Today's half-day session produced no surprises and was quiet as expected. The bears are using the holiday period to rest while the bulls enjoy thoughts of more sugar plums.

Wednesday's Market Stats

It was a half-day session today and not a whole lot happened in the market. Considering we've all got Christmas songs in our heads and family things to tend to, I'll keep tonight's wrap a little shorter than usual and dive right into the charts for a quick review of how things look to me. The rest of this month tends to be bullish if only because sellers go away and people's positive mood puts them into a buying mood. I see downside risks, especially with everyone expecting the market to rally, but we'd have to see some key levels broken to the downside before the bears can start claiming some successes.

Economic reports for today were light and there will be none on Friday. We got the unemployment claims data a day early and the numbers were little changed from last week and roughly in line with expectations. Crude inventories bumped up while natural gas inventories fell, and the large increase in crude inventories caused some selling in oil today but as I'll review later, it remains inside a small trading range since its December 16th low. It does look like it will be heading at least a little lower.

Economic reports and Summary

I'll start out with the RUT tonight since it's presenting an interesting setup here that the bulls are going to need to break before the bears get wind of it. The RUT is also one of the better sentiment indexes, especially at this time of year when many traders play the seasonal pattern of strength in the small caps in December and into the early part of January. That wasn't looking so good for the first half of December but that's been more than made up for with the +6% rally (about 70 points) into today and traders continue to look for the Santa Claus rally to continue. But it has now rallied up to resistance and what happens from here is going to set the tone for January.

The weekly chart shows the bearish setup, but only if the bears can get past the bulls. The current rally has again brought the RUT up to its previous highs in March and July, near 1213. Only marginally higher, near 1220 by the end of the month, is the broken uptrend line from March 2009 - October 2011. This trend line was back-tested on November 3, 12 and 13 and each time it held as resistance and therefore it's obvious traders think it's an important trend line. As I've noted on the chart, this is the 3rd attempt to get through 1213 and another failure would leave a very bearish triple top. At the moment the bearish setup is a 3-drives-to-a-high topping pattern and the bearish divergence shown on MACD is not encouraging for the bulls.

Russell-2000, RUT, Weekly chart

The daily chart of the RUT shows a closer view of the triple top and now in addition to the bearish divergence on the weekly chart we also have bearish divergence at the current high vs. the November 25th high. The leg up from December 16th fits as the 5th wave in the rally from October and the bearish divergence against the 3rd wave high in November supports the wave count. One thing I don't like about it is how large the 4th wave is compared to the 2nd wave but it doesn't violate any EW rules. Also, the 4th wave in the move up from October (the November-December choppy pullback) is a fractal of the larger 4th wave in the move up from June 2012. As can be seen on the weekly chart above, the larger 4th wave is also much larger than the 2nd wave (the September-November 2012 pullback). So from a fractal perspective, which is what EW patterns measure, it's a good fit for a final high, or at least one that should lead to a much larger pullback before starting another rally next year. This is what makes the triple top all the more interesting for the bears.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1220
- bearish below 1135

Zooming in closer to look at the 5th wave rally (from December 16th) we have another bearish divergence at this week's high vs. last week's. The RUT achieved the 127% Fib extension of the previous decline (November 25 - December 16), at 1207.34, which is a common "reversal" Fib. At this point all the pieces are in place for a major reversal for the RUT and now all we need is confirmation, starting with a drop below yesterday's low near 1200.

Russell-2000, RUT, 60-min chart

Referring to the SPX weekly chart below, you can see that the rally from December 16th is now approaching the top of its parallel up-channel from October 2011. The top of this channel has repeatedly held back all rallies for the past year and it's currently near 2100. That's the upside potential I see for SPX if the buyers can keep at it for the rest of this month. As with the RUT, the bearish divergence at the December 5th high, and further divergence at the current high, suggest buyers here could get stuck holding the bag with no chair to sit down on when the music stops (like my mixed metaphors?).

S&P 500, SPX, Weekly chart

The weekly chart above is using the arithmetic price scale and the daily chart below is using the log price scale. That shifts up the trend line along the highs from April 2010 - May 2011, currently near 2081. You can see how SPX poked through that trend line in late November and early December but couldn't hold above it (that's also where it banged into the top of its parallel up-channel shown on the weekly chart above). It's now doing the same thing and the last two days have been little shooting stars, indicating a failure to rally. The bearish divergence against the November-December highs is another warning sign. But if the buyers can keep the sellers away for at least another week we could see SPX close out the month at a higher high, perhaps near the trend line along the highs from July-December, currently near 2095, which is basically the same line as the top of the parallel up-channel on the weekly chart. I'd be a nervous long here, especially if SPX drops below Tuesday's gap closure, at 2078.52, which would also put it back below its December 5th high at 2079.47.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2100
- bearish below 2019

The DOW ran into trouble back in November-early December when it hit the trend line along the highs from May 2011 - May 2013, shown on its daily chart below (purple line). I'm using the same wave count for the rally from October as I showed earlier for the RUT, which calls the rally from December 16th the final 5th of the larger 5th wave of the rally from October 2011. It's showing the bearish divergence I would expect to see for a 5th wave. Keep in mind the bullish potential (for all indexes) is that the current rally is the start of a MUCH more bullish rally to come (3rd wave in the rally from October). But the bearish divergence suggests that is not the correct wave interpretation so it's an alternate count for now. Today's candle, as a result of the selling in the last half hour of trading (profit taking or something more?), is a gravestone doji at trendline resistance, which is a possible reversal candle but it needs a red candle on Friday to confirm. The hard part with interpreting this stuff this week is the light volume -- it's easy to push the indexes around with a couple of large buy/sell programs. But for now it's a bearish heads up.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,050
- bearish below 17,067

Different index, same story -- NDX is banging against resistance at its trend line along the highs from April 2010 - March 2012, currently near 4318. It hit it last Friday, pulled back, and then gapped up to it yesterday morning, which was followed by an immediate selloff (leaving a gap n crap). Since yesterday's low it's had a choppy bounce attempt to a lower high so far and it looks like a correction before heading lower. It's possible NDX will complete its rally with a truncated high (below its November 28th low), which would be another bearish sign since it means the 5th wave (the rally from December 16th) is especially weak. The sideways chop since last Friday could be a bullish consolidation but at the moment I think that's a lower probability than topping action here.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4347
- bearish below 4089

A quick review of the dollar and commodities shows no change in trend yet. They're getting extended, like the stock market so pressing bets to the downside in commodities doesn't appear to have a good risk:reward ratio (considering the short-covering potential for a blast back up) but I also see the trend continuing for at least a little longer.

I had thought the U.S. Dollar would be ready for a stronger pullback once it reached the top of its parallel up from April 2011, near 89, but following a relatively small pullback to 87.83 on December 16th it rallied strong to a high at 90.40 yesterday. As can be seen on its daily chart below, that was good enough for a poke above a potential rising wedge pattern for its rally from October, which I have labeled as the 5th wave in the rally from May. The weekly chart continues to show bearish divergence against its October high (labeled wave-(iii) on the chart) and that supports the currently rally as the 5th wave. Once complete, which would be confirmed with a drop below the December 16th low at 87.83, we should see a multi-month pullback for the dollar. Interestingly, I see the same setup for the dollar as I do for the stock market and I suspect they'll pull back together once each has finished their highs.

U.S. Dollar contract, DX, Daily chart

For a long time I've been suggesting gold would likely drop below 1000 before putting in a good tradeable bottom and so far I haven't seen anything to change my mind. Since gold's low on November 7th we've had very choppy price action and the bounce into the December 10th high tagged the top of its down-channel from 2011, which was then followed by more selling. The bounce is corrective and price remains in the down-channel, both of which support further downside. Even RSI can't get back above its broken uptrend line from June 2013. For holders of gold I know this is painful but for an opportunity to add gold to your portfolio (or for your TEOTWAWKI cache), the more it drops the more we'll be able to buy. Just not yet.

Gold continuous contract, GC, Daily chart

Silver's 3-wave bounce off its December 1st low had it back-testing its broken uptrend line from 2003-2008, near 17.10, but sold off from there, leaving a bearish kiss goodbye. I show the potential for a larger bounce up to the 18.60 price-level S/R but I'm starting to wonder if that's too optimistic here. It's just as likely for silver to decline to the bottom of its down-channel from 2011, currently near 13.15.

Silver continuous contract, SI, Daily chart

While many wonder where and when we'll see a top to the stock market's rally, there are many wondering where the bottom is for commodities, especially oil. I'm constantly reading why this is a good place to buy a bottom. OK, that didn't work but here's a good place. As opposed to the stock market, which has most believing in a continuation of the rally, it seems most oil traders believe oil is bottoming here. And as long as traders keep looking for a bottom, and keep trying to catch falling knives by buying the bottom, there's probably more downside to come. From a pattern perspective I also see at least a little bit more to the downside before oil puts in a tradeable bottom.

The daily chart of oil shows a wave count that would look best with one more drop lower to complete a 5-wave move down from June. The 5th wave, which is the decline from November 21st, needs one more leg down to complete the 5th of the 5th wave and I've got Fib price projections lining up just below $50 for what should be a tradeable bottom. The choppy consolidation since the December 16th low looks like a small 4th wave correction, which supports the idea for at least one more new low. Many are looking at the recent consolidation as basing in preparation for a rally but I don't see that yet. The idea for another leg down would be negated though with a rally above the December 1st low at 63.72. In that case we would likely already be into a multi-month bounce/consolidation.

Oil continuous contract, CL, Daily chart

Near the $50 downside projection is the 78.6% retracement of the 2009-2011 rally, at 50.67, as shown on the weekly chart below. As I've shown on its weekly chart in the past, the Fib price projection at 54.14 was achieved on December 16th and it's been consolidating since then. This price projection is where the 2nd leg of the decline from August 2013 is 261.8% of the 1st leg down, a common projection for an extended move, especially for commodities. If the leg down from June is a 3rd wave we'll see a multi-month choppy bounce/consolidation through the first half of 2015 before dropping lower later next year.

Oil continuous contract, CL, Weekly chart

From a trading perspective, a choppy bounce/consolidation for six months could mean dead money. But if the decline from June is completing the c-wave of an A-B-C pullback from August 2013 we'll get a stronger rally so buying a bottom, when we have a better setup for one than we do here, could result in a nice trade. Only after the bounce is underway would we get some clues as to how strong/weak it's likely to be, which would then be used for stop management. The first bullish sign would be a rally back above the 1998-2008 uptrend line, currently near 65.

From a fundamental perspective it makes sense to me to see oil in decline. Many believe low oil prices, and therefore gas prices, will spur demand. The chart for gasoline looks just like oil's chart so evaluating one is like evaluating the other. Gasoline demand is inelastic, meaning demand doesn't change much because of price changes. The data fully supports this view and it makes a lot of sense. Commuters still commute and people still need to get out to the grocery store. What probably changes a little is how many trips you'll take to see Grandma or the grandkids. There's been a significant drop in gasoline demand over the past couple of years, along with demand for oil (but why? Our economy is doing soooo well, said with tongue firmly planted in cheek). The drop in demand combined with the rise in supply has the demand/supply curve working like it's supposed to.

The Fed's easy money policy, especially with abnormally low interest rates, had many drillers borrowing cheap money to do their drilling. Much of the high-yield debt is energy related. That probably won't end well for the banks (again). All the new-found oil is coming into a market that is showing declining demand and that's putting the higher-cost drillers at risk of defaulting on their loans. But why the reduced demand? There are two things that come to mind -- first, fewer people in the work force (labor participation rate has been dropping), which reduces gas demand from commuters. More and more employers are also allowing employees to work some from home, further reducing commuter costs. Second, baby boomers are retiring, perhaps many of them earlier than they had originally planned. There's been a spike in early retirees collecting social security before they turn 66-67. So there are even fewer commuters on the road.

Just these two things are cutting demand for gasoline and as yesterday's economic numbers indicate (forget the bogus GDP report), the economy is not that healthy, which further reduces demand for oil products. I think we'll find a tradeable bottom soon for oil but I think the bounce/consolidation will be a period where traders downsize their expectations for where price should be. The fundamentals and the technical (wave pattern) support each other in this view but we'll obviously have to wait for Ms. Market to tell us whether or not she agrees with my analysis.

It's not just the metals and oil getting the smackdown; it's commodities in general, as shown on the Bloomberg Commodities index (DJUBS) weekly chart below. Some of this is obviously U.S. dollar related since the dollar has rallied strong since May. But some of it has to do with demand so how much of a bounce correction we can expect, once a tradeable bottom is in place, remains to be seen.

In October-November DJUBS tried to hold support at its long-term uptrend line from 1999-2009, near 117, but broke down with a gap down on November 28th. And then in mid-December it briefly held support at the bottom of a parallel down-channel from September 2012 (with the parallel line attached to the August 2013 low) but then broke down further on December 15th and appears to be heading toward 101-104 support.

Bloomberg Commodity index, DJUBS, Weekly chart

The commodity index could be heading to the bottom of a larger down-channel from September 2012 (with the parallel line attached to the June 2012 low), currently near 104, which is not much above the February 2009 low at 101.48. Nice round trip for commodities if it tests that low. In the meantime the stock market is in lala land thinking everything is fine with the economy. Just keep listening to the man behind the curtain and everything will be fine. Once the leg down from November completes I think we'll see a tradeable bottom in commodities but keep in mind it could still be a month away.

The commodities have been warning us that the economy is not as healthy as stock market analysts (and the Fed) would like us to believe. It hasn't meant squat to buyers of the stock market but my concern about a real scary downside disconnect remains, and I get more concerned about it the longer the upside disconnect continues. Practically no one believes we'll have a down year in 2015. No one (except perma bears). Once we get through December and into January, if it doesn't remain bullish, we'll have a better idea about whether or not the bulls can hang on.

We're in a seasonally bullish period but nothing is guaranteed, especially a rally that everyone believes will continue from here. I'm seeing enough evidence to suggest we will not see a continuation of the rally into early January but this market's strength has fooled me too many times before to ignore the upside. We're in an uptrend and that keeps the bulls in control until proven otherwise. I've provided some key levels to watch in the coming week and we'll see how well the bulls can hold the indexes above them.

Good luck and I'll be back with you next Wednesday. In the meantime I hope you all have a very Merry Christmas. Happy Hanukkah as well and enjoy whatever faith you practice during this holy period. Remember the market will always be here but your friends and family will not. Keep your priorities straight as you think about what you'll focus on in the coming year. Work to live, not the other way around, but mostly have fun with whatever you do, starting with a joyous time with friends and family tonight and tomorrow.

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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