While we haven't had a strong rally in the first part of opex week it has nevertheless stayed bullish. The choppy move higher with bearish divergence suggests caution but maybe not until after opex. The buyers are still buying the dips and the bears are still running for cover, which tells us to stick with the bulls until things change.

Today's Market Stats

It was another quiet day in the market (only a 63-point swing for the Dow all day) but the slow choppy move higher was good enough for another new all-time high for the indexes (except the RUT). There are enough warning signs that the opex-induced rally could run into trouble soon but for now the message is clear -- don't fight the (up)trend.

It was also a very quiet day for news, earnings and economic reports, which left the market on its own and with very few catalysts to move the market there wasn't much movement.

This morning's PPI numbers showed inflation a little lower than expectations but an increase from July's -0.1% for both PPI and Core PPI. August came in at +0.4% and +0.1% for PPI and Core PPI and since it's the Core PPI that the Fed is most concerned about, it continues to give them a green light for another rate increase. The next rate increase is not expected until happen until December (one more to finish the year and before some Fed heads leave the Fed, possibly Yellen included).

Last Wednesday I showed a chart of Federal tax receipts, which highlighted the fact that tax receipt growth has been in decline since May of this year. Despite the attempt to make it sound like we have employment growth we are actually seeing a decline in employment wages (and therefore tax receipts).

Lower tax receipts could mean more people have gone off the payroll and are now working for themselves (and under-reporting income?) so it's difficult to judge the actual employment picture just from tax receipts. But it's just one more metric that calls into question the employment picture.

The Fed makes many (most) of its rate decisions on inflation expectations according to the Philips Curve (the stronger the employment picture, the stronger the wage pressures, the stronger the inflation) and therefore it's important to see what kind of wage pressures we actually have. The Fed probably doesn't look at the Federal tax receipts because that would make too much sense.

Another metric for how the economy is doing is growth in credit. The chart below shows the growth/decline in global credit and it's been in decline since the end of 2016. Thanks to abnormally low interest rates (including negative rates in other parts of the world), it was easy for companies and people (not to mention governments) to borrow more money. Credit greases the economy's skids and without it the economy has a much more difficult time growing.

When credit contracts (less borrowing, paying down debt, defaulting) it's often followed by a contraction in the economy and that's the message from the chart below. When credit started contracting in 2011 and 2015 we had the largest market corrections that we've seen in the rally from 2009. We now have the largest credit contraction since 2009 and yet the market hasn't reflected it (yet).

Credit Contraction

In my opinion this is a major warning sign since I believe the market is being held up on hopes and dreams for something constructive from our Congress. When the stock market correction comes it will likely be bigger than anything we've seen since the rally started in 2009, possibly much worse since the credit contraction will likely continue during the next economic/market contraction. We need to keep in mind the level of debt this time around and the fact that it's likely the bubble that's going to pop and take the market down with it.

While we should be looking over our shoulder for potential trouble, the market has been ignoring the troubling signs and that could continue longer than most think possible. Don't fight the trend is clearly the message after just a 3-wave pullback in August. The pattern of the rally off the August 21st low is not clean but the choppy move higher fits as an ending pattern. So I would definitely not get complacent about the current rally. Don't fight it but be careful joining it. I have a feeling the reversal from it could happen quickly and strongly.

If the market does hold up into October it would fit a pattern for years ending in 7, which is what we're currently in. In the past, with August and September being typically weak months, it's been common to see some ugliness into September. October has been known as the bear killer since a strong rally into the end of the year has typically started from a stronger pullback into October.

But in the more recent years ending in 7 (1987, 1997, 2007) we've seen market highs in October and strong declines follow. There was the stock market crash in October 1987 (down -34%), the mini-crash in October 1997 (-13%), which started in Asia, and the peak in October 2007, which led to the crash into the 2009 low. Instead of being bear killers, the past three Octobers in the year ending in 7 have been bull killers (even if for only just a scary pullback before heading higher again).

The way the price pattern is setting up I think this October (if not a couple weeks before it) will be another bull killer. The market is so badly distorted right now (excess credit) and the rally from last November has been built primarily on hope (for government tax and regulation changes). Sentiment is a fickle thing and when it changes it's likely to induce panic quickly, which is the reason for watching over your shoulder while enjoying the ride higher.

The blue chips have a similar pattern but slightly different reasons to suspect the rally could soon run into trouble. But each also shows why the rally could hold up into the end of the month. I'll start tonight's chart review with the weekly chart of the Dow.

Dow Industrials, INDU, Weekly chart

The previous high for the Dow was on August 8th when the Dow poked above the trend line along the highs from May 2011 - March 2015. It then dropped back below the trend line in mid-August, back-tested it on September 1st and is now back up to it (marginally above the line, currently near 22094. There's a broken uptrend line from November-May, currently near the August 8th high at 22179, which is also close to being back-tested.

If the bulls can power through these multiple resistance levels at roughly 22100-22200 it will be more bullish but in the meantime watch for a possible reversal from resistance, especially seeing the bearish divergence against the March 1st high.

Dow Industrials, INDU, Daily chart

The Dow is at risk of creating a double top with the August high if it's unable to keep the rally going. As stated above, there's resistance at the broken uptrend line from November-May, which crosses the August 8th high at 22179 on Thursday. Crossing the same level is the mid-line of the parallel up-channel for the rally from April (dotted green line). There are a couple of short-term price projections for the current leg up that point to the possibility of a rally to about 22300 so I think the Dow would be more bullish above that level but between here and there I think we'll see a top to this rally.

Key Levels for DOW:
- More bullish above 22,300
- bearish below 21,680

Dow Industrials, INDU, 60-min chart

The wave pattern is not clear enough to get some good price projections but the 60-min chart shows my best guess for how this rally could play out. A pullback followed by one more leg up into next week, potentially stopping near 22200 but maybe up to about 22300, and then down. As long as the pullbacks/consolidations remain choppy we should see higher prices but an impulsive decline (clear 5-wave move down) would tell us to short the subsequent bounce. For now, stay long as long as we see corrective pullbacks.

S&P 500, SPX, Daily chart

SPX is nipping at the heels of 2500 as it approaches it carefully, almost as if afraid it's going to get slapped back down from this important number. It's like a dog running after a car -- what does it do with it when it catches it?

There's actually higher potential to 2516, which is a projection for the rally from January 2016 (5th wave of the rally from 2009 where it would equal the 1st wave). September 22nd is when that projection crosses the trend along the highs from March-July, which is currently near 2512. There's a shorter-term price projection for the leg up from September 5th near 2510 so we have roughly a tight 2510-2516 target zone for a top. It also means SPX would more bullish above 2156.

Key Levels for SPX:
- bullish above 2491
- bearish below 2446

Nasdaq Composite Index, COMPQ, Daily chart

The tech indexes have also climbed above their September 1st highs and new all-time closing highs above their July/August highs. The Nasdaq looks like it could make it up to at least its trend line along the highs from April 2016 - March 2017, currently near 6505 (arithmetic price scale, while higher if using log price scale). With a 5-wave move up from the August 21st low the rally can be considered complete at any time.

Key Levels for COMPQ:
- more bullish above 6515
- bearish below 6334

Russell-2000, RUT, Daily chart

The RUT was the more bearish index with its July-August decline but it's had the most bullish bounce back. Whether or not it can join the other indexes at new highs remains the question. I'm thinking it won't but I'll more seriously consider that possibility if it rallies over 1434. There's a price projection for the 2nd leg of the bounce from August 18th that overlaps price-level S/R at 1434 so that's a level of interest if reached. At the moment I'm looking for the completion of a 3-wave bounce correction off the August low that will then lead to a stronger 3rd wave decline into October.

Key Levels for RUT:
- more bullish above 1434
- bearish below 1393

10-year Yield, TNX, Daily chart

While the stock market has been rallying the bond market started to sell off strongly following the high last Thursday. The selloff has spiked the 10-year yield back up and TNX has now made it back up to the broken downtrend line from June 2007 - December 2013, just above 2.02% (today's high was 2.197). At the same location is the downtrend line from July-August.

If TNX can climb above 2.02 it would be more bullish but then it will have to deal with its broken 50-dma, near 2.23, and then its downtrend line from March-July, currently near 2.27. A drop back down from resistance here, with buying in the bond market, would likely be happening with a selloff in the stock market, even if not timed together.

KBW Bank index, BKX, Daily chart

With the strong rebound in Treasury yields the banks have followed in pursuit. BKX leaves us wondering which way it's going to go at the moment but it's at least looking potentially bullish. The breakdown from its descending wedge, on September 7th, was followed by a gap back up into the wedge on Monday, which left a head-fake break to the downside (bear trap).

Now it's broken its downtrend line from August and is sitting back above its broken 200-dma, which was recovered on Tuesday. A back-test of the downtrend line, near 92.30 on Thursday, would be a bullish setup if it holds. But if TNX pulls back from resistance (yet to be determined) we could find BKX leaving a head-fake break to the upside if it drops back into the wedge (as below, so above). Careful trading the banks until this settles on a direction.

U.S. Dollar contract, DX, Daily chart

The US$ should be very close to a bottom if last Friday's low wasn't it. For a long time I've been looking for a drop down to about 90 to then set up a big rally into next year. Last Friday's low at 90.99 might have been close enough and if it can rally through resistance at roughly 92.50 to 93.50 we'd have a strong signal that a bottom is in place. But the bounce into today's high has brought the dollar back up to the top of its down-channel from May so we'll see if the rally can continue the rest of this week.

Gold continuous contract, GC, Daily chart

As the dollar rallies back up to the top of its down-channel from May gold has pulled back to the bottom of its up-channel from July and is approaching its rising 20-dma, near 1320. If the dollar does drop down to 90 we should see gold reach its price projection at 1377 for two equal legs up from December 2016. From that level I'd be looking to short gold, assuming of course it cooperates and rolls back over.

Gold would be more bullish above its March 2014 high at 1393 (maybe). But if the dollar breaks through resistance and continues higher from here then we've probably seen the high for gold's bounce. The silver COT report shows commercials are betting on the downside, which is not a good sign for gold bulls either.

Oil continuous contract, CL, Daily chart

Oil is threatening to break its downtrend line from February, where oil closed today. Today's high at 49.40 is also just below its broken 200-dma at 49.54. The dollar's next move from here will either help lift oil up and over resistance (if the dollar sells off) or slap it back down (with a dollar rally).

Economic reports

Thursday morning we'll get the CPI data and see if shows the same increase in inflation that this morning's PPI report showed. How the market interprets it is always a guessing game. On Friday we'll get some more retail numbers, which are expected to be a little less than July, the Empire Manufacturing survey (looking for slower), Capacity Utilization (same) and Michigan Sentiment (no significant change).


The market is in rally mode and with opex week it's looking like it could continue into Friday and maybe even into next week. A choppy pullback on Thursday or Friday would be a good indication higher highs are coming. The uptrend remains intact and traders should be sticking with the trend. While we have plenty of signs and reasons to expect a market high at any time, picking tops is always an exciting adventure (and usually painful). Stick with the trend but don't get complacent -- I think the end of this rally is near and the reversal could be fast and painful for those who don't take profits and get out of the way.

The price pattern supports the idea of a top soon (potentially within days but maybe not until October). As mentioned earlier, we are in a year that ends in 7 (2017) and the past three Octobers in the year ending in 7 were painful for bulls. Either October was painful (1987 and 1997) or the year following that October was painful (2007).

I believe we're going to have another painful time for the bulls, either in October or in the coming year. I think it would be foolish to simply ride out the decline in hopes it will simply rally higher. It might not this time. Bulls have been conditioned to simply buy all dips and/or ride all pullbacks with the expectation the market will go higher. I believe we're now near the point where that attitude is going to hurt a lot of bulls. Stay disciplined, set your stops (pay taxes on gains) and wait for the all-clear sign to get back in if stopped out.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT