The market has been anticipating an accommodative ECB to help fill the gap from a tapering Fed. The market doesn't care where it gets its drugs, as long as someone is printing money. But now one must wonder if the market will respond to Thursday's ECB announcement with a sell-the-news reaction.

Wednesday's Market Stats

As measured by the S&P 500 we've seen the market work its way higher since May 15th, with only minor pauses on 3 of the past 13 trading days, but it's been doing so on slowing volume, waning momentum (bearish divergence) and deteriorating market breadth. If the market has been rallying on expectations of good news from Thursday's ECB rate announcement, and perhaps Friday's Payrolls report, we could be setting up for a sell-the-news reaction.

The ECB's head, Mario Draghi, has been attempting tojawbone the markets higher, taking over from the Fed, by hinting that they're ready to be more accommodative. A reduction in the policy rate by at least 0.10% (wow, that would sure make me want to get a loan) is expected but the real consequence is that it drives savings rates into negative territory. Banks will have to pay the Central bank to hold its cash, with the hope that banks will want to lend the money to customers instead of holding onto it. The trouble is customers don't want loans and a drop of 0.10% is not going to make a difference.

The Fed, ECB and all the other central banks are pushing on a string in their attempts to get more people to go more into debt. It's an effort that has failed miserably over the years and yet they keep trying the same thing, only getting themselves into more debt buying up worthless paper. But what the market really wants to hear is how accommodative the ECB intends to be. What does "whatever it takes" really mean? The market expects to hear concrete steps the ECB is going to take to help "improve" the credit market, seemingly not understanding the problem right now is too much credit.

Ideas being discussed include direct loan financing to banks, purchasing asset-backed securities, buying short-term loans and offering longer-term loans in their place. The ECB rate announcement will be at 7:45 AM EDT so we'll see a pre-market reaction to the news. Draghi will then hold a press conference to discuss his ideas about how the ECB will become more accommodative. If the market doesn't hear specific plans and dates you can bet it's going to sell off. If there are specific plans we could see a positive reaction out of the gate Thursday morning.

But how much of the "good" news has already been priced in? I see the potential for a quick positive reaction and then nothing to follow. We're already seeing signs of distribution in the market and a morning rally could see many fund managers selling into it. This could result in a sell-the-news reaction and a high gets put in on a news event, which is a typical way highs occur. That's just speculation of course but we've got some chart patterns that support that idea.

Today's economic reports were filled with more bad news about the economy and yet the market rallied anyway (not much but still more new "all-time" highs). It's one more sign that the market only cares about central bank QE efforts and not fundamentals. I never thought I'd say I'll be glad when fundamentals matter again. The ADP employment report showed less-than expected hiring in May, with 179K jobs added vs. 210K expected and less than the downwardly revised 215K (from 220K) in April. There should be some fear in the market about what the NFP report Friday morning might have. The only fear I see is the VIX slowly making its way higher even though the indexes keep tacking on a few more points.

The Trade Balance came in worse than expected, with a -$47.2B deficit vs. expectations for -$41.3B and more than March's -$44.2B (revised from -$40.4B). We're not exporting as much and this reflects a slower global economy). The real goods trade deficit was the largest we've seen in more than 6 years and that has economists lowering their GDP estimates. The market doesn't care (yet)

From a labor perspective the news wasn't good either -- productivity for Q1 was revised lower to -3.2% from the previously reported -1.7% and worse than the expected -2.5%. Labor costs for Q1 increased +5.7%, a jump up from +4.2% in Q4 and a larger than the expected +4.8%. This will result in lower profit margins for businesses, which in turn will make it difficult to support the high P/E ratios the market now has. The market doesn't care (yet).

At least the ISM Services, at 56.3, came in a little better than the expected 55.5 and an improvement over April's 55.2. But overall we continue to get more results showing the economy is slowing and companies are going to be less profitable. We've also been getting signs of a slowing housing market and later I'll show why I think it will continue to slow further. With such a large impact on our economy, a slowing housing market will simply amplify the slowdown and GDP revisions will likely continue to get ratcheted lower. The market doesn't care (yet).

Kicking off tonight's chart review, I'm going to start with a top-down look at NDX since it's got an interesting setup surrounding the news events due Thursday morning (ECB) and Friday morning (Payrolls). There's also AAPL's split on Monday and we've had an old-fashioned pre-split run in the stock and for those who remember the good ol' days of pre-earnings and pre-split days (late 1990s), tech stocks in particular used to be great call option plays but you needed to get out of the position just before the earnings/split since volatility premium would collapse post earnings/split as well as the price would decline. If you're trading AAPL to the upside I'd get out NLT Friday's close.

The NDX monthly chart below shows an uptrend line from 1990-2002, which was broken in 2008. The rally from 2009 has been riding up underneath this broken uptrend line (with small breaks back above) and while this could continue longer, it's usually a sign that the trend line is going to hold as resistance and more importantly, when it does break down it's likely to drop hard. The line is currently near 3675.

Nasdaq-100, NDX, Monthly chart

The weekly chart below shows one idea for a wave count, which says the rally from April 15th is the 5th wave of the move up from November 2012. I've been playing with different wave counts and had been looking at this differently but with the blue chips making new highs I think this idea keeps it in synch with the broader market. There's a price projection near 3760 where the 5th wave would be 62% of the 1st wave, about 10 points above today's high. Currently NDX is up against its trend line along the highs from February 2011 - April 2012 and a little higher, near 3788, is its broken uptrend line from June 2013 - February 2014.

Nasdaq-100, NDX, Weekly chart

The leg up from April 15th is shown on the daily chart below and at the moment I'm looking at it as an ending diagonal (rising wedge) pattern. The final leg of the pattern is the rally from this morning's low and at the moment I'm projecting a move up to 3760-3766 to complete its rally. That would accomplish the 3760 price projection shown on the weekly chart above as well as a 3766 projection shown on the 60-min chart following the daily chart below. This is also where the broken uptrend line from October 2013 - February 2014 and the trend line along the highs from April 24th are both located. So from an EW pattern, Fib projections and trendline perspective, the 3760-3766 is a good target zone. Above 3770 would therefore be bearish (short against that level) and below 3700 would confirm the top is in place.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3770
- bearish below 3700

From an EW perspective it's questionable what the April 25 - May 15 triangle consolidation pattern is but for now the important leg is the rally from the end of the consolidation, which is the May 15th low. I'm looking at it as a 5-wave move and the little triangle from last Friday to this morning's low fits well as a 4th wave, which means only one more leg up to complete the rally. The 5th wave would be 62% of the 1st wave near 3766 and then it would equal the 1st wave near 3797. The price objective out of the little sideways triangle off last Friday's high is to 3766, coincidentally the same as the lower Fib projection.

Nasdaq-100, NDX, 60-min chart

On the above chart I depict a rally for NDX up to the 3797 projection but it's important to understand the 5th wave can be considered complete at any time now. Playing the upside is very risky when considering the downside potential. I can see the upside target being met if the market reacts favorably to the ECB and Friday's Payrolls report. After that there's not likely to be anything bullish and it would be timed well with the completion of the 5th wave. But there's the risk that we might see a positive reaction to the ECB, get the gap up, make a new high and then close below today's low, which would give us a key reversal day. Play the short side if that happens.

As the rally has progressed the trading volume has declined, which is not a bullish sign. It fits with the idea that we're looking at an ending pattern and that's where the EW pattern helps identify where and when it might occur. It provides us setups but obviously price is king and the market often makes mincemeat out of bearish setups. But the QQQ chart below, like SPY, shows a steady decline in trading volume since the April low and you can see the rally is simply running out of energy. The last runner (AAPL?) is barely able to cross the finish line on its hands and knees.

QQQ, Daily chart

SPX has broken out the top of a rising wedge from the April 11th low, the top of which has been tested and held for the past 4 days. That's bullish. The top of the larger rising wedge, which is the trend line along the highs from May 2011 - December 2013, is currently near 1927 and today SPX closed above it. That's again bullish if it can hold above it but bearish if today's finish was a small throw-over above the top of the wedge and then it drops back below it tomorrow following the ECB announcement. A better finish would actually be a quick pop higher Thursday morning on some "good" news from the ECB and then drop below today's low at 1918.60. That would provide the bears a reversal signal to get short against the high.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1927
- bearish below 1897

If the bulls can keep this rally going there's upside potential to 1933 and then 1942, where the 5th wave of the move up from May 15th would be 62% and 100% of the 1st wave, resp. Currently the rally is up against the trend line along the highs from May 2011 - December 2013. It's important to note that this trend line stopped the rallies in March and April and the bearish divergence seen on the 60-min chart below suggests the trend line might hold again. But a trend line drawn across the highs since December 2013 is a little higher, near 1940, so with the price projections for the 5th wave and that upper trend line I see some upside potential from here. But again, once the 5th wave of the move up from May 15th completes it could be a steep drop that follows so the upside potential is dwarfed by the downside risk, which is why the long side is not the way you want to trade here.

S&P 500, SPX, 60-min chart

The DOW's new high above its May high has now given us a clean rising wedge pattern off the February low. It needs to be a 5-wave move and the leg up from May 15th fits as the 5th wave, and it's giving us typical wave relationships inside the ending diagonal. The 3rd wave was 62% of the 1st wave at 16735, which was the high on May 13th, and the 5th wave would be 62% of the 3rd at 16786. Slightly higher, near 16818 on Thursday, is the top of its rising wedge. A rally up to that level would be enough to hit stops parked a little above the 2000-2007 trend line, which has stopped rallies since December and is currently near 16725, and then set a bull trap. Don't get sucked into buying any rally from here unless you're watching carefully and can pull the plug immediately.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,810
- bearish below 16,480

The RUT has been struggling underneath its broken 50-dma since first back-testing it on May 27th, as well as its downtrend line March 21 - May 27. They're currently near 1132 (which it tested into the close today) and 1134, respectively, and therefore the bulls would be in better shape if they can get the RUT above 1134 and keep it above that level. Watch out for the possibility of an intraday break of resistance to tag stops and then a collapse back down. The upside potential is to 1152-1156 to meet some price projections based on a 3-wave bounce pattern off the April 15th low and a 5-wave move up from May 15th. But if it drops below yesterday's low near 1118 it will negate the bullish pattern and suggest a stronger selloff to follow.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1156
- bearish below 1116

Bonds have been on a tear since last Thursday, as in being torn down. They've sold off sharply the past 5 days, which has driven yields back up, but it's not clear yet whether we've had a change in the up trend for bond prices or just a sharp correction to the rally. TLT, the 20+ year bond ETF, is shown below and you can see that the pullback is to support at the bottom of its up-channel from December 31st as well as almost down to its 50-dma, currently at 111.17 (0.10 below today's low). It's short-term oversold and therefore I suspect support is going to hold and whether it holds longer-term or not will tell us whether the 5-month uptrend will remain intact. The selling in bonds might have been one factor holding the stock market up so if bonds start to rally again from here it could take money away from the stock market. Both a stock market decline and bond market rally is the way it appears to be setting up.

20+ Year Treasury ETF, TLT, Daily chart

Coming into this week we have an interesting setup on the TRAN, which has been one of the stronger indexes. But its rally to new highs has not been accompanied by the DOW (although I suppose we could count the series of 10-point gains as following the TRAN, cough) and that has given us a bearish non-confirmation so far. The weekly chart of the TRAN shows an wave count that fits well and the a-b-c move up from October 2011, once complete, will complete the larger 3-wave move up from March 2009. The c-wave of the a-b-c rally from October 2011, which is the leg up from November 2012, needs to be a 5-wave move, which it is and the 5th wave is the rally from April 14th. A trend line along the highs from May 2013 - Jan 2014 is now being tested and a longer-term trend line along the highs from April 2010 - July 2011 is a little higher, near 8268. Once the 5th wave completes it's a setup for the completion of the entire rally off the 2009 low.

Transportation Index, TRAN, Weekly chart

The daily chart of the TRAN below shows the reversal off Monday's high and today it consolidated sideways, which has it looking like it's going to drop lower. IYT is one way to play the Trannies and at the moment short against Monday's high looks like a good play. How the pattern develops over the next few days should tell us more about whether or not the high is THE high or just another in a series of them. With the daily chart showing overbought and turn over and the weekly chart showing bearish divergence, it's not a time to be thinking long this index.

Transportation Index, TRAN, Daily chart

One sign of economic health that I keep a close eye on is the housing sector. The home market is such an important part of our economy, especially with all the ancillary components (furniture, appliances, plumbers, electricians, etc.) that it's important to see how it's doing. It's truly one of the canaries.

The home builders index, DJUSHB, hasn't done a whole lot in a while and has been able to hold price-level support near 460, last tested in April. One could even view the pattern since January 2013 as an inverse H&S pattern, which in its location would be considered a bullish continuation pattern (since the pattern is near the high, not the low). A break above its February 2014 high at 540 would be a bullish move and that in turn would be a good sign for our economy. But a break below 460 would likely lead to stronger selling and that would be the canary falling off its perch.

DJ Home Construction index, DJUSHB, Weekly chart

Another index to watch, to see how the home builders might go (since it's the middle of no-trader's land and not easy to figure out which way it might go) is to watch lumber prices. Obviously the more homes that are built the greater the need for lumber. Higher prices for lumber would therefore be a good sign that home builders should do well. Unfortunately it's looking like the canary is sucking hard for air.

Lumber continuous contract, LB, Weekly chart

On May 20th LB broke longer-term support at its uptrend line from January 2009 - September 2011, which was last tested in May 2013. The break is likely an indication that the bounce correction off the 2009 low has completed and prices should return to at least test that low (137.90, less than half its current value). This is a heads up that the home builders are going to break down and in turn a signal that the economy is slowing, which for anyone paying attention is a "duh."

The U.S. Dollar has been struggling the past week to get back above its broken uptrend line from May 2011 - December 2013, currently near 80.65. It's also fighting to hold above its recovered 200-dma at 80.47. Today's trading range was 80.51 to 80.71 and closed at its high. The nod goes to the dollar bulls but I see the possibility for a consolidation before pressing higher again.

U.S. Dollar contract, DX, Daily chart

Gold has been consolidating its loss since last Friday but it's looking like a bearish continuation pattern. It should soon be giving us a stronger bounce but in a pattern that should lead to lower prices, with the first downside projection near 1189 still on my radar.

Gold continuous contract, GC, Daily chart

Oil dropped sharply this morning and gave up more than a dollar by this afternoon. The longer-term pattern remains unclear but the shorter-term pattern continues to look like a sideways triangle, the bottom of which is the uptrend line from March 17th, currently near its 200-dma at 100.19. A break below 100 would be more bearish but it's got potential support at its 20- and 50-dma's and an uptrend line from January-April, near 101.34.

Oil continuous contract, CL, Daily chart

The big "economic" report tomorrow comes from the ECB tomorrow morning before our market opens. The markets are hoping to hear how accommodative Mario Draghi's "whatever it takes" really means. The market is expecting a drop in rates by 0.15% (yawn) but more importantly it wants to hear more about some QE efforts the ECB is ready to do. With the Fed tapering their QE it's hoped the ECB will pick up the slack in providing some more global stimulus (since the theory is that money from nothing in Europe will buy something in the U.S.). With Draghi talking up the markets it's doubtful he'll disappoint and a positive reaction by the market Thursday morning could lead to a sell-the-news reaction so watch the morning action carefully.

Economic reports and Summary

If the ECB report Thursday morning doesn't do much for the market, or it rallies and holds onto its rally, the next potential problem will be the Non-farm Payrolls (NFP) report Friday morning. Expectations are for a decline from April but still well above 200K. After a disappointing ADP report this morning the market might have its sights set too high and a number below 200K could spark a selloff. At least the price patterns suggest that could happen if we don't get a selloff Thursday. Or perhaps a selloff on Thursday, big bounce Friday morning and then another selloff. In any case, be careful of some volatility around these announcements the next two mornings.

The VIX has been on the rise since Friday even as the market indexes chop their way higher, an indication that some have been edging their way into some put protection if not speculation. It's usually a good sign the rally is finishing. Trading margin debt is on the decline, which typically happens ahead of a market top (when traders start backing away it leaves fewer and fewer suckers, I mean traders to continue pushing prices higher). The declining trading volume is another sign of traders backing away. Oftentimes market tops happen simply because there are no more buyers to push it higher, not necessarily because of a big selling event (Black Swan).

When the buying stops and selling begins it will usually start tripping stops and selling begets more selling. Tops are often no more complicated than that and we're getting many of those signals now. Listening to the market tells us now is a risky time to be thinking long. Whether playing the short side is hour, days or weeks from now, we can't know for sure. I like the setups I'm seeing on the charts for an important high, which could be today's or it could be Friday's. But in any case I think it's that close. Trade carefully over the next few days since we're due for some greater volatility.

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