Up and down, down and up -- the past 12 trading days has left the market where it was in mid-February and the choppy price could continue for at least another day (to get through Friday's NFP report). But the market looks like it's setting up for a big move.

Wednesday's Market Stats

Traders have been whipped around for the past two trading weeks and it hasn't stopped this week. SPX finished today a point off where it was on February 13th and the question here is whether the price consolidation is a bullish continuation pattern or is instead a topping pattern. As always, an argument can be made for either case as to what the market will do in the coming week. The bigger question is what kind of pullback/decline will follow the current rally (even if the rally will extend another week or so).

The market has been reacting to what the Fed thinks, or at least to what the market thinks the Fed thinks. And then of course what the market thought the Fed said vs. what they think can lead to confusion about what was actually said vs. what was inferred and that can then lead to all kinds of erroneous conclusions about what the Fed is going to do next, which then gets traders looking for a train from one direction while they get slammed from the one they didn't see coming from the other direction. Confused? Welcome to the club.

The list of economic misses is significant, with each one showing a continuing sign of economic slowing. Yet when you look at the stock market you would think the economy is humming along nicely. After all that's what the Fed believes so it must be true. Of course you know the real way to tell if the Fed or politicians are lying to us -- it's when their lips are moving. To say the stock market is totally and completely disconnected from the economy and reality is a gross understatement. The only takeaway from this situation is to recognize that the disconnect cannot and will not stay that way and when they start to reconnect it will be either the economy improving (not happening) or the stock market will decline. And the reconnect usually happens very quickly once the mood of the market changes. What that trigger will be is anyone's guess and the bears know better than anyone that it's taking a really long time.

As for the latest economic reports, the ADP Employment Change for February was a little less than expected, coming in a 212K vs. 220K and a drop from the upwardly revised 250K (from 213K) for January. There's wasn't enough of a change to suggest how Friday's NFP report will look, which is expected to show a gain of 240K following January's 257K.

The ISM Non-Manufacturing (Services) number for February ticked up to 56.9 from 56.7 in January, which is the 61st straight month of growth (above 50). There tends to be very little volatility in this index and therefore very few surprises. Hence the market tends to ignore it.

The Fed's Beige Book was released this afternoon and the statements about the economy were general positive. What's interesting is that the Fed stated the economy was growing at a moderate pace with steady manufacturing and employment gains. I guess they have different metrics than most of the rest of us follow. But regardless, as mentioned above, the market has been ignoring all the signs of slowing in the economy, as can be seen on the list of reports below and which ones were below expectations (most) and which ones exceeded expectations (a few).

February U.S. Economic Results, table courtesy Bloomberg via zerohedge.com

Monday was a positive day for the market, which many have come to expect since it was the first trading day of the month. But interestingly, that pattern is actually not holding any more. Betting on the long side just because it's the first day of the month hasn't worked in a while. Rob Hanna, from QuantifiableEdges.com, showed two interesting charts to highlight the change in behavior of the 1st trading day of the month. It has been generally accepted that the reason for first-day bullishness is because of new investment money (paycheck distributions, retirement accounts, etc.) being put to work. A trading technique had been developed around it where you buy the close of the last trading day of the month and you sell at the close of the first trading of the new month. This was a very winning strategy, as can be seen on Hanna's chart below.

SPX results for 1st trading day of month, 2000-2010, chart courtesy QuantifiableEdges.com

First thing to point out here is that the period covered above is 2000-2010 and the blue line shows a net gain of 419.81 points trading just the first day of the month. But if you were out of the market on the 1st trading day and in on all the other trading days (red line) you would have suffered a loss of 631.42 points. That's a 1050-point spread between the two! It's no wonder this idea of bullish first days became so well known. And this was during a period where the market experienced some significant declines

But look what has happened in the period 2011 through February 2015, shown on the chart below. The blue line at the bottom shows a loss of 18.66 points over the past 4 years if you had traded this same strategy. And this was during the time of a raging bull market -- being invested all the other days except the first trading day of the month netted you 871.76 points, a spread of about 900 points against the idea of a bullish first trading day. It's a perfect example of once something is known about the market it stops working, and it's also why many historical patterns, such as those in Trader's Almanac, are not necessarily reliable.

SPX results for 1st trading day of month, 2010-February 2015, chart courtesy QuantifiableEdges.com

Now the big question is what this might mean during the next bear market. If the 1st day of the month has struggled during one of the strongest bull markets we've seen, what will it do during a bear market? There is of course no way to know but at least the takeaway here is that you should not enter the new month feeling bullish based a pattern that is clearly no longer working (even if it did work this past Monday).

I'll start tonight's chart review with a weekly chart of THE market, the Wilshire 5000 index, which has been warning bulls that to expect much more of a rally might not be the best bet. There's always the possibility for more rally (this market has proven that over and over again) but when up against a trend line while overbought and overloved (high bullish sentiment) it's generally best to take at least a cautionary approach to the long side. Bears have been required to be extremely cautious but the W5000 is telling us the bears might have the better trade here.

Following a series of 1st and 2nd waves in the rally off the October 2011 low the wave count has been "unwinding" with a series of 4th and 5th waves since the July 2014 high. The trend line along the highs since last July is where the rally stopped last week. One of the things to look for with 5th waves is negative divergence and that's what we see with the higher price highs but lower MACD and RSI highs. This helps confirm the wave count and the rally from February 2nd should be the final 5th wave to complete the rally from October 2011 (which in turn completes a large A-B-C correction off the March 2009 low). The final 5th wave would be 62% of the first 1st wave at 22383, which is shown on the chart. The February 25th high missed that projection by 14 points with a high at 22369. There's still more upside potential to the trend line along the highs since April 2012, near 23700, so a break above last week's high should be taken seriously by the bears.

Wilshire 5000 index, W5000, Weekly chart

The daily chart of the W5000 shows the rollover from the trend line along the highs since last July. It bounced off its 20-dma this morning, near 22061 today, which shows traders are still buying dips to support. Only time will tell us whether or not buying the dips is still the right way to go or if instead we've had a trend change and selling the bounces is the way to go. To keep it relatively simple here, I think it would be bullish above last week's high at 22369 and bearish below 22000.

Wilshire 5000 index, W5000, Daily chart

Key Levels for W5000:
- bullish above 22370
- bearish below 22000

One chart I've shown before is the W5000 compared to new 52-week highs and the number of advancing stocks minus declining stocks. The middle chart shows the decline in the number of new 52-week highs since the peak in October 2014. The 10-dma of the advance-decline smoothes out the daily wild swings and shows a coinciding decline with the number of new 52-week highs. The rally since last October has been on the backs of fewer and fewer stocks and this is another sign of the endgame. Bull markets see this kind of deterioration at the end, not at the beginning of the next major bull leg, which many pundits are calling for. This could turn around but at the moment it's another warning sign.

W5000 vs. New 52-week Highs and Advancing-Declining Issues, daily chart

The daily chart for SPX looks very similar to W5000 and the two track each other very closely, which adds confidence to using SPX as a good proxy for the stock market. Its trend line along the highs from July-December 2014, like that for the W5000, has not been reached yet and I've been keeping it on my radar as far as upside potential. That trend line, which is very close to the longer-term trend line along the highs since April 2010, is currently near 2134. SPX also bounced off its 20-dma today and many traders will use that MA to help define the intermediate-term trend. It will be near price-level support at 2093 (its December 29th high) and therefore the bulls would be in more trouble with a close below that level (for more than a day). It stays bullish above 2093.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- stay bullish above 2093
- bearish below 2064

The short-term pattern since last week's high is not clear enough yet to help determine the next move from here. Based on a 5-wave move up from February 2nd, labeled in red, I could make the argument that the rolling top appearance over the past two weeks, the bearish divergence and the break below price-level support at 2102 all support the idea that an important top is already in place. But I could also argue the idea that today's low was the completion of the 4th wave in the rally from February 2nd and we still need a 5th wave, which is shown in green. A price projection shown at 2144 is where the 5th wave would equal 62% of the 1st wave (which would be expected since the green 3rd wave is shorter than the 1st wave. A rally up to that level would also coincide with a test of its trend line along the highs from last July-December. Better confirmation for the bears would be a drop below the 1st wave high (February 6) near 2072.

S&P 500, SPX, 60-min chart

Like SPX, the DOW has more upside potential if it's to make it up to its trend line along the highs from December 2013 - December 2014, near 18390 by the end of the week. Above 18100 the DOW stays bullish but below 18K would turn it more bearish since it would be a break of trend line, price-level and 20-dma support.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- stay bullish above 18,100
- bearish below 18,000

The DOW's 30-min chart below is being used to show how the market could be at an important juncture right here. From a bullish perspective, the pullback from Monday is an a-b-c correction and it will be followed by another rally. But this rally needs to get started immediately Thursday morning or else it could turn uglier for bulls. The bearish wave count for the move down from Monday is a 1-2, 1-2 setup and that calls for a 3rd of a 3rd wave down, something that would likely drop the DOW to the 17800 area on Thursday and then stair-step lower from there into Friday (to then set up a bounce correction next week). This bearish 1-2, 1-2 potential exists for all of the major indexes. Note the close below its December 26th high at 18103 -- it's only by 6 points but it should make bulls a little nervous here. If the market immediately drops Thursday morning we could see some strong selling kick in, otherwise the bears need to give the bullish potential some respect, especially if the bounce continues immediately out of the gate and makes it back above Tuesday afternoon's high, which would leave a confirmed a-b-c pullback (so bullish above 18215).

Dow Industrials, INDU, 30-min chart

As with the other indexes, the NDX shows some more upside potential if it's going to make it up to its trend line along the highs from March-November 2014, near 4590 by the end of the week. As I've shown on its daily chart below, there's a price projection based on the width of its previous descending triangle (December-January) at 4520. But the bulls better get back to buying soon otherwise a rollover from here could leave a completed 5th wave at Monday's high near 4484.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- stay bullish above 4420
- bearish below 4270

Like the W5000, the RUT has rolled over after a minor poke above its trend line along the highs from last September-December. The daily oscillators have turned down and it's looking a little more bearish than bullish here. But the bottom of a small parallel up-channel for the part of the rally following the first leg up from February 2nd is aligned with the 20-dma, near 1222 today. It would therefore be more bearish below that level but it stays bullish above it. There's upside potential to its broken uptrend line form March 2009 - October 2011, near 1270 next week, or maybe only up to the top of its little parallel up-channel, near 1254 by Friday. But for the bullish potential to hold we're going to have to see some stronger buying kick in and soon.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- stay bullish above 1222
- bearish below 1214

I've been keeping an eye on HYG, the High Yield (Junk) bond fund, to watch for clues when it's signaling possible danger for the bulls. This fund is of course a very good risk-on/risk-off indicator and right now it's telling me traders are about to take risk off. The 3-wave bounce off the December 16th low created a rising wedge for the c-wave and price poked above the top of the wedge last week but then failed to hold. It's a classic finish to these rising wedge patterns and the drop below the wedge on Monday, with a further selloff yesterday and today, tells me the A-B-C bounce off the December low has completed. It should now head back down and drop below the December low and I strongly suspect the stock market won't be far behind. This is a good canary index for the stock market and while it doesn't prevent the stock market from still making a new high, it does mean it should not be trusted if HYG is not participating.

High Yield Bond ETF, HYG, Daily chart

Last week the TRAN almost made it above its downtrend line from November 28th, poking slightly above it but then dropping back down. It's holding support at its 50-dma, tested today at 8970, and a shorter-term downtrend line from December 31st, near today's low at 8963. That trend line will be near 8940 by the end of the week and as long as the TRAN can stay above that line it stays potentially bullish for another run higher with the broader market (if the broader market is able to do the same). Bullish above last week's high at 9215 and bearish below 8940.

Transportation Index, TRAN, Daily chart

Last Thursday the U.S. dollar finally busted out of its sideways triangle and it's now looking very good for the final leg (5th wave) to complete the rally from May 2014. Once it completes we should see a multi-month pullback/consolidation before heading higher (bullish case). There is the potential that this rally will complete a larger corrective pattern off its 2008 low and start another bearish decline that will take the dollar below the 2008 low at 71.05. At the moment that's not my preferred wave count but at a minimum we should expect some kind of correction of the rally from last May. The 97.28-97.35 target zone continues to look good for the dollar, with the possibility that it will stretch higher to the 99.20 projection for the 5th wave. Dollar bulls (and any trades around the dollar) should now be moving into a defensive position and a good stop level would be the apex of the sideways triangle (near 94.50) or more conservatively wait for a break below its up-channel, the bottom of which is currently near 92.45.

U.S. Dollar contract, DX, Daily chart

Gold has been struggling to get another bounce started and it might not be able to do it, in which case we should see a drop below its November low at 1130 and on down toward the 1000 level. But there's still the potential for a higher a-b-c bounce off the November low and if it can start the next leg up from here we have an upside projection at 1307 for two equal legs up from November. The first sign of trouble for gold bulls would be another drop below price-level support near 1180.

Gold continuous contract, GC, Weekly chart

Oil was a little volatile today after dropping this morning (following a report of a huge inventory build) but after slightly breaking its 50-dma at 50.04 it took off to the upside. A sharp rally up to 52 keeps alive the potential for another leg up to create a larger 3-wave bounce off its January low. Two equal legs up points to 58.47, which is right at price-level S/R. If reached, which could take another week or two if the choppy price action continues, I think it would be a good setup for a reversal back down since I continue to believe oil will be consolidating for months before heading lower.

Oil continuous contract, CL, Daily chart

Tomorrow's economic reports will not likely be market moving. The Factory Orders at 10:00 AM could have an impact, especially if it shows more slowing than the -0.1% that's expected but this market has been ignoring deteriorating economics for a long time. This will eventually catch up with the market but not until the fallacy of depending on the Fed is exposed. I mean really, what can the Fed do at this point? They're trapped and soon the market will fully realize it. Friday's NFP report will be the big report for the week, which is expected to show some more slowing but that's OK, it will keep the Fed's finger off the raise-rates button.

Economic reports and Summary

Friday, March 6, is the 6-year anniversary of the current bull market, a streak that is thanks mostly to central bank policies and the massive distortions in asset prices that their interference has created. Many are calling for another year, at least, for the bull market but even if we do get that I seriously doubt it will continue to rally much, if any, from here. At a minimum I think we should be looking for a multi-month pullback and March has been an important turn month in the past. Just since the March 2000 high we've had a March 2001 low, March 2002 high, March 2003 low, March 2004 high, March 2005 high, skip 2006, March 2007 pullback low, March 2008 low, March 2009 low, skip 2010, March 2011 pullback low, March 2012 high, skip 2013 and 2014, and now we're sitting at a high in March 2015. It can always go higher but with the kind of reputation March has for reversing trends I'm not so sure I'd want to fight it.

When you consider how weak this rally has become over the past several months and how bullish the sentiment is and the fact that margin debt is at record highs, I think the market is ripe for more than just a pullback. The EW count also provides a reason to believe we're going to get more than just a pullback. It's a matter of identifying the top, whether here or a little higher, but in any case I think upside potential is dwarfed by downside risk and I think your trade/investment positions would do well to heed the warning that the market's technical indicators are showing us right now. Even the canary index, the HYG, is telling bulls to pull their stops up tight now since the downside could get a little rough.

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