Price action since the August 7th low has been a choppy and whippy sideways consolidation. Bulls will argue it's a bullish continuation pattern while bears will argue it's part of a topping pattern. Neither side can be declared a winner yet.

Market Stats

Last week I declared the top is in. Since last Wednesday the market has done nothing to help confirm that call and in fact I see divergence between indexes to the point where some indexes could make new highs (NDX did yesterday) while others do not. It could be part of the divergence seen at tops (such as the new highs in late October 2007 by the techs but not the others) but at the moment it remains unclear what this market is up to.

With the whippy price action over the past week it's been driving traders on both sides a little crazy. If you don't like the direction today just wait a day. But try putting on a position to hold for more than a few hours and you've likely been stopped out. This could easily continue for the rest of opex week as more stocks get pinned to key strike levels. Depending on the index viewed one could easily argue either the bull or the bear case and that requires caution by both sides. There are good times to trade and there are bad times to trade. This is not a good time, although I will admit to carrying a small short position in anticipation of a breakdown that comes as a surprise.

The bulls will argue that the overbought condition into the August 2nd high is being relieved in time rather than a larger price pullback. We've seen this happen many times and the longer-term uptrend from November clearly needs to be respected. We had a false breakdown in June and both sides have been conditioned to expect any pullback/consolidation to be just another buying opportunity. And we've seen the buyers come back in each time the market has threatened to break down this week. SPX 1687 and DOW 15400 are being heavily defended. We of course have big players protecting their short puts into opex so that extra "help" might last the rest of the week but could be absent next week.

Bears are arguing their point that tops are a process (not a v-top like bottoms are made) and that this messy back and forth price action is a topping process. The data showing a strong handoff of inventory from professional money managers to the retail crowd supports the bear's view. But that's a process which could continue for who knows how long. That kind of information does not tell you when a top will be made. And we don't know if additional information will come along and convince those money managers to get back in the game and start accumulating stock.

The only economic report of interest this morning was the report on the PPI numbers, which showed "disinflation" with PPI coming in at 0%, down from +0.5% in June, while core PPI stayed the same at +0.2%. It always cracks me up when the Fed heads report that they're battling disinflation. They're programmed to never ever use the word "deflation" otherwise their head might fall off or something equally as bad. At least it gives the green light for the Fed to keep its foot on the gas pedal with a program that's clearly not working but they don't know what else to do (they're proving Einstein's statement correct -- the definition of insanity is doing the same thing over and over again and expecting a different result).

The bottom line right now is that the choppy mess is driving traders on both sides to drink. It's a time when traders support their brokers but not themselves. It's a time to trade lightly, if at all, while we wait to see how the bigger picture develops. That will be tonight's theme as I go through my charts but with me leaning bearish.

Starting off tonight's chart review with a weekly view of SPX, there's nothing clear yet as to whether the market has made THE high or if it will press higher to an upside target at 1768, where the 5th wave in the move up from June 2012 would equal the 1st wave. It has already met the minimum expected projection at 1688, where the 5th wave is 62% of the 1st wave and from a form and price perspective the pattern can be called complete at any time. The weekly oscillators are now starting to cross back down so there is the potential for the market to roll over from here.

S&P 500, SPX, Weekly chart

SPX has been clinging to 1687, the May high, for life support but the more it pounds on this level the weaker it becomes (buyers at support start to give up). It has been breaking on a few gaps to the downside but then it quickly recovers with a couple of buy programs. Intraday breaks don't count; it's the closing price that matters. And today it closed near its low of the day and below 1687 for the first time since it peaked on August 2nd. That left a bearish taste in my mouth at the close and suggests we might see downside follow through on Thursday.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1710
- bearish below 1682

If you squint you can see a H&S top on the daily chart and a closer view of it on the 30-min chart below (the head and right shoulder). The uptrend line from July 16-26 is the neckline and is currently near 1683.50. The past week can be viewed as building a larger right shoulder and a break below Monday's low near 1682 would be a confirmed break of the neckline. The downside price objective would be 1653 (the height of the head above the neckline, projected down from the break), which would drop it down to support at its 50-dma, near 1656, and its June 18th high at 1654.

S&P 500, SPX, 30-min chart

The DOW has been weaker than the other indexes and it has now broken support near 15400, which it's been clinging to for a week. It has now dropped down to potential support at its June 18th high at 15340 and not much further down is its 50-dma at 15278. It's been a sloppy decline, which looks corrective and therefore potentially bullish, but sometimes these end up being stealth declines that suddenly let go to the downside. That's the direction I'm currently leaning.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 15,560
- bearish below 15,490

NDX has a potentially bullish pattern that I tried to outline on its daily chart below (more easily seen on its 60-min chart). A choppy sideways consolidation might have formed a sideways triangle for a 4th wave in the move up from June. It broke out of the triangle yesterday and has dropped back down to the top of it today, setting up a bullish kiss goodbye if there's a rally on Thursday. But it has to rally right away on Thursday otherwise the bears will take over and a break below 3106 would leave a failed bullish pattern. I don't think it's very bullish anyway, especially since these triangles always point to the last leg of the rally and it might have already finished or could pop up to 3185 by Friday to complete the pattern.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3138
- bearish below 3106

Thanks to Carl Icahn's pump-and-dump scheme yesterday (slap my mouth for even suggesting such a thing) he helped AAPL jump over resistance near 470 (broken H&S neckline and 200-dma). I say pump & dump in jest (of course) since Icahn believes AAPL is heading back to 700. While it's all legitimate use of social media there is a reason why so many investors believe the market is rigged against them and that it's not a level playing field. That sense of frustration is leading to more and more investors remaining very skittish about the market, regardless of its rally. They're waiting for one piece of news, via Twitter, Facebook or overseas, that pulls the rug out from under them. And that nervousness makes the market vulnerable to a LOT of selling when it starts.

I still look at AAPL as a good sentiment stock, even though it doesn't always trade with the market. If people feel bullish or bearish about AAPL I think it will spill over into how they feel in general about the stock market. It could of course be the other way around. So I'll take a look at its daily and weekly chart to show what I'm watching.

I'm looking at a band of resistance for AAPL from about 497 to 507. Today's rally up to 504.25 hit its 50-week MA near 497 and the projection for the 5th wave in the move up from June 28th at 499.65, which is where it's equal to the 1st wave. Then there's century-level resistance at 500 and the 38% retracement of the 2012-2013 decline is near 507. If a 5-wave move up from June completed today, in what will be a more bullish move, I would expect a pullback to correct the rally (some Fib retracement) before heading higher. But the bearish possibility here is that the rally from June completed the c-wave of an a-b-c bounce off its April low and that another large decline will be next (potentially down to the 300 area). Either a pullback or the start of the next major decline for AAPL could leave late buyers holding the bag (the dump following the pump) if this week's high is followed by a reversal. Today's candlestick is a long-legged doji, which is a potential reversal pattern if followed by a red candle on Thursday (especially if AAPL gaps down).

Apple Inc., AAPL, Daily chart

From a weekly perspective you can see how the potential a-b-c bounce fits in relative to the 2012-2013 decline. Today's high at 504.25 was a little shy of the 38% retracement of its decline, at 507.33, and up to price-level S/R near 504-506 from November 2012 through January 2013. It's very possible the a-b-c bounce is actually a 1-2-3 bounce and that's obviously a lot more bullish. We should find out soon whether the bounce is just a correction in what will be a larger decline or if in fact the April and June lows were very good buying opportunities for AAPL. If it starts a choppy consolidation it will be bullish but if its starts back down in a sharper decline, especially with a break back below the neckline at 471, it's going to be bearish (leaving a bull trap this week).

Apple Inc., AAPL, Weekly chart

Of the various indexes the RUT is one of the most bearish looking ones. The very choppy price action off its August 7th low looks more like a bear flag pattern than anything else. It's very hard to look at it as anything but a bearish continuation pattern on top of its parallel up-channel from October 2011. It looks like another H&S topping pattern with a downside price objective near 1024, or maybe down to its 50-dma near 1017. The bulls could view it as a bullish consolidation pattern on top of support but following an impulsive decline last week I would expect the RUT to break lower. At least it has a narrow spread between key levels -- bullish above 1056 and bearish below 1042.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1056
- bearish below 1042

Since early July I've been looking for the possibility that the 10-year yield (TNX) would top out at 2.744%, which is where the c-wave of a large A-B-C bounce off the July 2012 low would be 162% of the a-wave. The July 8th high came close, at 2.723, and the August 2nd high came closer, at 2.737. Both of those highs were gaps to the upside followed by a selloff (buying in the bonds). That projection now intersects on Thursday with the trend line along the two highs in July and August as well as the broken uptrend line from May 1st, which was broken last week. A back test at the 2.744 projection would do a very nice job finishing its rally. If the larger A-B-C bounce off the July 2012 low is the correct wave count then we'll be looking for TNX to start the next (and final) leg down into next year (to about 1%). I have read very few analysts calling for the bond market to rally so it will be interesting to see if the pattern is identifying too many lining up on the bearish side of bonds.

10-year Yield, TNX, Daily chart

Last week I showed the home construction index and the break below the trend line along the lows from February. This was a bearish sign for the index and it hasn't improved in the past week. Last Wednesday's break was followed by a bounce back up to the line on Monday for a back test. A kiss goodbye on Tuesday sealed the fate for this index with a breakdown on Tuesday and lower today. A breakdown in the home builders is not a good sign for the housing market and in turn not a good sign for our economy. There are too many horses hitched to that wagon and when it leaves town there go all the horses. Now poor Bernanke won't even have any horses to lead to the water.

DJ Home Construction index, DJUSHB, Daily chart

Last week the TRAN broke its uptrend line from June, back tested it on Thursday (and failed), dropped back below its 20-dma, back tested it on Tuesday and also failed that back test with today's new low for its decline. It's getting close to its 50-dma at 6369 so it could find at least temporary support there but so far the bears are controlling this one following a good setup for a major reversal off its August 1st high.

Transportation Index, TRAN, Daily chart

The U.S. dollar looks to have found support at its uptrend line from August 2011, near 80.90. The current bounce off last Thursday's low looks like it should develop some legs to the upside so it remains bullish as long as it doesn't drop back below 80.90.

U.S. Dollar contract, DX, Daily chart

Silver's bounce off its June 28th low looks like an a-b-c bounce because of the choppy a-wave (the first leg up to the July 23rd high). Yesterday it achieved equality between wave-a and wave-c at 21.51 and today it pushed a little higher and tagged the top of its parallel down-channel for price action since the end of 2012, currently near 21.85, which was today's high). It's also now close to price-level S/R at 22. So silver would be more bullish above 22 but remains bearish below that level. If it starts back down from here there is a downside price projection at 16.67 where the 5th wave in the leg down from November 2012 would be equal to the 1st wave.

Silver continuous contract, SI, Daily chart

The 2nd leg of gold's bounce has been weaker than silver's since gold has not yet been able to make a new high above July 24th high at 1348.70. Monday morning's high at 1343.70 is the best it's been able to do so far and as can be seen on its chart, it continues to find the bottom of its parallel down-channel from September 2011 to be resistance, currently near 1336. I see upside potential to 1376, where it would tag the 62% projection for the 2nd leg of its a-b-c bounce off the June 28th low. It's also where the broken uptrend line from April-May intersects its downtrend line from February-April next Tuesday. But if silver starts back down this might be all we'll see for gold's bounce. It would be more bullish above 1376 for a run up to 1441 (two equal legs up from June) or higher.

Gold continuous contract, GC, Daily chart

Like the stock market, oil has been chopping up and down for about a month now, stuck in a trading range from about 103 to 109. There's at least short-term potential for a rally to resistance at 110.55 (March 2012 high and the top of its up-channel from June 2012) but it's not clear yet whether even that modest bullish target will be achieved. It's at least bullish that the pullbacks in the past two weeks have used the broken downtrend line from May 2011 - March 2012 as support, currently near 103. A drop below the August 8th low at 102.22 would be bearish.

Oil continuous contract, CL, Weekly chart

An interesting chart shows why traders might not want to be bullish oil. Apparently many traders are now bullish oil and it's not a good idea to be on the same side of the boat as them. The chart below shows the price of oil vs. the COT (Commitment of Traders). You can see the relationship between the times the COT report showed an excessive number of traders long oil and the price peaks in oil. The latest COT report shows a significant jump in the number of traders long oil and that does not bode well for its price.

Crude oil vs. COT, Weekly chart, courtesy Bloomberg

Thursday will be a busier morning for economic reports, as can be seen in the table below. We've got CPI numbers, which are expected to be about the same or lower than June, and some reports that will show what kind of manufacturing strength the economy is showing (or not), including the Empire Manufacturing index, Industrial Production, Philly Fed and capacity utilization. Expectations are for more signs of slowing, which would keep the Fed with its foot on the gas pedal so the market would probably like signs of weakness (in our bizarro world).

Economic reports and Summary

I'll leave you with one more chart to show why caution is warranted in this market and why I think some exposure to the short side is the right way to go (give yourself some time for the trade to work if using long options such as buying puts).

The chart below shows SPX on top and Rydex leveraged funds for the SPX and NDX (how much is in bullish vs. bearish leveraged funds) at the bottom. There's a red dotted line running across the bottom chart at $500 million and each time bullish funds get above that level there's been trouble for the bulls. This chart runs from 2010 through the present and you can see how the peaks line up, including the last one in May 2013. There was a quick exit from bullish funds into bearish funds into the late June low and now a rush back into bullish funds. Too much too fast is what I see and I think the bulls are setting themselves up for major disappointment, especially if they hang on during the next downturn, thinking "it always comes back and I'm not going to let the market shake me out this time like it did in June." In my opinion that would be a very painful mistake.

SPX vs. Rydex leveraged funds, 2010-2013, chart courtesy

When you combine this sentiment chart with the fact that traders are fully margined in their accounts, we're a tinder box looking for a match. Professional traders have been selling their inventory in huge numbers to the retail traders who are rushing back into the market. When I see price patterns that can be counted as complete and read about these sentiment measures I can't help but feel now is a good time to be thinking short, not long, the market. Look for some good opportunities in your favorite trading vehicles. It should be an all-the-same market with no place to hide so it's not going to matter much what you choose. Don't spread yourself too thin and keep a tight control over your trades. Bear markets are very tough to trade.

Price action over the past week has been choppy and whippy and it's unclear whether it's consolidating before another run higher or consolidating before dropping lower. Depending on how you view the market you'll see it differently. It's easy to say the uptrend remains intact and therefore we should be looking higher. But based on the break of uptrend lines from June, along with wave counts that suggest the leg up from June completed, I have to side with the bears here and stick with last week's call that THE high is in place, at least for the blue chips.

NDX made a marginal new high yesterday and could still press higher. I consider new highs for the techs without the blue chips, or even the small caps, to be bearish divergence. Look what happened at the October highs in 2007 -- the techs were the lone new highs at the end of October and we could be repeating that behavior as the retail crowd rushes in to buy the sexy techs. AAPL could be part of that last rush in before they close the door on the bulls and drop the elevator.

Opex weeks are always a challenge to figure out because there's so much manipulation to push the market around (easy to do with the low trading volume we've been experiencing), protect sold put positions and just generally pin stocks to their key strike levels. Opex weeks often see some false propping that disappears once opex is finished and I see that potential for next week. If THE top is in place and the choppy decline is the start of a more serious decline it should kick into gear very soon since the pattern could be building up a very bearish wave count. The potential for a percent or two to the upside is dwarfed by the downside risk, which is why I'm recommending exiting long positions, even those you want to hold onto for your kids. It's simply not worth the risk in my opinion.

Trade carefully and be thinking if getting some exposure to the short side. 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