Today's price action in the stock market suggests the small breakdown could be the break the bears have been looking for. Of course the bulls still view any and all dips as buying opportunities and there is the potential they could be right again.

Wednesday's Market Stats

I hope everyone had a great Thanksgiving weekend, especially if you were able to turn it into a 4-day weekend. Last Friday's half-day session was one of the slowest days, if not the slowest, of the year. But it just might have marked the top of this market since today's decline looks potentially important.

The market started in the hole this morning following a decline in equity futures last night, which is uncharacteristic for a Sunday evening. Right away that was a heads up that something changed -- it's been typical for Sunday evening to see a rally in the futures as bets are made on a continuation of the rally. Manipulated or not, that's been a strong signal of rally strength. So the decline (gap down) Sunday evening was a ruh-roh warning and today's inability to reverse the early-morning decline was another ruh-roh.

The dip buyers immediately showed up this morning and the indexes (except the RUT) got a sharp bounce. But the quick short-covering rally quickly fizzled and the indexes dropped back down to their lows and some made new lows for the day. From there it was more or less a sideways consolidation for the rest of the day and that's another bearish sign. All in all I'd have to give today's round to the bears and that starts the bears with a deficit for the week.

The metals and oil dropped lower Sunday evening but then ran sideways for the rest of the overnight session before they started to ramp back up shortly after the European markets opened. I'll cover them in more detail later but it's looking like key reversal days for them. Equity futures tried to bounce with the metals but got turned back down as we approached the opening bell.

Some of this morning's weakness was blamed on a lonely economic report this morning -- the ISM index dropped marginally from 59 in October to 58.7 in November, and near expectations. But U.K.-based Markit Economics reported earlier in Europe's day that U.S. manufacturing activity grew at the slowest pace since January. Their index ticked down to 54.8 vs. 55.9 in October, which was slightly below economists' forecasts. It's not below 50 and there it's not contracting (yet) but the growth is definitely slowing. The recent trend makes it a little more worrisome for the economy, which in turn makes the high stock valuations a little more vulnerable.

What was a little more worrisome in the ISM report was the prices-paid component, dropping to 44.5 from 53.5 in October. This is another indication of price softening and another deflationary signal. Much of this is attributed to the strong drop recently in commodity prices but I suspect they're not going to see any sharp upward pressure over the next few months.

Today's 14-point (-0.7%) decline for SPX was not that much but it's the biggest drop in the past month. That alone tells you how narrow the price range has become. Contracting volatility is always followed by expanding volatility and that of course begs the question -- was today the start of a period of higher volatility. It's of course possible, especially since selling pressure (if only due to profit taking) will be fought by dipsters who believe December is going to be good for the bulls. An article in Bloomberg this morning (Momentum Forecast) sounded pretty unanimous by market forecasters -- look for higher prices this month. This of course ties in with recent data I've shown about bullish sentiment in this market -- everyone is fully aboard the train and now everyone's hoping we haven't run out of more buyers to keep pushing this thing higher.

Seasonality says we should continue to look higher, including through the coming year (election cycle and years ending in 5), but it's my belief that with everyone looking northward they're not seeing the tsunami headed their way. I could of course be wrong in my assessment (no, say it isn't so) but long-term successful traders know when not to run with the crowd and the crowd is clearly looking for more rally. Rather than guess how the market will react to news or sentiment I'll continue to stick with the charts and look for early warning signals. Today was the first torpedo across the bow of the USS Bullship so we'll see if the bulls simply ignore the torpedo, full speed ahead.

I want to take a top-down look at NDX first tonight since it had a very interesting setup on Friday for a reversal and I thought a red candle on Monday would create a sell signal. So far that's what we have. The weekly chart below shows NDX ran up to a trend line along the highs from December 2012 through the December 2013 - March 2014 highs. The wave count for the leg up from June 2013 has the rally from October completing the 5th wave. Up against the trend line is a strong reason to watch for the completion of the 5th wave here.

Nasdaq-100, NDX, Weekly chart

In addition to the trend line along the highs from December 2012 there is a shorter-term trend line along the highs from July-September and the combination of the two trend lines made for some formidable resistance at 4337-4347. Friday's high was at the high end and it closed at the lower number. Today's decline also broke the uptrend line from October 15 - November 20. At the moment though, NDX is holding inside the up-channel from November 4th, the bottom of which is currently near this morning's low at 4274. That keeps the bulls in the game but only if they can get a stronger bounce started on Tuesday.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4350
- bearish below 4237

Moving in closer to the up-channel mentioned above, you can see it consolidated in the bottom half of the channel, which itself looks like a bearish continuation pattern following this morning's sharp decline. It supports the idea that the next move will be another leg down but as already mentioned, the bulls can't be ruled out yet. From a price perspective I think a stronger sell signal would occur if NDX drops below its November 20th low near 4237.

Nasdaq-100, NDX, 30-min chart

Gann's analysis of the market had him believing time was much more important than price. It's one reason why I pay attention to the work of others who study cycles. I mentioned last week the .447/.553 work by Stan Harley. This time ratio shows up repeatedly and since multiple cases of this relationship were coinciding in the last two weeks of November it pointed to the potential for a major market turn before December. This is the updated chart from last week's update and today's small red candle is hardly scary to a bull, it could be the initial crack in the earth that will soon widen more than the bulls can spread their legs.

S&P 500, SPX, Weekly chart with .447/.553 time ratio

The Bradley turn model and the new moon on November 22nd was also a good setup for a reversal. Last week's holiday bullishness might have been just a way to hold the market up into the end of the month. But the updated MPTS chart shows a top on Friday could certainly have been close enough for government work.

SPX MPTS Daily chart

On November 21st SPX popped above its trend line along the highs from April 2010 - May 2011, which stopped the rallies in July and August (small throw-over above the line in July) but was again not able to hold above the line, currently near 2064. With the waning momentum seen on MACD as it was hitting trendline resistance I thought it was a fair bet resistance would hold. Of course betting on resistance holding in the wild ride up from October has been a bad bet. But this one looks like it's going to hold. Also holding is the Fib projection at 2073.28, which is the 127% extension of its previous decline (September-October). This is such a common reversal Fib that you should make a note of it and always watch price action around it -- any signs of weakening around that Fib level is reason enough to start anticipating a reversal. Combined with the timing factors discussed above had me thinking the week following Thanksgiving was not going to be kind to the bulls who remain convinced we'll head higher into year-end. It could happen but I think the odds are not with them. What we don't know yet, and won't know for a few weeks, is whether or not a larger pullback/decline will lead to more rally next year or instead be the start of the next major decline. Playing it just short term for now...

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2076
- bearish below 2040

There is one bullish possibility here, although I think today's bounce pattern weakened the probability, is for this morning's sharp decline to have been the c-wave of an a-b-c pullback from the November 21st high. For SPX the c-wave projected down to about 2052 where it would be 162% of the a-wave (light green wave labels). This interpretation calls for a sharp rally on Tuesday and if it gets above 2063 it would look more bullish. Above the 78.6% retracement of the decline from Friday would strongly suggest new highs are coming. A drop below 2047 would negate the bullish potential, at which point I'll be looking for a drop at least to the 2030 area (more bearish below that level).

S&P 500, SPX, 60-min chart

If the market does head higher again I can see the potential for the DOW to rally up to the top of its up-channel that it's been in since November 4th, which will be near 18100 by the end of the week. Like NDX it's holding at the bottom of its up-channel but today's bounce off the morning low looks bearish. Like SPX, it rallied up to resistance at its trend line along the highs from May 2011 - December 2013 and Friday's attempt was soundly rejected, leaving a bearish gravestone doji (with a long upper shadow). As noted by Gregory Morris in his book "Candlestick Charting Explained" (a highly recommended book), "If the upper shadow is quite long, it means that the Gravestone Doji is much more bearish...this cannot possibly be interpreted as anything but a failure to rally." This was one of the factors that had me feeling more bearish by the end of Friday's half-day session. The gravestone doji following a rejection at trendline resistance and bearish divergence was a special invitation to bears. Now we wait to see if today's pullback is just another 1-day correction.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,900
- bearish below 17,600

Another bearish sign for the market on Friday was the RUT. As a leading indicator, bailing out of small caps on Friday was the same sign you'd get if you saw rats scrambling off a ship and running down the ropes tying the ships to the pier. Sometimes those rats are the smarter creatures when they sense the ship is about to sink. Last Wednesday I noted the 3 drives to a high at both its broken uptrend line from March 2009 as well as its previous highs in March and July. Friday's sharp decline, and the close below its 20-dma, left me thinking it was the first index to turn on its turn signal. Today's decline, which has it almost testing its 200-dma, nearing 1150, has it now looking like a 5-wave move down from last Tuesday. This should set it up for a larger bounce to correct the decline, which is what I've depicted, but it should be the next good shorting opportunity.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1192
- bearish below 1140

On Friday the SOX ran up to 687.71, a point shy of its price projection at 688.71, which is where the 5th wave of its leg up from November 12th equals the 1st wave. This morning's sharp decline, followed by the corrective bounce into this afternoon, has it looking like today started an important turn back down. The completion of the leg up from November 2012 is the completion of the c-wave of a big A-B-C bounce off its November 2008 low.

Semiconductor index, SOX, Weekly chart

The banking index, BKX, also is in the early stages of what looks like could be an important reversal. It might have completed its own 3-drives-to-a-high topping pattern after failing again to get through its March and September highs, which are near the projection at 73.64 for two equal legs up from 2009. But it needs to drop below 66 to prove it's not still in a bullish sideways consolidation.

The TRAN left a bearish shooting star at resistance on Friday. It was another reversal pattern in the making and today's big red candle confirmed it, especially with the drop below its previous low at 8961 on November 19th. That also has it back below the short-term trend line along its highs from July-September, currently near 9000, which had supported the pullback into the November 19th low. It also closed below its 20-dma near 9030. Following the bearish divergence at Friday's high, there's very little bullish about this chart.

Transportation Index, TRAN, Daily chart

While commodities made a big reversal today there wasn't that much action in the U.S. dollar so it can't be blamed for the big commodity move, as many are saying (looking for some air time and trying to sound like they know what they're talking about). I thought last week's high for the dollar will lead to at least a multi-month pullback but it might not be ready for the pullback yet. It could be heading for about 89.10 where it would hit the top of an up-channel created off the uptrend line from 2011-2014. It's not something I'd be willing to bet on the upside but there is at least a little more upside potential before pulling back.

U.S. Dollar contract, DX, Weekly chart

The metals saw a key reversal today. Following a spike down this morning there was a strong reversal and that produced a bullish engulfing candlestick. The gap down and new lows for gold and silver, followed by a close above the previous day's high, defines an outside up key reversal day. Gold had an $80 reversal intraday (about 6.5%) and that puts gold bears on the defensive. Now we watch to see if the bullish day will see follow through. Interestingly, gold rocketed higher today following a "no" vote from the Swiss about whether or not their central bank should move to a gold standard. There was an expectation for a strong gold rally if the Swiss demanded their central bank start buying gold. The overnight decline could have been the result of the vote, which produced a washout event (on news).

On gold's weekly chart I've been showing an expectation for a drop down to Fib support at 1090 before starting a larger bounce but this morning's reversal now has it looking like that bounce could start earlier rather later. But at the moment there is the potential that today's short squeeze will not see follow through, which would obviously disappoint more than a few gold bulls.

The daily chart below shows today's big white bullish engulfing candlestick. The price projections shown on the chart, at 1218.90 and 1266.61 are for the 2nd leg of the bounce off the November 7th low. At 1218.90 the bounce has two equal legs up and at 1266.61 the 2nd leg of the bounce would be 162% of the 1st leg up. It's possible the bounce off the November 7th low is a completed a-b-c correction to the decline, with today's high at 1221, and will now continue lower from here. If we see a choppy pullback it would support the idea we'll get a larger bounce pattern into the end of the year, which is the way I'm leaning until proven otherwise.

Gold continuous contract, GC, Daily chart

Silver's spike down this morning tagged its price-level support from back in 2006-2010, near 14.65 (with a morning low at 14.15), as well as its broken downtrend line from November 2012 - August 2013 (light blue). Silver has been riding this broken downtrend line since breaking it last February. As with gold, the strong reversal off this morning's low has created an outside up key reversal day today with its bullish engulfing candlestick. Now we watch to see if the silver bulls can keep today's short covering going. The first level of resistance is at its broken uptrend line from 2003-2008, near 17.15 this week (log price scale). Above that level there's very little resistance until broken price-level support near 18.60. By the end of December that level crosses its downtrend line from November 2012 - July 2014 (light purple). If the selling continues there is downside potential to about 13.25 where it would hit the trend line down along the lows from 2011-2013.

Silver continuous contract, SI, Weekly chart

Oil's overnight decline had it testing its long-term uptrend line from 1998-2008, near 64.50, with a low at 63.72. Today's rally has it now approaching price-level S/R near 69, which it broke below on Friday. Assuming a tradeable low is now in place, the bearish pattern calls for a multi-month choppy bounce for a 4th wave correction in the decline from August 2013. At the moment the decline from August 2013 is a 3-wave move and could be the conclusion to its pullback, to be followed by another rally up to the 110 area next year. I have my doubts about the bullish scenario but for now it's at least bullish if it holds above 64.

Oil continuous contract, CL, Weekly chart

Tomorrow will be another quiet morning for economic reports with only Construction Spending and Auto/Truck Sales. That will likely leave the market to fend for itself and what happens overseas. Wednesday's economic reports will have more of an impact on the market, such as the ADP Employment report and the labor costs and ISM Services. Friday will be the big nut for economic reports, which will include the Non-farm Payroll report.

Economic reports and Summary

Today appears to have marked reversals in stocks and commodities and while I didn't touch on bonds, they appear to be starting at least a larger pullback. Interestingly, bond prices and stock prices seem to be trading in synch at the moment. The key reversals in the metals suggest an important low has now been put in place. How bullish commodities will become is still not clear since we could see only a choppy sideways consolidation before heading lower again. The opposite could happen with stocks as well. But the longer-term pattern supports the idea that an important high has now been made. It's too early to declare THE top is in place but bulls should understand that that is the potential here. At a minimum I'm looking for a pullback to correct the rally from October. More bearishly, today's decline has kicked off a much larger decline that could quickly retrace the rally. As always, we'll piece the market's moves together and let it tell us what the higher-probability pattern will be.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

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