The S&P 500 and Dow Industrials have declined 4 days in a row, which has some thinking the long-awaited market correction is upon us. While more downside can be expected, the bulls are far from in trouble.

Market Stats

It was a fairly volatile day today as the bears tried to drive the market lower but the bulls kept wrestling back the control stick. As we've seen each day this week, the market started off with selling but then tried a recovery. For the 3rd day in a row the dipsters went unrewarded as the bounce failed and the market dropped to new lows. There was a spike down of about 60 points for the DOW, followed by a spike up of about 110 points, followed by a stronger drop where the DOW gave up about 170 points and that was followed by an afternoon bounce that retraced about 100 of that 170 point drop. The end result was a finish in the red but only down about -25 points. Nice roller coaster ride though.

We got a lot of economic reports this morning and Thursday and Friday will be busy as well. Before the bell we got the MBA Mortgage Index, which declined by -12.8% in the last week of November. After the bell we got the New Home Sales reports for September and October and it was a mixed message. The September number came in less than expected, 354K vs. 432K, and it was a drop from August's downwardly revised 379K. But then October picked up with an increase to 444K, which was better than the 420K that had been expected and certainly better than September's 354K.

There was a big jump up at 10:00 this morning and it could have been the better-than-expected New Home Sales report or it might have been the worse-than-expected ISM Services number, also out at 10:00 AM. The number for November was 53.9, a drop from October's 55.4 and below expectations for 55.0. Worse than expected is good for the Fed watchers who don't want to hear about any tapering. There's a reason why it doesn't pay to follow news since it really is hard to guess how the market is going to react.

Before the bell we also received the ADP Employment report, which showed a gain of +215K. That was better than the expected +160K and better than October's upwardly revised +184K (revised up from +130K). This was a good report (about employment) and there was a small positive reaction in the equity futures but then it dropped a little lower into the open as traders realized good employment numbers are bad for the market (Fed tapering and all).

Many have been expecting this Friday's Payrolls report to show a downward revision of the +212K that was reported in October (because of all the adjustments that were made because of the government shutdown) but today's ADP report now has many thinking the Payrolls report will be stronger than expected. Will that be good or bad? How will the Fed react? Is a strong employment number good for the economy and therefore the stock market? What happens if the Payrolls report bombs? Will that spark a rally in favor of the Fed keeping their foot firmly planted on the gas pedal? It will be a pleasure when we get to exclude the Fed from the equation.

At 2:00 PM the Fed's Beige Book was released and that helped the market continue its afternoon rally. Or at least it didn't kill the rally that had already started. There were no surprises in the report and the same language about the economy was used -- "modest to moderate" economic growth. There was a small boost in the economy from manufacturing, especially autos and high-tech production, and a housing recovery (mostly multi-family) but it was noted that the pace has been slowing. Overall the assessment seems to be that the report shows mixed reviews about the economy. Stuck in neutral.

I'm going to spend a little more time than usual on some longer-term charts of the DOW and SPX to provide some perspective on where we are and what I see as the next big move. Starting with the DOW's monthly chart, it shows the DOW finally made it up to the trend line along the highs from 2000-2007, near 16140. During Friday's half-day session it popped above the line, with a high at 16174, but then closed down for the day. From a Fib perspective I see the potential for a rally to 16300, which is where the leg up from 2009 would achieve the 127% extension of the previous decline (2007-2009). That's just a guide, and we could certainly be close enough, but it's often a good level to watch for a reversal setup. The big expanding triangle pattern calls for one more leg down to complete the a-b-c-d-e pattern and a drop to about 5400-5500 in the 2016-2018 time span is the current projection. Once that completes we'll then be at the conclusion of the big bad bear market and ready for the next secular bull market.

Dow Industrials, INDU, Monthly chart

The leg up from 2009 is essentially a 3-wave move, as would be expected in a triangle pattern, and the 2nd leg up started from October 2011. There are a couple of ways I can label the move from an EW (Elliott Wave) perspective and the weekly chart below shows one. As part of a double zigzag wave count I've got the rally labeled as an A-B-C (3-wave move up to the 2012 high and then the 2nd 3-wave move up from October 2011. The 2nd leg of the move up from October 2011 would be 162% of the 1st leg up at 16702, which is very close to the projection for two equal legs up from 2009, which points to 16686. So that's the upside potential if the bulls are not finished yet. As pointed out above, there's also the 127% extension at 16300. But now that the DOW has reached the line across the highs from 2000-2007 there is the potential the rally has now completed. Part of the problem in figuring out whether or not a high is in place is how to count the move up from either August or September.

Dow Industrials, INDU, Weekly chart

Getting in closer with the daily chart below, you can see how last Friday's candle was a shooting star at resistance, which was then followed by Monday's red candle. That made for a confirmed reversal signal at resistance and I started looking for lower from there. Today's close was below its 20-dma, which held yesterday's close, and this is the first time since it was recovered in mid-October. The short-term wave count suggests a bounce into tomorrow, maybe Friday, and then another leg down into next week to match the leg down from Friday. I'm taking it one leg at a time while trying to figure out the longer-term pattern but at the moment the DOW is looking bearish.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,175
- bearish below 15,721

A couple of weeks ago I had shown a monthly chart of SPX and how it has pressed above its Bollinger Band (and I labeled the rally the "Bernanke Bubble" following the Tech Bubble in 2000 and Housing Bubble in 2007) as well as a comparison to the commodity index, showing how wide the two have separated as the stock market has rallied while the commodity index has declined. Neither of these charts has changed and both point to a very strong correction coming when it comes (she'll be coming around the mountain when she comes...). The DOW's monthly chart supports this expectation as well.

Another way to look at the longer-term chart is to compare it to the VIX, which as can be seen on the SPX monthly chart below, the VIX has made a higher low than its 2007 low while SPX has rallied to new highs. That's bearish non-confirmation. In addition to that we have RSI showing bearish divergence at the 2007 high and now the new high. We should not be seeing this if the bull market had a couple more years to run, as many market pundits now claim. At market tops it's important to keep in mind that most people believe the bull market has a lot more to go.

S&P 500, SPX, vs. VIX, Monthly chart

Along with the longer-term bearish divergence seen on the monthly chart above, we can see shorter-term bearish divergence on the weekly chart below. This one compares the new price highs to the lower a-d line (I'm using a 10-dma to smooth out the jagged peaks and valleys). Notice the lower a-d high into the May 2011 price high and now the a-d divergence since the September 2012 high. This can't continue and will very likely resolve in favor of the bears.

SPX vs. Advance-Decline line, Weekly chart

At the moment I'm counting the move up from August as a completed 5-wave move, which suggests we're at the very beginning of a major decline. But I could also argue that last Friday's high was the completion of the 3rd wave and not the 5th, which means we need a pullback followed by one more rally leg into the end of the year (green dashed line). The short-term bullish path would likely see SPX reach at least 1835 (I've got a price projection there) and probably 1850.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1814
- bearish below 1775

One of the first things I was looking for this week was to see if we'd get a 5-wave move down or just another 3-wave pullback correction. That gives me the first clue about the larger pattern. As of this afternoon's low we have a 5-wave move down, which is an impulsive move, and that tells us we have at least a short-term change in trend. A bounce to correct the decline from last Friday, perhaps into this coming Friday, should then be followed by another leg down.

On the 60-min chart below I'm projecting a bounce to support-turned-resistance near 1802 but obviously that's just a guess right now. But assuming it reaches that level and turns back down from there I would expect a drop at least to the 1768 area for two equal legs down from last Friday. A stronger decline, where the 2nd leg of the decline achieves 162% of the 1st leg, would target the 1746-1747 area. What I'm showing is a 4th wave correction from the 1746 area and then another leg down to the 1740 area before the end of next week to give us a larger 5-wave move down. If that plays out then we'll get a bounce into opex week but it will be a bounce to short into the end of the year (no Santa Claus rally). But if another leg down finds support in the 1768 area and starts back up strongly then I'll be looking for an end-of-year rally, possibly into early January to meet some cycle turn dates.

S&P 500, SPX, 60-min chart

Unlike the other indexes, NDX has been chopping its way lower this week and this supports the idea that it's in a small 4th wave pullback correction in the move up from November 7th. The uptrend line from October 9th, currently near 3431, should hold the pullback if reached, and then one more leg up to compete the 5th and final wave. At the moment I'm showing a projection up to about 3540 before the end of next week and then start a decline from there. That would mean a bearish opex week so it will obviously have to be evaluated more closely next week. A drop below the November 18th high, at 3429.20, would be bearish since it would be an overlap of the 1st wave in the move up from November 7th. Therefore NDX stays bullish above that level, especially since a drop below it would also be a break of its uptrend line.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3514
- bearish below 3429

The choppy pullback pattern for NDX this week is shown on its 60-min chart below. I'm showing an expanding triangle, which are not as common as contracting triangles but they're typically found in 4th and b-wave positions. So it fits here. The expanding triangle pattern calls for a lot of volatility and whipsaws and we certainly had that today. One more leg down in the widening pattern would finish it and set up the 5th wave rally into next week. Another drop to the bottom of the triangle would also be a test of its uptrend line from October 9th and as long as it stays above 3429 I'd look to be a buyer of the decline and ride it back up into next week.

Nasdaq-100, NDX, 60-min chart

The RUT's daily pattern mimics the others but it hasn't been clear enough for me to trust. The drop below its November 18th high, at 1119.98, negates the 5-wave count for the move up from November 7th but for the wave count I'm using it doesn't matter. An ending diagonal rising wedge) for the 5th wave starting from August fits very nicely here and calls for the next rally leg to start from here. I've got an upside projection to about 1160 into opex week. This is in opposition to what I'm expecting for the other indexes (another leg down following the bounce off today's low) so we'll have to see who will win the tug of war here.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1147
- bearish below 1096 -

Bond prices have been working lower since the October highs but the pattern looks choppy and supports the idea that we're going to get another rally for bonds. The 10-year yield, TNX, has made it back up to its downtrend line from 2007-2011 (log scale chart) with today's high at 2.852%. We'll soon find out if that line of resistance will hold or not but at the moment I'm thinking it will and it could be completing the right shoulder of a H&S reversal pattern since June. It takes a break below the July and October lows at 2.46% to confirm a high for the rally, which started from the July 2012 low, has finished.

10-year Yield, TNX, Daily chart

A longer-term perspective of the banks is shown with the weekly BKX chart below. The rally into the November 25th high, at 68.45, had achieved two equal legs up from its October 9th low and at the time I thought that might cap its rally. A sharp decline to below the October 9th low, at 61.07, could follow as part of a larger corrective pattern off the July 28th low, or something more bearish. There's a little more upside potential if we get a Santa Claus rally -- the 50% retracement of the 2007-2009 decline is at 69.45, only a dollar above the November 25th high. Reaching that 50% retracement, to complete its 3-wave bounce pattern off the 2009 low, would be an interesting setup for the start of the next bear market.

KBW Bank index, BKX, Weekly chart

The U.S. dollar has been ping-ponging between its 20-dma above and 50-dma below and could be consolidating before it gets another leg down to complete a pullback before heading higher again. But it could also be basing just above its 50-dma and getting ready to take off to the upside. The strong impulsive move up from the end of October to the November 7th high, followed by a very choppy pullback pattern, strongly suggests we've got another rally leg coming.

U.S. Dollar contract, DX, Daily chart

The metals got a strong bounce today, which reversed the strong decline on Monday. It's not clear yet whether a higher bounce will continue or if it's instead going to continue lower. I've been expecting a bounce up to the 1300 area for a couple of weeks but so far it's been struggling to get anything going. Until gold can climb above 1300 I'll continue to look for lower prices.

Gold continuous contract, GC, Daily chart

Silver also bounced today and almost broke its downtrend line from the end of October. It broke it briefly today but then pulled back and closed at the line. I show a higher bounce coming, maybe up to the 21.75 area, but unless it can get above 22 I'm expecting lower prices for silver as well as gold.

Silver continuous contract, SI, Daily chart

Oil finally got a bounce off support near 92 and today it hit resistance at its downtrend line from August, near 97.40. Its 50-dma is just above that at 97.62 and then its 200-dma at 98.46. Bullishly, RSI has broken its downtrend line from July and I see the potential for a higher bounce following a pullback from resistance, perhaps up to the 100 area by the end of the year. But then lower prices from there.

Oil continuous contract, CL, Daily chart

Before the bell tomorrow morning we'll get the Challenger Job Cuts, unemployment claims and the 2nd estimate for GDP. Factory orders will come out at 10:00, which are expected to show slowing into contraction territory

Economic reports and Summary

There's been a lot of speculation this fall about how much longer this bull market from 2009 can continue. Some claim it's long in the tooth while others claim it has years to go. I came across this interesting chart that T. Rowe Price had done, showing the bull markets since 1928. It shows each bull market in both length of time (horizontal axis) and % gain (vertical axis). The average gain is +165% and the average length of time is 57 months. As of this month the bull market is 57 months old and the S&P 500 has gained +164%. So it's an average bull market so far. Interestingly, you can see how far out in left field the 1990-2000 bull market was, both in time and % gain. So neither side can make a strong argument for either an end to the bull market or for further gains. But while the bull market could continue, we know what comes next.

Historical Bull Markets, chart courtesy T. Rowe Price

The bulls have the first sign of trouble for the stock market when looking at the price pattern for the blue chips -- they suggest the impulsive decline off last Friday's high into today's low will be followed by at least one more leg down into next week. What happens following a larger 3-wave move down will be the next puzzle to solve. One leg at a time while we figure out the larger pattern.

Both the NDX and RUT support the idea that just one more low for the current pullback will set up the Santa Claus rally, although it could finish as early as the end of next week (to be followed by a bearish opex week). We have enough of a difference between indexes to warrant caution by both sides. Today's whipsaws also support the idea that caution is probably a better choice than aggressive trading. While there's additional upside potential, depending on which index I'm looking at, I see a whole lot more downside risk than upside potential so keep stops tight for now, no matter which direction you're trading.

A trader friend, who does some really good work with cycle studies (Fibonacci and other math related periods), sees a lot of correlation for a major market top around January 10th. Whether it rallies from here or after a larger 3-wave pullback into next week, there is certainly the potential for new highs into early January so bears need to stay cautious no matter how bearish things look on a daily basis. By the same token, blindly going long from here could be a very costly mistake -- I think when this market cracks it could drop very fast.

We'll see how it's looking next week and in the meantime be very careful out there.

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

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