Today was the slowest volume day we've seen since before Christmas. It would appear traders extended the holiday weekend into a 4-day weekend. The day was positive but the bulls need more participation than we saw today.

Monday's Market Stats

Today's trading was a snoozer. The overnight action in the futures was calm, this morning's open was calm and it remained calm and quiet for the entire day. Neither earning's announcements nor economic reports (of which there was only one) could get traders excited about much today and trading volume was extremely light. It was bullish because the indexes closed in the green but bulls would be in better shape with volume behind the rally and that was clearly lacking today.

For a sense of how slow today's trading volume was, a normal day for the ES contract (S&P 500 emini futures) is about 1.6M contracts but today's was less than 500K, so about a third of the usual volume. For SPY it was slowest day since last December 24th, which was only a half-day session. Perhaps most traders thought today was a holiday instead of last Friday and some likely stretched their long weekend into a 4-day holiday. Europe markets and a couple of Asian markets were closed on Monday so without some hints from their markets there wasn't much interest in trading U.S. markets either.

Today's volume continues the pattern we've been seeing since the March/April highs -- higher volume during the declines and lower volume on the rallies, which is not what the bulls want to see. However, as weak as today's volume was, at least the buyers were able to outperform the sellers. And that could continue for longer than most believe possible -- the momentum is clearly on the side of the bulls right now and many are looking at the pattern of the rally off the February low. Once that momentum got going there was very little that got in its way.

Speaking of patterns, we're seeing the usual pattern behind rallies for this market, most of which occurs in after-hours in an effort to get the market to start with a gap up. We could see the same thing Tuesday morning if the after-hours positive reaction to NFLX earnings holds. Overnight buying in the futures (or in the morning before the cash market opens) produces a higher open with a gap up that then gets traders chasing it higher.

But it's the selling of rallies that's been more prevalent since the March highs and that's what looks like distribution to the retail traders who are excited about buying the highs (where else are people excited about buying things at their most expensive price?). The selling into rallies (although not today's) is then followed by another manufactured overnight rally to gap it up, sell into it, rinse and repeat. We could easily get more new highs out of the indexes before the end of the month, at least for the blue chips, but so far it doesn't have the signs of a healthy rally and it simply means don't get lulled into a false sense of security about the upside.

This week will see a lot of companies reporting earnings and there continues to be a lot of hope that they'll justify the high prices traders are paying. But the current earnings cycle (a cycle is defined as the period between cycle peaks) started from the prior cycle peak in Q2 2007 and it's been the weakest earnings cycle in the past 55 years (since 1959). The average earnings per share (EPS) in the previous 6 cycles prior to this one has been 7% annualized, with the best being 9.1% following the Q3 1969 cycle peak and the worst being 5.6% following the Q3 1959 cycle peak. The others (Q3 1974, Q4 1981, Q2 1989 and Q3 2000) fit tight to the average 7%. The current cycle, since the Q2 2007 peak, is running at 2.8%, which is half of the previous worst cycle. These cycles and their lengths of time between peaks are shown on the chart below.

EPS cycles (measure from earnings peak to peak), chart courtesy Business Insider

The significance here is that the Fed has made trillions of dollars available with extraordinarily low interest rates for an extraordinarily long time and yet we've still only seen 2.8% annualized earnings growth rate for the period starting Q2 2007 through Q1 2014. As an economic metric it's a dismal performance. The deep trough into 2009 certainly has dragged performance lower, as can be seen on the above chart, but it's been a lackluster performance since that period, especially with the growth rate flattening out since about the 16th quarter.

For the past 12 quarters (3 years) earning's growth has been anemic and it's expected to be only about 1% for Q1 2014 (the weather is going to get the blame). Many are hoping for a rebound in the coming quarters but the evidence is not there yet. It's just another example of how out of synch the stock market is with the underlying fundamentals of the economy and companies' performance. It will matter when it matters and then traders will wonder why the market is selling off and not responding to good news. That's the sentiment shift that hasn't happened yet and until it does we remain in a bull market.

For tonight's chart review I'll start with the weekly chart of the granddaddy of the indexes, the Wilshire 5000. As with all of the indexes, it's been a real challenge trying to figure out where we are in the price pattern in an attempt to figure out where the top of this rally is going to be (and therefore where to be cautious about chasing it higher). With the relatively minor pullback from the April highs for the blue chips, and with the 3-wave corrective pullback pattern that held above support, it's not difficult to see the need for at least one more new high to complete the rally. We could be looking for another rally to a new high before the end of April and maybe even stretch into mid-May before the final high is in place. The months of April and May have seen important highs in the past and it was a May 19, 2008 high that led to one of the worst stock market declines we've seen. It's possible we'll set up for a similar pattern this year.

The W5000 chart shows the wave count ideas I'm currently considering but disregarding the count, the trend lines are our guides for now. The pullback into the April 15th low held the uptrend line from November 2012 through the February 2014 low. An older uptrend line through the June 2013 low crosses the trend line across the highs since April 2012 near 20650 in mid-May. That's another 750 points (+3.8%) from here. However, a break below last week's low near 19269 would be trouble for the bulls since it could indicate we've already seen the final high.

Wilshire 5000 index, W5000, Weekly chart

SPX has a near-identical pattern as the W5000 and as I remain neutral the index (and market) until I see more price action. Above 1882 would be potentially bullish and in that case I'll be looking to see if it can make it up to the 1904-1920 area, with a focus on 1910-1912 and potentially by the end of the month. If the current rally can keep going without any strong pullback I see this as a decent possibility. There's a price projection near 1904 for the 2nd leg of a 3-wave move up from February where it would be 62% of the 1st leg up. By the end of the month a trend line along the highs from December will be near 1912. A little throw-over finish above the line could tag 1920. The bulls are not in trouble until price breaks below last week's low near 1814 and price-level support near 1813.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1882
- bearish below 1812

Could a new high coincide once again with a new moon on April 29th, perhaps a couple of days following the new moon, just as it did for the two previous new moons in March? That would make for an interesting setup.

SPX MPTS daily chart

The reason I'm using 1882 for a key level for the bulls to break is because that's where the top of a parallel down-channel is currently located. This channel has been created off the trend line along the lows from March 14th and a parallel line attached to the April 4th high. If this channel holds price down there is still a chance the bears could snatch the ball away here. Currently there's a bearish pattern that I'm considering, which is basically an a-b-c bounce off the April 8th low and while it's a bit of a stretch (for an expanded flat correction in EW terminology), the sharp rally off last week's low actually supports the interpretation. It calls for a strong sharp decline to follow, which is the reason I remain cautious about the upside even though I see the potential.

S&P 500, SPX, 60-min chart

Back to the upside projections I show for SPX on its daily chart above -- the sweet zone at 1910-1912. It's been a while since I've shown the Gann Square of Nine chart but interestingly it's a beauty of a setup for a high at 1910. First, the chart below is a squished view of the top half of the chart to give you a sense for where we are currently on it. You can't see the numbers but it's the red vector, pointing roughly to the 11:00 position, that's important. What can't be seen at the bottom of the Gann Sof9 chart is that red vector is very close to December 31st, which of course was the high that led to a deep pullback into February. The red line that is square to this one, running from about 8:00 to 2:00, points to previous important dates as well -- at the 8:00 position it points to the October 2002 low, October 2007 high, October 2011 low and October 2012 high and at the 2:00 position it points to the April 2012 high. As Gann would have said, these dates "vibrate" off important price levels and it pays to watch closely how price behaves around them.

Gann Square of Nine chart for SPX, top half of chart
**Will not load properly and ran out of time to troubleshoot -- I'll show it in my Wednesday wrap**

It's the top portion of the red vector at the 11:00 position that is important at the moment. It crosses through important and linked prices on the chart -- the October 2002 low at 768, the April 2012 high at 1422, the October 2007 high at 1576 and the next one that's close is 1910. Notice the connection between those prices and the dates on the perpendicular line at 8:00 and 2:00. This is the relationship that Gann always looked for. A closer view of the top-left section of the chart is shown below and it's the Gann chart along with the trend line across the highs since December, also near 1910 next week, if achieved, would have me drooling like a slobbering grizzly eating all the fatty portions of the salmon that he can catch. Go ahead bulls, make my day.

Gann Square of Nine chart for SPX, top left portion of chart

Alright, so that's the bullish setup I'd like to see happen into next week. After that I'd be watching very closely for another 2008-like setup to get short. Now all I have to do is (im)patiently wait to see if it will set up. In the meantime, the short-term pattern remains elusive and it's the reason I'm somewhat neutral at the moment. The rally from last week appears to running out of momentum but 5 days in a row to the upside is a previous pattern that has led to higher highs. Today's weakness could quickly be replaced with strength on Tuesday once the rest of the players get back in the pool.

The DOW's pattern is the same as the W5000 and SPX so there's not much to add for it. Upside potential is to its longer-term trend line along its highs from 2000-2007, which stopped its December and April rallies and is currently near 16650. That could coincide with a back test of its broken uptrend line from February through its March 27th low, which crosses the 2000-2007 trend line on Wednesday. On April 29th the broken uptrend line crosses a price projection at 16735, which is where the 2nd leg of its rally from February would be 62% of the 1st leg. The DOW stays bullish as long as we don't see strong impulsive declines from here and would turn bearish below last week's low at 16015.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,500
- bearish below 16,015

NDX was the stronger index today, thanks to some more help from the SOX, and it rallied up to its broken 20-dma near 3560, which is just below the top of a parallel down-channel for its decline from March, currently near 3570. A rally above 3570 would therefore be bullish, especially if it uses resistance as support on a back test. This one has a lot more work to do than the blue chips to make a new high and one possibility is that we'll see the blue chips make new highs without the techs and small caps (for bearish non-confirmation). That's just a though right now but something I'll be watching for. If NDX drops back below 3500 I'd become a little more bearish but the bulls aren't in serious trouble until it drop back below 3425, in which case I think it would be extremely bearish, based on its bearish wave count. We'd see some impulsive price action to the downside before breaking below 3425 so we'd have time to position for the break. In the meantime it's for the bulls to lose at this point.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3570
- bearish below 3425

The RUT has the same choppy pullback pattern as the techs and typically a choppy pattern is a flag pattern is bullish. So that remains the potential until proven otherwise. The bulls did what they needed to do last week by holding support at the 200-dma and then got back above price-level S/R near 1120. Now the bulls need to get the RUT above price-level S/R near 1147, its broken uptrend line from November 2012 - February 2014 and broken 20-dma, both of which will cross near 1149 on Tuesday, and then the top of its parallel down-channel, which is currently near 1162. The top of its down-channel crosses its broken uptrend line from November 2012 near 1153 on Friday. The bulls have a lot of work to do here but if they can get the RUT much above 1150 I think it would scare the bears back into their caves.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1150
- bearish below 1095

TNX got the bounce off the bottom of its bear flag pattern (parallel up-channel from the end of January) and up to its nest of Mas, stopping last Thursday at its 200-dma at 2.726%. It dropped back this morning but then rallied back up this afternoon (with bonds selling off), stopping just short of its 200-dma again. It left a hanging man doji at resistance so we'll see if acts as a reversal candle and how it plays out tomorrow. It's a setup for the next leg down and a break below its bear flag and if that happens it would mean buying in the bonds and that would make it tougher for stock market bulls.

10-year Yield, TNX, Daily chart

One trouble spot I see for bulls, and therefore the broader market, is the banks. The bounce pattern off the April 11th low for BKX looks corrective (bear flaggish) and it's up against its broken uptrend line from June 2012 - February 2014, where it's been struggling since April 14th. If it drops away from this back test it's going to be a bearish kiss goodbye and the bearish wave count calls for it to stair-step lower (or worse) into early May before setting up a bigger bounce. I have a hard time believing the broader market, even if it's just the blue chips, rallying to new highs without the participation of the banks. Follow the money.

KBW Bank index, BKX, Daily chart

Last Wednesday I showed a chart of housing starts, which pointed out how much stronger multi-family construction has been than single-family construction since 2009. But even multi-family construction has declined sharply since the end of 2013 and the chart that showed the decline in mortgage originations since 2012 is not good news for home builders either. The only surprise to me has been how well the home builders have held up since 2012. But then they've just been part of the disconnect between the stock market in general and the economy.

But that disconnect could be reconnecting as evidenced by the chart of the DJ Home Construction index (DJUSHB). Keeping an eye on this index should tell us plenty about what to expect in the coming year, which in turn will give us a good idea about how well the housing market in general will likely do. I expect weakness in all areas housing related and with so much of the economy dependent on the housing sector it will be a good leading indicator. What it will mean for the stock market is anyone's guess short term but the longer it remains disconnected the stronger that "reconnect" is going to be.

The DJUSHB is what I watch although for trading purposes you can use the ETF ITB or XHB. The 200-dma is currently near 456, slightly below its uptrend line from October 2011 - September 2013, currently near 459, which is also price-level support from previous highs and lows (including the January low), near 460. As can be seen on its weekly chart below, there's a lot of support near 460, including its 50-week MA at 463. For this reason a break below 460 that stays below it would be a bearish move. But I would expect at least a bounce off support and the longer-term uptrend obviously remains intact above 460.

DJ Home Construction index, DJUSHB, Weekly chart

Because of the big move up from its 2008 low at 130 to its May 2013 high at 553, we should actually use the log scale and that makes the uptrend line steeper. It was broken at the end of March, back-tested on April 4th and now the lower low below its March 27th low does give it a bearish feel. So it would be another reason why a strong break below 460 would be a serious break. Other than the banks, how the home market goes, so goes the economy and theoretically at least, so goes the stock market.

I'll pick this up on Wednesday and cover the dollar and commodities in more detail than usual. I've got some interesting charts to show on the commodities and what it might mean for the economy.

Tomorrow will be about as quiet as today for economic reports. In fact the whole week will be relatively quiet in that regard. We'll get a little more housing data tomorrow morning and Wednesday morning so we'll see what that does to the home builders.

Economic reports and Summary

There's not much to take away from today, as quiet as it was. There was just enough buying to keep the bears away but volume was so light as to be meaningless. We'll know more on Tuesday, when we have fuller participation, whether or not the buyers can continue to keep the sellers at bay.

The indexes bounced where and when they needed to and the price pattern for the pullback from the March/April highs looks corrective, which keeps the bulls in control of the tape until proven otherwise. New market highs, at least for the blue chips (perhaps truncated highs for the techs, small caps and other weaker indexes), looks like the higher probability move from here. But bulls can't get complacent here -- there's stiff resistance just above many of the indexes and a rise on dropping volume is not a good recipe for the bulls.

At the very least, if you're trading the long side you'll want to trail your stops close. I'd rather get stopped out on a whipsaw and miss further upside than get caught in a downdraft that I thought was going to be just a pullback before heading higher. I see more upside potential but I think the downside risk dwarfs that possibility. We might have 3%-5% more to the upside but that pales by comparison to the downside risk. So trade accordingly.

Good luck and I'll be back with you on 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