The bulls are looking tired as the market makes marginal new highs but like an overtired baby refusing to go to sleep the bulls are refusing to give up. Anyone who has seen what happens to an overtired baby knows the market could do the same thing -- the bulls could crash and finally go to sleep.

Market Stats

It was a quiet day for economic reports and earnings but without anything spooking the market from Obama's State of the Union address we had a small gap up this morning and then a run slightly higher before reversing. One giveaway this morning that something was wrong was a bolt higher in the RUT while the DOW tucked tail and dropped quickly into the red. SPX soon followed the DOW while the RUT pushed higher. The generals were retreating while the troops were out there fighting. Once the troops turned around to see their leaders disappearing over the hill behind them they too beat a hasty retreat.

There was an effort to recover some of the morning decline but an afternoon selloff drove the market to new lows for the day. Not to be deterred, the buyers came back in during the final hour, and especially the final 10 minutes, and recovered most of the day's losses. Like we saw in the morning, the RUT took off into the close, indicating a lot of bullish hope for more. There's very little fear out there when money rushes into the small caps the way they are and when the blue chips are holding back. At the beginning of a rally I would look at that as very bullish (out of the defensive blue chips and into the riskier small caps). But towards the end of the run it's usually more a sign of too much complacency and performance chasing, which is typically part of a capitulation move.

We had an economic report on retail sales, which came in near expectations for +0.1%, with +0.1% for all sales and +0.2% ex-auto sales. These were down from December's +0.5% and +0.3%, respectively. So not a strong showing but no negative surprises either.

This prompted a look at the chart for retailers, using XRT, the SPDR ETF, and as the weekly chart below shows, it's at an interesting place. The uptrend line from March 2009 through the June 2012 low was broken in August 2011 and price has been oscillating around it as it's made new highs. But as noted on the chart, each new high above the line since March 2012 has been fewer points above the line. Momentum is slowing as the downtrend line on RSI shows. It's also at the trend line along the highs since March 2012. With the daily chart showing bearish divergence since January 25th I'm thinking XRT is very close to a reversal if it hasn't already put in its high (today's brief new high was quickly reversed). Three drives to a high is a common reversal pattern setup and that's what we have here. It's a time for caution, not aggressive buying. What's interesting about that pattern is that we can view 3 drives to a high for the move up from 2009 and that the 3rd drive is itself 3-drives to a high. In my mind it makes the potential top here even more significant.

SPDR S&P Retail ETF, XRT, Weekly chart

As Jim mentioned last night, Obama's State of the Union speech probably didn't help the market much today. His speech was more of a campaign speech where he promises a lot but says very little. He's certainly one of the best campaigners we've ever had but now we need someone who wants to solve our economic problems. The market perhaps sees trouble with more spending and taxing plans but little in the way of solving our massive debt problem. But he probably thinks he's doing what's needed to help the economy -- spend more money even if we don't have it.

The government and Fed are full of Keynesian economists and Obama has surrounded himself with group thinkers. Their solution to the problem is more spending. If you believe in people like Paul Krugman and Ben Bernanke you believe that the reason the economy isn't doing better is because the government hasn't spent enough money. Of course it's an argument that's hard to refute. How do you prove they're wrong? Any economic weakness can be blamed on not spending enough. How do argue against their logic? Only by having a fundamental belief that taking money from those who earned it and giving it to those who have not earned it can you believe in their logic. Government spending is largely wasteful spending and reduces the ability of others to make up for the loss of their money.

Whether or not you agree with what I just said, you trade in a market that largely believes that higher taxes on individuals and corporations will dampen their ability to invest. We care about how the market might react to thoughts about what Obama is going to do, or not do. Cap and trade, EPA regulations, stronger unions -- these all create a headwind for corporations and if investors begin to feel that corporations will not be able to grow in the coming years then the higher P/E ratios are not justified and down will come cradle, baby and all, helped by the government.

But enough with funnymentals. It's interesting to ruminate about such things but we are largely technical traders. The charts show us everything that can be known at this time. Traders have made their investment decisions based on current knowledge (and guesses about the future) so we can only trade what we see in front of us. The market is often too disconnected from funnymentals, which eventually catch up to the market, but the charts give us advanced clues.

Today's trading volume was at least slightly better than the previous 3 days but not by much. As the market has pressed higher it's doing so on less volume, lower momentum and a declining advance-decline line (indicating the higher prices for the indexes are on the backs of fewer and fewer stocks). The chart below compares the higher highs for SPX vs. the declining highs for the a-d line, especially since the end of January. This is not a timing indicator but it is a warning -- unless volume and a higher participation rate come back in quickly we're probably looking at a market high very soon.

SPX vs. Advance-Decline line, Daily chart

I'm going to start with the RUT tonight because I think it presents a pretty clean picture for us at the moment. It's either going to break out and head much higher from here or it's a very good setup for a top. In other words, we could be at a decision point (volatility bands are shrinking so the market is setting up for a big move one way or the other). It's also an excellent index to monitor bullish vs. bearish sentiment.

Starting with a higher-level view of the RUT, from its March 2009 low, it's easy to see the 3-wave form of the rally up to the 2011 high. Once we got the deep pullback into the October 2011 low it confirmed we were in a correction to the 2007-2009 decline and not something more bullish. It's one reason why I have remained a bear, even while recognizing upside potential for a higher bounce -- I fully expect it to be completely retraced (with the possibility we'll see a higher low than the 2009 low in a very large sideways triangle pattern since 2000 for the blue chips). Following the October 2011 low we've had another corrective (overlapping highs and lows) leg up and I'm now looking for the completion of it.

Russell-2000, RUT, Weekly chart

The first leg up, from March 2009 to the July 2011 high (the July high is used instead of the May high because of the wave count for the move up from July 2010), has been followed by another leg up from October 2011, creating a larger 3-wave move up from 2009. The 2nd leg of this larger 3-wave move is 62% of the 1st leg at 921.35, which is the projection shown on the chart above. Today's high was 921.29 and could be close enough for government work. Only in hindsight will we know if today's high was THE high but it's a good setup for it.

Zooming in a bit, the daily chart below shows a closer view of the final leg of the rally, which is the move up from November. You can see how price has poked above the top of its parallel up-channel for price action since the June 2012 low (a line that is parallel to the uptrend line from that low and attached to the March 2012 high), currently near 913.50. A drop back below that level is needed to create a throw-over finish but at the moment it's a bullish break and a rally above this morning's high would clearly keep the bulls in charge.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 922
- bearish below 898

It's a little hard to see on the daily chart since I scrunched the chart but there is a rising wedge pattern for this month's rally, which fits well as the 5th wave of the move up from November. The 60-min chart below shows the wedge pattern and the 5-wave move inside it to this morning's throw-over completion. A break of the bottom of the wedge, near 918, would normally be good confirmation that the wedge pattern has completed but the spurt back up into the close left today's pullback a 3-wave move and we could be looking for at least another new high, with upside potential to the top of its parallel up-channel from January 8th, currently near 926. But watch for a possible back test of its uptrend line from February 7th and a retest of this morning's high followed by a bearish kiss goodbye.

Russell-2000, RUT, 60-min chart

Keep in mind that a completion of the 5-wave move up from February 4th for the RUT would also complete the rally from November, which in turn would complete the a-b-c move up from June 2012, which in turn would complete the corrective pattern up from October 2011, which in turn would complete the 3-wave bounce pattern off the 2009 low. It all comes down to this 60-min chart and whether or not the final high has been made, or maybe a minor new one, and if the wave count leading up to this point is correct then the high we're looking for will be very significant. We'll know more once the pattern of the decline can be evaluated (looking for an impulsive move down) but in the meantime the bulls control the tape and will look even stronger if the RUT makes it above 922 and stays above it (not just an intraday break).

SPX remains stalled at its trend line along the highs from April-September 2012, now near 1521 (1523 when viewed with the log price scale). If it can break free of this resistance there is upside potential to the trend line along the highs from November, currently near 1540 on Friday. I suspect we'll see the top of its rally either here or that 1540 area.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1524
- bearish below 1498

The move higher since the end of January has been choppy and as with the other indexes it's looking like a rising wedge pattern, which is fitting for an ending pattern. But these rising wedges have a nasty habit of morphing into a larger one just when you think it's coming to an end. I've drawn a rising wedge for SPX on its 60-min chart that accommodates a higher move into at least Friday before finishing. It calls this morning's high the 3rd wave of the wedge and the 3-wave pullback to this afternoon's low the 4th wave. This interpretation calls for one more move up to complete the 5th wave. The bold red path is my preferred wave count for the short-term bullish move, with an upside target near 1530 on Friday. If we get a blow-off move (not sure what would spark it), the trend line along the highs from November crosses 1540 midday Friday. The green dashed line shows a pullback on Thursday before chopping higher in the 5th wave. Needless to say, it's not at all clear yet how it might play out from here and it takes a break below about 1512 before the bears can even think about getting a little more aggressive on the short side. Patience -- it's risky buying it here and too early to short it.

S&P 500, SPX, 60-min chart

The DOW was the only index to close in the red today. Not even GE's strong day (+3.6%) could hold it up. The DOW has been chopping sideways/up since its January 29th high at 13970. In two weeks it's been able to add less than 70 points and the choppy pattern looks more like an ending pattern than a bullish continuation pattern (it looks like a distribution pattern where each rally is sold into as inventory is handed off to the very bullish retail crowd). But it needs to break below the February 7th low at 13852 before a top can be declared in place (a drop below Monday's low at 13940 would be a bearish heads up). For the short term, as depicted on the SPX chart above, I see the potential for at least one more minor new high, which also fits the idea that the market could hold up at least into Friday morning's settlement for SPX options.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 14,100
- bearish below 13,850

The NASDAQ Composite achieved a target today at 3202, which is where the move up from November has two equal legs. The 2nd leg, following the gap up on January 2nd, is one of the sloppiest choppiest rallies I've seen. But it's like the Energizer Bunnyâ„¢ -- it just won't quit. Today's doji at this price target might be a setup for a reversal but if not I see upside potential to the top of the parallel up-channel from January 3rd, near 3213, and then to the trend line along the highs from December-January where it crosses the trend line along the highs from March-September 2012 near 3252 on February 20th. The bears need to see a break below 3160 to indicate the top is in place.

Nasdaq Composite, COMPQ, Daily chart

Key Levels for COMPQ:
- bullish above 3213
- bearish below 3160

In last week's wrap I showed a weekly chart of the home construction index, pointing to the confluence of price projections in the 500 area. It pulled back from that area in the past week but then got a big bounce back up yesterday. Between the pattern of the pullback and yesterday's strong rally I like the idea of at least a retest of the January 29th high if not a minor new high. That would do a nicer job in completing a 5-wave move up from November and upside projections are near 515 and 536. The pattern for the bounce off the February 5th low suggests it only needs a small push higher at the 515 to 518 range looks like a good target. Back below 480 would strongly suggest the top is already in place. The ITB and XHB are two ETFs that closely follow this index.

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

Following up on last week's weekly chart of the TRAN, the daily chart below shows what I think is a good wave count that is very close to completing, if it did not complete today. An a-b-c move up from November is what I'm expecting to see and the c-wave up from December 31st needs to be a 5-wave move. The 5th wave is the small rising wedge up from January 31st. The bearish divergence supports the idea that it's in its final 5th wave and what can't be seen on the daily chart is that price broke below the bottom of its wedge (the uptrend line from January 31st), near 5919, in an impulsive decline and then bounced back up to into the close, stopping at the broken uptrend line. It's a setup for a bearish kiss goodbye if it begins to sell off some more on Thursday.

Transportation Index, TRAN, Daily chart

One of the things we're still waiting for is for the DOW to confirm the TRAN's rally above its 2007 high. Without that happening we still have a Dow Theory sell signal in place and if the TRAN starts back down from here it's likely the broader market will as well. That would leave a bad taste in bulls' mouths since it would create a significant Dow Theory bearish non-confirmation. Even CNBC might report that one correctly (although I'm not holding my breath).

As indicated in last week's chart of the dollar, we got the rally up to its downtrend line from November (which happened faster than I thought it would) and as I suspected, it was rejected at the trend line. If the bearish wave count is correct the sideways triangle from September 2012 is now complete and the dollar will start the next leg of its decline. The only way for the dollar bulls to negate the bearish setup is to rally it above Tuesday's overnight high at 80.59, in which case the dollar would turn potentially very bullish.

U.S. Dollar contract, DX, Daily chart

Keeping the bigger picture of the dollar in mind, the weekly chart below shows how small the consolidation from September really is. But if it's a bearish continuation pattern following the decline from July 2012 we get a downside projection to 74.94 for two equal legs down. The uptrend line from 2008-2011 will be near 74 in May so that's also a potential downside target. From there it would be anyone's guess since it would likely be support and it would still be a very large sideways triangle pattern from 2009. Back up to the top of the triangle after that? But as already mentioned, a rally above 81 would suggest a leg up to the top of the triangle (the downtrend line from 2009) would be starting now, not later.

U.S. Dollar contract, DX, Weekly chart

Since last week's update we had fairly big moves in the dollar and metals and gold broke down while the dollar rallied. The dollar's pullback this week hasn't helped gold and it's now threatening to break support near 1640. As shown on the chart this is a level where the pullback from January 17th achieved two equal legs down for a possible a-b-c correction that will lead to a stronger rally. But a break below 1640 would suggest the more bearish wave count (or something similar) is in play, which calls for at least a drop down to the bottom of its down-channel from October, currently near 1585.

Gold continuous contract, GC, Daily chart

Oil bulls are not letting go of their black gold but the retest, so far, of its January 30th high is showing bearish divergence, suggesting the retest is not going to hold. But it would turn more bullish if price gets above 98.35 and holds above that level.

Oil continuous contract, CL, Daily chart

Thursday will be quiet for economic reports and then Friday will see some potentially market-moving reports, with the Empire Manufacturing index, Industrial Production and Michigan Sentiment. The Empire index is expected to show some improvement to a "less bad" -2.0 from January's -7.8. No significant changes are expected from the others. Finishing up opex will likely be the reasons for market moves.

Economic reports and Summary

CSCO reported after the close and beat estimates with a small gain in earnings for its 2nd quarter but CEO John Chambers mentioned the revenue range for its 3rd quarter should be ratcheted down a little. Trader don't like to hear that and were interested in taking profits, dropping its stock price about -2% in after-hours trading. Considering it's up about 25% from its last earnings report it's not much profit taking. But one look at its daily chart I see bearish divergence since its mid-December high, indicating buyers are running low and profit taking could become more of a problem. It's holding its 20-dma (tested yesterday and today at 20.97) but a break of that level could send it down to its 50-dma at 20.42. Its after-hours low is 20.36 and is trading near 20.70 in the after-hours session (-0.42). Equity futures are down slightly but nothing is indicated by it (besides, it's a poor predictor of how the following day will go).

The pieces of the puzzle are falling into place for a market high. Whether it's too much bullish sentiment by the public and media (not by the commercials who still hold a large net-short position), waning momentum, drying volume, price targets hit, rising wedges or completed EW counts, I think we're days at most from a market high. It might even be in place as of this morning's high. But using tonight's SPX 60-min chart as an example, I can see how the market might hold up into the end of opex week. Next week would likely be a different animal if that happens.

Keep in mind that rising wedges get retraced quickly and once selling starts it could spook a lot of people out of their newly bought positions. They painfully remember how quickly this market can sell off. Selling begets selling and the program traders start kicking in with their momentum models and before you know it the DOW has lost 1000 points and everyone looks around wondering what just happened, asking "Things are so bullish, why is everyone selling?" Human emotions and herd mentality are fickle things and we all know the market doesn't have to make sense to create a big move.

Volatility bands have shrunk and low volatility leads to high volatility, sometimes in a big way. Most don't know which way the move is going to go and of course no one can possibly know. The only thing I can go on are all the pieces of the puzzle that are falling into place and the picture is a big bear mauling a poor unsuspecting bull. It's not a pretty picture. Trade carefully from here and good luck. 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