Not a creature stirred, not even a mouse... The wild ride on Monday and Tuesday had traders a bit shell-shocked today and neither side tried to do anything. All financial markets were very quiet today, prompting the question, "Is this the calm before the storm?"

Market Stats

Following Monday's and Tuesday's volatile sessions, knocking both sides onto their butts, market participants decided to take a wait-and-see attitude before stepping back into the arena. All financial markets -- stocks, bonds, commodities (except oil) and currencies -- were quiet today and now we're left to wonder if the market is simply resting before the existing trend continues or if the volatility is part of a trend change.

The charts are not real clear on a short-term basis but on the longer-term charts there are plenty of reasons for the bulls to worry. The bears are already worried -- it goes with the territory when in a bull market that appears to have no end. But the over-the-top bullish sentiment, especially after yet another recovery from a scary selloff, continues to leave the market vulnerable to a much stronger selloff than just a 1-day correction. As always, we've got some key levels to watch for pivotal changes in the markets and while the uptrend in stocks is clearly still doing well, there are also plenty of signs that tell us to be more cautious than usual about expecting the uptrend to continue. I'll cover those signals in a review of tonight's charts.

It was a quiet day for economic reports as well. The only significant report this morning was the ADP employment report before the bell and it came in a little less than expected, +139K vs. 150K expected, and down from the upwardly revised 175K for January (revised up from 127K). There was a small negative knee-jerk reaction in the futures but the overnight session was quiet and that simply continued for the rest of the day.

The ISM Services number came out at 10:00 but was essentially ignored by the market. The number was 51.6, which is still positive (above 50) but not as good as the 53.5 that had been expected and lower than the 54 in January. Just another sign of a slowing economy that the stock market is ignoring...

The crude inventories, out at 10:30, was higher than the prior week and that might have something to do with the decline in the price of oil today, which was one of the biggest movers. Oil dropped sharply today, down -2.25%, which followed yesterday's steep drop after Monday's spike up. As I'll cover with its chart, the downturn from Monday's high could be a significant sell signal for oil (and maybe a warning for the stock market). The pressure is off with the Ukrainian situation settling down to a dull roar but with the multiple signs of a slowdown in the global economy there is also anticipation that the demand for oil will continue to drop.

The Fed's Beige Book report was released this afternoon and it too was largely ignored. Any weakness in the economic numbers was simply written off to bad weather -- there were 119 mentions of the word "weather" in the Fed's report. It was their get-out-jail-free card and they used it since it provided good cover for them not to have to change tactics yet. Janet Yellen said it could be "months" before there is enough data to judge whether or not the weather was the main factor or something more systemic. At the moment they believe the slowdown will be short-lived. I think they said the same thing back in 2007 about the subprime slime problem.

The Beige Book report said the energy industry benefitted from the cold weather but the impact was felt on home sales, which were "mixed." Employment levels are "gradually" improving and inflation pressures are "subdued" with the lack of demand for products and no pressure on wage growth. At the moment the Fed is on track to reduce asset purchases by another $10B/month when they meet on March 18-19, which would then have asset purchases at $55B/month, down from the peak at $85B. At that rate they'll "only" be adding $660B annually to their balance sheet.

Commodity prices are likely to come down if the global economy continues to slow, which is what we've been seeing. One commodity that is a good one to watch for signals about the global economy is Dr. Copper and at the moment I think it's getting ready for a stronger breakdown. I've updated the weekly chart of copper below and you can see last week's break of the uptrend line from June 2013. Not only has copper not made a new high above its December high but it has broken its uptrend line. For SPX to do the same it would now be below 1760 instead of pushing to new highs near 1880. That's quite a disconnect between the stock market and reality, especially between the 2011 high for copper and the one for the stock market. Eventually this will correct and I doubt it will be from copper rallying.

Copper contract, HG, Weekly chart

We trade what the market gives us and for a long time the stock market has been marching to the beat of a different drummer, which is now Janet Yellen. As long as the Fed can continue to convince the stock market that the man (woman) behind the curtain controls things, it will remain calm and not worried. The danger of course is that a rally on sentiment alone is a dangerous market because sentiment can, and does, spin on a dime. A rally on fundamentals takes a lot longer to change investors' perceptions. So, while the market is still in its uptrend we should look higher but keep turning around to see if the bear is getting closer. He took a nip out of the bull's butt on Monday but that only spurred the bull to run faster on Tuesday. But me thinks the bull is getting tired.

The RUT has been leading the charge up the hill so I think it's a good index to watch to help determine when traders turn from "risk-on" to "risk-off." Starting with the weekly chart below, I have two upside projections based on wave relationships -- the first at 1203.45 (achieved yesterday) and the second at 1221.27. Yesterday's high near 1213 not only achieved the first projection, which is where the 5th wave in the move up from June 2013 equals the 1st wave, but it also tagged the trend line across the highs since September 2012 (log price scale). The higher projection, at 1221.27, is where the 5th wave in the move up from June 2012 would equal the 1st through 3rd waves. Keep the upper number in mind if we see another rally leg this week.

Russell-2000, RUT, Weekly chart

The daily chart below shows a closer view of a trend line along the highs from July 2013 (arithmetic scale on this chart) and you can see how this line has repeatedly stopped rallies, yesterday's included. Betting on the upside from here is a risky bet, especially being overbought up against this line of resistance. The important point here about the wave count is that the leg up from February 5th fits as the completion of the 5th wave in the move up from June 2013, which in turn completes the larger 5-wave move up from June 2012. The larger pattern is still subject to interpretation but at a minimum we should be ready for at least a 38% retracement of the rally from 2012, which would see the RUT back down to 1028 over the next several months (a steeper and deeper drop if the rally from 2009 is complete).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1215
- bearish below 1164

Moving in closer, the 60-min chart below shows yesterday's rally also tagged the top of its parallel up-channel for its rally from February 5th. It also achieved the 127% extension of the previous decline (January 22 - February 5), which is a common reversal Fib to watch. The bearish divergence since February 18th is another warning sign, especially with overbought conditions on all time frames and price up against resistance after reaching upside price projections. The only thing needed is a few bears willing to take advantage of the setup and not run away, screaming like scared little girls at the first sound of gun fire.

Russell-2000, RUT, 60-min chart

You can't even see today's small doji next to yesterday's big white candle but it's sitting on the trend line along the highs from April 2012 - May 2013. As I've been pointing out since the February 3rd low, there is the projection at 1887 still calling the bulls and that remains the upside potential for now (higher but I'd want to first see how it does at that level). This is where the 5th wave in the move up from June 2013 would equal the 1st wave (the equivalent projection for the RUT was achieved with yesterday's rally). Today's sideways consolidation looks bullish for at least one more leg up to the 1887 projection but I've seen enough breakdowns from a bullish consolidation at tops to know it's a possibility here.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1850
- bearish below 1834

The DOW is one of the few indexes to remain below its December 31st high and most probably wonder how long it will be before it finally climbs to new highs, not if it will. I'm thinking the DOW will leave a bearish non-confirmation with the other indexes by not making a new high but I do wonder if it will at least test its high. As with the others, I see vulnerability to the downside following Tuesday's squirt higher on short covering without any follow through. Buyers might be all in at this point.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,420
- bearish below 16,070

Is the DOW analog pattern between 1929 and today no longer valid? Certainly with the new highs for all the other indexes it's no longer valid but comparing the 1929 pattern to today continues to leave an eerie resemblance for the DOW. The amplitude of the moves is not as important as the timing and at the moment the bounce into early March coincides almost exactly with the 1929 bounce that led to the crash. This analog pattern suggested the month of March will not be a good time for the bulls. I'm not saying it will happen but it's important to note, for the DOW, the analog pattern has not yet been negated.

INDU, 1929 vs. 2014 analog pattern, chart courtesy

Since the February 18th high NDX has been showing bearish divergence with each new high. It's pushing up along a trend line along the highs from February 18th but the waning momentum hasn't stopped the bulls yet. The choppy move up looks like an ending pattern and when it breaks down it could go quickly.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3750
- bearish below 3640

Bonds appear ready to rally some more, which in turn would drive yields down. And if bonds are getting ready for a bigger rally, which I think is setting up, it's going to take money out of the stock market. My opinion about a bond market rally this year goes counter to the majority and it's a lonely position to be in. But John Mauldin had an article last month that provided some arguments in favor of a bond market rally this year before the bear takes a bite out of bond holders. I agree with Niels Jensen, from Absolute Returns Partners in London, who states there is little doubt that in the long term the bond market will decline and send yields higher. But we first we need to get through a deflationary period.

As Jensen stated, "Now, when I look at financial markets going into 2014, I cannot recall ever having come across a more one-sided view than the one which prevails [for the bond market]. The consensus view on bonds is overwhelmingly bearish while pretty much everyone is bullish on equities... As far as the bond market is concerned, the 2014 consensus is a major outlier, and that is precisely what has piqued my interest."

He goes on to make the following points which I think differentiates him from most others. "I agree with the view shared by many that, in the long term, as economic conditions normalise, interest rates will almost certainly rise. I cannot possibly disagree with that. The words to pay attention to, though, are 'long term'. In the meantime, 2014 may contain one or two surprises, effectively delaying the bond bear market. Now to those reasons, and in no particular order:

-- The emerging market crisis escalates further;
-- The Eurozone crisis re-ignites;
-- The disinflationary trend intensifies and potentially turns into deflation;
-- The economic recovery currently underway proves unsustainable; and/or
-- Flow of funds provides more support for bonds than anticipated.

It will be interesting to see how his bullet items pan out this year but I think the charts support his view. Using TNX, the 10-year yield, there was a sharp decline off the December 31st high, coinciding with the decline in the stock market (rally in bonds), and the bounce off the February 3rd low (again coinciding with the stock market rally) was a choppy correction to the decline, which pointed lower. TNX topped on February 21st and had another small impulsive decline into Monday's low. But here's where the stock and bond markets separated as the stock market continued to rally in a choppy fashion beyond the February 21stt high while TNX dropped down toward its February 3rd low. Following Monday's low I've been looking for TNX to bounce up to about 2.72% before turning back down in a stronger decline and today's high at 2.719% might be all we'll see. The stock market's rally beyond the February 21st high could be reversed quickly if the bond market starts to rally stronger, which is the setup I currently see in front of us.

10-year Yield, TNX, Daily chart

Investors in the bond market are typically more conservative than investors in stocks but there are times when even bond investors get more aggressive when looking for yield. How aggressive they are can be measured by how well the high-yield corporate bond fund (HYG) is doing. High-yield bonds is another way of saying junk bonds so investors in these bonds are willing to take on more risk for the higher yield and as long as HYG is doing well we know the risk appetite is strong.

As can be seen on the HYG daily chart below, HYG investors got cold feet following the peak in May 2013, which was the end of a large rising wedge pattern from the November 2011 low. That low, at 82.50, is the downside target this year after the current bounce off the June 2013 low finishes and it might have done that with last Friday's back test of its broken uptrend line from June 2013. It was a bearish setup and today it turned back down after a 2-day bounce off Monday's low, potentially signaling the stock market could do the same.

High Yield Corporate Bond fund, HYG, Daily chart

HYG is often a leading indicator for the stock market and the large divergence since last year has been a warning for stock market bulls. As we can easily see, it's not a timing indicator but the warning has been there for some time. If we look at HYG's relative strength (RS) to Treasuries, using TLT (20+ year Treasury bond fund), we get a good idea about when investors are willing to accept higher risks and when they're not. The weekly chart below shows HYG outperforming TLT since June 2012. Coinciding with that low was a low for the stock market and both rallied together into the end of 2013. This RS chart peaked on January 3rd, giving us a bearish non-confirmation between this chart and the stock market (yet another divergence). The HYG/TLT RS chart could see a precipitous decline if investors jump out of junk bonds in favor of Treasuries since that would weaken HYG while strengthening TLT.

HYG vs. TLT Relative Strength, Weekly chart

Since the January 3rd high the RS of HYG has been lagging, indicating a desire to reduce risk. January's break of the uptrend line from June 2012, and then the back-test of the line last week, sets up a potential bearish kiss goodbye. At the top in 2011 there was a lower high in April but the stock market made a higher high at that time. The bearish divergence between the two was a warning sign and the May 2011 flash crash followed shortly thereafter. We have the same situation now with the RS chart making a lower high in February/March vs. the higher high for the stock market. The bearish divergence is again a warning to stock market bulls that the "risk-off" trade will likely hit the stock market next.

The Transports have been lagging along with the DOW, although the TRAN was able to make a new high in January (22nd), above its December 31st high at 7410. In fact it's back above its December high with yesterday's rally and it added a little more today. That is so far a continuation of the bearish non-confirmation between the DOW and TRAN. But the TRAN has not been able to get back above its January 22nd high at 7591 and I'm thinking it's not going to be able to. The 60-min chart of the TRAN below shows the pattern I'm watching and the projection shown at 7526 could be the limit for its rally. This morning's rally had it reaching the top of its up-channel from February 5th, at 7506 and a strong decline from here would indicate its rally could be finished.

Transportation Index, TRAN, 60-min chart

The U.S. dollar is holding support at its uptrend line from May 2011 - October 2013, near 79.96, but just barely. The wave pattern and the uptrend line suggest the next big move will be a rally and I'm just waiting for it to get started. A drop below its December 18th low at 79.50 would spell trouble for dollar bulls, possibly suggesting the Fed started hinting they'll back off their taper program.

U.S. Dollar contract, DX, Daily chart

Gold's pattern counts best as an a-b-c correction to its longer-term downtrend. Monday's emotional spike up might have been the completion of the bounce pattern and now the next leg down is beginning. But it's obviously in an up-channel, which would not be negated until gold drops out the bottom of it. Confirmation of a breakdown would be a decline below its 200-dma at 1303.

Gold continuous contract, GC, Daily chart

Oil's sharp decline over the past two days, following the spike up on Monday (like gold, it looks like the spike finished a bounce correction and now the next leg of a larger decline might have started. If the a-b-c bounce off the November low is the correct interpretation we should see oil below 90 in the next month or two.

Oil continuous contract, CL, Daily chart

Thursday's economic reports include unemployment claims and some productivity and labor costs and then after the bell we'll get the Factory Orders, which are not expected to show growth (but "less bad" than December's). Bad economic reports for a while will simply be written off as bad-weather related. Never mind the reports have been showing a slowdown long before the bad weather arrived. Bad news will matter when the market is ready for it to matter. Friday's Nonfarm Payrolls report will be the big report for the week.

Economic reports and Summary

The big recovery off Monday's scary drop has just about everyone bullish the stock market. VIX is low, bullish sentiment is high. What could possibly go wrong? Plenty as we all know but the trend is up and it's dangerous to fight it. By the same token don't get sucked into complacency here. I see too many indicators that tell me we should be looking for a top and the post-Monday squirt to the upside doesn't look like much more than short covering. There was very little buying after the short squeeze Tuesday morning and only churning today (on low volume).

We've got significant divergences between the stock market and the bond and commodities markets, which is a heads up that the rally in the stock market could soon run out of energy. Watch the bond market since a rally there could start to pull money out of stocks. The difference between the sagging junk bond market and the rallying stock market is another warning sign. There are plenty of warning signs but that's all they are right now. Don't short the market just because of these bearish divergences. But the message is clear -- don't get complacent about the upside since the large bearish non-confirmations I'm seeing right now could get rectified with a sudden stock market selloff.

We don't need an external shock to provide a catalyst for selling. In fact tops are usually put in on good news. Might that be a better-than-expected Payrolls report on Friday? One could only guess about that but keep in mind that most tops did not have a "cause." Selling starts and then it snowballs and most traders wonder why it's selling, often on good news. The setups that I'm seeing on the charts tell me we're not far from that kind of event so stay vigilant.

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