The stock market rallied off a brief low this morning and bounced into this afternoon's release of the FOMC minutes, which then spooked the market and it sold off sharply and broke this morning's lows. The bond market sold off all day in anticipation of a possible June rate hike.

Today's Market Stats

The market did not care about much today while it waited for the release of the FOMC minutes from last month's meeting and it appeared some were buying/covering shorts as the day progressed. But the bond market was selling off, driving yields back up, and that was a clue that the Fed's minutes could indicate a higher willingness to raise rates in June than had been verbally communicated to us last month. The Fed heads did in fact call for a June rate hike if the data continued to support it and recently we've seen some supporting data. Some recent economic improvements and higher-than-expected inflation data is prompting more to believe the Fed will take the opportunity to raise rates sooner rather than later so that they can "normalize" rates as soon as possible.

After the release of the minutes, at 14:00, Fed funds futures jumped to a 27% chance of a June rate hike (hardly what one would consider "locked in"), a rise from 16% before the minutes. Last week the futures indicated only a 4% chance so there's certainly been an increase in the expectation of a rate hike in the past week. Data into next week could reverse that so one week's data does not give us a trend that will necessarily hold into June's meeting.

A big challenge for the Fed is how to raise rates without killing the economy, which is already on life support. They've been pushing for years for people and businesses to borrow more money and spend it and many of these loans have rates tied to the 10-year Treasury Note. If they drive those rates higher it could create even more difficulty for all those borrowers. Most companies who have borrowed, usually by selling bonds at very low rates, used the money for stock buybacks. Several analysts attribute the rally from 2009 as almost solely a result of companies jacking up their own stock prices through share buybacks.

According to Yardeni Research, last year alone S&P 500 companies spent almost $1 trillion on buybacks and dividends, which is more than they earned in profits. This is more than they did in 2008-2009, which at the time led to a severe market selloff. These companies didn't invest the money into productive uses but instead spent it on supporting their stock prices. Paying back the borrowed money is becoming increasingly more difficult with reduced earnings and if the Fed raises rates it will cause companies to have to pay more to continue borrowing in order to pay their expenses and loans. This combined with a lack of spending on more stock buybacks will cause a loss of support for stock prices.

When you throw in all the personal debt, especially the auto loans which have reached bubble levels (thanks again to liar loans) and the huge increase in student loans (which can't be paid back because of the lack of good-paying jobs), we're sitting on a powder keg that could blow at any time. Raising rates only exacerbates the problem and yet the Fed wants to get it done so that they can "normalize" the rates. There's nothing normal about this time and that's why I think the Fed is trapped. They'll be damned if they do and damned if they don't.

Frankly the Fed will deserve all the damning coming to them for not knowing what the hell they're doing and only stealing from savers to enrich the rich. When the dam breaks this time, there will be nowhere for the Fed to hide. Unfortunately there will be a lot of pain to spread around but we'll need to get through it in order to get to the other side and back to health and a position from which to grow again (real growth, not the make-believe numbers we're getting now from companies). As traders we have an opportunity not only to protect ourselves but more importantly to make some money in a bear market and be in a position to do some buying at the bottom when most everyone else will have no money to do any buying. In fact, if played right (by being mostly in cash and trading some on the short side) we should have a buying opportunity of a lifetime at the end of the next bear market.

I'm going to start tonight's chart review with a top-down look at S&P 100 (OEX) since the patterns are fairly clean and should provide a good sense of direction with a break in one direction or the other.

S&P 100, OEX, Weekly chart

A few weeks ago I showed a weekly chart of OEX and the idea of a big rolling top pattern. The rally from October 2011, which fits as the c-wave of a big A-B-C bounce off the March 2009 low, started to run out of steam in 2014 and the result has been a slow topping and rollover. It's been 18 months where the market has essentially gone nowhere and the risk is that a decline could start to build up some strength once it does roll over.

We could see the OEX drop back down to price-level support near 810 and the bullish interpretation is that it's consolidating before heading higher. A break above the downtrend line from July 2015, which is where the rally into April stopped, is currently near 936 and it would be a bullish breakout above that level but if the rolling top pattern is correct we'll eventually see a drop below important price-level support near 810 (support since early 2014). The first thing the bulls need to do is hold support at its 50-week MA, near 898, a break of which would be the next sign of the bear.

S&P 100, OEX, Daily chart

The daily chart of OEX shows another support level that was tested with this afternoon's low -- the broken downtrend line from November-December 2015. OEX rallied above the downtrend line at the end of March, chopped around it for two weeks and then rallied up to its April 20th high. It then dropped back down for a back-test on May 6th and now again today. Usually a successful back-test, on May 6th, is not followed by another one so it's now questionable whether or not the downtrend line will hold as support. The next support level is price-level S/R near 895 and the bottom of an up-channel from January-February, near 898, which is also where its 50-week MA is located. Based on these levels the bears want to see OEX below 895 to start some serious selling.

The interesting thing about the up-channel from January is that it calls for another rally leg to complete a 5-wave move up. If the first leg of the rally, into the February 1st high, is the 1st wave, followed by the pullback into February 11th as the 2nd wave, then the February-April rally is the 3rd wave. Drawing a trend line from the 1st wave to the 3rd wave and then attaching a parallel line to the 2nd wave low (February 11th) gives us a parallel up-channel to help guide us. The bottom is often where the 4th wave correction will finish (approximately) and as you can see, OEX is now approaching the bottom of this channel, near 898. If we get another rally leg, for the 5th wave, and it starts from here, it projects up to 962 where it would equal the 1st wave. A lower projection, at 939, is where the 5th wave would equal 62% of the 1st wave and that would also result in a test of the April high and its downtrend line from July-November 2015 (where the rally into April stopped). A rally above its May 10th high, near 925, would indicate a new high/test of the high is coming.

Key Levels for SPX:
- bullish above 925
- bearish below 895

S&P 100, OEX, 120-min chart

Something that's true for most of the major indexes is a H&S top that has formed since the left shoulder in early April. This pattern has been discussed by other analysts and that's actually one of the reasons why it might not "work," but it's something to keep an eye on since many times they do in fact work. The OEX H&S top is shown on its 120-min chart below and the neckline runs from March through the May 6th low, which was broken today but recovered into the close. If the pattern gets follow through to the downside (right now it's not a confirmed break since the neckline is holding as of today's close) the price objective is down near 870. As noted on the chart, we now have 3 steepening downtrend lines since the April 20th high and steepening downtrend lines like this often lead to waterfall declines as the selling accelerates. That's not a prediction but it shows the risk for bulls. Two equal legs down from April 20th points to 890.83 so that's a level of interest if reached and then the next projection for the 2nd leg of the decline from April 20th is near 870, which is where the 2nd leg down from April equals 162% of the 1st leg down. That coincides very closely with the H&S price objective, which I'm sure is purely coincidental (wink).

S&P 500, SPX, Daily chart

SPX looks a lot like OEX, including the possible H&S topping pattern. A break below the neckline, near 2042, could usher in stronger selling. There's also price-level support near 2043 (the 2015 closing high is 2043.62), which has been getting hammered on since the May 6th low. The longer it gets hammered on the weaker it becomes but so far it's still holding, including again today with the bounce into the close, like yesterday. Someone big is supporting this level and it could be opex related (they want to be sure their short puts expire worthless this week). If 2043 does hold and we get another rally it's possible we're seeing a descending triangle playing out since the April high. As explained for OEX, it's possible this triangle is a 4th wave correction in the rally from January and it could lead to a rally to the 2175 area in June. Bears don't want to be caught short in that kind of move. But that means the bounce needs to start now since a further breakdown could lead to a drop to its H&S price objective near 1965 (near the 50% retracement of the February-April rally).

Key Levels for SPX:
- bullish above 2085
- bearish below 2039

Dow Industrials, INDU, Daily chart

The same parallel up-channel idea that was discussed with the OEX and SPX daily charts is shown on the Dow's chart below. The Dow has chopped its way down/over to the bottom of its up-channel, near 17530, which was broken intraday but recovered at the end of the day. It also came within 18 points of testing price-level support at 17400 (its March 24th low). Holding above 17400 keeps it potentially bullish and today's long-legged star doji could be the middle candle of a reversal pattern. A white candle for Thursday would be a bullish completion. However, I'd want to see the Dow above its broken 50-dma, near 16674, before turning bullish. That would also be a break of its downtrend line from May 10th and above today's high, all of which would be a stronger sign for the bulls.

For the bulls, the first upside target would be 18073, where the 5th wave of the rally from January would be 62% of the 1st wave, which would also be a test of its April highs and the top of a larger shallow parallel up-channel from August/September 2015 (bold blue line on the chart). The higher target, at 18478, is where the 5th wave would be equal to the 1st wave. That projection crosses the midline of its up-channel from January on June 2nd.

For the bears, the first downside target, if 17400 breaks, is price-level S/R and its 200-dma, both near 17140. Below that it would likely drop down to the next price-level S/R near 16500. It's an important time for the Dow right now and the bulls really need to step up to the plate. Many times a post-FOMC reaction gets reversed the next day and that's the move the bulls need here.

Key Levels for DOW:
- bullish above 17,935
- bearish below 17,400

Nasdaq Composite index, COMPQ, Daily chart

The Nasdaq is battling its uptrend line from February through the May 6th low, currently near 4750, which it back-tested today after breaking below it yesterday. It also tested, again, its downtrend line from April 20th, now near 4750. Following the sharp bounce off its May 6th low into the May 11th high it's been very choppy, which could indicate we'll get at least another leg up for its bounce pattern. In that case, two equal legs up points to 4832, slightly above the 50% retracement of its decline from April. A little below that level is a nest of MAs, with the 20-dma at 4792 and the 50- and 200-dma's near 4820. Its previous high on May 11th is at 4812 and based on all these I think it would be safe to say the Naz would be bullish above 4820 but until then it's looking vulnerable to more selling. A downside projection is near 4435 where it would test its uptrend line from October 2011 - November 2012.

Key Levels for COMPQ:
- bullish above 4820
- bearish below 4675

Russell-2000, RUT, Daily chart

If the H&S topping pattern is correct for the RUT as well, its neckline was broken yesterday and only back-tested today. Note also that its uptrend line from February through its May 6th low was broken last week and Monday's rally resulted in a back-test of the broken uptrend line, as well as its downtrend line from April 27th. This makes Monday's high near 1120 an important level for the bulls to recover. One thing I'm seeing for the indexes are MACD levels on daily and intraday charts that are below zero and staying below zero during the bounce attempts. This is bearish and as long as the series of lower highs continues to hold (the definition of a downtrend) I'd stay bearish.

Key Levels for RUT:
- bullish above 1129
- bearish below 1101

10-year Yield, TNX, Daily chart

Bonds sold off strong this morning and then spiked lower after the FOMC minutes were released, which spiked yields higher as the bond market adjusts to the potential for a June rate hike. That caused TNX to jump back up near its downtrend line from March 16, which at the moment fits as the top of a sideways triangle consolidation pattern. If it's a bearish continuation pattern, following the decline into the February low, today's rally could be completing the triangle pattern and will be followed by another leg down (perhaps as more information leaks out that a June rate hike is not likely). If the triangle consolidation holds, the top of which is near 1.90%, we could see another trip down to the bottom of it, near 1.71%, before a stronger rally follows. TNX becomes more immediately bullish (bearish for bond prices) above April 26th high at 1.941%, in which case its 200-dma will likely be tested, near the important 2.0%.

KBW Bank index, BKX, Daily chart

Higher yields help banks make a profit and the banks look to be banking on a rate increase from the Fed. BKX rallied +3.8% today that lifted it off 66.50 S/R level where it had been consolidating since May 4th. That could be bullish, pointing to a possible rally to its downtrend line from July-December 2015, currently near 72. But first BKX needs to deal with its 200-dma and 62% retracement of its leg down from November 2015 into the February low, at 69.17 and 69.06, resp. This afternoon's high was 69.13 and it closed at 69.04. Sometimes a correction (a bounce correction in this case) completes on news so it's possible that's what happened today. But obviously it would be more bullish if it can hold above 69.17.

U.S. Dollar contract, DX, Weekly chart

The US$ also got a little extra boost today after the release of the FOMC minutes. It's been rallying since the spike low on May 3rd but stalled at its broken 50-dma since last Friday. This afternoon's pop higher has it now solidly above the 50-dma at 94.72 with its close at 95.19. The top of its down-channel from last December is currently near 96 so that could be the dollar's upside target before a pullback correction. As long as it holds above 92 it should continue to rally up towards 100 into August before it will be ready for another pullback. Reviewing the commodities index it's looking like it's ready for a pullback following its bounce off the January low and that supports the idea that the dollar is going to bounce higher.

Gold continuous contract, GC, Weekly chart

The gold miners typically lead the price of gold and they've been looking vulnerable since GDX reached its broken 200-week MA on May 2nd and today's selloff (-7.9%, the bulk of which occurred following the FOMC minutes) looks like the kickoff to at least a stronger pullback and that will likely mean the same for gold itself. Gold was down only -2.70 (-0.2%) today but in its after-hours session (following its 13:30 close) is when it got it with additional selling and dropped another $21 (-1.6%) to 1256 before getting a little bounce later in the afternoon session. Between its 50-dma and short-term uptrend line from March 28th, both near 1252, and then the top of its parallel down-channel from 2013, near 1243, the bulls have support to help them. But if the selling gold takes it below 1240 there's a good chance we'll get at least a deeper pullback and possibly something more bearish (we'll know more after seeing what kind of pullback/decline develops, assuming we'll get one).

Silver continuous contract, SI, Weekly chart

Silver's parallel down-channel from 2013 is similar to gold's except that the top of the channel has held silver's rally down. It had a minor break above the top of the channel into its May 2nd high but then dropped back into the channel the following week. The top of the channel is currently near 17.45 and this morning's high was 17.19. Like gold, it spiked down following the FOMC minutes (as the dollar spiked up) and it looks like it's starting at least a deeper pullback. If it does rally higher, the next upside target would be its 200-week MA, currently at 20.53. But the longer-term bearish wave pattern suggests silver, and gold, have new lows ahead of them before we'll see a better buying opportunity. There are still too many people recommending gold and silver as a good investment, which I also think is true (for when fiat currencies collapse) but I think we have time to start accumulating the alternate currency at lower prices. That opinion will be updated of course as the price pattern dictates.

Oil continuous contract, CL, Daily chart

The daily chart of oil below gives me a strong impression that we're looking at an A-B-C bounce off the January low and that it will be followed by a drop below that low, potentially down to the $20 area. Two equal legs up from January points to 50.95, which would be a test of its October 2015 high at 50.92. For the c-wave, which is the leg up from April 5th, it's now a 5-wave move and can be considered complete at any time. But if the 5th wave is to achieve equality with the 1st wave, that points to 50.21. The top of a rising wedge pattern will be at 50.21-50.95 between this Friday and May 26th. With those upside projections, trend line and October 2015 high, we could easily see another push higher following the small pullback from today's high (it also spiked down after the release of the FOMC minutes) but at this point I think oil is vulnerable to a reversal back down at any time.

Economic reports

Tomorrow we'll get a couple more economic indications from the Philly Fed, before the opening bell, and Leading Indicators after the bell. But I think they'll be secondary to whatever post-FOMC reaction we get in the morning.


Typically when economic indicators show an improving economy and inflation ticks higher the stock market rallies in anticipation of improved earnings. However, in our bizarro world, better economic conditions will mean higher Fed rates (or more importantly, a less accommodative Fed) and that scares the stock market. Granted, these indications are only this week and it's questionable whether the past week's trend will continue. I think it's more likely we'll see a reversal back to the continuation of deteriorating economic indications and more signs of deflation than inflation. The Fed has made it very clear they want to start "normalizing" rates and want desperately to raise rates so that they have some wiggle room to lower them again when we drop into a recession.

If the Fed does raise rates in June I suspect it will be well timed with a reversal in the economy and the Fed will get the blame. Couldn't happen to a nicer bunch of Ph.D. banksters. The economy is deteriorating and deflation is still the greater problem (or it certainly will be when loans start defaulting in greater numbers) and the Fed has very little to fight that trend. They're playing with weekly numbers when trying to manage a years-long development. And the markets continue to knee-jerk react to every little word change from them. This could go on for longer than most of us traders wish but it's the hand we've been dealt.

Short term, an afternoon reaction to FOMC minutes/meetings is often reversed the next day and that means we could see at least a morning rally. The last 3 days we've seen morning rallies get sold as it appears big money is propping the market up in order to sell into it. The volume pattern supports this idea so a morning rally tomorrow might not develop legs. And if there is no rally attempt it would be immediately bearish since some important support levels will start breaking. It's a choppy market and we're finishing up opex week, which has been weaker than usual so it's possible we'll get a stronger squirt to the upside on Thursday to protect all those short puts. The upside looks riskier than the downside but with the whippy moves it's been hard for both sides to stay in a trade. Stay safe through the rest of the week.

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