Bernanke's prepared testimony helped the market start positive but his testimony then failed to help any further. The indexes finished in the green but only marginally so. Just a day of consolidation.

Market Stats

The market remains bullish in its move up from June and the bears have been able to do little to dent the move. Momentum is slowing, as is trading volume, and there are signs of weakness when looking under the hood of the market, but so far the bulls continue to hold the reins to control the stock market.

This morning's economic reports (housing related) had no impact because it only cared about what Bernanke said and was going to say. At 8:30 AM his prepared testimony for the House Financial Services Committee, to be held at 10:00 AM, was released and the initial reaction in the futures was positive (negative for the dollar). But when Bernanke started answering questions, shortly after 10:30, there was a slightly less positive response.

Bernanke reiterated that he believes the Fed could start scaling back its asset purchase program later this year if the economic data supported such a move (basically not telling us anything and certainly no different than what we've been hearing). But this time, unlike in May, the market seems to be rejoicing from his comments. Well, at least it's not tanking. Need I say more about news is not important; only the reaction to the news is important and right now the market wants to rally. That should be enough to frighten the bears away.

What's more than a little fascinating for those who study the market from a sentiment perspective (which drives the market, regardless of the actual news), is how much the market still believes in the Fed. When that belief has run its course the market will simply not respond to anything the Fed (or economists in general) say about the economy or markets.

The chart below shows the Fed's GDP forecasts each year since 2009 (the red line showing a steep rise from less than -1% in 2009 to above 4% by 2011. Then each year they've lowered the forecast slightly but always showing growth. In the meantime the gray line shows an improvement into 2010 and a steady decline since then, and below all of the Fed's rosier projections.

Federal Reserve GDP Forecasts, 2009-2013, chart courtesy

With this kind of underperformance by the Fed why does anyone even listen to what they have to say? They're always wrong and especially at major turns. And based on actual economic performance does anyone really believe the Fed will have the numbers they want to see before reducing asset purchases? I've been saying for a while and firmly believe the Fed will double, and double again, their asset purchases long before they start "tapering." They long ago boxed themselves into a corner and the only way out, as in any pyramiding scheme, is to increase what you're doing until the whole things collapses. Those in charge are simply hoping the collapse doesn't happen on their watch.

Bernanke said he thinks the asset purchase program could be completed by the middle of 2014, but again said this would be dependent on economic and financial goals being achieved along the way. In an effort to assuage bond market fears he also said the Fed would remain "highly accommodative" for the foreseeable future, which of course means they'll be doing everything they can to support lower rates.

Several analysts mentioned they thought Bernanke's comments added nothing new but he sounded a bit more dovish, trying to back track a little on his earlier comments that tanked the bond market, sending yields higher (including mortgage rates).

The higher mortgage rates are hurting housing, as this morning's reports showed. Housing starts were down -10% to 836K from May's upwardly revised 928K. Permits were also down -7.5% to 911K from May's upwardly revised 985K. Following the previous week's -4.0% decline in the MBA Mortgage index it dropped another -2.6% in the past week.

The overall slowing in housing is what has Bernanke worried. Plus he is of course worried about the increase in rates in general -- he likes the fact that the stock market has been rallying (for the "wealth effect") but what the Fed is most concerned about is keeping rates as low as possible. It's when the bond market revolts that the Fed will be in trouble (the time when the rest of the markets realize their emperor wears no clothes).

Since identifying how corrective the pullback appeared from May, especially for the RUT, I've been looking for another rally leg following the June low. The wave pattern has played out very well and as expected. It was a good opportunity for a long play at the June low after achieving two equal legs down from May. But now is not a good time to be long the market. While I expect (hope) to see one more high this week or next we're at a place in the wave pattern where THE high could be put in place at any time. Therefore I consider the market very risky for longs while at the same time it's too early to get aggressively short. I suspect in a week's time we should know whether or not the final high has been made or being made.

One of the signs of potential trouble for the market is the amount of "air" beneath the market. Last week I showed a daily chart of the SPY chart to show how "gappy" it is in the rally from June 24th. The updated chart below shows it continued into Monday, with most of the rally occurring during the overnight sessions in the futures market. Following the gaps to the upside the market made little progress each day and the end result is a bunch of small dojis with a lot of "air" between them. That makes the market more vulnerable to a downside disconnect once the rally completes. And as the final wave of the rally from November, which in turn will complete the entire rally from 2009, the weakness of the 5th wave is something the bulls now have to be very cautious about. You can also see the decline in volume in the rally from June -- not a good sign for the bulls.

SPDR S&P 500 ETF, SPY, Daily chart

By any measure we've had a strong rally from June and many might say too strong (too much, too fast). It has all the appearances of a blow-off top. It's got everyone chasing it higher again, having missed the start of it and now trying to grab hold of the end of it. The AAII bull ratio has rapidly increased and currently stands at 73%, which is an indication of extreme optimism about the future prospects for the market. We all know these sentiment measures are not timing tools but they're warning us that things are getting a little too frothy again on the bullish side. The boat could tip over at any time.

Bulls all lining up on one side

The momentum players (HFTs - High Frequency Traders) will step aside and reverse direction (or simply get out of the market, leaving a lack of liquidity, which makes it hard for sellers to try to sell) before most traders see it coming. So while I don't think it's yet time to be thinking short the market, since I see more upside potential, I'd start using further rallies to start lightening your long positions, especially since I strongly believe the next high will mark THE high for the rally from 2009 and start the next major bear market.

There are several timing studies (cyclical, Fibonacci, anniversary) that suggest this Friday the 19th could mark THE high for the market. I've been mentioning for the past month or more than a few different cyclical studies coincide in the middle of July for a major market turn. The market has been in a strong drive to the upside since December but is now looking tired. It's been about 136 trading sessions now where the market has not seen more than a 3-day pullback. The longest previous run like that was 53 days according to Jeff Saut, an investment strategist at Raymond James. As he said, "we are outta time, outta momentum, outta leadership, and outta the oversold condition that spawned this stampede. The only question in my mind is if we end this thing with a whimper or a blue-heat, upside blow-off."

If I've got the wave count for the move up from June 24th correct we've got one more wave up and then kiss the rally goodbye. I consider the final wave to be the riskiest to play (from the long side) but it also means it's too early to look to short the market. What will be interesting is what happens after the turn date on the 19th, which is of course the completion of opex week this week.

I'll start off tonight's review with the DOW's charts to see what kind of upside potential we could be looking at and where and when we'd have a signal that the bulls are probably done and the bears are taking over. The weekly chart shows the DOW approaching its broken uptrend line from December through the April low, currently near 15725. That's also the location of the top of its parallel up-channel from October 2011. Above that is the trend line along the highs from 2000-2007, just above 16K. Once this leg up completes it should be the completion of the rally from October 2011 which will complete the 3-wave move up from 2009. On a weekly basis the bulls will not be in trouble until the DOW breaks below its June 24th low at 14551, although there will be plenty of shorter-term evidence when a top is in place.

Dow Industrials, INDU, Weekly chart

Getting in closer with the daily chart below, there is another parallel up-channel for the leg up from June. Since last Friday it has been consolidating in what should be the 4th wave in the move up from June 24th. It should then be followed by another rally leg and for now I'm showing upside potential to the mid-line of the up-channel from June where it crosses the top of its up-channel from October 2011, near 15800 before the end of the month. That's obviously beyond the potential turn date this Friday the 19th so it will be important to see if the rally can continue past this week. A drop below the June 27th high at 15075 would indicate the rally has finished, although a drop out of its up-channel from June would be a bearish heads up, the bottom of which is currently near 15290.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 15,500
- bearish below 15,075

The up-channel from June 24th is shown up close on the 60-min chart below. After tagging the top of the channel last Friday it has been motoring sideways in a tight trading range. If that trading range continues the rest of the week it will run into the bottom of the channel next Monday. Another rally leg should then follow and the 5th wave could make it up to above 15900 if the 5th wave equals the 1st wave, which is what I'm currently depicting. It could also drop down to the bottom of the channel and only make it up to 62% of the 1st wave, which is shown with the light green dashed line, giving us an upside projection to only about 15625 in that case. Once the 5th wave up gets started (assuming we'll get it) I'll be able to zoom in on a more accurate upside target.

Dow Industrials, INDU, 60-min chart

SPX has the same pattern as the DOW and for a while I've been thinking 1700-1710 for an upside target, perhaps up to 1750 if the rally holds on into the end of the month. A drop below 1650 would be a bearish heads up and below the June 27th high at 1620 would confirm the high is in place.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1685
- bearish below 1650

The strong spike up for NDX has taken it from its uptrend line from November 2012 to the trend line along the highs from September 2012 - May 2013, which fits as the top of a rising wedge pattern for the c-wave of an A-B-C move up from October 2011. If it does a little throw-over above the wedge it could tag the Fib projection at 3115 where it will achieve the 127% extension of the previous decline (May-June), a common reversal Fib. By the same token it would be more bullish above 3116 if it stays above that level. The rising wedge pattern for the move up from June 2012 fits well as the completion to its rally from 2009.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3116
- bearish below 2825

The RUT has been one of the strongest indexes in the rally from June 24th and as can be seen on its chart it has remained inside a very tight and steep up-channel. Today it closed marginally below the bottom of the channel, near 1044.50 Thursday morning. The channel is only a guide but after holding the uptrend line for the previous 15 trading sessions it would be a bearish heads up if it breaks.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1053
- bearish below 993

Bonds have been rallying since their July 5th lows but in a bit of a choppy pattern. They haven't rallied enough or in an impulsive pattern for me to feel more confident that the decline July 2012 has completed and a new (and final) rally leg has started. As I showed last week, the 10-year yield (TNX) pulled back from the price projection at 2.73% (and slightly below its downtrend line from 1981-2007) and has dropped further this week. It's a good start for a reversal but better evidence will be a drop below 2.4% to break below price-level support and its uptrend line from May 1st) and then 2.0%.

10-year Yield, TNX, Weekly chart

The banks have been chopping their way higher since the spike up on July 5th and BKX has reached the price projection at 64.60 that I've been showing on its weekly chart. There's a price projection, based on the wave relationship in the move up from November 2012, at 64.90 and BKX has so far stalled in this 64.60-64.90 area. One more minor new high could complete its rally following 3 drives to a high following its July 9th and 15th highs. But if the bulls maintain control for another couple of weeks we could see BKX reach the top of its up-channel from October 2011, which will be near 67.80 by the end of the month.

KBW Bank index, BKX, Weekly chart

The home builders bounced today even though the numbers were not very good this morning. I guess they were "less bad" than some had feared. On a longer-term basis I continue to watch the potential diamond top pattern that I began to show after the April low. I'm not going to get excited about any move unless it breaks out the top or bottom of the pattern.

DJ Home Construction index, DJUSHB, Weekly chart

The dollar has been whippy for months now and its direction is still not clear. I continue to lean toward the long side but admittedly neither side has probably felt confident about direction.

U.S. Dollar contract, DX, Daily chart

Gold made it up to price-level resistance near 1300-1310 with a high of 1299.70 today but quickly gave it up and closed below Monday's and Tuesday's lows. It almost reached its downtrend line from April, near 1303. There's a lot of resistance just overhead and while it could head a little higher in its bounce I think there's a good chance for a drop lower to its Fib target zone at 1150-1155.

Gold continuous contract, GC, Daily chart

Oil has remained bullish in the past week by the mere fact that it's holding above its downtrend line from May 2011, which it broke above last week and is currently at 103.38, about $3.30 below its current price. An upside target at 108.75, for two equal legs up from June 2012, remains in effect and for the past 6 trading sessions it has chopped sideways between these two levels. The top of its parallel up-channel from June 2012 crosses the March 2012 high at 110.55 in mid-August so above that level would be a confirmed bullish move for oil. But at the moment it could go either way.

Oil continuous contract, CL, Weekly chart

The Philly Fed index and Leading Indicators, both out at 10:00 tomorrow morning, might move the market some but I'm not seeing much that will move the market now that we're past Bernanke's testimony. There is the potential for the rest of the week to finish quietly since there are no reports on Friday. Earnings might have more sway on the market.

Economic reports and Summary

So far the sideways choppy consolidation near the high supports the idea that we're getting a 4th wave correction in the move up from June and that once the consolidation completes we'll get a 5th wave up. This Friday the 19th is a potentially important turn date and it's possible the consolidation is preparation for a breakdown, which has been common at major highs in the past. So don't bet the farm on another leg up. The final 5th wave could be a no-show, like I've seen countless times before, and the consolidation could catch too many leaning the wrong way.

Because the pattern would look best with another (and final) rally leg I think it's still too early to be thinking short. If it suddenly breaks down I figure there will be plenty of time to get aboard what should be a large decline. That makes it a little easier to be patient here -- don't trust the upside but it's too early to try the downside. Enjoy the summer weather and be patient for the setup for the bears to take a run at this thing.

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