Monday's strong decline was followed by Tuesday's strong reversal and retracement of Monday's losses, which was then followed by today's reversal that more than retraced yesterday's gains. Welcome to the land of volatility, especially with today's 90% down day.

Wednesday's Market Stats

If you don't like the direction of the market just stick around for the next day's reversal. And the reversals have been violent. Following the slow methodical climb in November we're now seeing some tough battles for control between the bulls and the bears and the resulting price swings have both sides wondering which side is up or down. And that battle could continue for at least the rest of the week. But today was clearly bearish and as you can see in the table above, the down volume swamped up volume 10:1. That's a lot of selling pressure for the bulls to overcome.

If you haven't heard yet, the Hindenburg has descended upon us. The Omen that is. Yesterday was the 5th sighting of the Hindenburg Omen (HO) this month and as I'm sure you've heard, no market crash has ever occurred without the HO first being sighted. The problem with this signal is the number of false positives. We get many of these signals and no market crash and in fact people tend to look at it as the boy who cried wolf. Only after the crash do people wish they had paid attention. Considering what I believe to be a very vulnerable market that's been pushed too high too fast without any fundamental underpinnings, its probably wise to pay attention this time, especially since we've had multiple HO's in a short period of time.

Basically the HO occurs with the following conditions:

1. NYSE new 52-week highs and new 52-week lows are both greater than or equal to 2.8% (about 84 stocks) of the sum of the number of NYSE issues that advance or decline that day (about 3000)
2. New 52-week highs cannot be more than twice the number of 52-week lows (although it can be the other way around)
3. NYSE is above where it was trading 50 trading days ago
4. The McClellan Oscillator is negative on the same day

The important point to remember about this signal is that it occurs because fewer stocks are participating in the rally. The indexes might be looking strong, even making new highs, but more and more stocks are not helping the rally. In recent weeks I've shown plenty of charts to highlight the deteriorating market breadth, a big reason why I kept saying the upside potential is not worth the downside risk. I still feel that way, even if the market makes new highs into the end of this month. It just makes the new highs that much weaker and that much vulnerable to a disconnect to the downside. It's another example, imo, of knowing when to trade and when not to. It's been a good time for bulls to take their chips off the table and go to cash. It's also been a good time for the bears to wait for a top to get put in place. We might have that signal but depending on your trading timeframe, it's a good time to stay cautious until we see how the decline from last week develops.

Once we get an HO it's good for 30 days and multiple signals in a short period of time is more negative than one lone signal. The signal is negated when the McClellan Oscillator climbs back above zero. So at the moment we have an active signal and multiple signals. It's another sign of deterioration in market breadth, which is what alerts us to the potential for the market to top out. It's just something to keep in mind and not a predictor of a market crash. It alerts us to the possibility and it's a reason to at least be cautious about bullish positions. Assuming the market will come back during times like this could be a dangerous game to play. The last cluster of HO's was in September, just as the nearly 10% decline was getting started.

Another topping signal came from the New York Fed President, William Dudley. I say this somewhat tongue-in-cheek but the Fed is not known for its accuracy in economic predictions. In fact with a 100% failure rate I'd say you'd have a good track record always taking the other side of their bet. Recently Dudley predicted we'll see a 2.5%-3.0% growth rate in 2015 instead of the 2% we've been experiencing, saying "The U.S. economic outlook looks brighter, with growth likely to be somewhat above the trend of the past five years." If you didn't hear it, that was Dudley ringing the bell at the top.

With this week's volatility there's no telling where the market will be by the end of the week but so far the weekly candle, as can be seen on the SPX weekly chart below, is a strong reversal of the rally from the top of its parallel up-channel for the rally from October 2011. This is using the arithmetic price scale and if I use the log price scale the trend line along the highs from April 2010 - May 2011 (bold green line) is where price was only able to poke above in the past two weeks. The leg up from October finally looks complete and now the question is whether we'll get a just a pullback to the 2000 area before pressing higher (green dashed line) or if instead we've started at least a much larger pullback. The more bearish possibility is that last week saw THE high for the bull market.

S&P 500, SPX, Weekly chart

After holding its 20-dma for the past two days, especially with the strong spike back up yesterday, today's decline had SPX solidly breaking its 20-dma at 2057. The next MA support is the 50-dma near 1998, which could coincide with millennial support at 2000 by the time it's tested. But first there's potential support near 2019 where it would test the September high.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2080
- bearish below 2019

One other trend line that SPX struggled with, shown in blue on the 60-min char below, is the uptrend line from November 2012 - February 2014. Last Friday's high was a perfect tap of the trend line before dropping away. In fact it was a small 3-drives-to-a-high pattern with the tests on December 3rf, 4th and 5th, with bearish divergence. Hindsight trading is so easy and it's real easy to see this setup now. At the time I liked the setup by the end of the week for a short play but I'll admit to feeling completely beaten by this market when it came to thinking about another short play. That's what this market does to traders.

S&P 500, SPX, 60-min chart

So now we've got a new downtrend in progress for SPX with today's lower high and lower low. What we don't know yet is whether the move down from last Friday will only be a 3-wave pullback before heading higher or if instead we've got the start of something more bearish. Two equal legs down points to 2015 and if that breaks we've got a projection at 1987 where the 2nd leg of the decline would be 162% of the 1st leg down. At the moment SPX found support near 2024, the November 3rd high. The bottom of a down-channel for this decline is currently near 2020 and another price-level support is at 2001 (the November 4th low). The first sign of bullishness would be a break of the downtrend line from last week, currently near 2051.

One of the reasons why it's important to note the potential for just an a-b-c pullback from last Friday is the VIX. It shot higher today, up +24%, and it's the first time above 18.50 since gapping down on October 21st. Whenever we see this kind of spike in the VIX it's usually led to a v-bottom reversal in stocks. An early-morning low in stocks, especially if SPX holds 2015 or higher, could be followed by another short-covering rally. But something about the VIX is a little different this time. As I noted yesterday, Tuesday's drop back down to support-turned-resistance, near 14.75, was a setup for a reversal back up for the VIX and back down for the stock market. This played out to perfection today. But stay aware of the potential for the VIX to be moving too much, too fast.

Volatility index, VIX, 60-min chart

Another warning to bears comes from the TRIN reading. For a reminder, TRIN, originally known as the Arm's index (for its developer, Richard Arms), measures the strength between advancing and declining issues and volume. The formula is advancing-declining issues over advancing-declining volume. This results in a ratio and the higher the number the more selling pressure it indicates. It's kind of like the VIX -- when the TRIN is high it's time to buy.

Today's TRIN closed at 3.1, the highest level since the highs in November/December 2011. That's some strong selling pressure. For some perspective, even the strong selling in October didn't produce a reading over 2.0. High readings like this are typically seen at major lows in a washout event, not at the beginning of a decline. The bearish view is that it's the kickoff to a much stronger decline to come. The bullish view is that the market is washed out short term and is ready for another bounce. Between the VIX and the TRIN it's certainly something both sides need to stay aware of.

For an a-b-c pullback with two equal legs down from last week for the DOW, we're looking at 17447 for a downside target. That coincides closely with the uptrend line from October 2011 - November 2012, as shown on its daily chart below. That makes this level an important one for the bulls to defend. The bulls would be back in business with a rally above its broken 20-dma near 17767, less than 130 points back up, which should be easy in this whippy market (wink).

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,000
- bearish below 17,447

Tuesday's sharp rally for NDX was essentially a back-test of its broken uptrend line from November 4th. It was a nice recovery back above its 20-dma, near 4268, following the hard break below it in the morning but it had the appearance of short covering instead of real buying (too much, too fast). Today's drop back down leaves a sell signal with a bearish kiss goodbye following the back-test. Price-level support near 4200 should be tested next if there's any more selling Thursday morning. The market is oversold again on a short-term basis and we have the spikes in the VIX and TRIN, all of which says the bears need to be careful and certainly can't afford to get complacent. The bulls are probably getting some of their complacency shaken out of them too but we know how quickly this market can recover so the bears can't claim control yet, even if we're currently on a sell signal.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4300
- bearish below 4216

Because of the impulsive decline from last Friday into Tuesday morning's low I felt the high bounce into Tuesday's close was a head fake that sucked in too many bulls and spit out the bears (again). But I will admit to being worried about that opinion based on how high a bounce we saw in the RUT -- to within 4 points of its November 25th all-time high. The bearish wave count required an immediate turn back down and strong selloff today and that's what we got, which keeps the bears in the driver's seat for now. As you can see on the daily chart below, it's been one whippy ride since November. As long as the RUT stays below its November 25th high it stays bearish.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1192
- bearish below 1150

The reason I say the RUT stays bearish below 1192 is because of a pattern that I've been watching since its November 25th high. With the choppy price action I had the sense it was an ending pattern and an expanding triangle into the November 25th high is a bearish topping pattern, often followed by a contracting triangle that forms a diamond top, which is what I have drawn on the 60-min chart below. Only in hindsight will we know if this is the correct interpretation but it's a pattern that often has traders feeling bullish about the index because it looks like a high-level consolidation that should break higher. It's the breakdown instead that catches too many traders suddenly bailing out of their positions bought on the dips. It takes a break below Tuesday's low near 1153 to confirm the bearish pattern otherwise it's possible we'll still get some violent up and down moves inside the diamond before it breaks down.

Russell-2000, RUT, 60-min chart

The RUT is typically used as a sentiment indicator, indicating whether traders are willing to go with a risk-on or a risk-off strategy. Another, and perhaps better, indicator of risk-on/risk-off comes from HYG, the High Yield bond fund (junk bonds). The higher the yield the higher the risk and in this yield-chasing environment (thanks to the Fed pushing investors into chasing yield performance) investors have been looking to the junk bonds for the higher yields. But while stock indexes continued to rally in 2014 HYG was unable to climb above its May 2013 high and topped out in June 2014. It has been in a down-channel since then and is now testing its June 2013 low. If the DOW was doing the same thing it would now be down to about 14500, 3000 points below us. I have no doubt the DOW will get back down there and it could do it relatively quickly next year. If stock indexes continue to push higher into the end of this year I think it will be just that much more vulnerable to a disconnect to the downside in the new year.

High Yield Corp Bond fund, HYG, Weekly chart

The Trannies are getting hit with the rest of the market, which is a little surprising in that weaker oil prices should be helping them. But concern about reduced shipments, including reduced oil shipments, is creating some selling pressure. Following the double test of the trend line along the highs from March-May 2013 - July 2014, in November, accompanied by bearish divergence at the new high, it's not surprising to see the pullback. But so far the pullback is inconclusive about what it means. It's only a 3-wave pullback and two equal legs down for it is at 8841. Yesterday's low was 8843 and today's was 8852, leaving the potential for just an a-b-c pullback correction to the decline that will be followed by another rally into the end of the month/year. The projection to 9430, shown on the daily chart, still beckons. However, it's not a bullish bet I'd be willing to make here.

Transportation Index, TRAN, Daily chart

Following the U.S. Dollar's high on Monday it has seen a fairly strong reversal back down and it's looking like we might have seen the high for the dollar for the next several months. The high was a brief throw-over above the top of a parallel up-channel from its April 2011 low, as can be seen on the weekly chart below, and the drop back inside the channel creates a sell signal. It also looks like a completed 5-wave move for the leg up from last May. That calls for at least a correction of the May-December rally before pressing higher again.

U.S. Dollar contract, DX, Weekly chart

Gold got a boost yesterday but pulled back slightly today. Short term it looks like it push at least a little higher but it's about to run into the top of its down-channel that it's been in since 2012, currently near 1240. Slightly higher is the downtrend line from October 2012 - July 2014, currently near 1253. If gold bulls get feisty and push gold higher than that then there's the 200-dma and 50-week MA near 1270. I also have some Fib correlation (retracement and wave relationships in the bounce off the October low) near 1267. That provides some levels to watch for resistance if gold keeps rallying since I don't think gold has found its bottom yet. The bounce pattern off the October low looks corrective and the larger pattern for the move down does not look complete yet. I think we'll see lower prices into 2015 before we'll get a long-term bullish setup for gold (probably below $1000).

Gold continuous contract, GC, Weekly chart

All you preppers out there who are anxious to get some gold and silver coins stashed away for TEOTWASWKI, it's never a bad time to sock away a little bit of the shiny metal but if I'm right about what 2015 will be like for the metals, you'll have time to buy more at cheaper prices. Just keep adding to your stash on the way down but don't overdo it. As I've been saying for weeks, I think we'll see silver bounce back up to the 18.60 area, possibly a little higher, before heading lower. It could struggle here (17-ish) as it battles its broken uptrend line from 2003-2008, which it held at the end of September but broke in October, it could continue lower from here. But I think it's going to work off some more of its oversold condition before heading lower again. If it's able to break its downtrend line from November 2012 (light purple on the weekly chart below), currently near its 50-week MA at 19.22, it would look a little more bullish and especially so if it breaks its downtrend line from April 2011, near 21 by the end of the month.

Silver continuous contract, SI, Weekly chart

Every day I hear "washout!" when it comes to oil. It seems everyone wants to catch falling knives when it comes to oil and it just keeps dropping. Oil players are getting annihilated as it keeps probing lower and lower for that elusive bottom. That could keep it dropping but I think it's now close to what should be a tradeable bottom, especially if the U.S. dollar is also getting ready for a larger pullback.

Once oil broke support near 64 (62% retracement of 2009-2011 rally and a long-term 1998-2008 uptrend line) I went looking for additional potential support/target levels and I had to use a monthly chart to find them. The first one is the 200-month MA at 60.28, which is only 15 cents below today's low. The next one is near 58, which is price-level support from 2005-2006 and 2009. Below that is near 54, which is a 261.8% projection for the 2nd leg of the move down from August 2013 (a typical projection for an extended move, especially in commodities), and then 50.50, the 78.6% retracement of the 2009-2011 rally.

Oil continuous contract, CL, Monthly chart

If oil's decline from August 2013 is going to turn into a 5-wave move, the bounce following the leg down from June will be a choppy consolidation over the next several months for the 4th wave and then another leg down to complete the 5th wave later next year, which is what I’ve got depicted on the chart. A choppy 4th wave bounce back up to the broken uptrend line from 1998-2008 could see oil up near 70 by mid-year 2015 before dropping lower.

Thursday morning will be a little busier than this morning for economic reports but other than retail sales there's not much there to move the market. The market is desperate for better economic news though and as long as the improved sales numbers come through we shouldn't see much of a reaction.

Economic reports and Summary

Price action is clearly getting more volatile and that's usually a sign of a market turn in progress, which in this case could mean the market is putting in a top. This goes against the idea that the market has bullish seasonals providing winds at our backs. But as I've mentioned previously, with so many believing in a further rally, whether it's an end-of-year rally or a 2015 rally, the foregone conclusion is that the market is going to continue to rally. This is a setup for a major disappointment. It's way too early to predict what the market will do tomorrow, let alone this month and next year, so we'll take it one day at a time. But all big moves start out small and identifying the pattern of the decline will be important in helping define what the larger pattern might look like.

At the moment the short-term pattern is a 3-wave pullback from last week and as such could be just a correction to the rally and will be followed by more rally to new highs into the end of the month. If the current decline develops into a 5-wave move down we'll have something a little more bearish (and potentially a lot more bearish) on our hands. We'll take it one day and one move at a time while the bigger picture develops and helps give us an idea of how the rest of the month and next year might play out.

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

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