Many stock market participants have been anticipating a top in the market for at least a pullback. In the meantime the market just keeps chugging (slowly) higher.

Market Stats

Anticipation, anticipation
Is makin' me late
Is keepin' me waitin'

-- Carly Simon, "Anticipation"

It seems so many are anticipating a top to the stock market that it's no wonder why it keeps heading higher. The sentiment picture is confusing right now because short term it appears many are expecting at least a pullback. But longer term the sentiment numbers show a large percentage of bulls in this market. The short-term anticipation of a top is being met with a market that refuses to pull back and there could be at least a few more days before we do see a top. But the short-term pattern suggests we're now very close (days if not hours) to a tradable top and the longer-term pattern suggests those who believe the next pullback will be a buying opportunity might not be happy if they do in fact buy it.

An example of the bullish sentiment, as measured by and their Daily Sentiment Indicator (DSI), which is a daily poll of traders, is shown with the chart below. The DSI for the stock market has reached a level (87 as of Monday night) not seen since the May 2011 high. As the chart shows, each time the DSI has been near 80 it has coincided with an important high for the market, even if that high resulted in only a strong pullback before heading higher again.

DOW vs. DSI, Daily chart courtesy

Another sentiment measure comes from Market Vane's Bullish Consensus, which is a survey of advisors and newsletters, also done daily. On Monday night the reading was 70%, matching the high on September 14, 2012 and higher than previous highs since June 2007. As I'll get into with the stock charts, the pattern of the rally should be concluding within days and the timing with the DSI and Market Vane readings should again show us which side of the market we should think about trading next, especially when you look at the waning momentum of the move up and bearish divergences in market breadth.

It's been a very quiet opex week, including last Thursday and Friday, which tend to be the more volatile days leading into opex. For a quadruple witching week we haven't seen much volatility at all. The market appears to be very tired and very often that's exactly how a stock market top is put in -- it simply runs out of buyers (unlike a commodity top which is very often an emotional spike to a high followed by a v-reversal).

The futures saw a pre-market pop following the retail sales report at 8:30 AM but the pop was sold into when the cash market opened. The pre-market low held, the buyers stepped back in and market slowly worked its way higher for most of the day. Rinse and repeat. An afternoon dip provided another buying opportunity and the DOW was able to close higher for the 9th consecutive day. This is a rare treat for the market.

Typically the market reverses following a 7-day streak and rarely will it go 8 days. The last time it went 9 straight days was in November 1996 when it went 16 straight days from about 6000 to 6500 (+8%). That was followed by a 50% retracement of that streak before pressing higher. So far our winning streak has earned the DOW a similar point gain (about 500 points) but will need another 650 points over the next 8 trading days to get up to 15200 to equal the +8% feat in 1996. Never say never but I could be forgiven for saying that won't happen.

But if the DOW is to rally another 650 points in the next 8 trading days it's going to have to do better than +3 points on Tuesday and +5 today. As I've been showing recently, there's an upside price projection to 14678 for the DOW but even that looks like a stretch at this rate. We've got a tired looking market. Except for one day, February 25th into the close, neither the buyers nor the sellers have been able to drive this market to either a +1000 tick or -1000 tick reading since the first of the year. The last +1000 tick reading was December 31st. We've had gaps driving most of this rally but not much added during the trading days. It's been an odd rally and it's one reason traders haven't been able to get excited about it.

The reason for the pre-market short covering that pushed the futures back into the green for the open was the stronger-than-expected retail sales report. They jumped by +1.1% vs. expectations of +0.5% and much better than January's +0.2% (which had been revised higher from the originally reported +0.1%). Even taking out autos still left sales +1.0%. Sounds great, right? Well, until you realize that most of the increase was due to higher gasoline prices. That was probably one of the reasons for the quick selloff at the open. But even discounting auto and gas sales the retail sales were up about +0.4% so for all the worry about taxes and gasoline taking too big a bite out of consumers, they managed to increase their spending levels over January.

The retail sector (XRT) got nice little pop (+1.3%) out of today's retail sales report but the broader market wasn't able to make much hay out of it. SPX managed to tack on 2 more points to at least join the DOW in positive territory today. But that's not saying much. Without a sell signal though we still need to gaze upwards to see where the market might be headed. There are plenty of reasons to believe SPX will struggle with resistance at its current level, if it can get above 1560 I see upside potential to about 1600 where it would run into a trend line along the highs from 2000-2007. Whether it's got the energy to accomplish that is questionable right now but until the series of higher lows since the end of February breaks, we at least can watch for the possibility.

On the weekly chart below you can see price has stalled near the long-term uptrend line from 1991-1994-2002 and right at the trend line along the highs from May 2012 (I'm using that lower high, rather than April's, because of the wave count calling that truncated high as the completion of the leg up from August 2011). If it can power through these two trend lines then the upper one would be in play.

S&P 500, SPX, Weekly chart

On the weekly chart above, the uptrend line from 1991-1994-2002 is actually a much longer-term trend line, shown in blue on the chart below. There is a parallel up-channel for the rally from 1932, the top of which is where the 2007 rally stopped. A parallel line is attached to the 1946 high and after price broke it to the upside in 1955 that trend line then became support until 1969 when it was broken in the previous bear market (1966-1982). Price broke above it again in 1987, failed to hold as support during the 1987 crash but then used the line as support again from 1991. It was last used as support in 1994, which was the start of the parabolic run higher into the 2000 high. Did you ever wonder why SPX found support where it did in 2002? You can see how the channel lines have worked as support/resistance since 2000 and that blue line was broken once again in 2008. Now we're back up to it.

S&P 500, SPX, Daily chart, 1929-2020

Using this much longer-term view of the market, and as I noted on the chart, the throw-over above the up-channel into the 2000 high will likely be matched by a throw-under below the channel to end the bear market correction (as part of the mean reversion correction to the 2000 throw-over). That would mean SPX near 600 by 2016-2017. It makes for an interesting perspective of the rally.

On the weekly chart I mentioned the trend line across the 2000-2007 highs which is currently near 1600. A little lower is a price projection near 1590 that I've been discussing for weeks now -- that's where the 5th wave of the move up from November would equal the 1st wave. This is the leg up from the February 26th low and it has already achieved the first target near 1550, which is where the 5th wave equals 62% of the 1st wave. At 1551 it also achieved two equal legs for the a-b-c move up from June, which completes the larger corrective pattern off the 2009 low. So the rally has met its minimum upside objective and could complete at any time but keep in mind the upper projection as part of your risk management if you're itching to try the short side.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1553
- bearish below 1525

Now we look more closely at the leg up from February 26th since this will help identify where the tippy top of the rally might be. The leg up from February 25th will itself be a 5-wave move and the best fit for the wave count is that today started the final 5th of the 5th wave. It would be equal to 62% of the 1st wave at 1573 and achieve equality with the 1st wave at 1588.57. Notice how close that upper projection is for the larger 5th wave on the daily chart above. That makes 1589 a strong possibility if it develops a little more buying interest than we've seen for the past couple of weeks. It looks more like it's getting ready to peter out. If we get a sharp thrust lower from here I'd be inclined to think it will result in the completion of the correction off Tuesday's high and then continue higher again. It would be a cleaner finish if it rallies at least a little higher from here and then today's low (1548) would become the key level to the downside -- a push higher followed by a break below 1548 would likely be followed by much stronger selling.

S&P 500, SPX, 60-min chart

The DOW's 5th wave of its move up from November has created a tight rising wedge pattern as shown on its chart below. It too has achieved the minimum upside projection for its rally but there is still upside potential to the projection at 14678. As with SPX, a push higher from here that's then followed by a drop below today's low (14411) would indicate the final high is likely in place. If we were to get a quick drop lower from here I'd be more careful about it since it could be immediately followed by another final push higher.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 14,412
- bearish below 14,149

There is one DOW stock in particular that is worth watching here -- GE. This is a company that is one of the better economic indicators since its business is both industrial as well as financial. As GE goes so too will the stock market. Of note recently is the fact that GE has not been following the DOW to new highs and certainly not to all-time highs. As the weekly chart of GE below shows, it has been able to retrace only 50% of its 2007-2009 decline. All the Fed's printed money has apparently not found its way into GE.

General Electric Co., GE, Weekly chart

In addition to GE retracing 50% of the 2007-2009 decline, at 23.94, there's also another Fib projection right at that level -- the 2nd leg of the 3-wave move up from 2009 is 62% of the 1st leg at 23.86. Last Friday's high was 23.90, right in the middle of those two numbers. Purely coincidental I'm sure (wink). Last week's high was also a small throw-over above the rising wedge pattern for its 2009-2013 bounce and Monday it dropped back below the top of the wedge, which creates a reversal signal. This setup says GE has topped and will now start its next leg down, one which will drop GE below its 2009 low in the next couple of years.

Here's another sign of the disconnect between the stock market and reality. We know there's a real difference between Wall Street and Main Street. But how about the difference between Wall Street and Wall Street? The market is supposed to care about earnings. After all, P/E ratios are used by many fundamentalists to derive the theoretical value of the market. As future projections for earnings increases we would expect to see the stock market rally in anticipation of that. And just the opposite when earnings estimates are dropping. But earnings expectations have been on the decline, as the blue dotted line on the chart below shows (Q1, 2013 bottoms-up estimate), while the stock market has rallied (green dotted line). The only thing the market seems to care about is more drug money from the drug czar himself, Mr. Buzz Bernanke with his QE to infinity and beyond. But I suspect this is going to matter real soon, regardless of the Fed's efforts and then what are they going to do? I know, just print more money.

SPX vs. Earnings Projections, Weekly chart courtesy

If it weren't for gaps to the upside NDX would not have made nearly as much progress in its rally from December as it has. The long sideways consolidation following the January 2nd gap up was followed by a gap up on March 5th and it has again run sideways since. I see the potential for at least a minor new high before topping out with the rest of the market but a drop below its March 5th gap, with a decline below 2761, would indicate the top is in place.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2825
- bearish below 2761

The RUT continues to show a clear pattern for its rally from November and the leg up from February 26th fits very well as the 5th wave of the move. I show the price projections on its chart that are based on the size of the 1st wave. The 5th wave would be 62% of the 1st wave at 949.20 and equal at 983.18. Based on the shorter-term pattern of the move up from February 26th I'm thinking the lower target will be the one but recognize the potential for at least a little higher than that to reach the top of its parallel up-channel from December, currently near 960.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 952
- bearish below 915

The 60-min chart of the RUT, shown below, shows the pattern for the 5th wave of the move up from November, which I think is a little cleaner pattern than what I'm seeing in the others. It too needs to be a 5-wave move and ideally we'll see the completion of the 5th of the 5th wave this week. On the daily chart above I show the 62% projection for the 5th wave at 949 and on the chart below I show the same projections based on the size of the 1st wave in the move up from February 26th. Showing the fractal nature of these EW patterns, the 62% projection for the 5th wave points to 951.95 and the higher projection (where it would equal the 1st wave) at 960.22. So we've got correlation near 950 for the final 5th wave and then 960 where the top of the larger up-channel is also located.

Russell-2000, RUT, 60-min chart

I'm watching the banking index closely here since it may have already topped. Looking at the move up from November, the 5th wave achieved 162% of the 1st wave at 57.19 with a high on Monday at 57.22. From a short-term perspective the leg up from February 26th would look better with another minor high but I'm not holding my breath for it. However, if the market is able to hold up for another week I see the potential for BKX to make it up to a confluence of longer-term and short-term price projections surrounding 57.58 and 57.95. But a drop below its February 2011 high at 55.88 would be a good sign that the top is in place.

KBW Bank index, BKX, Daily chart

Last week when I last looked at the TRAN's weekly chart I pointed out an upside projection near 6271, which is a good upside target to finish its rally, which required another push higher following last Wednesday's high and a pullback into Thursday. Today's new high at 6089 remains about 82 points shy of the target and the short-term pattern supports the idea that its rally is close to finishing but not quite. Therefore the 6271 projection (for two equal legs up from October 2011) remains a good one. Following the completion of the a-b-c rally from October 2011 it should all be completely retraced in the coming year(s).

Transportation Index, TRAN, Weekly chart

The dollar rallied a little further today and hit the first upside target I've been looking for. It has poked above its downtrend line from 2010-2012, at 82.77, and reached the projection at 82.99 (this morning's high was 83.07) where the 5th wave of the move up from February 1st is 62% of the 1st wave. There's higher potential to 83.63 where the 5th wave would equal the 1st wave or slightly lower at 83.43 where the 2nd leg of its rally pattern off the September 2012 low would achieve 162% of the 1st leg. But the short-term pattern for the move up from March 5th counts well as complete and the bearish divergence at the new highs since the end of February tell me to look for at least a larger pullback correction before heading higher. For now I'm expecting a multi-week pullback to the 200-dma, currently at 81.07, but it's not yet clear if it will start from here or slightly higher.

U.S. Dollar contract, DX, Daily chart

How a larger pullback in the dollar (assuming we'll see one) affects the commodities and metals remains to be seen but at the moment I don't see them getting much of a bounce off their recent lows. Earlier I used GE as a good economic indicator and if I've got the correct price pattern identified we should see the market start to head much lower as economic reality starts to bite the bulls in the posterior portion of their anatomy. Copper is also a very good economic indicator and following up my post from a few weeks ago, I've updated the chart to show price action in its sideways triangle following its finish at the February 4th high.

The last time I updated the copper chart I showed a little throw-over above the top of its triangle and then a drop back inside, which created the reversal signal. Since the high at 3.79 it declined in an impulsive 5-wave move down to the low at 3.47 on March 1st and has tried to bounce since then. The bounce pattern is corrective so far and indicates that once the bounce completes we will see copper break below the bottom of its triangle, currently at 3.52 (and tested today), and head lower. The leg down into the start of the sideways triangle, in October 2011, will be followed by another le down. The sideways triangle is a bearish continuation pattern.

Copper continuous futures contract vs. SPX, Daily chart

I'm comparing SPX to copper to show how disconnected the stock market is with reality (I consider copper's price "reality"). But notice that when they disagree, marked with the red divergence lines, copper wins. Since copper's February 4th high we now have a very strong short-term divergence finishing the longer-term negative divergence since February 2012. The Fed's money has floated the stock market higher but unfortunately they've created another stock market bubble and when (not if) it pops there could be a lot of catchin' up to do (cue the music...anticipation...).

For gold there's a bounce pattern idea that calls for a rally up to resistance near its January 4th low at 1626 before heading lower again. Above 1626 would be at least short-term bullish for a test of its downtrend line from October 2012, currently near its 200-dma at 1664. But a continued decline to what should be strong support near 1525 is what I'm currently expecting. A break below 1525 would be much more bearish.

Gold continuous contract, GC, Daily chart

Gold is not a loved metal at the moment and in fact quite the opposite. A fairly steady decline from nearly 1800 at the beginning of October to almost 1550 before the end of February has resulted in many gold bugs abandoning the metal. Big hedge fund managers, such as Soros, have drastically reduced their holdings as stocks received more love. When the stock market turns down, and especially if the dollar turns down, we could see gold start a much stronger rally. But if the deflationary dragon rears its ugly head and fries Bernanke and his Merry Men (and Women), with their swords in the air and their bodies turned to ash, all asset classes (stocks, bonds and metals/commodities) will decline together. If gold drops below strong support near 1525 we'll know the dragon is winning the battle and he will immediately dispatch King Kong to climb the Empire State Building to knock down Bernanke's helicopters.

Silver has been trading well technically and is providing some good clues here. Following its March 1st low it has been choppy sideways/up, forming a bear flag, and the expectation is for the decline to continue. I can't rule out a higher bounce, such as up to its 50-dma and downtrend line from November 30th, both near 30.25 next week, but at the moment its broken uptrend line from 2008-2012 and its 20-dma are acting as resistance.

Silver continuous contract, SI, Daily chart

Oil bounced off its March 4th low at 89.33 and reached a high of 93.47 yesterday, giving us the bigger bounce I was expecting but earlier than I expected. It tested its broken 20-dma again today at 93.03, with a lower high at 93.40, and could fail from here. But I see the potential for at least a 50% retracement of its February decline, at 93.72, and a test of the top of its lower up-channel from November, near 93.90. My expectation is for oil to continue lower and drop well below its November low at 84.05. It would turn potentially bullish if it can get back above 95.

Oil continuous contract, CL, Daily chart

Tomorrow's economic reports include the unemployment claims and PPI data. Friday will have more important reports that include the Empire Manufacturing data for March, Industrial Production and Michigan Sentiment, as well as CPI data. Most recognize that the inflation numbers, as well as the employment data, are bogus and serve only the needs of the government. But as always, it's the reaction of the market that matters, not the numbers themselves.

Economic reports and Summary

March has been a very common month, especially since the March 2000 high, for big market turns. This March is setting up to be just as significant. Combining this with an EW pattern that is very near complete and market sentiment that is over-the-top bullish and we should be at the cusp of a strong reversal to the downside. I'm hoping we'll see the market push a little higher first, perhaps to the SPX 1567-1573 area, before starting down since that would do a better job completing the short-term pattern. If the market declines from here and drops below this morning's lows (SPX 1548/DOW 14411) it could be just a 1- or 2-day decline before heading higher again. But a push higher first and then a drop below this morning's lows would very likely be the starting gun for a significant decline to follow.

The market should hold up through opex and possibly into the first day or two of next week but at this point I consider the market very dangerous for bulls. The warning arrow is pegged to the right in the red section. I hear the robot warning young William, "Danger Will Robinson, danger!" Bulls should have stops pulled up tight and remember to use a market order for your stop so that an unpleasant gap-down surprise doesn't jump over your stop. It would be a real bummer to get a bad fill because it's a market order but even worse if you find out at the end of a 500-point down day for the DOW that you're still in your position because the stop didn't trigger (don't ask me how I know that).

Bears, it's time to start your engines and get ready. Don't jump the starting gun and instead wait for confirmation that we've either seen the high (I'm hoping I'll be able to identify it intraday) or a breakdown below key levels.

Good luck through the rest of this boring opex week and I'll be back with you next Wednesday, which by then I suspect we'll know whether or not the market high is in place.

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