Some more volume has returned to the market but it hasn't helped the bulls much. In fact the increased volume has seen more churning in prices and is either accumulation or distribution by the big funds. It's likely distribution.

Wednesday's Market Stats

Today's trading volume was a little less than yesterday's but both days at least had stronger volume than last week. But the stronger volume is not coming from the buyers since the indexes have more or less traded flat. This is an indication that we're getting churning and if we were near the lows of a big move I'd suggest it was accumulation of stocks by the big funds from retail traders popping their cookies and handing off their stock to the Big Boyz. But since we're at the highs of a longer-term move I'm guessing the funds are now distributing the stock to eager retail traders who want to get long now (retail trader bullish sentiment is back to historical highs, which is not a good sign for the market).

The DOW was the only major index to close in the green today but only by 10 points. We could see some minor relative strength in the DOW in the days to come if stock is in fact being distributed. Most mutual funds have to remain invested and therefore they'll "park" their money in the safety of big stocks which are more liquid and easier to get out of if panic selling hits. Tech stocks and small caps were the relative losers today, which again points to an effort to reduce risk in the higher-beta names. The utility sector was also relatively strong today, which is another defensive sector (stocks pay dividends instead of being a growth stock).

So far the market has been a little weaker than I expected to see (usually the first two trading days of a new month see inflows of retirement money) but with minor new highs, even if not holding, continue to support my expectations from last week for at least minor new highs to complete the rally, as in put in THE high. It might be worth reviewing last Wednesday's market wrap to see why I'm feeling very confident about a final high this week. We have 5th waves at multiple degrees of the pattern along with the normally high bullish sentiment found at market highs.

Between Mr. Gann and Mr. Fibonacci I've been thinking there's a good chance we'll see SPX make a high somewhere between 2007 and 2015. You might remember last week's discussion about the Gann Square of Nine chart which pointed out the importance of 1998 and 2007, each being on a vector 180 degrees from previous important highs and lows. The vector that 2007 is on passes through the 2009 low near 667. Today's high was 2009 but it closed near 2000. It's been holding 2000 on a closing basis for the past 5 out of 6 trading days but it hasn't been able to much better than that.

SPX 2015 comes from a Fib (127% extension of the previous decline, in this case the July-August decline) as well as a 5th wave projection in the rally from August 7th. The 2015 target needs a rally on Thursday since any further drop could indicate trouble for bulls. We've been in a strong turn window, between mid-week last week and tomorrow, so it's an interesting time to see if we do in fact get a major high this week.

Adding to the possible fireworks tomorrow are a couple of economic reports. The ADP report will be out in the morning but more importantly, from Europe we'll find out how much "whatever it takes" means to Mario Draghi. He has jawboned the market long enough and it's time to either SOGOP ("poop" or get off the pot). The market expects him to announce some type of quantitative easing program to help prevent Europe from sinking lower into another recession (if not a depression since the deflation monster is again rearing its head). The market is also expecting a rate cut, not that that will be helpful. Once in the mud, going lower doesn't really help.

Interesting times indeed. I'll do a little Art Cashin here for you -- on this day in 1720 the South Sea company's stock started its crash from about 810 (it had been slowly declining since it peaked near 950 at the beginning of July) to 180 on the London stock exchange before rolling into October, signifying the collapse of the first stock market bubble. There were virtually no bounces in that nearly 80% decline. Also on this day, 85 years ago, was the DOW's high on September 3, 1929. Hmmm...

One could reasonably argue we are once again in bubble territory in the stock market, especially when comparing the meteoric climb in the indexes in the past 5 years vs. the lack of economic improvement. One of the ways to make that comparison is to look at SPX vs. the commodity index, as shown on the weekly chart below.

SPX vs. Bloomberg Commodity index (DJUBS), Weekly chart

Speaking of commodities, one thing in Art Cashin's report for today was a discussion about why September has often been such a bad month for the stock market. Some of it had to do with food manufacturers buying bulk commodities, such as wheat, in late summer (when crops are harvested) and the spending by these manufacturers was a draw on the big banks, who then had to sell holdings to provide the cash (credit was not nearly has prevalent back then). This caused a swoon in the stock market and even though this cause doesn't really exist today, the pattern seems to have held. Now we wait to see if this September will be another swoon for the stock market. At the moment it appears to be setting up that way

At the end of April I had reviewed the DJUBS chart to point out a strong correlation of Fib price levels near 138.20, including the 50% retracement of the September 2012 - August 2013 decline. The 50% retracement has been a repeating pattern since the April 2011 high that retraced a little more than 50% of the 2008-2009 decline. At the end of April most had turned bullish the commodities and I, as my usual contrarian self, said to get ready for the start of another leg down in its continuing bear market.

Since its April high the commodity index has had an impulsive decline and today it tested its August 20th low, at 124.80, retracing in two days the 8-day bounce in the last half of August. The next likely test will be of the November 2013 and January 2014 lows, near 122. The disconnect between the stock and commodity indexes continues the widening gap in the chart above. This will soon end and the correction (with a stock market decline) could be a nasty one for all those who have again turned bullish the stock market.

In the meantime the stock market has pressed higher and bullish sentiment quickly moved back to a bullish extreme following the August 7th lows in the stock market. This week's AAII survey shows bullish sentiment jumped another +3.6% to 56.1% and last week's climb above 50% was the first time since last December and only the 4th time above 50% since February 2011. In last Wednesday's market wrap I discussed this sentiment picture and how common it is to see in final 5th waves of a rally. We've got an EW count and sentiment lining up very nicely for a top to the rally, which should be dangerously close for all those bulls jumping in with both feet here.

The bearish sentiment, at 13.3%, is the lowest reading since February 1987. The boat is starting to get tippy here with too many bulls on one side and not enough bears to counter-balance it on the other.

When too many bulls rush over to one side of the boat

One of the things that makes the stock market more vulnerable to a downside disconnect this time is the plethora of ETFs. These have never really been tested in a major bear market since most have increased in size only in the past 5 years. Many existed in 2008 but today their aggregate size is about 4 times what they were in 2008. If investors ever reach a point of exiting their ETF positions en masse we could see a liquidity lock-up event. Instead of selling individual shares investors can sell thousands of shares by simply executing one trade. ETF managers would then be forced to sell the ETF's holdings and get it done that day, which in turn could create a panic selloff.

In August we saw a very steep decline in the high-yield bond market, which was outsized as compared to the selloff in the stock market. It may be offering us a preview of what's to come in the stock market. When the high-yield ETF managers were forced to sell large volumes of their bonds and they quickly learned that even the larger bond market was not as liquid as they thought. Some of the ETFs, especially techs and small caps, could find liquidity vanish with no buyers on the other side of the trade. This is what causes the flash crashes as the computers go hunting far below for any buyers. Again, these ETFs with their huge holdings now have not been battle tested and many are starting to worry that it could exacerbate any selloff. Food for thought and just another reason why I suggest bullish complacency here is very dangerous.

Starting tonight's chart review with the 50,000' view of SPX, the monthly chart below shows the price pattern since the blast-off days back in 1994. Following the new high is 2007, with bearish divergence against its 2000 high, it broke the uptrend line from 1990 through the 2002 low. Since the 2009 low SPX has made it all the way back up to the broken uptrend line and now we've got the mother of all back-tests in progress with more bearish divergence. If this results in a kiss goodbye it's going to be the mother of all corrections that follows. It looks a wee bit risky to be long here.

S&P 500, SPX, Monthly chart

The weekly chart below zooms in on just the part of the rally from June 2012. A trend line along the highs from April 2010 - May 2011 has been resistance since almost being tested in December 2013 and price has been pounding on the line since August 25th, currently near 2006. It's interesting that the line will be near 2007 on Thursday, an important turn date, and at the important Gann Sof9 level. Could be all just coincidence. At any rate, as mentioned last week, we've got a clean 5-wave move up from February which completes the 5th wave of the rally from October 2011. The over-the-top bullish sentiment fits well for a final 5th wave and I'm on high alert for an end to the rally that will be followed by at least a very larger downward correction of the rally from October 2011. More bearishly, we'll be at the start of the next cyclical bear market within the larger secular bear. Both should end sometime in 2016, maybe 2017.

S&P 500, SPX, Weekly chart

The 3rd through 5th waves in the rally from February are shown more closely on the daily chart below. You can see how it's been banging on that trend line along the highs from 2010-2011. The bulls see this as bullish consolidation while bears see it as topping action. Whenever I see price chopping marginally higher I think ending pattern rather than bullish consolidation. But I do see the potential for a head-fake break above the trend line to tag the 2015 projection and then create a bull trap with an immediate reversal. It would turn more bullish above 2015, with upside targets then at 2030 and 2050.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2007
- bearish below 1967

What's not clear at the moment is what the price pattern since the August 26th high (last Tuesday) means. I see the potential for a sharp drop to about 1985 to complete a bullish consolidation pattern so I'd be cautious about an immediate drop from here -- without a clear ending pattern to the upside it's a bit risky to jump in short on a decline from here. There are plenty of reasons to suspect we'll start a stronger decline but I just don't have the price pattern to support an aggressive approach on the short side (not yet). Short term I'm watching a possible parallel up-channel off Tuesday's low to see if the final 5th wave finishes inside this channel.

S&P 500, SPX, 60-min chart

Keeping the bigger picture in mind for the DOW, it has the same wave count as SPX -- a 5-wave move up from October 2011, with the 5th wave being the leg up from February. The 5th wave of wave-5 is the leg up from August 7th and can be considered complete at any time. Today the DOW tested its July high at 17151.56 and August 26th high at 17153.80 with a high of 17151.89. It gave back 73 points from this morning's high by the close. A trend line along the highs from December 2013 is currently near 17300 so from a trendline perspective that's upside potential for now

Dow Industrials, INDU, Weekly chart

Key (Daily) Levels for DOW:
- bullish above 17,150
- bearish below 16,985

Getting in much closer to the above chart, the 60-min chart focuses on just the small rally from the August 7th low (the 5th of the 5th wave on the above chart). If the pullback/consolidation into Tuesday's low was the completion of a 4th wave correction then we've got a little rally ahead of us. Today's pullback was to the uptrend line from August 7th through Tuesday's low. If that holds as support and the 5th wave of the rally from August 7th achieves equality with the 1st wave we get an upside projection at 17303, which aligns nicely with the trend line along the highs from December-July that I mentioned above being near 17300. The projection shown on the chart below shows the completion of the rally on Friday. This would also make a very interesting reversal setup. But a drop below 17K would have me alert to the possibility that rally already completed.

Dow Industrials, INDU, 60-min chart

NDX has been battling two trend lines for more than two weeks now, since August 19th when it first reached its broken uptrend line from June 2013 - February 2014, currently near 4085. The other trend line is a longer-term one and is along the highs from April 2010 - April 2012, also near 4085. Yesterday it gapped above both of these trend lines and closed above (with a small hammer doji). Today it gapped up, hit a high at 4104 but then closed down near 4071 and below the two previous day's lows. That created an outside down day (bearish engulfing candlestick) following what could have been an exhaustion gap (suck in a few more eager-beaver bears, spit out a few more shorts) followed by a bull trap. A down day on Thursday could spell a lot more trouble for bulls. The 5-wave move up from April may have completed with this morning's quick high, which in turn completes the 5-wave move up from November 2012 (and in turn that completes a large zigzag correction pattern off the November 2008 low).

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4100
- bearish below 3985

The RUT had a relatively strong day yesterday but today it gave it all back and then some. Buyers of the small caps yesterday are already underwater. Today's candle looks even more bearish than NDX and is another bearish engulfing candlestick after failing to hold above a 62% retracement of its July-August decline. I haven't seen anything bullish about the RUT's price pattern since its double top on July 1st and believe it will continue to lead the way lower.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1191
- bearish below 1150

The bond market might have a little rally left in its gas tank before starting a larger pullback correction but it's now vulnerable to starting a pullback at any time. It has a clean 5-wave move up from December and while it could press higher (especially since there's no bearish divergence on its daily or weekly charts) but the risk of a downturn in the bonds appears to be growing. On the TLT weekly chart below I show a pullback to its broken 2012-2013 downtrend line, in the 110 area in November, before starting a stronger rally into next year. I remain in the (small) camp that's looking for higher bond prices (lower yields) into next year. This would give the Fed some cover not to raise rates (the bond market is in charge of rates even though the Fed likes to think it controls them).

20+ Year Treasury ETF, TLT, Weekly chart

Since the TRAN's July 23rd high at 8515 I've wondered if we'd see one more attempt at a new high and achieve the projection at 8591, shown on its weekly chart below, which is where the c-wave of an a-b-c move up from October 2011 would achieve 162% of the a-wave. Today's high was a minor new high, near 8538, but still a little shy of the 8591 projection. From a short-term perspective I see the potential for only one more minor new high but probably a little short of its projection. Nevertheless, it's looking like a good setup for a top this week and then a major reversal.

Transportation Index, TRAN, Weekly chart

The U.S. dollar's rally from July 1st should end soon and then possibly start a month-long consolidation or a deeper pullback. The rally from July 1st is the 2nd leg up in the rally from May and would be 162% of the 1st leg up at 83.22. The downtrend line from June 2010 - July 2013 is near 83.45 so that gives us an upside target zone to watch for now. If we get a choppy pullback/consolidation this month I'll then look for a break higher and as long as it stays above 81.50 in a pullback (assuming we'll get one this month) I'll stay bullish the dollar.

U.S. Dollar contract, DX, Weekly chart

Gold sold off hard yesterday and dropped it to a new low for the decline from July 10th. That decline has been very choppy and it's what has kept me thinking we'll see another bounce up in its sideways triangle that it's been in since 2013 but it should stay above the uptrend line from 2001-2005, which was tested with the overnight low at 1261.90. If it continues lower from here, and especially if it breaks below its June 3rd low at 1240, it will point much lower sooner rather than later. I have a minimum downside target near 1000.

Gold continuous contract, GC, Weekly chart

On August 19th oil broke below its uptrend line from June 2012 - January 2014, currently near 98, and its 200-week MA. By last Friday it had bounced back up to its 20-dma and its 200-week MA, which this week is at 96.25. It sold off sharply yesterday, leaving a bearish kiss goodbye, but rallied back up today for another test of its 20-dma at 95.44. Today's rally created an inside day so it's hard to judge the merit of the bounce but if it's able to bounce higher it could test its broken uptrend line near 98. However, oil looks like it drop a little lower before setting up a higher bounce later this year, to be followed by a stronger decline next year.

Oil continuous contract, CL, Weekly chart

Thursday morning will be busy with economic reports, including the important ADP report and some other measures of employment. Employment numbers are what the Fed has been discussing recently so the market could react to anything they believe will turn the Fed more dovish (not needing so much stimulation). The ISM Services at 10:00 AM is not likely to move the market, especially if comes in close to expectations and not much of a change from July's number (58.7). The big reaction might come from the ECB's rate decision (market expects a cut) and any firm plans (not just talk) about their own QE program.

Economic reports and Summary

There's a lot coming together this week for a major market high. We have over-the-top bullish sentiment at a time when the wave pattern looks to be completing (and the high bullish sentiment is typical in final 5th waves so there's a good match with sentiment and the wave count). The waning momentum at the new highs also fits for a final 5th wave scenario since 5th waves are almost always negatively divergent against the previous 3rd wave high.

We obviously do not have any confirming signals to indicate we have made or will see a high this week but that's the setup. Today's bearish engulfing candlesticks for NDX and RUT at resistance are a real heads up for a possible top made today. I see a little more upside potential for SPX and the DOW but it's not something I'd want to bet my money on from here. SPX even made its Gann number at 2007 (opposite its March 2009 low). The pieces are in place for the bears, what few remain.

Upside potential is dwarfed by downside risk so good luck in the coming week 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