As go the first five trading days, so goes the month and as goes the month of January, so goes the year. By this measure the January barometer is showing rapidly dropping pressure and an approaching storm.

Market Stats

Today closed the first five trading days of the new year and as you can see in the table above, each of the broader indexes is in the red. Interestingly, the VIX is down from where it was on December 31st, which doesn't reflect the decline in the stock market. That's either bullish complacency or perhaps the bulls know something about how the rest of the month will proceed. We head into opex week next week and that's generally a bullish week. The flip side is that when it's not bullish it tends to be very bearish and as I'll review tonight, the bulls have some reasons to worry.

The market started off flat at the open, had a quick bout of selling and then rallied quickly back up. The S&P 500 made it back up to the highs of 2-day trading range it's been in and then chopped sideways in a small range for most of the day. There was some selling in the final hour, as we've been seeing this month, but the market got a stick save with some buy programs driving the indexes back up into the day's trading range. The DOW was weak and the techs were relatively strong (thanks to a good day for the SOX). SPX and the RUT closed near the flat line. By the end of the day neither side could claim a win

Today's economic reports, nor the FOMC minutes this afternoon, had much of an effect on the market. Before the open we received the ADP Employment report, which came in better than expected at +238K vs. an expected +203K. That was an improvement over November's +215K. There was a slight negative reaction in the futures market (good employment is bad for an accommodating Fed) but then it was reversed back up before the open. Pushing the market back up was the common theme for the day.

The FOMC minutes gave us nothing new to chew on and the market barely reacted except for a slow selloff into the late afternoon before it was rescued with a couple of big buy programs in the last half hour. The minutes reflected the Fed's confidence in the economy's continuing improvement as a reason to start tapering now rather than later. The FOMC members reflected increasing concern about inflation as a result of a large quantity of money sitting in banks' reserves. Once that money starts getting lent out we could see a very rapid spike in inflation.

At least that's the concern. The slowdown in the housing market, presumably affected by rising rates, has members concerned enough to only want a slow tapering of their asset purchases in an attempt to keep the bond market from selling off. The minutes also reflected the Fed's desire to not get locked into any particular direction with their asset purchases. They will decrease or increase purchases as they see fit. In a nod toward recognition that their QE program might be creating "excessive risk taking," they acknowledged that their purchases were having less of an effect on the economy and more of an effect on other asset prices. They recognize that they have provided an incentive to get in riskier assets which could lead to asset bubbles. Do ya think?

The market's highs so far for the broader indexes is December 31st. That is inside a December 27 - January 6 timing window that I've been monitoring and I've been looking for clues as to whether or not price agrees that a market top has been made. There's some other cycle work that I follow that points to January 10th (specifically mid-morning) for a market high. Interestingly, we'll get the Payrolls report Friday morning and it has me wondering if we'll get a positive reaction from the market that then puts in the final market high.

And then there is the 1929-2014 analog that has been playing out since Tom McClellan first showed the comparison at the end of November (1929 Analog). His projection, if the market followed a similar path, was for a market top by January 14th and he has since acknowledged that we could see a similar topping process as in 1929 that will take the first two weeks of January to play out (similar to a rounding top pattern). This fits in the turn window by cycle studies and is in agreement with what I'm seeing in the wave pattern (top is either already in or we're waiting for one more new high). I updated his chart with the DOW's price action since the end of November and added in where an equivalent high would occur (around 16700). If this follows through, and that's a big if, we're looking for a rough time for the market in the coming quarter.

DOW analog between 1928-1929 and 2012-present, chart courtesy

At the same time this price analog might be playing out we've got several measures of sentiment at bullish extremes, which makes the market vulnerable to a strong selloff (the market is now full of sellers-in-waiting). As can be seen from the chart below, bullish advisors haven't been this net-bullish since May 2011 and before that in October 2007, both times when the stock market made a big correction, especially off the 2007 high. We've got everyone in the water and the market is looking for more buyers to jump in. But now swimming toward the shore are a bunch of bears wearing shark suits (cue the music to "Jaws").

SPX vs. Net Investment Advisor sentiment, 2006-2013, chart courtesy

I recently read a report on market advisors and their predictions for 2014 and it's nearly unanimous -- 2014 is going to be bullish. Wells Fargo's Gina Martin Adams was the most bearish last year and held onto her bearish projection for SPX 1440 for the entire year. Oops. And she remains more bearish than the others but her bearishness means SPX 1850 by the end of 2014. She's the most bearish one! She does acknowledge that we will likely have a volatile year where we could see 2100 on the upside and 1500 on the downside. To which I say bring it on! Let's get some volatility and inflated option premiums for us to trade. I have little doubt about her 1500 projection but I have every doubt about her 2100 projection. It's going to be an interesting year.

Starting off with the DOW's charts, the weekly chart shows how it has bumped up against its trend line along the highs from 2000-2007, near 15545. This is the 3rd week that it's been trying to get through that line of resistance but last week's and this week's candles are small doji stars. It's either signifying bullish consolidation or setting up a reversal pattern (with a red candle). I show a little more upside potential to the 16640-16700 area where three different price projections coincide. If the DOW is able to reach that level by Friday, or even January 14th, I'll be looking for the setup for a major reversal.

Dow Industrials, INDU, Weekly chart

The DOW's daily chart below shows how it's been struggling to get through its trend line while holding support at its trend line along the highs from September-November, currently near 16420, which supported this afternoon's low before getting a sharp little bounce into the close. We'll soon find out if it can get a quick pop up into Friday or instead break down. It turns more bearish below 16400 and confirmed bearish below 16170.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,550
- bearish below 16,170

SPX had achieved its 1845 projection at the end of December (where the 5th wave in the move up from October 2011 equals the 1st wave), as well as its trend line across the highs from September-November and the top of its up-channel from June. It was a good setup for a top on December 31st but we don't yet have proof of the high with an impulsive decline. I can make a bearish wave count work but I'd rather see another leg down before turning more bearish. I have been warning about a potential high but can't rule out another run up to a new high, perhaps even up to the 1870 projection where the 5th wave in the move up from August would equal the 1st wave. Trendline resistance is currently near 1848 and 1860 so the bulls could run into trouble along the way up to 1870. A break back below Monday's low at 1823 would be bearish and it would be confirmed bearish with a drop below 1810.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1845
- bearish below 1810

It was a nice setup for a top near January 1st according to my highly sophisticated and proprietary MPTS black-box trading system, as can be seen on the chart below. Now we wait for confirmation that the market made its final high on a new moon. Otherwise we might get a final high near the next full moon (January 16th), Thursday next week.

S&P 500, SPX MPTS daily chart

I sometimes work with Chris Carolan at and he shared with me a portion of his "Solunar Model" that points to a high on or near January 7th (yesterday). He uses solar activity and the lunar phases to track its influence on the market and has been very accurate in showing where future turns can be expected. Not always of course but you can his model has been pretty close in the period shown (since June 2013). This fits within the timing window from the cycle studies I follow as well. Just another piece of the puzzle pointing to a potentially important market high either already in place or about to be put in place.

DOW Solunar Model, chart courtesy Chris Carolan,

The SPX 60-min chart below shows the tight grouping of candles since Tuesday's pop up at the open. It looked like it was breaking down this afternoon until a couple of big buy programs slammed it back up into the close. Sometimes this is done to jam the shorts out if "someone" knows something and expects the market to drop the next morning -- they don't want the shorts in the market. That's of course pure speculation and I continue to respect the upside potential this week while waiting for proof the top is already in place. Above 1850 is bullish and below 1823 is bearish. Mind the chop in between.

S&P 500, SPX, 60-min chart

NDX bounced off its 20-dma, as it's done since October's low. That makes it an important level for the bears to break on a closing basis and then keep it below it, currently near 3533. An uptrend line from October-December (not shown on its daily chart below) is currently near Monday's low at 3512 so that's the level the bears need to break to confirm a top is in place.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3592
- bearish below 3512

On January 2nd and again on Monday the RUT found support at its November 29th high at 1147 so that's an important level for the bulls to continue to defend. Its short-term pattern supports the idea that it will get another leg up but in reality it's just been chopping up and down since its December 26th high and I could argue a move in either direction from here. Just need price to lead the way. But any move to the upside should be a very good setup to get short, especially if it manages to reach the trend line along the highs since September 2012, currently near 1176. Two equal legs up from November is at 1167.66, which was achieved with the December 26th high at 1167.96.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1166
- bearish below 1146

Bond yields look like they've been in a topping pattern since November. As drawn on the 30-year (TYX) chart below, we've got a rounding top pattern and a break of the uptrend line from May-October. The uptrend line was broken on December 20th but it quickly recovered back above the line two days later on December 24th. This time it's now below the line for three days and today's high was only a back test of the trend line, followed by a drop this afternoon.

30-year Yield, TYX, Daily chart

I think it's a good setup for a drop in bond yields/rally in bond prices. I've shown my long-term charts a few times recently, which calls for a major bond market rally this year, one that drives yields down to all-time lows (2% for the 30-year, 1% for the 10-year). I am in the minority with this opinion so take it fwiw, but a minority opinion here, just as with a bearish opinion about the stock market for 2014, actually makes me more comfortable (I don't like trading with the crowd at turning points).

The banks have been strong in the first 5 trading days of the year and BKX is up +1.8% and one of the few sectors in the green (biotechs continue to outshine them all, up +2.9% in 2014, on top of the +51% in 2013). On January 3rd BKX launched out of its 6-day consolidation on top of the trend line along its highs from August-November and I've been eyeing an upside projection for it near 71. The wave relationships in the move up from October point to 70.99-71.15 for a final high and I project that to be accomplished by Friday. A drop below the trend line along the August-November highs, currently near 69, would indicate the top is in place.

KBW Bank index, BKX, Daily chart

Bank of America (BAC) got an upgrade last week and gapped up each of the first four trading days in January. From December 31st it rallied nearly +8% before banging its head on the trend line across the highs from March 2012 - July 2013, as can be seen on its weekly chart below. Following the 4th gap up on Tuesday, which looks like an exhaustion gap, it the closed below Monday's low, creating a bearish engulfing candlestick at trendline resistance. It now looks like BAC is on a sell signal so it'll be interesting to see how the stock does vs. expectations for a little higher for BKX.

Bank of America, BAC, Weekly chart

On Monday the TRAN broke its uptrend line from October-December and has been attempting to climb back above it but in a very choppy pattern. It looks like it's ready to break down but I can't yet rule out another attempt at a new high. I've got two price projections, based on its wave count, at 7443 (two equal legs up from 2009) and 7428 (2nd leg of its rally from June equal to 162% of the 1st leg). And there's a slightly higher projection at 7553 where the 5th wave in the move up from August would equal the 1st wave, which is what I'm depicting on its chart below but I have my doubts about it making it that high. And based on the short term pattern for this week's bounce I'm having my doubts whether the TRAN can make new highs. A drop back below Monday's low at 7228 (and its 20-dma at 7245) would be bearish and below its 50-dma at 7175 would be confirmation the top is already in place.

Transportation Index, TRAN, Daily chart

The U.S. dollar looks good for a continuation of its rally but in the short term it looks ready for a pullback. If the pullback turns into something more impulsive to the downside, especially with a break below its December 27th low at 79.82, I'll turn bearish the dollar. But as I've been for a long time now, I remain bullish the dollar and expect to see a rally in the first part of 2014 up to at least its downtrend line from 2010, currently near 84.25.

U.S. Dollar contract, DX, Daily chart

Silver has been chopping sideways since its December 4th low and it looks like a bearish consolidation before heading lower. I expect the same for gold and if it drops down to the bottom of a parallel down-channel that it's been in since the August high we could see gold drop down to about 1140 in a couple of weeks. There's still a chance the 62% retracement of its 2008-2011 rally, near 1155, will be its downside target before getting at least a bigger bounce. There's a lot of resistance between 1250 and 1270 if it tries another rally but would be bullish if it can get above 1270. Until then I think gold has lower prices coming, either directly or after a slightly bigger bounce off the December 31st low. The big caution for gold bears is the large net short futures, which is begging for relief with a short-covering rally.

Gold continuous contract, GC, Daily chart

On December 27th oil back-tested its downtrend line from May 2011 - March 2012 and it was slap following the kiss and it's been all downhill from there. It is now back down to its broken uptrend line from August for what could be a bullish back test as well as a test of its November 27th low. The pattern of its decline from December 27th does suggest it's ready for a bounce, which is what I'm depicting, but then a continuation lower into February. The form of the bounce will tell me more about whether or not to expect a larger bounce/rally or just a correction to the decline before heading lower.

Oil continuous contract, CL, Daily chart

Tomorrow morning's economic reports include the unemployment claims numbers but nothing that's expected to move the market. It's possible the market will stay quiet through the day as it waits for Friday morning's Payrolls report.

Economic reports and Summary

I've got several timing studies pointing to now as a very important turn window for the market. Since we've rallied into the window I expect it to be a significant market high (one that won't be seen again for many years). If I'm correct in the longer-term pattern you will not want to ride the next "pullback" (especially if the 1929 analog continues to play out). I'd rather have stops tight on long positions, get stopped out and then from a flat position do your analysis and see where and when you want to try the long side. Getting out of a position is much harder than getting in because most traders like to relax and let their position run. We're entering a period, which will likely last the majority of the coming year, where you'll want to be much more actively involved in trading. It's highly unlikely we'll have a smooth market move like we had last year.

Market sentiment, bearish divergences, timing models -- they're all coming together to tell bulls to get very defensive now. Bears do not have a good setup yet because the short-term pattern since the December highs has not yet confirmed the highs are in place. I could easily argue that the highs are in but I also see the potential for one more new high, especially around Friday's Payrolls report. A blast higher on Friday morning could be a good setup for the bears, something I'll be watching very closely.

The market might stay quiet on Thursday while we wait for the Payrolls report, which usually leads to some whippy moves like we saw today. Trade lightly and keep trades on a tight leash until we get a direction started. Right now it's more likely you'll feed your broker's hungry kids rather than your own.

We've got opex week coming up and the Thursday prior to opex is often a head-fake day so watch for that possibility as well. Opex tends to be bullish but when it's not it tends to be very bearish. Considering the bearish setup I see I'm wondering if the very bearish scenario is going to play out. Be careful out there.

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