Inventory turnover sounds like a tasty pastry but in fact it's bad for retail investors who typically do the buying at major market highs, taking the inventory from smart money. At the moment it's looking like retail traders are the tasty treat for big fund managers.

Wednesday's Market Stats

The morning started the day with another gap up, thanks to a run up in the futures in the pre-market session (again), but in what's become a familiar pattern, these opening gaps to the upside are being used by big fund managers to liquidate inventory. The gap up creates a liquidity push as buyers scramble to buy (and shorts scramble to cover), helped by HFTs running the momentum, while big inventory holders are using the liquidity to sell into. The early-morning rallies are typically finished in the first 30 minutes and the selling drives the indexes back down. Rinse and repeat the next day.

Some of the pre-market rally was credited to James Bullard, the Fed's Bank of St. Louis President, who was interviewed by Bloomberg TV in Hong Kong this morning (so before our markets opened). As Jim Brown has been saying, the Fed heads are doing a little backpedaling and trying to tell us what Janet Yellen really meant to say. Bullard said they haven't decided on any specific month to end their QE program, while at the same time saying they would need to see a sharp turn in the economy to change their taper schedule. Sometimes I wonder if a requirement for any government or government-like job (the Federal Reserve is a private consortium of banks but acts like a government-run organization) is to show an exceptional skill at talking out both sides of your mouth.

Bullard said "There's a little bit of ambiguity around the notion of when the QE program ends..." and left open the possibility it could end in October, December or January. Bullard is a non-voting FOMC member this year. Yesterday the Atlanta Fed head, Dennis Lockhart, said the six months that everyone's been talking about since Yellen's press conference, relating to how long it would take to start raising rates once QE is completed, "is really a minimum, not a maximum." The Fed heads keep reminding us that their decisions will be data dependent but most recognize that the Fed would have a lot of 'splainin' to do if they significantly altered the timeline for the QE taper program.

The Fed has had a higher stock market as one of their primary goals, once admitted to by Bernanke a few years ago, as a way to create a "wealth effect" in the hopes that the trickle-down theory would work. It hasn't but the Fed hasn't given up on the idea that they need to keep the stock market charging higher. Yellen has as much as admitted that a continuing rally in the stock market is a requirement and is not worried that excess risk taking has created more bubbles. So if the market does take a well-deserved rest and pulls back more strongly this year than it has in a while, it will be interesting to see how the Fed will react.

I've been saying for a long time that the Fed has been painting itself into a corner (very slowly as it turns out) and can't tolerate higher rates out of the bond market, which would force their hand to raise rates faster than they want, or a declining stock market. Either or both of those events would force the Fed to reconsider their taper program and very likely Yellen (especially Yellen, who believes the Fed can control these things) would immediately reverse course and start increasing the QE program. That would of course goose the stock market back up (happy days are here again) but it would then become abundantly clear to all that the Fed is trapped.

If a strong market decline occurs this summer, as it looks like it might, many will blame it on the Fed's drawing down the QE program. That would likely panic many of the Fed members into reacting with more bond purchases, not less. The Fed, especially under Bernanke, believes the Great Depression was caused by too much stimulus being removed too quickly. I believe the Fed only stalls the inevitable but I'm not a Yale-educated economist so it's just an opinion. But that belief by the Fed drives current-day decision making and if they fear their pulling the plug on stimulus is tanking the stock market they'll likely be quick to push for more stimulus.

If in a panic the Fed pushes for more stimulus because they fear the stock market needs it, or the economy needs it, or the ruling party needs it (oops, sorry, that one slipped out) it will immediately spark fear of inflation and that will tank the bond market, driving yields higher. While the Fed wants the stock market to keep rallying, they need the bond market to keep rallying. With a huge balance sheet of debt they can't afford, literally, higher rates. So you see how the Fed is trapped. And they did it to themselves with fundamentally flawed economic models, which fail to predict the economy 100% of the time. It's an enviable record; too bad it's always wrong instead of correct.

There was only one economic report this morning, the Durable Goods orders, and it didn't have much of an impact on the market. Thanks to aircraft orders the number came in better than expected for February, +2.2% vs. expectations for +1.0%, and much better than January's -1.3% (revised down from the initially reported -1.0%). But excluding transportation orders the number was less than had been expected, +0.2% vs. +0.3%, and less than January's +0.9% (revised lower from +1.1%). As you can see on the chart below, the steady drop lower in the durable goods orders since the spike recovery into the 2010 high has it back down to where it was prior to the spike down in 2008. Dancing on the edge here...

Durable Goods Orders, chart courtesy

Before getting into the U.S. stock market indexes, I want to show what the FTSE and DAX are up to. These are the London and Munich market indexes and since they tend to lead the U.S. I think it's important to keep an eye on them if you're expecting a turn in the U.S. market. The FTSE's chart below shows a series of higher highs since the June 2013 low but each high is getting weaker, as indicated with the bearish divergence on MACD at the top of the chart. The price pattern has been building a rising wedge, another bearish sign and at the moment it's bouncing off the bottom of the wedge (uptrend line from June 2013). Today's candle was a bearish shooting star after failing to hold onto its rally. A drop below Monday's low near 6500 would be a sell signal but if it can get back above its 50-dma at 6672 (closed today at 6605), it would be at least short-term bullish

London Financial Times index, FTSE, Daily chart

The German DAX looks much stronger than the FTSE with its steady climb up from April 2013. It has reflected Germany's stronger economy in the past year. But then it started to negatively diverge since January, putting in a lower high in February and then a lower low on March 14th. The bounce off that low has made it back up to its broken 50-dma as well as its broken uptrend line from June 2013. It will either get bullish from here with a further rally or it will be a bearish back test and kiss goodbye. If both the FTSE and DAX fail to make it any higher from here, it will be a bearish sign for the U.S. stock market.

German DAX Composite index, DAX, Daily chart

Tonight I'll start with a review of the DOW since it's been holding up the best and should lead the way higher if the market has at least a little more work to do to the upside. At the moment I have to flip a coin for direction for the rest of the week since I could easily argue the case for both sides. That keeps me cautious. On the DOW's weekly chart below I show the potential for another push higher into April and the potential to rise up to at least the 16700 area, a level I've been talking about since December. But I'll be the first to admit that the very bearish divergence at the current high (highlighted on MACD and RSI at the bottom of the chart) is a significant warning to bulls -- chasing the market higher on any rally is not much better than a dog chasing a car in busy traffic (it's a good way to get bain dramage).

Dow Industrials, INDU, Weekly chart

The choppy rise since the low on March 14th looks corrective and therefore suggests lower prices. Today's selloff following the gap up could be the start of a stronger selloff and certainly the 200-point intraday reversal has to be disappointing for the dipsters and those who are buying the morning gaps (retail traders). Almost everything I read now from market pundits suggest just holding what you've got and adding on the dips since the market always comes back. It makes me cringe because I'm concerned about how much pain so many retail investors are going to go through if we have the kind of bear market I think we're going to have. The market has done its job on market sentiment -- the high level of retail-trader participation and extreme margin debt level says the market is finally sucking in the late-to-the-party wannabe bulls.

But while I'm feeling bearish longer-term I can see the potential for at least another rally leg for the DOW, potentially up to 16767 if the 2nd leg of the rally from February equals 62% of the 1st leg, to repeat the pattern for the October-December rally. But for that to happen, the short-term pattern says the bulls can't waste anytime jumping back in on Thursday.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,500
- bearish below 16,050

There's also the possibility the DOW has one more rally up its sleeve but a relatively short one. A possible rising wedge pattern may be in progress for the final leg up and it might need just one more leg up, shown in bold green. A minor new high for the current rally, perhaps up to only 16500, could cap it off and then down from there. But a break below its uptrend line from February 5 - March 14, near 16260, and especially below Monday's low at 16215, would be trouble for the bulls. At that point I'll be looking for a decline to at least 16007 for two equal legs down from March 7th. Below 16K would confirm the more bearish wave count is in play.

Dow Industrials, INDU, 60-min chart

Since last week's high, which so far coincides with a possible reversal around the FOMC announcement, price action has been choppy and leaves both directions from here still on the table. As shown on the daily chart, I've been eyeing a target zone at 1912-1920 for the bulls but they need to get going quickly here. Today's selloff brought the index back down toward price-level support at 1850, where it has bounced twice in the past week (last Wednesday and this Monday). The more it pounds on support the weaker it will become and a break below 1850 would be a notch in the bear's gun.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1885
- bearish below 1840

With all the choppy price action, if SPX drops below 1850 I'll be watching for possible support near 1842 where it would have two equal legs down from last Friday and then the March 14th low near 1840. Below 1840 would likely mean a test of the 50-dma, now near 1834. For the bullish path, which requires the buyers to jump back in Thursday morning and this time not give it up so quickly, I'm showing a possible ascending triangle pattern with another up-down sequence to go before it rallies out of it next week and into mid-April, potentially making it up to the 1920 target. The longer it chops sideways the more bullish it will become.

S&P 500, SPX, 60-min chart

NDX sold off strongly today, especially off its morning high -- 72 points, finishing down -1.3%. In so doing it firmly broke price-level support near 3635 and appears headed to its uptrend line from October 2013 - February 2014, near 3560. There are two downside projections coinciding at 3527-3537 where a corrective pullback from March 7th could finish and then launch another rally leg. While I show it would be bearish with a break of its uptrend line, near 3560, keep in mind the lower target zone to watch for possible support. The next price-level support is near 3515.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3718
- bearish below 3560

The RUT is leading the parade lower, which of course is not a good sign for the bulls. As a measure of risk tolerance the RUT is telling us traders are taking risk off the table. Today's strong decline dropped the RUT below its 50-dma at 1163 and unless it's recovered quickly it's going to another notch in the bear's gun. Price-level support at 1147 and two price projections at 1152 and 1142 give us a support zone centered at the 1147 level. Therefore a break below that level would more bad news for bulls. At the moment, with just a 3-wave move down for the indexes it remains possible for the completion of an a-b-c pullback to be followed by another rally leg (light green labels) but at this point that's looking less and less likely unless it can immediately turn around and rally from here (and stop the selling into rallies, which is inventory distribution to the retail traders).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1208
- bearish below 1147

On Monday the U.S. dollar pulled back from its strong 2-day rally last Wednesday-Thursday and found support at its 20-dma and uptrend line from 2011-2013, which it had broken below in early March and recovered last week (following the FOMC announcement). Since last Thursday it has repeatedly banged its head up against the 50-dma, now at 80.40, so the dollar remains bearish below that MA. But the more it beats on that MA the weaker it becomes and eventually it should break. I see the potential for a minor new high and then a pullback to correct the rally off the March 13th low and then a stronger rally but what it does over the next few days should help clear up its longer-term pattern.

U.S. Dollar contract, DX, Daily chart

Gold should be at a level where it gets at least a bigger bounce against its decline from March 16th. I've got a couple of Fib projections off its declining pattern that are lined up near 1300 and that's where it's also testing its 50-dma (1304) and 200-dma (1299). And it's where it's back down to the 50% retracement of its 2008-2011 rally (1302). I'd be surprised if gold doesn't get a bounce here but obviously it would be a lot more bearish if it doesn't. I think the bounce, which should last about a week, will be followed by lower prices but the bounce pattern should provide more clues in that regard.

Gold continuous contract, GC, Daily chart

Oil's next short-term move is a coin toss and I can see the potential for a move in either direction to get reversed before heading stronger in the opposite direction. One thing for the bears is the fact that its currently struggling to get through resistance at its 20- and 200-dma's, both at 100.42, while bulls like the fact that the 50-dma, at 99.36, held as support today (99.10 was the low but it then rallied from yesterday's after-hours low smack into the MA resistance this afternoon. We'll have to see how it shakes out over the next few days.

Oil continuous contract, CL, Daily chart

Tomorrow's economic reports include the unemployment numbers, 3rd estimates for GDP and pending home sales. New home sales for February, reported on Tuesday, came in lower than January's and a little less than had been expected. Thursday's report on pending home sales will show us if the sales in general are slowing down but then it will be simply written off as weather related.

Economic reports and Summary

The bull is on the ropes and trying the rope-a-dope trick on the bear. But if the bull doesn't come out fighting almost immediately on Thursday we could find the bull getting pummeled by the bear. He's so hungry right now that he might even bite an ear off. We've got what looks like a choppy pullback from the highs and therefore we could have just a corrective pullback that will be followed by another rally, and we'll watch the bull come off the ropes and start wailing on the tired bear. It's a tricky spot and what happens on Thursday might even tell us what the first couple of weeks of April will look like and from that what the longer-term market's projection will be.

The selling of rallies, and the term "rally" is used loosely since it's coming courtesy of the futures being driven higher in the pre-market sessions, is clearly bearish. Distribution of inventory is following in the footsteps of the big momentum stocks getting sold off. We've seen weaker momentum and a lack of participation in the rallies, all signs pointing to topping action. Now when it looks like it's tipping over it's hard to believe it actually will. Bears are being very cautious, and the VIX is staying subdued, because we've seen this movie before -- the dips get bought and the bears go home. Most are waiting for it to happen again. Certainly traders are fully conditioned to buy the dips and unfortunately for many of the dipsters they'll hang onto their positions through losses because they're convinced the market always comes back.

The market is at a tipping point and I see the same evidence in the bond market. Bonds look ready for a stronger rally and rotating out of stocks into the safety of bonds could be the next big move. Trade carefully during this transition, especially since we don't have proof yet that a final high has been made. Once we have an impulsive 5-wave move down we can then get more aggressive on the short side following a bounce correction of the 5-wave move down. Stay patient (both sides) and 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