Opex weeks have been bullish for so long that it's hard to remember a bearish one but so far that's what we've got. There's still a chance the bulls could rescue this week but they'll need to continue today's late-day bounce to make it happen.

Wednesday's Market Stats

This morning the stock market started off in a big hole that was created after the futures declined significantly during the overnight session, especially after 5:00 AM. What made this odd was that this followed an interim ruling from the European Court of Justice that said the ECB would not be blocked from using their Outright Monetary Transactions (OMT) program. It should actually be called the "OMG, they can just create money out of thin air" program.

With Mario Draghi given the green light to do "whatever it takes" I was surprised we weren't looking at a +25 gap up for SPX instead of a -25. The ECB said the ruling is "an important milestone" and that their program is "ready and available." The next meeting for the ECB is January 22nd and Draghi could finally launch a more significant QE effort. But surprisingly, with more jawboning and a court decision providing a green light for QE, the stock market tanked. Instead of rallying strong, as has been the normal reaction to such news, it leaves us wondering if good news is already baked into the cake. Selling good news is clearly a change in character for the market, which joins several changing signals now.

Following this news the value of the euro initially spiked down early this morning and dropped to 1.1726 and is now very close to testing its November 2005 low at 1.1642. When the euro first started trading against the U.S. dollar it traded at 1.1747 so this is a psychologically important level for the euro, which closed today at . From a technical perspective there is strong price-level S/R near 1.20 so this month's breakdown is potentially very important.

The U.S. dollar initially spiked back up during the overnight session but then tanked at 8:30 AM, as did equity futures. The retail sales report at 8:30 was the culprit since it came in weaker than expected and was negative. Sales dropped -0.9% in December and November's sales was revised lower to +0.4% from the previously reported +0.7%. Expectations for December were +0.1% but even small-growth expectations were not met and instead it was negative growth.

One of the causes for weaker sales was poor income growth. As reported last week, average hourly earnings for December declined -0.2% vs. November's +0.2%, which had been revised lower from the initially reported +0.4%. So the slower-than-expected earnings growth is now showing up in weaker retail sales. Who woulda thunk?

Lower gasoline sales gets the credit/blame for lower retail sales but many economists assumed the lower costs at the pump would prompt more buying elsewhere. Apparently consumers didn't get the memo and they're not doing their patriotic duty by spending more. Many thought consumers would dip into savings and/or increase their use of credit during December, neither of which happened.

Another area that saw a big dip in spending was building materials, down -1.9%, an indication the housing market is slowing down. This follows yesterday's earnings report from KB Homes (KBH) and CEO Jeffrey Mezger's warning in the conference call that their margins are shrinking. Gross margins dropped 30 basis points to 18.7% in their 4th quarter and they're expected to shrink further. Apparently higher sales incentives to compensate for weaker demand, combined with higher material and labor costs, are eating into their profits. The stock lost -16% yesterday, which pulled the home builder index lower as other home builders tanked in reaction to KBH's report.

Not helping the European or U.S. markets was a forecast from the World Bank that predicted slower global growth rates. They lowered their growth forecast from +3.4% down to 3.0%. The high stock valuations are coming under increased pressure as investors start to get more and more data showing the economies are slowing. Deflation fears are also depressing stock prices (asset prices decline in a deflationary period).

Another change in character for the market is what's happening this opex week, a typically bullish time for the market. One common pattern in the past was for the Thursday prior to opex to be down, especially in the morning, and then start the buying with some buy programs that triggers short covering and the buying continues through opex. That didn't happen this time. Another recent pattern, which was seen at the October and December v-bottom reversals, is for a selloff on Monday and Tuesday and a low Wednesday morning. The lows set a bear trap that was then followed by a strong rally into Friday. We even had the same VIX and TRIN setups seen in October and December but it didn't work today. It's another sign that the market has changed.

But first the bears have to fight the Trader's Almanac, which has some very bullish statistics for the coming year, including:

-- the 3rd year in a presidential cycle has produced zero losers in past 76 years
-- the year ending in '5' has been down only one time in the past 130 years
-- there have been only 3 prior times SPX has been up double digits 3 years in a row and each time the 4th year was up more than +20%

Oftentimes this becomes a self-fulfilling prophecy with traders believing, and buying, into the idea that it's a can't-lose market, especially with a Fed that's backstopping the market. We've got a long way to go before we'll know if the bullish records will hold but there is one record that the market might find difficult to break.

The chart below is from BusinessInsider.com and it was put together by Robert Shiller. It shows the period from 1874 to 2014 and the number of consecutive years the S&P 500 was positive. The only time it hit 6 years running was back in 1898-1903, whereas all other previous bull markets maxed out at 5 years except currently. The rally from 2009 will be 6 years old in March (some indexes hit their 6th year in November from their November 2008 lows, such as the SOX and NDX) so another positive year would break the record. It's not that it can't be done but what are the odds? A 6-year rally is by definition from this chart very overbought and that helps explain the -18% decline following the last time the market was up 6 years in a row.

SPX consecutive positive years, 1874-2014, chart courtesy Robert Shiller

Some recent warning signs for the market include:

-- The VIX has climbed more than 50% in the last month
-- There was no Santa Claus rally for the first time since 2008
-- The financial sector is acting especially weak and is typically a good canary sector
-- as goes the first 4 trading days of January so goes the month and as goes January so goes the year

But there's one relatively strong sector, the small caps, which hints of more bullishness and that means the bears cannot get complacent here just because there's been no Santa Claus rally and January is looking so weak. The U.S. has been outperforming most of the rest of the global economies and we could see a relatively strong earnings season that gets traders excited enough to reenter the market and drive the indexes to new highs. Unfortunately the charts are at one of those inflection points and could go either way but one good thing for traders is that the next move (one that lasts for at least a couple of weeks) will likely be a strong one.

Our job is to try to figure out early which way the market's next big move is likely to be so that we can get in front of it (or at least in front of most of it). For that we naturally go to the charts. Starting with the SPX weekly chart, you can see that this week's decline has SPX again breaking its uptrend line from October-December, currently near 2047 and near its 50-day MA. Monday's break below that level was the 2nd break, which increases the odds that the breakdown will hold. At the moment it's trying to hold price-level support near 2010 but if that doesn't hold then the 50-week MA, down near 1949, or its trend line along the highs from April 2010 - May 2011 (bold green line), near 1920, could be the downside targets in the coming days.

S&P 500, SPX, Weekly chart

Because the market is at an inflection point there are several paths the market could take from here and none of them jump out yelling "pick me, pick me!" Consequently my daily chart below is a little busy with the multiple possible paths from here. The more immediately bearish path says the market will continue lower into the end of the month an possibly bottom out near 1870 before setting up a larger bounce correction. Or we could get a sharp rally back up to just above last Friday's high at 2064, followed by a strong decline. Or we could get another rally leg up to new all-time highs. So it's a case of "it could go up or it might go down and if it does neither of those then it will go sideways." The sideways chop and whipsaws has been either a great trading opportunity or a nightmare for traders, depending on how you played it. Many smart traders simply stayed on the sidelines while waiting for the next direction to establish itself.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 2072
- bearish below 1963

The 60-min chart below shows a bullish sideways triangle that I had been following but it was negated with today's low that broke below the January 6th low. There's one more bullish wave count that calls for one more new high but it's a real stretch. At this point I do not believe we'll see any more new highs but we could certainly get a high bounce, which is what I'm showing for the coming week. It would finish a 2nd wave correction to the 1st wave decline from December 29th to January 6th and a new high for the bounce would likely get a lot of traders feeling bullish. But the bearish potential with the pattern is that a new bounce high could turn into a bull trap and lead to a strong 3rd wave decline. If this afternoon's small bounce is followed by a drop lower on Thursday we could see SPX drop down to its December low, near 1972, or its uptrend line from March 2009 - October 2011, near 1965 (log price scale). That's also where the 200-dma is currently located.

S&P 500, SPX, 60-min chart

It's the same picture for the DOW as for SPX. The sideways triangle technically was broken today but with only a throw-under it could still be a viable pattern, in which case we're looking for a new rally leg to a new high. Upside targets would be to the trend line along the highs in 2014, near 18300 by the end of the month, or up to the top of a parallel up-channel for the rally from October 2011, near 18600 by early February. The short-term bullish pattern calls for a sharp rally but only marginally higher than the December 26th high at 18103 before dropping sharply lower. The bears would be in better shape with the DOW below 17075, which is where the decline from December 26th would have two equal legs down, and then below its 200-dma, which is nearing 17000.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 18,000
- bearish below 17,075

NDX has also been chopping sideways in a descending triangle and is still inside it. As a bullish continuation pattern in this location (following the October-December rally) it's very possible we'll get a new rally leg out of the pattern. An a-b-c bounce off the January 6th low that achieves two equal legs up points to 4272, which would also be a 78.6% retracement of the December 26 - January 6 decline so it would be more bullish above that level but still potentially bearish if the December 26th high was THE high.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4272
- bearish below 4089

The RUT has been a different pattern than the others and has been relatively strong, which is bullish. But today was bearish because it again closed below its 50-dma, which it held on a closing basis on Monday and Tuesday, and it closed below its uptrend line from October-December. Worse, it bounced back up near the broken uptrend line today and could leave a bearish kiss goodbye if it sells off tomorrow. The uptrend line will be near 1181 Thursday morning and the 50-dma will be near 1179 so that's resistance until proven otherwise. If, like the other indexes, the market ramps back up to finish a larger 3-wave bounce off the January 6th lows we could see the RUT reach at least 1207 for two equal legs up. That level is also the 78.6% retracement of the December 31 - January 6 decline so it would be more bullish above that level and especially above the trend line along the highs from March-July, currently near 1216.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1217
- bearish below 1150

I mentioned earlier that a bearish signal for the market is the big jump up in the VIX in the past month. With more traders looking to protect their portfolios and/or speculate on the short side of the market, it says traders are not feeling as bullish about the market as they were. But the VIX has now made it up to a downtrend line from October-December, poking above it and then closing on it (mirroring what SPX did with its uptrend line from October-December today, except SPX was able to close above its line). The setup here is for a pullback in the VIX, which would be supportive of a market bounce.

Volatility index, VIX, Daily chart

Bonds continued their rally today, although they started to pull back after this morning's spike up. This week's decline in yields has TYX (30-year) testing a trend line along the lows from December 2008 - July 2012. It is marginally below both those lows but the trend line could offer support. Bearishly, TYX has dropped out the bottom of a parallel down-channel for its decline from December 2013 and that could lead to an acceleration lower. The bottom of the channel is near 2.53 so a rally back above that level would at least negate the short-term bearish picture based on this down-channel. A drop below today's low at 2.395 would continue to support the idea that TYX will be heading for 2% this year.

30-year Yield, TYX, Weekly chart

With Treasury yields declining there seems to be an interest in going for the yield on junk bonds, reflected in the price of HYG holding up better than the stock market. As a measure of risk-on/risk-off this is one thing that's not bearish at the moment. The divergence between HYG and the stock market could be a bullish heads up for the stock market so bears should watch this one carefully.

On the other side of the bull/bear coin is the banking sector. Bank stocks have been much weaker than the broader indexes and BKX was one of the first to break below the January 6th low, giving us a heads up that the others would follow. Back in October it had broken its uptrend line from March 2009 - October 2011 but only on an intraday basis (October 15 and 16). This time the break has been followed by lower lows and 3 days below the trend line, which makes it an official break. This is obviously an important trend line, one that defines the 2009-2014 bull market, and this says it's now over. But BKX has now dropped down to price-level support at about 66-67, with today's low at 66.48. It could be good for a bounce and maybe even back up to its broken uptrend line, near 70.50. That would be a good setup for a reversal back down but will need to be evaluated if and when it gets there. A drop below 66 would be more immediately bearish.

KBW Bank index, BKX, Weekly chart

The TRAN is presenting us with a bearish picture. It left a bearish non-confirmation at the December highs when the DOW made a new high but not matched by the TRAN. The TRAN then dropped sharply below its 20- and 50-dma's, currently near 8959 and 8994, resp., bounced back up to them last Friday and then sold off, leaving a back-test followed by a bearish kiss goodbye. This chart has SELL written all over it.

Transportation Index, TRAN, Daily chart

There's not much of a change to the U.S. dollar's weekly chart shown last week. It has stalled at 92.46 (last week's high was 92.76 and this week's high so far is 92.63), which is the projection for where the extended 5th wave in the rally from last May is equal to the 1st through 3rd waves. Only slightly higher is the top of its parallel up-channel for its rally from April 2008, currently near 93.30. It continues to be a good setup for at least a pullback and as I'll show later, the commodity index looks ready for at least a decent bounce.

U.S. Dollar contract, DX, Weekly chart

There's a lot of clamoring for a gold bottom as multiple market pundits pound the table about what a great buying opportunity we have for gold. When they start pounding the table that gold is worthless piece of shiny metal then I'll be interested in listening to them and doing the opposite. I still don't see a buying opportunity in gold. A trading opportunity maybe but I think we've got lower prices still coming.

If gold can break its downtrend line from October 2012 - July 2014, currently near 1238 (it's trying), I can see the potential for a rally up to a price projection at 1275.90 (two equal legs for the bounce off the November low). A little below that level, near 1271 by the end of the month, it would run into a downtrend line from March-July 2014, which would coincide with the top of an up-channel for the bounce from November. But the bounce has been very choppy and therefore I'm interpreting it as a correction to the decline and not something more bullish. As shown on the weekly chart below, a downside projection near 1000 by mid-year would be a better setup for the first opportunity to evaluate a longer-term buy setup. But we could see gold continue to work its way lower all year and finish near 890 (62% retracement of its 2001-2011 rally).

Gold continuous contract, GC, Weekly chart

Yesterday oil reached the support zone I've been looking for, near 44, and got a nice bounce off the low at 44.20. For the big move down from 2008, the 2nd leg of the decline started from the May 2011 high and it is 62% of the 1st leg down at 44.43, which I've noted on the weekly chart below. There's also the uptrend line from 1998-2008 offering support near 47.25, which was broken intraweek last week and this week but is holding so far. The setup is for a bounce off support but what's not clear yet is whether it will be a strong bounce, following a 3-wave move down from May 2011, or just a sideways choppy mess for several month as it hammers out a 4th wave correction in the decline from August 2013. I lean toward the latter interpretation so I'm expecting a bounce but I think it will be an ugly trading environment. Maybe sell some puts on USO.

Oil continuous contract, CL, Weekly chart

Last week I showed oil's daily chart to show why I liked the $44 area. In addition to the Fib and trendline support mentioned above, the shorter-term pattern for the wave count pointed to 43.63-44.42 for a downside target. This was based on the 5th wave in the move down from last June being equal to the 1st through 3rd waves (at 43.63) and for that 5th wave, which is the leg down from November, its 5th wave equals the 1st wave at 44.42. So there was nice correlation on the daily chart and weekly chart to suggest the $44 area should be strong support and now the size of the bounce suggests we could have a tradeable bottom.

Oil continuous contract, CL, Daily chart

Looking at the commodity index (DJUBS), today saw a relatively strong reversal off this morning's gap down, leaving an outside day for a key reversal. This came at the same time it was testing price-level support at 101.48 (the February 2009 low), with a low at 99.95 and a close at 102.35. The leg down from last April can be viewed as a completed 5-wave move and therefore sets it up for a larger bounce correction (if not something more bullish). One repeating pattern I've noticed with this index since its 2008-2009 decline is that each leg down was followed by approximately a 50% retracement of the decline before starting back down, which is shown on the weekly chart below. A similar 50% retracement, if all we're going to get is a bounce correction, points to 119.19 for a target. That level coincides with a back-test of its broken uptrend line from February 1999 - February 2009 and a trend line along the lows from 2012-2013. A rally above that level would therefore be considered more bullish but at least in the short term (the next few months) this is looking like a bullish setup for commodities, especially if it can back up inside the down-channel from September 2012, the bottom of which is currently near 103.30 (to leave a head-fake break below it).

Bloomberg Commodity index, DJUBS, Weekly chart

Tomorrow's economic reports include the unemployment claims and more importantly, the PPI data, which is expected to show a decline of -0.4% (deflation?) while the core PPI is expected to show +0.1%. The Empire Manufacturing index at 8:30 AM and then the Philly Fed at 10:00 AM will shed more light on how our economy is doing.

Economic reports and Summary

Using the January barometer, the weak start to the month is not good news for bulls. But we still have 11 trading days before the month will finish and with this wild market that could mean anything. The volatile price swings since the early-December highs has hammered out a sideways consolidation and it will likely lead to a strong move one way or the other. Which way is a bit of a coin toss at the moment but it should be noted that major tops have been put in with this kind of price action in the past.

Because so many expect a strong year this year (many past patterns point to a bullish 2015) we're seeing strong buying of the dips (helped with short covering) but we're also seeing many selling into rallies, such as yesterday's gap up that was immediately sold into. So there's a real battle going on and whichever side ends up being on the wrong side will help propel the winning side in a strong move. While I see the potential for a strong bounce to a minor new high above last Friday's highs, I'll be viewing it as a shorting opportunity (using relatively tight stop management) but there is the risk that the big bounces are over and we'll see a strong decline in the coming week. It's a risky time for swing traders and only the nimble who can watch the market during the day should be in there trying to trade this thing. Wait for a direction to become clearer to lessen the risk of a bad entry. This time next week should provide more answers.

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