Title: Another Newspaper Indicator USA Today's headline was "Bull run gets solid footing" and as newspaper/magazine covers go, this one is about as good a contrarian signal as you'll get.

Market Stats

With today's USA Today newspaper declaring the bull market in good shape and a good time to invest, it's a clear signal that the trend is now well identified and reported. It's a very good signal that the trend has likely run its course when a general publication (newspaper/magazine) identifies it and reports it to the public as knowledge that it will continue. It doesn't mean it will reverse here and now but the charts also warn us of that potential.

As opposed to yesterday, today's market started out weak with a gap down and never recovered from there. Yesterday's rally started off strong (gap up) but almost immediately started to sell off. The little bump back up into the close was followed by a gap down this morning. But as has been typical for the market, the day's big move was finished in the first 10 minutes. Once again the cash market caught up with the futures and then went relatively quiet. Following Memorial Day and the unofficial kickoff to summer we could find lots of mixed signals and slower trading from here.

Following this morning's open SPX lost 14 points and hit a low of 1646.40 by 9:40, bounced, dropped a little lower, got a bigger bounce, pulled back in the afternoon and closed at 1648.36, 2 points above its 9:40 low and almost -12 points for the day. The advance-decline line recovered slightly from the morning but the advance-decline volume finished the day near the low for the day. As you can see in the table above, the decliners outnumbered advancers almost 3:1. So it was a weak day.

There was no news that drove the market lower (no news is bad news I guess) and the somewhat subdued trading, following the initial low, leaves us guessing what the market is up to. We're getting some mixed signals from the market, such as weakness in the Transports, home builders and REITs (real estate), while seeing some relative strength in the banks and semiconductors. Strength in the latter two should keep bears cautious while general price weakness yesterday and today should keep bulls cautious.

Utilities were also weak today and it would appear the dividend-paying stocks are being shunned by investors. The REIT index is now down about -7% in the past five trading days, which is the equivalent of about two years of dividends from those stocks.

The home builders were one of the weakest sectors today, which might seem a little surprising considering the positive news we've been hearing lately about the housing market. I'll cover this a little more later in this report and explain why I think a check under the hood is important to look past what the media likes to report.

There's not a lot to report on this week so I'm just going to jump right into the charts, starting with a weekly view of SPX.

The weekly chart of SPX shows it's still bullish as it holds at the upper side of a parallel up-channel from November. Last week's inside candle and so far this week's doji are simply signs of indecision. Both sides are making their arguments but neither side is winning. Sounds like Congress. I could easily argue for another leg up to at least 1700, if not 1750, into June but I think the higher probability is for at least a larger pullback if not the start of the next bear market cycle. I show the potential for a larger pullback correction into August before another rally leg but that's just speculation at the moment (that potential would become clearer if we get a choppy sideways/down kind of correction from here). If it starts impulsing to the downside and drops below its April 18th low at 1536 it would confirm a major high is in place.

S&P 500, SPX, Weekly chart

Another possibility for a new high before the bear returns is shown on the daily chart below (light dashed green). We could see a pullback that drops lower but stays inside its up-channel from November, the bottom of which is currently near its 50-dma at 1596. That could be followed by another leg up as the 5th wave in the move up from June 2012 (but not as large or take as long as shown on the weekly chart above). It would also fit a major cyclical turn window in the first week of July. It's that turn window, which follows a very reliable cyclical pattern, which has me seriously considering this bullish potential (following a deeper pullback into early June). A drop below the bottom of its up-channel, and 50-dma, would be a serious breakdown, in which case a bounce up to a lower high in the first week of July would be my expectation.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1687
- bearish below 1595

The 60-min chart below is a mess of different possibilities (and I'm not showing them all). The one I'm leaning toward is the bold red line -- a further breakdown as the start of a much larger decline. But I'm not favoring this scenario strongly yet because I don't have enough evidence from the price pattern to get me aggressively bearish here. So I remain cautious about the bullish possibilities shown with the light green dashed lines.

S&P 500, SPX, 60-min chart

The most immediately bullish scenario calls for a rally right from here, which would be confirmed with a rally above 1675, and it would have me looking for at least 1700 if not 1725 by early June before looking for another potential top. Another possibility is for price to chop sideways this week (in the sideways triangle) before rallying up to about 1700 in early June. The 3rd bullish potential shown is for a deeper pullback first, perhaps down to either 1622 (two equal legs down from May 22nd) or 1590-1600 and the bottom of its up-channel from November. That could then be followed by another rally leg into the first week of July. It takes a 5-wave move down and a drop below 1590 to get me more aggressively bearish the market.

Yesterday's high for the DOW came very close to last week's high but left a bearish divergence against it (as can be seen on the oscillators on its daily chart below), which is a short-term bearish setup. Last week's high and yesterday's high were also the result of large gaps to the upside followed by a selloff. The highs were attempts to get through resistance at the top of its up-channel from October as well as its trend line along the highs from late-January. Again, the failure to hold on both attempts is bearish. The DOW could chop its way higher in an ending pattern but at this time it's looking more bearish than bullish. A drop below last Friday's low near 15200 and its 20-dma, near 15190 tomorrow, would have the DOW targeting its uptrend line from December-April, near 15025 and then its 50-dma, currently near 14845.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 15,520
- bearish below 15,200

By mid-May NDX had broken above the top of its parallel up-channel from November as well as the trend line along the highs from April-September 2012. Both of those lines crossed near 2995 last week and NDX dropped back below them last Thursday. It popped back above the lines yesterday but gapped back below them but found support at its 20-dma and finished the day with a doji. It could try one more time to make the price projection at 3062 (leg up from April 18th equal to 162% of the 1st leg up from November) but with the daily oscillators turned down it's not looking like the bulls are in control here. A breakdown from here could see a quick closure of its May 3rd gap (2911) and a test of its 50-dma, currently near 2880.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3037
- bearish below 2965

I'm continuing to use the RUT to show the idea of a new high to complete a 5-wave move up from April. Again, this is not necessary because of the larger wave count being satisfied with a 3-wave move but I can't rule it out yet (not until it drops below the April 25th high near 945. However, if it drops from here and below last week's low at 970 I think that would go a long way toward negating the expectation for a final leg up as shown in green. I'm leaning short here but not aggressively.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1000
- bearish below 970

Bonds have been declining sharply since their highs on May 1st and it has many pundits declaring the end of the bull market for bonds. They could be right but I remain unconvinced at this time. The weekly chart of TNX (10-year yield) shows a choppy bounce off the July 2012 low, which continues to have me leaning bearish yields (bullish prices). But the new high this week, above the March 8th high, suggests we'll see yields continue to chop higher into the fall before setting up for the next (and final) leg down. A double zigzag wave count (two a-b-c's separated by an x-wave) for the bounce from July 2012 is the wave count that I'm showing for the 4th wave in the move down from April 2010. I'm showing it completing in October near 2.33% (which could test the 200-week MA again) but obviously that's just speculation at this point. The 5th wave, if we get it, should drop TNX to about 1% sometime next year.

10-year Yield, TNX, Weekly chart

With the spike up in bond yields, and therefore mortgage rates, there's been a mad dash to get into a house before it becomes more expensive merely because of higher mortgage rates. This demand, along with a high demand from hedge funds picking up houses as investments, has driven up housing prices. But I think it's going to be a short-term phenomenon for two reasons: one, hedge funds will stop buying homes once they feel there are no more good deals out there (it's already getting to the point where it's going to be hard to get a return on their money); and two, as discussed above, I don't think interest rates have hit bottom yet and once rates start coming back down there will be less pressure to "hurry up and get something."

If I'm right about the hedge fund purchases, keep in mind that they're buying homes as an investment, not to live in. If they feel their investments are heading south they'll likely start dumping homes back onto the market (most expect the housing market to have bottomed and therefore believe they'll be able to either rent them or flip the homes back to the market at higher prices (we've seen this movie before). REITs are starting to show signs of weakness and hedge fund managers might not want to create another REIT for their housing inventory. What's creating a housing demand today could turn into a housing glut in a few short months.

We've been getting some good housing numbers recently but it's not helping the stock prices of the home builders. And it's certainly not helping the price of lumber, which I look to as part of the demand equation. The futures market looks ahead to see what the demand for lumber is expected to be and they make their price bets based on what they see (some for hedging, others for speculation). And since the March high the price of lumber has plummeted, almost as much and as sharply as the April-June 2010 decline and currently down almost -33% from March. Is this forecasting trouble ahead for home builders?

Lumber contract, Weekly chart

Interestingly, the sharp decline in lumber prices in 2010 also saw a steep pullback in the stock market -- SPX lost 209 points (-17%) from 1220 down to 1011. A similar -17% decline from 1687 would be a loss of 287 points so down to 1400 (the December low and a complete retracement of this year's rally). At the moment the stock market has been ignoring this particular warning (and many others) but I seriously doubt it will ignore it for long. Keep in mind the chart I showed last week, published by Morgan Stanley, that highlighted the significant decline in short positions in this market and how little "real" buying has been done since April's low. And we have a very high level of leverage being used by hedge funds and other investors. Everyone is in the pool. As the stock market whistles past the graveyard, even Casper's "boo!" could send the bulls running.

With lumber prices predicting a slowdown in home building (one of the highest uses for lumber), the home construction index is looking toppy but hasn't yet reflected what lumber is telling us. I had pointed out recently that the index was pushing up against the top of a megaphone pattern (the trend line along the highs from late January), which could be the left side of a diamond top but obviously that's just a guess right now. The megaphone and diamond top are both bearish reversal patterns. Yesterday's rally attempt was slammed back down and it lost a bunch of points today. I think the top is in but proof of that won't come until it drops below the April 22nd low at 442. If the home builders give up their rally you can think of them as a sentiment indicator and it would spook a lot of stock market bulls. But obviously it would be more bullish if the pullback is followed by another push higher (for more than just a head-fake new high and reversal back down, in which case the 50% retracement of the 2005-2008 decline, at 625, would be the next upside target.

U.S. Home Construction index, DJUSHB, Weekly chart

Since the dollar's high on May 17th we've seen alternating up and down days for the dollar and they're not small moves. It looks like a bullish consolidation pattern but I'm not expecting the dollar to make it that much higher before it begins a larger pullback next month. The larger pattern remains bullish but it's due for a rest.

U.S. Dollar contract, DX, Daily chart

As with the dollar, the metals have been consolidating for the past week and a half and what's not clear at the moment is whether gold is going to pop a little higher before the next leg down or if it will drop a little further and then start another corrective bounce. In either case, unless gold can get above 1450 I see it working its way lower for next couple of months.

Gold continuous contract, GC, Daily chart

Oil has also been chopping up and down but since its high on May 6th, and the retest on May 20th, the pattern supports the idea that we'll see a drop to the 86 area before potentially setting up a larger rally. A rally above 97 would likely lead to a stronger move up, one that could reach the downtrend line from 2011-2012, currently near 104.

Oil continuous contract, CL, Daily chart

Tomorrow morning we'll get the unemployment claims numbers, as well as potentially market-moving reports on GDP (second estimate for Q1) and pending home sales.

Economic reports and Summary

The stock market is acting weak, as evidenced by the failure to add to its gap up yesterday and the gap down this morning and failure to close the gap. Another leg down to match last week's decline remains the bearish pattern at the moment, with further downside potential if THE high is in place. We don't have enough evidence of THE high and therefore playing the market one leg at a time is the recommendation. Go for base hits and leave the homerun attempts once we have a clearer picture of the larger pattern.

We've got mixed messages from the various sectors and that's not helping us figure out the next big move for the market. But if the bond market is ready for a bounce back up (to at least correct a portion of this month's decline) we could see money rotating back into the bond market. The relative weakness in the home builders could be a bearish heads up but strength in the semiconductors and banks is a warning to bears. We're entering summertime trading and we might even see money just slosh back and forth between sectors. Trade carefully until the picture clears and keep your stops tight, especially those in long positions.

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