The tech indexes have pressed to new highs but the other indexes have at best been able to only test their previous highs (not the DOW), setting up possible double tops. The bulls can't let up on the gas here, no matter what the Fed says.

Market Stats

The day started like others -- small gap down, buy-the-dip opportunity, drive it up to a new high and wait for another dip to buy. But today turned out a little differently and with uptrend lines from the February 5th lows breaking we might have the start of at least a larger pullback correction. The FOMC minutes let some air out of the bull's hot-air balloon and now we wait to see if they can fill it back up and keep this market rising.

This morning's economic reports included the MBA Mortgage Index, which showed a further slowing last week by -4.1%, following the previous week's -2.0%, and Housing Starts and Building permits, both of which showed slowing. Housing starts were down to 888K, well below December's 1048K annualized rate and below expectations for 963K. Building permits dropped from 991K to 937K, also below expectations for 980K. Following yesterday's disappointing NAHB Housing Market Index we're getting more and more proof that the housing market is slowing down and it's slowing faster than expectations. As one of the primary drivers of our economy, because so many peripheral jobs and purchases are tied to the housing market, this is a worrisome sign.

The PPI numbers showed a slight tick higher, coming in at +0.2% (+2.4% annualized) and this might be one reason why the market reacted negatively to the FOMC minutes this afternoon, since a declining unemployment combined with a tick higher in PPI gives the Fed more reason to at least continue its QE taper program, not something the market wants to contemplate.

After the FOMC minutes were released at 14:00 today the stock market reacted negatively, adding another leg down to the one off this morning's early bounce high. The minutes reflected the Fed's opinion that the QE taper program would continue (with practically a no-matter-what kind of certainty). There was general agreement that there should be a change in forward guidance if and when the unemployment rate drops below 6.5%. The minutes caused a reaction in several markets -- the U.S. dollar bounced, Treasuries sold off and stocks and commodities (including the metals) sold off.

I'm comforted to know (cough) that the Fed believes the recent troubles in the emerging markets will be contained and should have little effect on the U.S. markets. They thought the same thing about the subprime slime problem back in 2007 when Bernanke assured us that it was a minor problem that would be "contained" and that there would be no spillover effects on the broader market. At least the Fed has a perfect record when it comes to their predictions -- they are 100% wrong. They use deeply flawed economic models and have never, repeat, never been correct in their economic predictions. Why the market even cares about what the Fed says has been a bafflement to me for many years. Actually if you think about it, we should listen carefully to them and use their information in a contrarian way -- we'd be 100% correct by doing that.

There was an interesting article recently that cited the work of Didier Sornette, who has some very unique theories about the market. A brief bio of him can be found at Wikipedia and reads: "Didier Sornette is Professor on the Chair of Entrepreneurial Risks at Swiss Federal Institute of Technology Zurich (ETH Zurich). He is also a professor of the Swiss Finance Institute, a professor associated with both the department of Physics and the department of Earth Sciences at ETH Zurich, an Adjunct Professor of Geophysics at IGPP and ESS at UCLA. He was previously jointly a Professor of Geophysics at UCLA, Los Angeles California and a Research Director on the theory and prediction of complex systems at the French National Centre for Scientific Research."

In short, he's a brainiac and he has developed some very interesting mathematical models of many things, the financial markets included. He wrote a book more than 10 years ago titled Why Stock Markets Crash, which was referenced in a recent article by John Hussman. Hussman is arguing the stock market is overbought on most of the important metrics used to identify the longer-term market cycles. Referencing the declining volume in the rally from February 5th, he believes the previous decline was not nearly enough to work off the "severely overvalued, overbought, overbullish, rising-yield conditions" that we find in today's market.

Sornette's work suggest that the stock market reaches a "critical point" or "finite time singularity" that he defines not as a crash date but instead more of inflection point where the behavior of the market changes from "self-reinforcing speculation to fragile instability." The deeper retracement into the February 5th low was not large by any measure but it was larger than previous pullbacks since it violated the series of higher lows by dropping below the mid-December low. The strong rally back up is a Pavlovian response (buy the dip) and could be falling into the "fragile instability" that Sornette talked about. Hussman believes the mid-January highs market the inflection point and the low-volume rally off the February 5th low is a reaction to the first stronger decline that has a good chance of failing.

What's interesting about Sornette's work is that he points out previous crashes did not happen because of an event (catalyst). As he says, "The collapse is fundamentally due to the unstable position; the instantaneous cause of the crash is secondary." This "finite singularity" may be setting up the next major stock market decline and as the chart below shows, the rally is reaching the climax point.

Building a Bubble, chart courtesy John Hussman

Sornette refers to this as a "Log Periodic Bubble With Finite-Time Singularity", which to me is a techy way of saying the rally has gone parabolic with narrower and narrower corrections along the way. You can see the sinusoidal characteristics in the rally as it accelerates higher with smaller and smaller cycles. All bubbles end the same and this one is setting up for another pop. That's why the break of the December low marked a turning point according to Sornette's work. It's why the mid-January highs may be the inflection point and why the back test of those highs is potentially important here.

Hussman added his notes on the chart, describing why the market should be ready for more than just a small correction. But as I circled in green, he notes Sornette's work allows for a possible blow-off top to SPX 1920, another 70 points above its December-January highs. If you're anxious to short the market you need to keep that possibility in mind.

Moving over to my regular charts, I'm starting with a weekly view of the NYSE to point out why the bears need to step in now otherwise the bulls should carry all the indexes to new highs in the coming month (SPX 1920?). At its double top in December-January the NYSE tested its 2007 high at 10387 with minor new highs at (10406 on December 31st and 10401 on January 21st). It had also achieved the price projection at 10317 where the 2nd leg (wave-c) of the 3-wave move up from October 2011 was 162% of the 1st leg (wave-a). Today's high at 10356 was almost good enough for a 3rd test of resistance and a possible triple top. There are no quadruple tops so this is it -- the bears will either drive this back down from here, following today's shooting star for its daily candlestick, or else there is further upside potential to about 10850 (Fib and trend line) in March. Today's high was also good enough for a back test of its broken uptrend line from June 2013

NYSE Composite Index, NYA, Weekly chart

What I like about the NYSE chart is the cleaner wave count than I can find on the other charts. Perhaps it's harder to manipulate this index and therefore it gives us a truer reading from an EW perspective. In any case, the initial move up from October 2011 - March 2012 is a 3-wave move and that says the entire rally since then will be retraced. I'm looking at the rally from October 2011 as a large 3-wave move and the 2nd leg, wave-c, is the rally from June 2013 (identified as wave-b). It needs to be a 5-wave move and that's what we've got. The 5th wave (the rally from June 2013 formed a rising wedge, which is a common pattern for 5th waves. Finishing at the price projections with a complete wave count gives us a strong setup for a reversal, which happened off the December 31st high. My sense is that the bulls don't know it yet but the rally is finished. But obviously price is king and I'm waiting for price evidence to back up my opinion.

The same 5-wave move up from June 2013 for SPX is shown on its chart, with a slight modification. It calls the leg up from February 5th the final 5th wave of the larger 5th wave up from June 2013. At the moment, if it rolls over from here I'd be calling the 5th wave a slight truncation, which happens after the larger move has gone too far and the final 5th wave simply runs out of poop. But the bigger picture will become clearer after we get a pullback to see if it's likely to be just a correction or the start of something more bearish.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1850
- bearish below 1738

For this week I'm staying aware that there will be strong institutional effort to hold things up and protect short puts. Next week could be painful for bulls if that happens and there's also the chance that selling in the last two days of this week could get out of control -- protecting long positions, including short puts, requires hedging with short positions (or selling long positions outright) and that would add to any selling pressure. We certainly can't assume the rest of the week will be bullish even though that's the norm.

The 30-min chart below shows the rollover from resistance at 1845-1450. Today it closed its January 23rd gap down, at 1844.91, but didn't quite make it up to its December 31st high at 1849.44 (stopped about 2 points shy). This morning's quick pop up off the initial low was also good enough for a back test of its broken uptrend line from February 5th and its trend line along the highs from last Thursday. It was an area of strong resistance after a strong rally and the new high left a bearish divergence against last Thursday's high. If the pullback from today's high becomes a corrective (3-wave or something choppy) we'll be able to look for a buying opportunity for another rally leg. But if we get a strong impulsive (5-wave) decline we'll know to short bounces after that.

S&P 500, SPX, 30-min chart

The DOW left a bearish candlestick today after failing to hold above its 50-dma and the 62% retracement of its decline, at 16111. Today's pullback broke its uptrend line from February 5th, which should be a good indication the leg up is finished. Now we wait to see if it will start back down strongly or just a corrective pullback before heading higher again.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,225
- bearish below 15,700 and more bearish below 15,340

I don't like it when everyone and their brother reports on the analog between the price pattern leading to the 1929 stock market crash and today's pattern. What everyone sees coming very rarely does. What I find interesting though is that almost to a person everyone declares it's different this time and it can't happen again because we have the Fed, too many protections in place, blah, blah, blah. From a contrarian perspective there's every reason to believe the 1929 pattern will repeat. Don't bet on it but continue to see the risk potential.

DJIA analog pattern between 1928-1929 and 2012-2014, chart courtesy

Yesterday NDX made it up to its trend line along the highs from September 2012 - December 2013, which stopped the rally in January. The February high is leaving a bearish divergence if it turns back down from here. It's also back below the price projection at 3661, which is where the 2nd leg of the rally from October 2011 is 162% of the 1st leg (the same as that shown for the NYSE on its weekly chart). It's a good setup for the bears but will they take advantage of this one? They're pretty beat up and not wanting to do much anymore, whereas the bulls still believe in buying all dips. That's going to bite the bulls in the butt one of these days and I don't think it's very far away.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3685
- bearish below 3515

Helping the techs power to new highs this month has been the semiconductor index (SOX). It's been on fire, with 10 straight up-days before today's minor loss. But it achieved a price projection at 562.40 with a high today at 562.59, which is where the February rally equals the August-September rally (possible 5th wave equaling the 1st wave). It's also poking slightly above the top of a parallel up-channel from August, currently near 560 (where it closed), so if it can stay above that level we could see it run up to the top of a larger up-channel from November 2012, currently near 574. But if it rolls over from here and closes below 500 I think it would be a very good opportunity to test the short side and use today's high for your stop.

Semiconductor index, SOX, Daily chart

Yesterday the RUT almost made it up to its broken uptrend line from June-October 2013 and today it finished its business by tagging the line with this morning's early bounce. It then proceeded to sell off, leaving a bearish kiss goodbye in its wake. A drop below price-level support near 1147 would be further confirmation the leg up from February 5th has finished and then we'd be looking for evidence to expect just a pullback before heading higher or something more bearish. The setup here is for something more bearish so be careful if you're in dip-buying mode.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1150
- bearish below 1121

The FOMC minutes caused a bullish reaction in the U.S. dollar and just in time. Last week I showed a projection for the U.S. dollar with my expectation for a pullback to its uptrend line from 2011-2013, near 79.87. It came close to tagging the uptrend line with the gap down in the after-hours session yesterday, with an overnight low of 79.95, and the reversal created a small outside up day, giving us a bullish reversal signal. Following its gap down last evening and new low it then rallied and closed above yesterday's high and with a higher intraday high as well. If dollar bulls take advantage of this setup we should see a rally leg develop from here.

U.S. Dollar contract, DX, Daily chart

Gold nearly achieved the upside target I've been showing -- two equal legs up from December 31st, for an a-b-c bounce correction to its longer-term decline, points to 1335.90 but yesterday's high at 1332.40 stopped a little shy of that projection and then left a shooting start for its candlestick. Today's red candle, which engulfs yesterday's candlestick body, looks like a good confirmation of its reversal. Above 1336 would be bullish but the larger pattern suggests we look for another leg down in gold, with a downside target at 1152-1155 before setting up a better buying opportunity.

Gold continuous contract, GC, Daily chart

Silver also stopped just short of an upside projection I've been looking for (and could still be achieved). An a-b-c bounce correction of its December 31st low would have the c-wave equal to 162% of the a-wave at 22.12. Taking the width of the December-January trading range and projecting it from the top of the range gives us an upside target of 22.07 so I thought 22.07-22.12 would be a good upside target but yesterday's high at 21.98 might be close enough and the next leg down might begin from here.

Silver continuous contract, SI, Daily chart

Oil spiked higher yesterday and added some more points to its rally today. Once it broke above its downtrend line from 2011-2012, where it stalled last week, it climbed quickly as shorts covered and it looks like oil should make it a little higher before running into potential trouble. Based on the 3-wave bounce in December I think the leg up from January 9th is the c-wave of an a-b-c bounce off the November 27th low and the 162% projection for it is at 105.77. The 62% retracement of its August-November 2013 decline is at 104.42 so that gives us an upside target zone to watch. The top of its parallel up-channel from January 9th crosses through this target zone today through next Tuesday.

Oil continuous contract, CL, Daily chart

Today we got the PPI numbers and tomorrow morning's we'll get the CPI number. The Philly Fed number will be out at 10:00 so we'll get to see if that area is showing economic weakness like the other areas.

Economic reports and Summary

Today's turn back down in the indexes is relatively small, especially as compared to the strong rally off the February 5th lows, but the small turndown could be important. As of Tuesday's close I was thinking it was a good setup for a reversal and today's decline now has the potential to develop into something more substantial, especially since most believe higher highs are all but guaranteed. We've got two more days in opex and institutions work hard to keep the indexes up so that their bullish options positions, such as short puts, finish in their favor. So look for an effort to keep the market up through Friday. If that happens I think we'll see a down week next week but we'll cross that bridge when we come to it.

If the market starts a bigger pullback I'll be watching the price pattern for evidence for what to expect next. A choppy 3-wave kind of pullback would suggest another rally leg to follow the pullback. But if we see an impulsive (5-wave) move down it will tell us the trend has changed at least for the short term and to then look to short bounces. Trade carefully in the meantime and take profits early and most of all protect your capital.

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