Lying out on the grass at night with your favorite squeeze under a cloudless sky watching shooting stars is very romantic. However, shooting stars in the stock market are anything but.

Market Stats

The stock indexes finished with shooting stars at resistance, which is not a celebratory sign that things will get more bullish. A gravestone doji is another name for the candlestick and is identified as a reversal pattern (failure to hold the rally) but so far it's just a warning. What the bulls don't want to see tomorrow is a red candle.

The stock market has been rallying into today with anticipation that Bernanke and the FOMC minutes would reveal that we are indeed in a period of QE "to infinity and beyond" (as Buzz Lightyear Bernanke wants the market to believe). This morning Bernanke gave the market what it wanted to hear and it blasted higher. Clearly the shorts were hoping for something a little more disappointing and when it didn't come they bailed on their short positions. Once the short covering finished, in about 15 minutes, the reversal was just as hard and the net result is a key reversal day (an outside down day with a gap up, higher high and then lower close).

Bernanke gave the market what it wanted to hear and what it has been anticipating (with the rally) -- no sign of letting up on QE. However, he did reiterate what we've been hearing lately about how the Fed might wind down its monetary easing program. When the FOMC minutes came out this afternoon they also showed there are a group of Fed officials ready to start tapering off the purchases now rather than later. That caused even more selling this afternoon.

Following a small bounce higher this morning bonds also sold off, presumably because of concerns the Fed may back off on their bond purchases in the next few months. Bernanke was essentially non-committal this morning, talking in circles about the Fed tapering off their purchases but not yet ready to do so. As he said, "If we see continued improvement and we have confidence that that's going to be sustained then we could in the next few meetings...take a step down in our pace of purchases." SELL MORTIMER, SELL! The net result was a nearly 300-point selloff from the DOW's +155-point gain, dropping to a loss of -122 before bouncing a little into the close and finishing down -80.

Following the initial sell reaction the market started to bounce back up on assurances from many others that Bernanke wasn't backing away from continued support for QE-to-infinity. But the bounce into a midday lower high was followed by a stronger selloff as many started wondering if this week's statements from hawkish Fed governors was not the direction the Fed planned to go in the next few months. The FOMC minutes, released at 14:00, further worried the market that QE-I might have a half-life.

The only other economic report, that had no impact on the market (it came out at the same time as Bernanke's speech), was the existing home sales report. It was flat at 4.97M for April vs. the 4.98M expected and March's 4.94M (revised up from 4.92M).

As I'll get into with the charts, this morning's short-covering spike (and late-to-the-party bull wannabes) followed a gap up to start the day, made a new high and then closed the day down. That created the shooting star and it's an outside down day. It's not a good sign for the bulls and considering most of the rally from April's low has been short covering, this morning's rally has the look of a final capitulation into the high.

Morgan Stanley's John Schlegel issued a report last week that showed much of the rally from April has been short covering, which explains why such a strong rally has been on relatively light volume. He watches both net-short and net-long activity to see what traders are doing and uses it as a sentiment indicator. The chart below shows the net-short activity in pink (top chart) and net-long activity in green (bottom chart).

Net Short and Long Activity Z-Score, chart courtesy Morgan Stanley

You can see the sharp drop in shorting activity (more shorts covered than added to) from about mid-April while long activity chopped sideways (equal selling and buying of long positions) from mid-April, which followed a sharp drop down in the first two weeks of April. So from early-April we have a sharp drop in net-long activity, followed by near-zero readings, and a sharp decrease in net-short activity (short covering). The net result has been a sharp rally in the S&P more from short covering rather than buying new positions. Schlegel's conclusion is that the rally is not so much from money on the sidelines coming into the market as it is massive short covering.

The interesting thing about this activity is that the last three times the net-short activity dropped to -2, which are shown with the red circles on the top chart, were at the market highs in April 2010, July 2011 and October 2011. Each of these highs were followed by declines of -13% in 8 days, -19% in 23 days and -10.5% in 20 days, respectively. Maybe it will be different this time and each of the previous times was followed by more rally so many will be tempted to simply ride out a correction and buy more when it drops, but the risk, as I see it, is that we might not see the market come back this time.

Hedge fund manager Doug Kass, a long-time bear, was quoted by the Wall Street Journal yesterday saying, "I rarely have been as mistaken as I have been thus far in 2013." He said he remains concerned about the economy and a slew of other factors that are negative for the market but acknowledged that others do not share his concerns (yet). Perhaps he was one of the ones doing a lot of short covering since mid-April. Just in time for a market top? We know that leverage has been nearly maxed out, hitting highs above that which was seen in 2000 and as high as in 2007. And now with the shorts exiting the market there is real risk for a sudden disconnect to the downside to fill the vacuum below us.

Today zerohedge noted that Kass reported the last two times the S&P 500 hit an all-time high (today) and then closed down more than 1% from that high were October 11, 2007 and March 24, 2000. You will probably remember that those were the two major highs in 2000 and 2007 that led to the start of each major bear market cycle within our secular bear. But don't worry; it's probably different this time (wink). Basically what he's referring to are key reversal days at all-time highs. Was today one of them? We'll know when we see it in the rear-view mirror but it's clearly a warning shot across the bow for the bulls here.

Today the S&P 500 did not close down -1% but it was close. Thanks to a 15-minute bounce into the close it trimmed its loss from -1.2% to -0.8%. Does that negate the bearish setup Kass refers to? In my opinion, probably not. It was a good reversal setup heading into this week's high but obviously we'll know a lot more in hindsight.

I'm going to start tonight's chart review with the Nasdaq for a top-down perspective. Between the pattern I'm seeing for the COMPQ and the SOX, we're at a very important level and whether or not the bulls can keep this going could have a large impact on what happens next.

The weekly chart of the COMPQ shows price up against the top of a parallel up-channel from October 2011, with a parallel line attached to the September 2012 high. Based on previous and current wave relationships I think the area starting with 3510 is important (I'll show 3510 on the daily chart) and today's high at 3532 could be all we'll see for this rally.

Nasdaq Composite index, COMPQ, Weekly chart

To start with, the price structure for the move up from 2009 is corrective (overlapping highs and lows, which would not be seen in an impulsive 5-wave move up). The 2nd leg of a large 3-wave move up is the rally from the August 2011 closing low and it consists of two a-b-c moves, labeled in red as w-x-y. Wave-w = wave-y at 3529.20, which was exceeded by only 3 points at today's high. In the second a-b-c move up (red wave-y), from June 2012, wave-c would equal 162% of wave-a at 3571.66. A 62% retracement of its 2000-2002 decline is at 3595.34. So by these measures we have an upside target zone at 3529-3595, the bottom of which was achieved today, as well as the top of its parallel up-channel.

The daily chart below shows price stalled at the top of its up-channel from 2011 and fell back to the top of its up-channel from November. The price projection at 3510.08 is where the 5th wave of the move up from November 2012 is 162% of the 1st wave, which has now been achieved. For you Elliott Wavers out there, the 3rd wave is pure ugly and a reason why I've been using a double zigzag count on the NDX chart. But the Fib relationship between the 1st and last waves of this pattern might still be important, regardless of what the actual count is.

Nasdaq Composite index, COMPQ, Daily chart

Key Levels for COMPQ:
- bullish above 3510
- bearish below 3340

The COMPQ has been in a very steady narrow up-channel since gapping up on May 3rd, shown on its 60-min chart below. This morning's spike up tagged the top of the channel (with a very small throw-over), which was then followed by a crash down below the channel. When the month-long channel broke it broke hard. The top of the up-channel from November, shown on the daily chart above, is also on the 60-min chart and is acting as support right now, which is bullish. I show a bounce tomorrow that should then lead to lower prices. There is the possibility of a slight break before getting the higher bounce. But this chart has "sell" written all over it so look for a bounce to short, using today's high for your stop.

Nasdaq Composite index, COMPQ, 60-min chart

Helping the tech indexes in the past month has been the strong rally in the semiconductor stocks. How goes the SOX, so goes the Nasdaq and in turn the broader market. They're both still very good sentiment indicators (as well as the RUT). The SOX rallied up to resistance at 470-475, hitting a high of 472 on Monday and almost 474 today. The February 2011 high at 474.73 is obvious resistance and the 3-wave pattern for the rally from August 2011 has two equal legs at 469. The top of a parallel up-channel from November 2009 is also near 470. This channel was created with the trend line along the lows from November 2009 and a parallel line attached to the April 2010 high, which was the wave-a high of the first a-b-c move up from November 2008. Wave-a of the second a-b-c, which started from the August 2011 low, stopped at the top of this channel, as has wave-c of the pattern. It's a good setup for a top and now we wait for proof.

Semiconductor index, SOX, Weekly chart

Today SPX pushed above the top of its up-channel from April, near 1677, but was unable to hold above it. That leaves the possibility for a throw-over above the channel (typically on a news-related event, such as Bernanke's speech promising the market lots more QE) followed by a close back inside. That reversal signal is typically a reliable one. If we do see the start of a larger pullback we'll have to wait for the price pattern to provide clues as to whether it will be just a pullback before heading higher again or if instead we'll see the start of a more significant decline. The 1705 Fib projection (where the 5th wave of the move up from November would equal 162% of the 1st wave) remains an upside target as long as it holds above 1600. For now the setup is at least short-term bearish.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1673
- bearish below 1600

A closer view of today's price action is shown on the 60-min chart below. Price did a throw-over above the top of its up-channel from November but banged its head on the top of the up-channel from April 18th. It then dropped back below the top of the November up-channel (first sell signal) and then below the bottom of the up-channel from April (confirmed sell signal). It bounced up to the bottom of the up-channel from April, which is the April 18 - May 1 uptrend line, potentially leaving a setup for a bearish kiss goodbye tomorrow. The short-term pattern for today's decline supports the idea for a minor new low before bouncing back up to correct today's decline and a lower high is expected, and one you'll want to short.

S&P 500, SPX, 60-min chart

Today's rally in the DOW pushed it above the top of its up-channel from October 2011, near 15475, as well as the trend line along the highs from late-January, where it has been stalled since hitting it last Friday, currently near 15420. A close below 15400 is a break below short-term price-level support and creates a reversal signal following the small throw-over. Back below 15300 confirms a high is likely in place and then like SPX, we'd have to see what kind of price pattern develops in the pullback to help determine the next move. An impulsive decline, especially if it breaks the uptrend line from December 31st, near 14950, would confirm a much larger decline is in progress while a choppy pullback would tell us to expect another new high, probably into the first week of July.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 15,470
- bearish below 15,300

Keep in mind the longer-term pattern that I showed last Wednesday -- the DOW's monthly chart going back to 1994. The big expanding triangle calls for one more leg down to complete the secular bear. Unfortunately for most investors (for those who hold onto their long positions), it's going to be a far more painful period than the two previous declines (2000-2002 and 2007-2009). And the recovery off the ultimate low is going to take many years (decades) before we see these highs again. There's still the potential for the DOW to rally up to the 16300 area (there's an important longer-term cyclical turn window in the first week of July), which would become more apparent if we get a multi-week choppy sideways/down pullback (big bull flag pattern) but the risk is for the start of a strong decline that will make a 1000-point upside potential pale by comparison to the downside risk here.

The RUT was looking strong this morning after its spike up -- it looked like it was going to finally break free of the 1000 barrier it's been battling this week. But 1008 was the best it could do and it then sold off hard and closed below well below 1000. It was spanked for even trying. The RUT's wave count has been keeping me guessing for a long time and it's not clear to me whether we should be looking for a 3-wave move up from April (to complete a large rising wedge pattern) or a 5-wave move up. If it's to be just a 3-wave move then I believe today's high completed it. If we're to get one more wave we could see the market reverse today's selloff (we've seen that a time or two) and make a new high near 1030 by the end of the month (to hit the top of its up-channel from November). Until it overlaps the 1st wave high of the move up from April, near 945, I'll keep the bullish potential on its chart.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1000
- bearish below 945

Not surprisingly the VIX rallied today but what is surprising is how little it rallied. It gave back quite a bit of its gain in the final hour. There was a clear lack of fear considering the strong reversal in price. It could be today's selloff was "engineered" and those in the know were piling into call positions to take advantage of the next short squeeze. It was one reason I remained a little cautious about today's decline -- I want to see a corrective bounce (3-wave or something a little choppier) followed by another leg down to help confirm the reversal.

If we have seen a top of significance and the market sells off without the VIX showing much sign of fear that will actually be more bearish. It would indicate traders are buying the dip and that could provide more selling fuel when the bounce doesn't happen. On the VIX's weekly chart you can see we only have a tiny little blip so far and it's got a long way to go before we'll see any real signs of fear.

Volatility index, VIX, Weekly chart

The initial reaction to Bernanke's speech saw the U.S. dollar spike down but then started to rally when the stock and bond markets started to drop. This morning's low might have been the completion of a little pullback from last Friday's high and now it's into the 5th wave of the move up from May 1st. If so then we should see the dollar a little higher before pulling back into June. Until something in the larger pattern changes, I see upside potential for the dollar to about 87 after the summer.

U.S. Dollar contract, DX, Daily chart

When the dollar started to rally we saw commodities coming down, including the metals. Gold could work its way a little lower to better support near 1302-1309 before setting up another bounce/consolidation in its stair-step pattern. The one caution about expecting lower prices (gold shorts should have stops fairly tight) is that there is a cyclical turn date the end of May, which calls for a low. The COT (Commitment of Traders) report also shows commercials in a large net long position while speculators are very bearish the yellow metal right now. Neither guarantees a rally but it does warrant caution by shorts.

Gold continuous contract, GC, Daily chart

Monday's high for oil was another test of its downtrend line from September 2012 followed by another failure. Currently near 97, if oil tries one more time to break through it should be able to do it. But the larger pattern suggests a move down to the 86 area before possibly setting up another bounce.

Oil continuous contract, CL, Daily chart

We've got unemployment claims before the open tomorrow and then new home sales at 10:00. No big swings are expected. Friday's durable goods orders are expected to be "less bad" for April than what we had in March.

Economic reports and Summary

They've been painting some pretty lipstick on the piggies lately but last time I checked they still can't fly. Following the money, it's going to be important what the banks can do. After GS had a choppy corrective pullback from its high in February it looked like we were going to see a new high, which has happened and it was bullish for the broader market as well. Today GS has reached a price projection at 162.35, with its morning spike up to 164.47, which is where the c-wave of an A-B-C bounce off its October 2011 low is 162% of its a-wave. The c-wave, which is the leg up from June 2012, is a requisite 5-wave move and therefore can now be considered complete at any time. Its daily candle is a shooting star, as is its weekly candle so far. This little piggy is trying to fly but I think it will soon return to earth.

Goldman Sachs, GS, Weekly chart

The other bank I like to keep an eye on is JPMorgan. It too has completed a 3-wave bounce off its October 2011 low (labeled differently than GS but same end result). It spiked up to the top of its up-channel from June 2012 and then sold off. Today's candle is a flaming shooting star following the little throw-over above the top of its channel. The close back inside the channel is the first sell signal. If it rolls over from here it will leave a bearish divergence at this week's high.

JPMorgan Chase, JPM, Weekly chart

As Todd Harrison at Minyanville likes to say, "As go the piggies, so goes the poke." And we have the SOX to watch to see how the techs might do. Across sectors and indexes I see the same message -- today's reversal off the highs looks potentially significant. Key reversals from resistance following a strong rally are to be taken seriously and I don't see the evidence in the VIX that traders are taking it seriously. I can't say I blame them. Dip? Woohoo, buying opportunity! But buyers may want to be careful what they wish for.

We who follow this market closely know the rally has extended beyond what is reasonable. In fact it's gone parabolic and those never end well. With Morgan Stanley's analysis of net-long and net-short activity showing the bulk of the rally from April has been short covering we know to be careful. The final portion of a bull market is often a capitulation of shorts and I think that's what we've seen. The net result is that we have bulls all in, using maximum leverage, and shorts are all out. That leaves a gaping hole beneath the market and we know what happens when strong selling starts and the program trading stops. A lack of liquidity when traders want out has resulted in flash crashes. We'll be seeing more of those. So be careful out there.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying