The Santa Claus rally has been essentially a no-show this year and it was hoped he'd show up at least for the final week of the month. But Santa seems to have eaten one too many cookies that were washed down with too much milk and now his reindeer are complaining his round belly has become rounder and fuller. His sleigh seems to be stuck on the ground with the reindeer now struggling to break it free of the ice.

Today's Market Stats

The stock market has been chopping mostly sideways in a consolidation pattern following the December 18th highs, which points higher but this week's lethargy hasn't exactly lit a fire under the bulls. The choppy consolidation continues to look potentially bullish since it fits as a continuation pattern within the larger rally pattern but the very low trading volume and flat market breadth are not helping the bull's cause. It's looking like the bulls are going to have to help the reindeer lift Santa's sleigh off the ground. Can bulls fly? The market has already proven pigs (the lip-sticked variety) can fly so why not.

It was another slow day in a holiday-shortened week and other than the expectation that the market would at least float higher there hasn't been much excitement. The only economic reports this morning were the Consumer Confidence and Pending Home Sales. There's been very little stock news as most companies either shut down between holidays or have people that are thinking more about their long weekends than about work.

The Consumer Confidence was weaker than had been expected for December, coming in at 122.1 vs. expectations for 128.0. It was a drop from 128.6 in November, which was a revision lower from the originally-reported 129.5. The present conditions index remains strong, at 156.6, but the expectations index dropped from 111.0 to 99.1 and the widening difference between the two is a concern, especially since all the talk about the new tax plan included discussions about how it should help the economy and jobs. It would appear many people are not buying into that idea. Worry about the future could dampen bullish sentiment so it's a potentially important leading indicator.

Consumer Confidence, 2002-December 2017, chart courtesy briefing.com

Pending Home Sales for November was an unremarkable increase of +0.2%, which was a significant drop from the +3.5% in October but better than the -0.7% decline that was expected. Home sales in general remain strong enough to support the large industry attached to this market.

It was a quiet day in what has been a quiet week and therefore not much to discuss. The tight doji days are leading to small doji weeks so there hasn't even been much of a change in the charts since this time last week. As I'll point out in the charts, there's still a bullish expectation for the next few days at least and some key levels to the downside that would tell us when the bears are taking over.

The thing to continue to keep in mind is that the current bull market is stretched by most measures, including how far it has stretched above moving averages and adaptive channels, all of which makes the market vulnerable to at least a larger correction. The correction could be a large sideways choppy consolidation (multi-week kind of consolidation) or it could pull back and shake out the weaker holders before continuing its march higher. The more bearish potential is for the bull market to conclude before most are ready for it. It is this latter possibility that I'm thinking could happen.

A chart that I had shown a month ago provided a graphic look at long it's been since the market (S&P 500 index) has corrected 3%. On November 27th the streak was 391 days and I've updated the chart to show it's now been 424 days, significantly exceeding the prior streaks in the past 60+ years. To say this has been a non-stop rally for well over a year is a gross understatement and highly unusual. The only thing that it has me wondering what the coming correction will be like (how strong). The higher and longer this goes, the more vulnerable it becomes.

Number of days without a 3% correction

Jumping into the charts, I'll start with the SPX weekly chart and work down from there. It has pushed up against potentially strong resistance so we wait for either a bullish breakout following the current consolidation or a smack-down after testing resistance.
S&P 500, SPX, Weekly chart

If you squint and use a magnifying glass you can see the little dojis for last week and this week's candle so far. If the bulls can recruit some more buyers I see upside potential to the top of its rising wedge for the rally from February 2016, which is the trend line along the highs since April 2016 - March 2017 and currently near 2722. But there are two price projections below that level that will be important to watch -- near 2705 and then 2718.

As noted on the chart, the 2704.87 projection is for the extended 5th wave in the rally from 2009, which is where it would equal 162% of the 1st wave. This 5th wave is itself a 5-wave move and its 5th wave would equal the 1st wave at 2718.30. In addition to the price projection near 2705, that number is also an important Gann Square of 9 level and the correlation is an important reason to watch it carefully if reached.


S&P 500, SPX, Daily chart

In addition to the large rising wedge for the rally from February 2016 there is also a smaller one for what could be the final portion of the rally from November. The 5th wave of the rally from 2009 is the leg up from February 2016 and its 5th wave is the leg up from August. It too is a 5-wave move and the extended 5th wave would equal the 1st through 3rd waves at 2704.94.

Again, the tight correlation of price projections, plus the Gann level at 2705, makes this a potentially important price level. For now I show a rally to that level in the next few days and then the start of a reversal back down. That of course remains to be seen but at the moment I see significant downside risk in January. But for now there remains upside potential and above 2705 would open the door to 2718 and then maybe up to about 2725 where it would hit the trend line along the highs since September.

The trend line from September crosses the trend line along the highs from April 2016 - March 2017 near 2721 on Friday. The bulls need a lot more interest in this market than we've seen so far this week if they hope to achieve that level in the next two days.

Key Levels for SPX:
- bullish above 2695
- bearish below 2652


S&P 500, SPX, 60-min chart

Moving in closer, the 60-min chart shows the wave count for what should be the final 5th wave of the rally. The sideways consolidation following the December 18th high looks like a bullish continuation pattern but yesterday's break of the uptrend line from November 15th, which was back-tested this morning, looks a little bearish. The decline into this afternoon's low continued to hold at the bottom of the sideways triangle consolidation pattern and the little snap back up into the close could be the bullish start to the next leg up.

Assuming well see a rally on Thursday and into Friday, we'll have to see how it does if and when it nears 2705 and then the higher levels if 2705 is breached. A drop below the December 4th high at 2665 would be the first indication a top is likely already in place.


Dow Industrials, INDU, Daily chart

The Dow looks like SPX with its sideways consolidation over to support at its short-term uptrend line from December 1st (the bottom of a possible rising wedge for the final leg of its rally). As long as it stays above its December 14th low at 24508 it remains bullish for another, and potentially final, leg higher. It closed near a price projection at 24775, where it's been stalled since December 18th, which is where the 5th wave of the rally from January 2016 is 162% of the 1st wave.

Assuming the Dow will be able to push higher, the next level of interest is 25026, which is where the 5th wave of the rally from 2009 would be twice the size of the 1st wave. Stay aware of the potential for only a minor new high above the December 18th high at 24876 to essentially create a small double top before starting down.

Key Levels for DOW:
- bullish above 24,876
- bearish below 24,508


Nasdaq Composite index, COMPQ, Daily chart

Since its December 18th high I've been waiting to see if the Nasdaq will reach a price projection at 7034.71 where the 5th wave of the rally from August would equal the 1st wave. There is higher potential above that level, especially if it heads for the top of its up-channel from August, which will be near 7130 by the end of next week. But as with the other indexes, any new high could be quickly followed by a reversal at any time. And if the Naz drops below its December 14th low at 6851 it would tell us a top is likely already in place.

Key Levels for COMPQ:
- bullish above 7004
- bearish below 6851


Russell-2000, RUT, Daily chart

The RUT has also been consolidating in a bullish continuation pattern and unless it breaks down we should see a move up at least back up to trend line along the highs from December 2016 - October 2017, near 1557, and then maybe 1562. There's higher potential above 1562 to a trend line along the highs from October-December, which will be near 1585 by the end of next week. We'd have the first bearish signal if the RUT drops below its 20-dma and uptrend line from November 15th, currently near 1532 and 1528, resp.

Key Levels for RUT:
- bullish above 1553
- bearish below 1505


10-year Yield, TNX, Weekly chart

Last week TNX broke above its downtrend line from 1988-2007, near 2.41%, and with a high at 2.50 it came very close to a price projection at 2.508, which is where the c-wave of an a-b-c bounce off the June 14th low (the higher low before the September 7th low) is 162% of the a-wave. The significance of this projection is that the a-b-c bounce correction could lead to a strong 3rd wave down in the decline from March and a strong decline in yields would mean a strong rally in bond prices. A strong bond market rally could coincide with a strong stock market decline and hence my reason for watching this so carefully.

The flip side of the pattern for TNX is that last week's bullish break of the downtrend line from 1988-2007 has now been followed by a pullback to the trend line and that gives us a bullish setup for yields (more selling in Treasuries). As long as TNX stays above its November 7th low at 2.3% it will remain potentially bullish, which would be confirmed if it rallies above 2.51. But a drop below 2.3 would also be a confirmed drop back below its 50-dma, currently near 2.32, and that would suggest a stronger decline will follow.


KBW Bank index, BKX, Daily chart

The banking pattern is a bit ugly from an EW perspective but whether or not it will proceed higher following a relatively brief pullback it's looking ready for at least a pullback. The bearish divergence as it chopped higher in a small rising wedge since the December 7th low, followed by Tuesday's break of the uptrend line from November 27th, has it looking like BKX will drop from here. From a short-term pattern perspective I see the potential for one more minor new high but I wouldn't trust it unless it's able to rally stronger above 109.


U.S. Dollar contract, DX, Daily chart

The US$ has dropped a little further since last week and now the test is on -- will it be a double bottom with its November low at 92.43 or is it instead going to break down further. A drop below 92.40 would suggest we'll see a decline at least back down to the top of its broken down-channel, which will be near 91.10 by the end of next week. Two equal legs down for a larger a-b-c pullback from November 7th would see the dollar dropping to 91.57 and another rally leg could start from there. The more immediate bearish potential is for the dollar to drop to the $90 area before setting up the next large rally in the coming year.


Gold continuous contract, GC, Daily chart

Last Friday gold closed marginally back above its broken uptrend line from December 2016 - July 2017 and its broken 50-dma, both near 1276. That was followed by yesterday's rally, which broke through its downtrend line from September-November, near 1278. That's a bullish move and now all the gold bulls need to do is break the shorter-term downtrend line from October-November, where it has currently stalled near 1291, and then get above price-level resistance at 1300. The past two times, in October and at the end of November, gold had trouble with 1300 so it would obviously be bullish above that level. MACD is also making a bullish move back above the zero like so things look good for a continuation of its rally, especially if the dollar breaks down further. Gold's larger pattern leaves a lot to be desired as far as supporting the bulls but for now, as long as gold stays above its nest of 20-, 50- and 200-dma's, all in the 1268-1275 range, it's looking good for a continuation of the rally off the December 12th low.


Oil continuous contract, CL, Weekly chart

Yesterday's strong pop up in oil's price had it breaking price-level resistance near 58.50 and the 38% retracement of its 2013-2016 decline, near 59. The next level of resistance is near 62, which is the current location of the top of a rising wedge for its rally from June and the top of a larger rising wedge for the rally from February 2016. The top of the smaller rising wedge will be near 62.35 by the end of next week. Following the completion of the rising wedges could result in a fast reversal and decline, confirmation of which would be a drop below trend lines and 50-week MA, all coinciding near 51.

Oil would be more bullish above 63.50, in which case I'd look for the next Fib retracements of its 2013-2016 decline (50% at 69.14, 62% at 79.31) and then potentially up to about 85 to meet its inverse H&S pattern that developed 2015-2017 (the neckline was broken in late October).


Economic reports

While Thursday morning will have a few more economic reports than we had on Tuesday and Wednesday, there will be nothing that is market moving. Friday's only report, Chicago PMI, has the power to move the market but probably not this time since no big change is expected or worried about (there's not much worrying this market).


Conclusion

It's been a slow week and that might not change. If the sellers stay away we could see the market at least drift a little higher and then rally a little more strongly for at least the first two days after New Year's. The price patterns support the idea that we'll get a final fling higher from here and maybe into January 3rd. Assuming we'll get another leg up to new highs for the indexes it should be the final one. Whether we'll get just a larger pullback (maybe finally break the record of time without a 3% correction) or something more bearish will have to be determined after we see what kind of pullback/decline develops.

I'll reiterate that I think there's significant downside potential, especially since most market participants have forgotten what a correction even looks like. A 3% correction could scare the hell out of lot of traders and their panic could drive the index/sector ETFs into a no-bid situation as the market crashes lower on automatic computer sell programs. A normal 3% correction could turn into a 10% rout in a heartbeat.

If you're OK with a stronger decline (10%, 20% or 30%) then sit tight through it and look at it as a buying opportunity. Buying following panic selloffs tends to be extremely strong and they can be quite lucrative for quick traders. But for most traders, even if you want to hold onto your longer-term positions, hedging with puts and/or a couple of shorts on weaker stocks or getting some exposure in inverse ETFs could do a nice job protecting your portfolio from a bad fall. Getting more into cash will give you an opportunity to buy back in at lower prices. Buying up here seems to be a high-risk/low-reward kind of setup, something traders should avoid.

Play it safe, enjoy your time in front of the market instead of sweating the moves. If you're losing sleep over worry about your positions then that's your body telling you to lighten your exposure. Quality sleep is far more important than money, especially since lack of quality sleep and too much stress can significantly harm your health, even to the point where you won't be around to enjoy your hard-earned winnings.

I hope everyone had a Merry Christmas and has a better 2018 than 2017. Happy New Year and be careful out there over the holiday weekend.

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


 

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