how you're going to want to short the market rather than being the one shorn of your money.

The Sheeple

Today, with the help of IBM, the DOW achieved a price projection at 13778 with a high of 13794 (but it closed only a point higher at 13779), which is where it has two equal legs up from November. It's a good setup for a reversal but only time will tell if the bears take advantage of it. This month they've been completely ignoring bearish setups as the bulls ran them over time after time. The trend is your friend until the bend at the end so while the trend is up, just be sure you're watching carefully for the bend since price could come tumbling back down. If the bulls can keep the rally alive I see another price projection at 13856, which is where the leg up from January 8th would have two equal legs up. That projection crosses both its broken uptrend line from October 2011 (log price scale being used here) and the trend line along the highs from March-September 2012 on Thursday-Friday. That would be a sweet setup for a short (which means it won't get there, wink). Actually today's close was a very good setup to get short but I considered it a little too risky in front of AAPL's earnings. Better to regret not being in a trade you wish you were in than to regret being in a trade you wish you were not.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 13,570
- bearish below 13,445

NDX got a kick start this morning from GOOG as well as from the semiconductor sector (the SOX finished +1%). Its rally finally broke price-level resistance at 2750, where it's been stalled since January 2nd, but now has to deal with its broken uptrend line from August 2011, currently near 2775. That broken uptrend line was support at the end of October 2012 before breaking in early November and then acted as resistance at the end of November and at the January 2nd high. We'll have to see if the bulls can break it this time (that might be difficult if AAPL breaks down), in which case the next upside target will be 2803 where it will have two equal legs up from November.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2750
- bearish below 2700

Make special note of today's candle on the NDX chart above -- it's a star doji and the worst thing for the bulls to see tomorrow is a gap down that doesn't get closed -- that would create an evening star reversal candlestick pattern (gap up, doji, gap down) and it's typically a very good (reliable) reversal pattern. Unless the futures recover overnight (NQ is down -45 this evening) we'll be looking at a big gap down and an immediate test of the 2700 support (watch for the possibility of a bounce off its 20-dma near 2713).

At 897 the RUT has made it up to the 127% extension of its previous decline (September-November), which is a common reversal level if there's to be a reversal (it's a guide, not a certainty). Today's high was a quick and minor new high above yesterday's 899.24 but it closed slightly below the 897 Fib level. The trend line along the highs from March-September 2012, which fits as the top of its rising wedge pattern, is currently near 884. If it pulls back from here look for that level to be support and whether it holds or not will tell us whether or not THE high is in place. Below 875 would tell us the high is in.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 884
- bearish below 875

The home builder's index has now reached into the upside target zone (495-508) that I've been waiting for so we should soon find out if it will top out or continue higher. Obviously it would be bullish if the latter happens, which would be a rally above 508, the topside of the Fib resistance zone. Today's high was 501.71. For review, the weekly chart below shows an a-b-c bounce off its November 2008 low and the c-wave (the leg up from October 2011) is 162% of the a-wave (November 2008 to April 2010) near 495. For the 5-wave move up from October 2011 (which is what the c-wave needs to be), the 5th wave is 623% of the 1st wave near 504. This is an expected Fib relationship between the two waves because the 1st wave extended (larger than normal). And then a 38% retracement of the 2005-2008 decline is near 508. This tight correlation should never be ignored, even if price will eventually push through it. The a-b-c bounce pattern (and the very choppy first leg up from November 2008 suggests it's an a-b-c correction, not something more bullish) is a correction to the 2005-2008 decline and says it will be completely retraced. I believe those calling for a recovery in the housing market from here is incorrect.

DJ US Home Construction index, DJUSHB, Weekly chart

I found the chart below last week and thought it pointed to coming weakness in the housing market that is receiving very little (as in none) discussion. It shows a significant increase in buyers' traffic (dark line) and that's good news, or at least it should be good news. The bad news is the lighter-green line showing new-home sales, which is only marginally better than flat off the 2010 low. All those buyers are not converting to sales and one has to wonder why. Tight credit? Lookers but not buyers because they can't sell their home or worried about keeping their job? And what's going to happen to all of the inventory the builders are building? Can you say inventory glut?

New Home Sales vs. Buyers' Traffic, Monthly chart courtesy MoneyGame

The sharp rally in the construction index, off the October 2011 low, has been in anticipation of a stronger rebound in the housing market. The price pattern tells me that anticipation is going to turn into disappointment and the chart above, showing new-home sales, is one explanation of why -- it's the weak link that very few are paying attention to. We also know a lot of foreclosed inventory is going to hit the market. If you're trying to sell your home, or planning to sell in the spring, I would suggest wasting no time in getting it sold. I think we have another leg down and it's going to be painful to live through (for all of us).

Last week I had mentioned an upside target zone for the TRAN near 5730, which is where I have a couple of price projections based on wave relationships. As shown on its weekly chart below, the move up from October 2011 is a 3-wave move and the 2nd leg up (from November) is 62% of the 1st leg near 5728. The 2nd leg has two equal legs up near 5730 and today's high was 5783. So far the rally has created a small throw-over above the trend line along the highs from May 2008 - July 2011, which is currently near 5680. That's a level that the bulls will need to defend on a pullback.

Transportation Index, TRAN, Weekly chart

The daily chart of the TRAN looks more closely at the sideways triangle that ran from March to November 2012 and I show a price projection out of that pattern. Taking the widest part of the triangle and projecting that distance from the breakout point (December 10th) typically provides a good price objective for the pattern. As shown on the chart, the projection is to 5757, which has also been achieved. Today's candle is a star doji at potential resistance and a red candle for Thursday would create a reversal signal.

Transportation Index, TRAN, Daily chart

The U.S. dollar continues to chop around, leaving both sides guessing about its next big move. If it doesn't rally above 81 from here before the end of the month it's going to look more like a bearish sideways triangle will play out into February, to be followed by a decline. The dollar is currently battling its 50-dma at 80.16 and its broken uptrend line from October 2011, near 80.10, so the first thing the dollar bulls need to do is get the dollar above 80.16 and keep it above.

U.S. Dollar contract, DX, Daily chart

This morning the euro spiked down while the dollar spiked up -- a bad combination for gold and sure enough, gold spiked down as well. There were reversals in the dollar and euro but not much in gold. There hasn't been much of a change in gold from last week's update since gold has been chopping around following its high on January 17th. I continue to see upside potential to its downtrend line from October, currently near 1702, as well as the price projection at 1705.90 for two equal legs up from January 4th, but the bottom line is that the bounce off the January low remains corrective (choppy overlapping highs and lows within the bounce) and that points back down once the correction finishes. It would turn more bullish with a rally above 1706.

Gold continuous contract, GC, Daily chart

Silver made it a little higher than I had expected (I thought last week its bounce would stop near the 50% retracement of its December decline) and made it up to the 62% retracements at 32.44 (this morning's high was 32.47. If the dollar is ready to rally then silver should have made its high today but proof of that won't happen until it drops back below 31.

Silver continuous contract, SI, Daily chart

Watching gasoline prices decline in my neck of the woods it's been surprising to see oil prices continue higher. They're not always in synch but it shows the demand for gasoline is down and in fact the demand for oil is down as well. But that hasn't stopped the speculation that oil is going higher, which could be dampened if the dollar starts a stronger rally. Oil's rally has now retraced 78.6% of its September-November decline, at 96.92. This morning's high was 96.92, which was then followed by selloff back down to 95. This might be it for its bounce but there's a little more upside potential to the top of its up-channel from December, currently near 98, and of course a retest of the September high near 100 remains a possibility. It takes a drop below 93 to indicate the top is in place.

Oil continuous contract, CL, Daily chart

There's nothing exciting in Thursday's economic reports and the market will likely be reacting to any overseas developments and then to AAPL. Buckle your seatbelts if traders feel AAPL's decline (if it doesn't recover from the overnight "dip") is a bad omen.

Economic reports and Summary

The easy trade has been to stick with the bulls and simply ride the market higher. There have been virtually no pullbacks in January, which has created the environment where any little pullback becomes a buying opportunity. Hence the pattern of small morning declines followed by steady buying the rest of the day. There's no telling how long that pattern will continue but now that just about everyone is talking about it you can bet it's going to end.

If the decline in the after-hours futures holds into the morning and AAPL sells off hard, it's going to be a little scarier than normal to buy the dip. I fully expect the dip will be bought and then we'll be able to determine whether or not it was a good opportunity or if instead the dip-buying pattern has finished. A decent bounce off the morning low followed by another decline to a new daily low (such as what the RUT did today) would be a break in the pattern. It would be the market talking to us and it will be important to listen.

Searching for a top to this rally has not been easy and it will likely continue to frustrate the bears. But the bears are far and few between as the bulls have taken over. It's a good time to look at the market from a contrarian perspective but I know I don't need to tell you how frustrating it can be to find a top and then find out it was just another high leading to more new highs. Tomorrow may result in the same thing. In fact it's not hard to fathom the market being held up into the end of the month (to get investors believing in "as goes January so goes the year).

We know the Fed has a vested interest in not letting the market fall. I liked Todd Harrison's description of Bernanke's efforts here -- instead of the Greenspan put (Fed intervention to stop a selloff) we now have the Bernanke call. Bernanke has made it abundantly clear he wants the market to rally and has been "helping" it do that.

But it's become too bullish and fear has evaporated. Things like bullish percent and the number of stocks above their 200-dma's (as shown earlier) are indications the market is getting a little too frothy, which typically marks important tops. Will AAPL be the catalyst that starts profit taking that then leads into full blown selling? I've got price patterns that argue for exactly that. Only time will tell whether or not the bears are going to get back in the game.

Good luck, be careful of some whipsaws 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