Most indexes have been able to push to at least minor new highs this week but they're doing so with waning momentum (as evidenced by lower highs in momentum oscillators) and today's pullback has the potential to develop into something more bearish. But the bulls still have the opportunity to add more points, especially as we head into opex week.

Today's Market Stats

As will be evident in many of the charts shown tonight, the new highs last Friday and into the early part of this week looks bullish but with trading volume at lows not seen for the past couple of years and waning momentum for the rally we have a market that simply looks tired following a strong rally from June. There could be enough money to keep the bears away (the selling pressure has been minimal, although a little stronger today) but we're not seeing the kind of volume the bulls would like to see with a breakout to new price highs. That's a warning sign.

SPY traded 39M shares on Monday, which was the lowest full-day volume for the past couple of years and it was less than half the 50-dma for volume. Traders are simply disappearing from the market and one must wonder where the buying horsepower is going to come from. That's of course a silly question because we know who our Sugar Daddy is.

Part of the problem with attracting more buyers is that more traders are starting to understand better that the fundamentals for the market rally stink. With the earnings season for Q2 winding down, it has turned out to be another disappointing one and the projections for Q3 are no better. Earnings growth for Q2 2016 is shaping up to be about -3.5%, which will be the 5th straight quarter of year-over-year declines and the longest streak since the financial crisis.

With all the reports about how many companies "beat" their earnings expectations you would think it was a good season. But this is how the communication to traders is manipulated so as to keep it looking positive. Most retail traders catch the headlines and the intent by Wall Street is to keep retail traders feeling bullish.

Companies have been consistently revising their earnings projections downward and making sure the Wall Street analysts get this information as early as possible. That way the earnings expectations by the analysts are known before the companies announce the actual results and voila!, the company manages to beat expectations by a penny, joining the many companies beating their (lowered) estimates. Amazing performance, or so the average retail trader believes. It's important to remember the goal of politicians, the Fed and Wall Street is to keep people feeling good about the economy and the stock market because when the mood changes it will have a huge negative impact on both.

As the stock market continues to march higher, as earnings decline, the P/E ratio continues to climb into nosebleed territory, which of course puts us back into bubble territory. Goldman Sachs reports a forward P/E of 18.2, which ranks it in the "98th percentile since 1976." When the P/E ratio has climbed this high in the past it has historically led to subpar (negative) performance for the stock market over the next several years.

As of last Friday sellside analysts now project Q3 earnings to be down -1.7% and these estimates typically get downgraded as the quarter develops (due to companies start downgrading their estimates early in the quarter and feed that info to the analysts). That would make it six quarters in a row with negative year-over-year earnings. According to Factset, "year-over-year earnings are now set to decline -0.3% for the full year, after starting the year at +6%. This would mark the second time the S&P has reported 2 consecutive years of earnings decline since 2008 and 2009." But this time the market is pressing to new all-time highs instead of hitting significant lows. That's a real disconnect between stock market prices and company performance and the resulting high P/E ratio. Eventually the market will correct and my concern is that the market is sitting on top of a huge air pocket with nothing underneath to support it.

The chart below highlights the problem with forward guidance, which has been regularly downgraded as the quarter develops. The chart shows how earnings estimates have changed since March 2015 and how forward estimates have changed since January. As stated on the chart, hope springs eternal with high estimates at the beginning of each quarter and then drops significantly as the quarter develops. And then at the end the companies manage to beat their lowered expectations and everyone is happy. The coming correction to this Bizarro World is likely to be a painful one.

Forward Estimates, 2014 through Q4 2016, chart courtesy

I'll start tonight's chart review with a look at the granddaddy of the indexes, the Wilshire 5000 (which I just read actually has a little more than 3600 stocks) and then as you'll see, SPX looks very similar and remains a good proxy for the broader market.

Wilshire 5000 index, W5000, Weekly chart
W5000 rallied up to and slightly above its May 2015 high at 22537, which like the other indexes, has many feeling very bullish about the market. But I think the overshoot of resistance at that level will hold on a monthly closing basis. Last week's hanging man doji at resistance could lead to a red candle for this week and that would leave a reversal signal. We don't have that yet so it's just speculation but something I'm watching for.

The bullish pattern is very bullish -- it's looking for a pullback to correct the rally from June 27th and then a screaming rally from there in a 3rd of a 3rd wave. It's the kind of move that would take W5000 well above 25K before the end of this year and up to the 30K area next year. Call me a Doubting Thomas on that one but it's what the bullish pattern supports. The bearish pattern says the May 2015 high was the completion of the rally from 2009 and this month's slight new high is only part of a corrective pattern that is the start of the next cyclical bear within the larger secular bear. It calls for a sharp decline below the February low (18462) before the end of the year. There's a good chance we're going to have a much more volatile market between now and the end of the year than we've seen so far this year.

Wilshire 5000 index, W5000, Daily chart

On Monday and Tuesday W5000 pushed up to the trend line along the highs from April-July, making a new price high but leaving behind a significant bearish divergence on MACD, which tells us the momentum is drying up. The market is simply running out of buyers, be it short covering or real buying. At the same time trading volume is hitting lows not seen all year. This could simply be a sign that we're into the summer doldrums or it could be more bearish than that but in any case, it's a warning sign for bulls to heed. But the bulls have the opportunity to take advantage of a bullish setup with the pullback to the May 2015 high at 22537 (today's low was 22531 and it closed at 22559). It would leave a bullish kiss goodbye following the back-test if it can get a rally going tomorrow. Upside potential is back up to the trend line along the highs, which will be near 22750 by the end of the week. It would turn more bullish above 22800.

S&P 500, SPX, Daily chart

SPX looks very similar to the W5000 but it came a little closer to testing its 20-dma today, near 2170 with this afternoon's low at 2172. If that acts as support to launch another push higher, keep an eye on the trend line along the highs from April-July, which will be near 2195 by Friday. Higher than that I'd then look for the price projection at 2220-2223. But if drops lower and breaks below its August 2nd low near 2147 we should get at least a deeper pullback and the May 2015 high near 2135 and its 50-dma, currently near 2124, would be good downside targets for now.

Key Levels for SPX:
- bullish above 2195
- bearish below 2147

S&P 500, SPX, 30-min chart

The SPX 30-min chart has been providing a good pattern to analyze the short-term wave count, which I am always suspicious of because of the amount of blatant manipulation in this market (EW measures sentiment swings in traders' behavior), but for now it's providing a good road map to follow. The bearish wave pattern would look best with another drop lower, with a downside target at 2167, followed by a larger bounce correction and then lower again. But I could argue for a larger bounce from here and then lower for at least a larger a-b-c pullback pattern (that would keep things bullish and could be a good setup for a pullback before opex week and then launch the buy programs). If we get an immediate drop Thursday morning (reversing the series of small gaps to the upside recently) and it drops below 2167 we could see an acceleration of the selling. Back above 2184 would have me thinking new highs sooner rather than later.

Dow Industrials, INDU, Daily chart

The Dow has not been able to make a new high above it July 20th high at 18622 (the high on Tuesday was 18585) but there's upside potential to a Fib projection at 18778, which is where the 5th wave (leg up from June 27th) of its rally from January would equal 162% of the 1st wave. That projection crosses a trend line along the highs from April-July next Wednesday, August 17th. Could we get an opex rally to get the Dow to achieve that level? At this point it's looking doubtful if only because the rally has lost so much momentum but it's only about a 200-point rally in a week's time, something that could easily be achieved if there remains enough money to counter any selling in the coming week. But a drop below the August 2nd low at 18247 would be a strong indication the top is already in place.

Key Levels for DOW:
- bullish above 18,800
- bearish below 18,247

Nasdaq-100, NDX, Daily chart

NDX got within 5 points of hitting its all-time high back in March 2000 at 4816.35. To fail there would be an epic fail and I have a hard time believing the manipulators would let that happen. I see a short-term pattern that suggests we'll get at least a larger pullback but bulls probably don't need to worry if NDX can stay above its December 2015 high near 4740. Below that would then risk a further drop to its 20-dma, near 4700, and its August 2nd low near 4689. Below that level would strongly support a top already in place and then it would be time to figure out if we're looking for just a larger pullback correction to the rally from June or something more bearish.

Key Levels for NDX:
- bullish above 4820
- bearish below 4689

Russell-2000, RUT, Daily chart

Last Friday the RUT tried to get through a trend line along the highs from June-July, which has stopped all rally attempts since July 12th, including the last attempt. Today's larger red candle looks like a firmer rejection at that trend line and leaves a significant bearish divergence on MACD against its highs since mid-July. It can still press higher but the rally is looking weak. It has plenty of support between here and the August 2nd low near 1198 and not until that 1198 low is broken will the bears have a better sense that a top is in place. That's the setup here but there's no confirming evidence yet.

Key Levels for RUT:
- bullish above 1250
- bearish below 1198

20+ Year Treasury ETF, TLT, Daily chart 10-year Yield, TNX, Daily chart

Since Monday's update for TLT it rallied back up to its downtrend line from July 8th today and pulled back. Its short-term pattern suggests a pullback before proceeding higher and there's still the possibility it will drop back down to the bottom of the down-channel from July 8th, currently near 134.50. But a break of its downtrend line with a rally above today's high at 140.51 would be bullish, which would be confirmed with a rally above its July 29th high since that would leave a 3-wave pullback correction from July 8th. A rally in bonds would likely put pressure on the stock market, which is why it's important to keep an eye on this ETF.

KBW Bank index, BKX, Daily chart

Monday's high for BKX, with the small poke above its downtrend line and then close below it (leaving a small spinning top doji at resistance), has been followed by a turn back down. This could be a significant reversal in the making or it will lead to just a correction to the rally from June 27th and then a continuation higher. I think price-level S/R near 66.50 remains the key level for the bears to break. This level supported the last pullback into the August 2nd low.

U.S. Dollar contract, DX, Daily chart

Last Friday through yesterday the US$ tried to get back above its 20-dma, near 96.40, but was unable to crack it and yesterday and today it gave up the fight and has pulled back, dropping back below its 50-dma at 95.62 in the process (it closed at 95.57). The bottom of an up-channel from May is near 94.60 so it would be a little more bearish below that level but in reality the dollar's pattern is a choppy mess and my expectation is for another choppy rally into September as it makes its way back up to 100.

Gold continuous contract, GC, Daily chart

While the dollar found its 20-dma to be resistance since testing it last Friday, gold found its 20-dma to be support and today managed a little higher bounce off that support level, currently near 1340. From a bullish perspective, although it requires another leg down for a larger pullback from July 6th, I can see a rising wedge pattern for the rally from December that would look best with another leg up (following a pullback to the uptrend line from December, near 1280. That possibility will have to be evaluated if and when gold drops down to its uptrend line. A drop below 1280 would be more bearish. If gold simply heads higher from here I continue to like a price projection near 1415, which is also where its downtrend line from 2011-2012 crosses the trend line along the highs from February-July.

Oil continuous contract, CL, Daily chart

Oil was also rejected by its 20-dma, and the top of its down-channel from June highs and now we watch to see its 200-dma at 40.54 will hold as support (today's low was 41.42) so it has a little room to run before testing support. A rally above yesterday's high at 43.52 would obviously be more bullish but at the moment the price pattern, down-channel and lack of bullish divergence suggest we'll see oil drop lower.

Economic reports

There were no market-moving economic reports this morning and there won't be any Thursday morning either. Friday's reports could move the market some but Thursday and Friday will be the start to the shenanigans that we often see in front of opex week.


The stock market has defied all odds that we'd see at least a pullback in August since the earnings news continues to get worse, not better. But with a strong Wall Street "interest" in keeping the market elevated into election season (Wall Street would rather Clinton than Trump) and the "good" news flowing from government reports (the political establishment clearly would prefer Clinton over Trump) we have to expect more "influence" in the market by those with a lot more money than you and I have. New market highs, despite the plethora of bad fundamental news for the market, tell us what we need to know about who's in control of the market. They make no denial anymore about the support.

The risk for market bulls, as I see it, is that the market has been propped up on the fluffy stuff of dreams and there's a big air pocket below the market. When the market starts down and big money can't stop it, HFTs will run for the shadows and most everyone is going to be looking to sell, but without any takers. The market is fun for the bulls until it's not and then I suspect it's going to be sheer panic and all the King's horses and all King's men are going to find it difficult to put the pieces back together again. This "free" market is anything but and the level of distortion will correct someday. The big question of course is the "when" part but keep in mind that the very low trading volume and low liquidity as a result of that could create problems sooner rather than later. Be careful out there.

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