The bulls got the bad jobs number on Tuesday as a reason to rally (don't ask) but gave it back today. They now need another reason to entice more bulls into the water.

Market Stats

The bad jobs number on Tuesday have the bulls more reason to hope since it means the Fed will have to keep up their QE efforts. The hope now is that the $85B/month will be increased instead of decreased. But the spike up Tuesday morning was followed by an immediate spike back down, which was then followed by an all-day effort to push the indexes back up. Today the market gapped down, retracing Tuesday's gains, which was then followed by all-day effort to push the indexes back up. Rinse and repeat.

Yesterday's bounce off the morning low was a choppy move and pointed lower today. Today's bounce off the morning low was a choppy move and points to lower. It appears to be a distribution pattern where the big fund managers keep the market propped up as long as they can but use the rallies to sell into. It keeps the sheeple feeling bullish while affording the fund managers an opportunity to offload their inventory to the masses.

This pattern of selling followed by choppy bounces back up will continue for as long as the fund managers can keep investors interested. But as soon as investors get nervous and see that their dip-buying efforts are going unrewarded they too will start selling, which will prompt heavier selling by the funds and that's what creates the sudden disconnect to the downside. That's what we're currently set up for but the bulls have had an uncanny ability to break bearish setups. I'll review in tonight's charts the bearish setups but at the moment that's all we have; confirmation is needed with a decline, which might have started but it's too early to tell.

Bullish sentiment is reaching levels that have market previous major market highs and we've got chart patterns coinciding with sentiment that tell us to watch for the possibility that any turn back down could gain speed quickly. There are many sentiment measures that we can use to see how the bulls line up with the bears. There are of course surveys, such as the AAII bullish vs. bearish sentiment, the put/call ratio and net short interest ratios.

Another measure of sentiment can be seen from the amount of funds allocated to the various Rydex funds. Too much in either bullish or bearish funds (relative to each other) can be a strong sentiment indicator. Another fund, the Money Market fund, can be used to measure how cautious or bullish investors are. The more cautious they are the more money they'll park in the MM fund. The more bullish they feel the more money they'll pull out of cash and put it to work.

At the moment it appears investors are feeling very bullish since cash levels are way down, as can be seen on the chart below. There was a further drop in the fund as we headed for an expected deal out of Congress to end the government shutdown. Investors pulled $70B out of the MM fund while putting nearly $11B into equity funds, all in anticipation of a further stock market rally. It's looking like we've got everyone in the pool now and oftentimes a stock market top is found simply because it runs out of buyers. As the Jeffries chief global equity strategist, Sean Darby, noted to clients, it looks like we have a "U.S. equity parabolic blow off."

Rydex Money Market Funds ($Millions), chart courtesy Business Insider

Interestingly, the decline in funds in the Rydex MM fund from July 2013 can be viewed from an EW (Elliott Wave) perspective as an A-B-C pullback and the c-wave is a 5-wave move. What it means is that it's ready for a reversal, which of course would mean more money heading back into the MM fund as investors become worried about keeping money exposed to the stock market.

Another measure of bullishness is how much margin investors are using -- the more bullish they feel (and secure in that feeling), the more margin they'll use to purchase stock. The leverage of course provides much better returns and prudent use of it can supercharge your earnings. But too much leverage can be a dangerous thing, both for the individual investor and the market.

The chart below shows NYSE margin debt has now climbed to an all-time high, above both the 2000 and 2007 highs. This is not a market-timing tool but it's certainly a heads up to be careful if you're feeling bullish about the market. A highly-leveraged market is susceptible to a downside disconnect when the market starts to drop and the margin calls go out. Keep in mind that the winners are often sold first when that happens so forget funnymentals in deciding which horse you want to ride. Sometimes the best horse is the strongest since it will run the fastest back down the hill also.

NYSE Margin Debt, 1999-present

We've got highly leveraged investors and an all-in market (as measured by the withdrawals from the Rydex MM fund), which leaves it very vulnerable. This is not a good time to feel complacent about the upside. While shorting this market has proven to be an exercise in frustration for the bears, more money can be made in a bear market than a bull market (at least a lot faster) but it's a much more difficult market to trade. The government regulatory agencies and the Fed hate shorts and will do everything in their power to smoke them. Trading the short side means constant worries about brief but strong short-covering rallies followed by just as strong reversals back down to new lows. I think that kind of market is just around the corner now.

I'm going to review a few weekly and daily charts for the indexes to show why we're at an inflection point here. The bulls need to keep this rally going otherwise the setups favor the bears. The one setup that still favors the bulls is the DOW's, which is interesting since it's been the weaker index. Starting with the SPX weekly chart, this week's high achieved an upside price projection at 1752 for two equal legs up from March 2009, for a big A-B-C bounce that should be completely retraced before the bear goes back into long-term hibernation. The weekly candle is so far a star doji at the top of rising wedge pattern from June. It would create a reversal pattern if next week produces a red candle.

S&P 500, SPX, Weekly chart

The daily chart shows the small throw-over above the top of the rising wedge. A close back below the top of the wedge, currently near 1745, would create a sell signal and short against Tuesday's high would be the recommended place to be. We'll have to wait for a decline to see if it will be impulsive or corrective to help determine whether or not Tuesday's high was THE high or just another in a stair-step pattern higher. Holding up into at least the end of the month remains a possibility.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1758
- bearish below 1710

As a review for where we are on the Gann Square of Nine chart, shown below, the highlighted numbers are the important highs and lows since the 2002 low at 768. The October 2007 high at 1576 is on the red vector through 768 and therefore was an important number to watch as SPX rallied up to it. Similarly, the 2009 low at 666-667 suggested 1748 is an important level since it's on the same vector and is therefore connected to the 2007 low. It quickly popped above that level on Tuesday but closed below it today, leaving the possibility it was just a throw-over completion to the rally.

Gann Square of Nine chart

Tuesday's high was also within the potential turn window around the full moon on October 18th and as the chart below shows, each high since the May high has occurred on a full moon (as well as the minor new high on August 5th). There are plenty of pieces in place to consider a major high being put in place, especially with the sentiment picture discussed above, and all we wait for is confirmation from price.

SPX MPTS Daily chart

I'll continue to use the DOW to show the bullish case until it no longer fits. The sideways consolidation since May supports the idea that it's a 4th wave correction in the rally from June 2012 and the October 9th low finished it. The pattern calls for another rally leg and there's reason to believe the DOW would rally to the 16700 area by late-November/early-December to complete the bull-market rally from 2009. A trend line along the highs from March 2012 - May 2013 is close to intersecting the trend line along the highs from 2000-2007 by the end of the year, both of which cross two price projections for the rally near 16700. Two equal a-b-c legs up from 2009 points to 16686 and for the 2nd a-b-c the c-wave would be 162% of the a-wave at 16702. Bears need to keep this possibility in mind when evaluating risk if holding short positions and it's do or die time for them right here. With MACD trying to curl back up from the zero line, if RSI breaks its downtrend line from April, look out above -- get long and stay long for another few weeks at least.

Dow Industrials, INDU, Weekly chart

The DOW loves to retrace 78.6% of its previous decline and has done so again, shown on its daily chart below. The 78.6% retracement is near 15498 and yesterday's high was 15518 but it closed at 15467. Until the bulls can get the DOW to close above 15500 this retracement level could be marking the end of its bounce.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 15,500
- bearish below 15,160

NDX has a large 3-wave rally off its 2002 low and the 2nd leg of this move is the rally from 2009. It is 162% of the 1st leg (2002-2007) at 3355.22, which has been achieved this week. Yesterday's high was 3384 but today its closing price is back below that projection. At the same location is its broken uptrend line from March 2009 - November 2012, which it's been bumping up against since breaking it in November 2012. If the bulls stay in charge, as per the idea shown on the DOW's weekly chart, we would likely see NDX make it up to its longer-term broken uptrend line from 1990-1995-2002, near 3460 by the end of the month (about another 80 points above yesterday's high).

Nasdaq-100, NDX, Weekly chart

Yesterday's high for NDX was a brief throw-over above the trend line along the highs from December 2012 - May 2013, as well as the top of a parallel up-channel for price action since its June 2013 low. Today's gap down leaves a sell signal on the chart, which would be negated with a rally above 3374. As with the other indexes, the intraday pattern following Tuesday's high is pointing to a stronger decline on Thursday and closing Friday's gap at 3301 looks like the higher-odds play here.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3380
- bearish below 3240

A large A-B-C wave count for the RUT's bounce off the March 2009 low points to 1119.49 for two equal legs up. This was accomplished with Tuesday's high at 1121.53, which it was unable to hold and closed at 1115.63. I should post "Mission Accomplished" at the top of the chart to show the bulls did it. At the same time it has rallied up to the top of a rising wedge pattern for its rally off the November 2012 low, currently near 1115 (a brief throw-over so far). The wave count can be considered complete at this point and up against resistance and the price projection says the bulls are now in very dangerous waters. A new breed of shark, called the bear-nose shark, is now circling and looking to attack.

Russell-2000, RUT, Weekly chart

Yesterday's throw-over above the top of its rising wedge has been followed by this morning's gap down, which leaves a sell signal. It says you should be short against Tuesday's high and hang on for the ride back down. It gives us a low-risk, high-reward setup on the short side.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1122
- bearish below 1077

The Transports continue to act bullishly and the TRAN stayed in the green today. It has been acting much more bullishly than the DOW Industrials and with today's bounce it is back up near Tuesday morning's high. At the moment we have bearish non-confirmation between the TRAN and the DOW but as reviewed on the DOW's weekly chart, there's reason to believe the TRAN will pull the DOW higher. But on the TRAN's weekly chart you can see the choppy overlapping highs and lows since March as it has worked its way higher. This is typically an ending pattern and suggests we should be looking for a top.

Transportation Index, TRAN, Weekly chart

The wave count for the TRAN's move up from November 2012 is hard to count because of all the overlapping highs and lows but as I labeled it you can see there are a total of 9 waves, which is an impulsive count (5 waves and multiples of 4 thereafter). For the c-wave in the move up from October 2011 it has to be an impulsive wave count and by this measure we should be looking at the leg up from October 9th as the final one. So far there's a big throw-over above the top of a rising wedge for the choppy move higher, which could be a bona fide bullish breakout, especially if it comes back down to the top of the wedge and uses it as support, currently near 6830. A close below 6830 is needed to give us a sell signal.

With an expectation that the Fed will continue, if not increase, its QE efforts, the bond market rallied strong on Tuesday and added to it today. This of course has yields dropping back down and yesterday's decline had TNX (10-year yield) letting go of its H&S neckline near 2.6%. The H&S price objective is 2.14% but could find some support at its 200-dma, currently near 2.25%. Short term it looks ready for a bounce and if it makes it back up to its H&S neckline for a back test I'll be watching for a kiss goodbye to follow.

10-year Yield, TNX, Daily chart

Following the poor jobs report yesterday the dollar broke support at its H&S neckline that runs along the lows from February 2012, currently near 79.60. It dropped down to the bottom of a potential bullish descending wedge pattern (with supporting bullish divergence), at 79.26. It has done a minor throw-under below the bottom of the wedge so it's poised for a rebound and the start of next rally leg but like the stock market, we only have a setup for a reversal right here, with today's star doji, and we wait for price to confirm, starting with a rally back above the neckline. It's also possible it could work its way a little lower into early November before starting another rally.

U.S. Dollar contract, DX, Daily chart

The dollar's high October 16th matches gold's low on the 15th and as the dollar has dropped to potential support gold has bounced up to resistance at 1336-1345 (yesterday's high was 1344.70 and today's was 1342.20). In addition to the price-level band of resistance there is also its 50-dma at 1343.10. The bearish wave pattern calls for a resumption of its decline but there is a bullish alternate count that says we'll only see a pullback before heading higher, with an upside target at 1505.60 (for two equal legs up from June). A pullback to the 1300 area followed by a rally above yesterday's high would suggest the bullish wave count is the higher probability one. In the meantime look for at least a pullback to correct the bounce off the October 15th low, which could turn into a decline back down to the 1150-1155 area.

Gold continuous contract, GC, Daily chart

Silver's weekly chart below shows what I've been expecting for quite a while now -- a continuation lower into the end of the year. The broken downtrend line from February intersects the bottom of its parallel down-channel from April 2011 and its uptrend line from 2003-2008 at the end of the year, near 15.50, which makes a good downside target for now. This one says gold's bearish wave count gets the nod but stay aware of the bullish potential into the end of the year instead of this bearish one.

Silver continuous contract, SI, Weekly chart

Since the end of September oil had consolidated near its broken downtrend line from May 2011 - March 2012, looking like it was in a small ending pattern and getting ready for at least a high bounce. But the breakdown on Monday was a break of a short-term bullish pattern and failed patterns tend to fail hard, resulting in a quick loss 3.70 in 3 days. It sliced right through its 200-dma as though it weren't there and could continue to drop to support at its uptrend line from June 2012 - April 2013, near 91.40 by the end of the month. But there are short-term bullish divergences that are suggesting it could be ready for a bounce back up to its broken downtrend line before heading lower again.

Oil continuous contract, CL, Daily chart

Oil and the stock market tend to be in synch more often than not, although as you can see on the weekly chart below, SPX has outpaced oil to the upside since mid-2012. The real disconnect is from the end of August as oil has dropped and the stock market has rallied. That disconnect will not last so you can bet on oil climbing or the stock market declining. My bet is on the latter.

Oil vs. SPX, weekly chart

Tomorrow's economic reports include unemployment claims, the JOLTS report and New Home sales. Everything will be looked at through the Fed-QE filter.

Economic reports and Summary

The bulls have been tenacious in their belief that the Fed will protect us and the buying has been relentless. One could say we've been in a blow-off top as the shorts throw in the towel and late-to-the-party bulls also throw in the towel and stop resisting the urge to get in. We've got an all-in market as the sentiment picture also shows. When looking at the sentiment picture with indexes pressed up again solid resistance, with overbought conditions on all time frames and bearish divergences, it's not hard to think this will not end well for the bulls. But the trend is your friend and until we identify the bend at the end it's been hard to argue (or trade) against the bulls. Just keep a close eye on things from here since we might find that we're about to get confirmation of that "bend at the end."

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