The stock market trading has been accompanied by slowing volume, especially during rallies, and today's consolidation was also slow. After hitting price targets/trend lines we're left to wonder if the consolidation will lead to higher or lower prices from here but the bond market might be pointing the way.

Wednesday's Market Stats

The market's slower-than-normal volume today was a mixed bag for both sides. As you can see in the table above, up volume equaled down volume while declining issues marginally outpaced advancing issues. This fits with the indexes being lower today but with slow volume and choppy price action the market could be simply resting before heading higher again. The one fly in the ointment for stock bulls is what's happening in the bond market.

I'll cover some bond charts tonight but the -3.2% drop in the 10-year yield was a big move for a normally slow market and when yields drop it's been common to see stocks drop as well. The buying in the bonds drops the yields and is usually a result of money rotating out of stocks and into bonds. That's not always the case but it's been often enough to pay attention to. The bond market is made up of smarter traders than the stock market and the message is they see the economy slowing and a deflationary risk, both hazardous to stock bulls.

It was a quiet day for economic reports and geopolitical events. Perhaps the lack of a catalyst for either side had both sides sitting on the sidelines while waiting for the next big move. In any case, I'll just jump into the charts and show what we're looking at for setups.

Last week at this time we had chart patterns that were looking bearish for another leg down. The bulls had different ideas and when those bearish patterns failed they failed hard. The rally since last Wednesday has been strong, helped by thin holiday trading. Tuesday's big gap up, thanks to the futures market being pushed higher during the holiday hours, led to a strong day, especially for the techs and small caps. Today it looked like the market was simply consolidating the gains since last Wednesday but now the question is whether or not the bulls will get some follow through or if instead the rally was just a little bear fry surrounding the holiday weekend.

Equity futures made new highs in the overnight session but then sold off in this morning's pre-market session. Those highs were not tested during the day's trading hours and we've seen this at other important market turns. For now it's a heads up, especially since price patterns and some cycle studies (as well as the new moon today) has had me looking for evidence of an important high. It's too early to determine with any sense of high probability but today's choppy climb slightly higher, before selling off into the close, had the look of an ending pattern. Price action on Thursday will be important (choppy consolidation vs. impulsive decline).

Since I mentioned the new moon I'll show the SPX MPTS chart to show how the series of highs since December has been very close to new moons. I have no idea why a new moon would have this effect (I can understand full moons) but it's a pattern to respect. Will today's new moon market another top?

SPX MPTS, Daily chart

Kicking off tonight's chart review I'm showing the S&P 100 (OEX) since I've found it often trades well technically and we could be at/near an important high for the market. Starting with the weekly chart, it's no different than the others when trying to figure out the wave count for the entire rally from 2009 but the overall look is the same -- a large 3-wave move up from 2009 with the 2nd leg of the rally starting from October 2011. It's this leg up from October 2011 that's been a challenge to figure out but using price relationships between the waves as well as trend lines and channels helps identify the higher-probability wave count. This then helps identify price targets for where the rally might complete.

The OEX weekly chart below shows a corrective wave structure that consists of two a-b-c moves up from October 2011. The 2nd a-b-c is the rally from November 2012 and it would have two equal legs at 849.75. Perhaps more than coincidentally, this is close to the 127% extension of the 2007-2009 decline, a common reversal Fib. The close correlation is a strong reason to watch carefully for topping signals in this area.

S&P 100, OEX, Weekly chart

I'm counting the rally from June 2013 (wave-b on the chart above) as a 5-wave move to complete the final rally leg and the 5th wave is the tightly bunched group of candles since the February 2014 low. This is shown in more detail with the daily chart below. It's been a very choppy rally, which fits as an ending pattern for the 5th wave. There are some additional wave relationships in the pattern that also correlate closely to the 127% extension of the 2007-2009 decline, near 848. This cluster of Fib projections line up at roughly 846-847, which the top of a small rising wedge for the rally from April 11th is currently crossing through.

S&P 100, OEX, Daily chart

Today's high for OEX was 848.77 and there was a small throw-over above the top of its small rising wedge that was followed by a drop back inside the wedge this afternoon. That created a sell signal so any impulsive decline on Thursday would add to the reversal signal. That's the risk for those looking for more upside. The risk for the shorts right here is that there's at least a little more upside potential to the top of a larger rising wedge, which is the trend line along the highs from March 7 - April 4, which will be near 857 by Friday.

SPX has a very similar pattern as OEX's but I'm looking at a different wave count. Both point to the same conclusion -- once the leg up from May 15th has completed there's a very good chance the larger rally will also be complete. The top of the smaller rising wedge for SPX is near 1915 and will be near 1918 by the end of the day Friday. The top of the larger rising wedge, which is the trend line along the highs since December will be near 1930 by Friday. Wherever this tops out (assuming it doesn't break out the top of these rising wedges), keep in mind that rising wedges are retraced quickly and the nested rising wedges could mean double trouble for the bulls when this starts back down. The rally has been choppy and with low volume, which leaves somewhat of a vacuum underneath the market. Just like nature, the market abhors a vacuum and tends to fill it quickly.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1917
- bearish below 1886

Getting in closer, the SPX 60-min chart below shows how yesterday's rally nearly tagged the top of its smaller rising wedge, which is the trend line along the highs from April 22 - May 13, and today it chopped marginally higher, tagging the trend line twice before selling off a little into the close. If it consolidates for another day we should see one more leg up to complete a 5-wave move up from May 15th, potentially up to 1930. But the larger pattern supports the idea that the leg up from May 15th should be a 3-wave move, which is why an impulsive decline from here would be a sell signal, especially if it drops below 1900, and confirmed bearish with a drop below 1886.

S&P 500, SPX, 60-min chart

We've discussed ad nauseum the bearish non-confirmation with waning market breadth as the indexes continue to make it higher. Making higher prices on the backs of fewer stocks is not the sign of health for a rally. It is instead the sign of an ending rally. It's not a trade signal, especially since these divergences can continue for a long time, but it's a warning sign and a reason to keep tight stops on long positions. You might get whipped out of a long position but I'd rather that than get trapped in a stronger-than-expected decline because I thought it would come back and I didn't want to get shaken out of my trade (too many traders find it much easier to get into a trade than out of it).

The chart below shows the number of stocks in the S&P 500 that are above their respective 50-day moving averages. SPX itself is well above its 50-dma, currently near 1872, but you can see the steady decline of its component stocks that can say the same thing. This measure last peaked with the index back in May 2013. It's just a matter of time before SPX doesn't have enough participation to push it higher.

S&P 500 component stocks above their 50-day moving averages

Another divergence I've shown before compares the NYSE index to the number of new 52-week highs for its component stocks. NYA made another of a series of new 52-week (all-time) highs on Tuesday (not today) but there's been a serious lack of participation by the number of stocks doing the same thing. The rally from October 2011 was being well supported until May 2013 and there's been a degradation of the strength since then. Again, this is obviously not a market timing tool but it is another sign of the end for the rally, especially since price is chopping marginally higher in its own ending pattern. When it breaks down it's likely to go fast.

NYA vs. New 52-week highs

The DOW has been weak compared to the other indexes since it has not been able to climb above its May 13th high. Money has been chasing the hot techs and small caps but when the reversal comes we could see the DOW outperform by at least holding up better. The 2000-2007 trend line, which stopped the December and May rallies, is currently near 16760. There's higher potential but at the moment it's looking vulnerable to the downside as well.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,760
- bearish below 16,340

Last week I showed the Nasdaq's sideways triangle and mentioned it's a bullish pattern following the rally leg from April 15th. The top of the triangle and its 50-dma were due to cross last Thursday and the rally above both confirmed the bullish breakout. There's at least a little more upside potential to 4267, where the rally from April 15th would have two equal legs up. It doesn't have to get there, or stop there, but it would be a good setup for what I believe will be the completion of an a-b-c bounce correction to the March-April decline. The top of a parallel up-channel from April 15th will be near 4290 by the end of the week.

Nasdaq Composite index, COMPQ, Daily chart

Key Levels for COMPQ:
- bullish above 4300
- bearish below 4128

Yesterday's rally in the techs had the COMPQ breaking its downtrend line from March 7th but I don't give that downtrend line too much credence since it's off two points close to each other and it's an untested trend line. But the break of it, followed by the consolidation above the line today, gives the bulls the nod here. The 60-min chart below looks more closely at the a-b-c bounce off the April 15th low and shows upside potential to the top of its parallel up-channel, near 4290 by the end of the week. For now I'm favoring the a-b-c bounce pattern instead of a more bullish 1-2-3 because of the sideways triangle following the April 24th high -- this is typically found in a 4th wave or b-wave position, not a 2nd wave. Once the leg up from May 15th completes, ideally with just one more new high, another decline at least matching the March-April decline, should follow (that would be down to about 3865 if the bounce tops out near 4290).

Nasdaq Composite index, COMPQ, 60-min chart

The RUT's pattern continues to be a mess so it's very difficult making projections off it. At the moment it's struggling with its 50-dma, near 1139, which it climbed above yesterday but closed back below it today. Bullish above, bearish below -- doesn't get much simpler than that.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1139
- bearish below 1116

Treasury bond yields dropped strong today and have reached an important inflection point, which I'll show on the weekly charts for both TNX (10-year) and TYX (30-year). Stocks and bond yields have traded in synch more often than not and if yields break down here (from bond buying) it's going to put more downward pressure on the stock market, right at a point where the stock chart patterns suggest an important turn may be coming.

Today TNX dropped below its May 15th low and price-level support near 2.46%. A 1-day break can quickly get reversed but if the break holds it will be a bearish signal for yields (bullish for bond prices). A breakdown would be a message from the bond market that says the bond bull market is still alive and all those who have been declaring the death of the bull in bonds might have to modify their position. TNX has created a potential H&S topping pattern since the left shoulder was formed in September 2013, with the neckline near 2.46%. The downside price objective out of this pattern is to 1.866%, last seen in May 2013.

10-year Yield, TNX, Weekly chart

As noted on the chart, without bullish divergence at the 2.46% neckline I don't have a lot of faith it will hold. Declining yields reflects the bond market's opinion the economy is slowing and deflation, not inflation, is the main worry. While the Fed and government want low rates, it's the "threat" of deflation that is the Fed's worst nightmare, something they don't realize they're powerless to stop (and it's a necessary event to clear out the wastefulness from an overextended credit bubble).

TYX also broke below its May 15th low, which was a test of its uptrend line from July 2012. This confirms the break of the uptrend line and that means the 3-wave bounce correction off July 2012 low has likely finished. A 3-wave correction to the long-term decline in yields means we should see new lows (below 2.45%). For years I've been looking for TNX to hit 1% by 2015, and TYX to hit 2%, and those projections still remain on the table.

30-year Yield, TYX, Weekly chart

So how can you play the bond market if you'd rather not trade the futures (ZN for 10-year, ZB for 30-year)? TLT is a good ETF (or the inverse fund, TBT) and it represents a mix of bond maturities around the 20-year point. Its weekly chart is shown below and as you can see, it's in the process of breaking its downtrend line from July 2012 (the opposite of what TYX is doing). It has also exceeded the level for two equal legs up from December 31, 2013, both of which are bullish signals. It's a strange pattern for the leg up from March 7th (choppy) and it's overbought on the daily and weekly charts so I'm feeling a little leery about further upside but TLT remains bullish above its May 22nd low at 111.79.

20+ Year Treasury ETF, TLT, Weekly chart

The Trannies were outperforming the market today and TRAN was up more than +1% before giving back some of its rally into the close. There was further bearish non-confirmation between the DOW and TRAN so it's a heads up that the rally might not last. Today's high was good enough to tag the trend line along the highs from May 2013 - January 2014 and a throw-over above its rising wedge for the rally from April 14th. The wave count, if today's high holds and it drops back below this morning's low at 8010, looks good for the completion of its rally. If it drops below 8010 you can use IYT to play the short side.

Transportation Index, TRAN, Daily chart

The U.S. dollar has continued its rally after bouncing off support the first week of May and has now broken its downtrend line from January-April (broke it last Friday, back-tested it yesterday and continued higher today) so that's bullish. It should be early in the start of the next rally leg but in reality it's still within its sideways trading range since October 2013, between 79 and 81.50. It's now approaching the midpoint of that range and its 50-week MA at 80.87.

U.S. Dollar contract, DX, Weekly chart

Gold had been building up pressure for a move after tracking sideways in a narrowing range for two months and when it broke (down) yesterday it broke hard. Today it added a little to the decline and it should be early in the next leg down that should drop gold to at least 1194 (two equal legs down from March 17th) and potentially below 1150. There was no explanation yesterday for why gold got hammered (silver did also but it's still holding above its May 1st low) so the risk for gold bears is an out-of-nowhere big bounce back up.

Gold continuous contract, GC, Daily chart

Oil has been consolidating since March 3rd in what appears to be a sideways triangle. This is a bullish continuation pattern following the January-February rally and only needs one more leg down inside the triangle to finish it. A break the May 1st low at 98.74 would negate the bullish pattern, which would in turn be followed by a strong decline. The larger pattern shows a choppy bounce off the January 9th low, following the strong August-November 2013 decline and if the bounces to lower highs since February could be a prelude to much stronger selling oil. I have no strong opinion about its direction following a pullback to the bottom of its triangle, currently near 99.70. If it gets there we can then watch closely for the next move.

Oil continuous contract, CL, Daily chart

Tomorrow will be a little busier for economic reports than what we had this morning. The usual unemployment claims data will be followed by the 2nd estimate for GDP, which is expected to drop into negative territory (-0.5%) from the 1st estimate that was +0.1%. The 3rd and final estimate will probably drop even lower. Can you say recession? We'll also get some more housing data with pending home sales numbers.

Economic reports and Summary

There's an important cycle turn date centered on May 27th and we have a new-moon day today, both of which have me alert to the potential for an important market turn. The price pattern, while supporting the idea for a consolidation day on Thursday and a final new high into Friday (maybe next Monday), I'm not holding my breath for it. The risk is high for a breakdown from here. Fibs, EW counts, trend lines, market breadth, cycle turn date, new moon -- there's just too much lined up against the bulls right now for me to even suggest looking at the long side. It could rally some more but the risk is high for those carrying long positions overnight (that goes without saying for shorts). Get your selections for short plays ready since I think you'll have an opportunity very soon.

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