He might have been late, due to fighting off the bears attacking his reindeer, but Santa arrived for the final two days of the period when we typically get the Santa Claus rally. January has started off on a bullish hoof and that bodes well for the rest of the month and year (maybe).

Today's Market Stats

The late-day selling last Friday was followed by a big gap up Tuesday morning, thanks again to the overnight rally in the futures, and that left more than a few bears trapped at Friday's lows. With another overnight rally in the futures we started the day with another gap up and the bulls kept the rally going. Some initial upside targets have now been met so it's going to be important what follows the conclusion to the Santa Claus rally period.

There wasn't much in the way of economic reports today to influence the market or to change the bullish intention. This morning we got the ISM Index and Construction Spending, both of which came in slightly better than expected but nothing extraordinary. ISM for December was 59.7, an improvement from 58.2 in November and better than the expectations for 58.0. Construction Spending for November was +0.8%, which was a small drop from the +0.9% in October but better than the +0.7% that had been expected.

Auto and truck sales were in line with expectations and changed little in December. There was also no response to the FOMC minutes that were released this afternoon. If anything, there was some concern over the lack of agreement about how many rate hikes there should be this year but that had no effect on the market. The market did rally a little more following the report since it was one less thing to worry about.

For a long time we've seen volatility bleed out of this market and it's one of the measures of complacency that's been both bullish as well as worrisome. It's bullish of course because it says investors are not worried about significant market corrections and therefore they feel comfortable putting more money to work in the market. We can also see this in investor surveys (which are actually now getting too bullish from a contrarian perspective). Since the big spike in the VIX back in August 2016 we've seen it work its way lower over time as the spikes created lower highs and the lows dropped marginally lower each time before spiking back up.

The pattern that the VIX has created is a large bullish descending wedge, as seen on its weekly chart below. The bottom of the wedge is currently at 8.27, which if reached would have it dropping below is December 2006 spike low and which was tested with the spike low this past November 24th. It will be interesting to see if the VIX will in fact drop to a new all-time low with a rally to more new all-time highs for the stock indexes.

The worrisome thing for bulls with what we see with the VIX chart is the bullish interpretation of the pattern. It's a bullish pattern with confirming bullish divergence at the new lows over the past two years. A bullish VIX is of course bearish for the stock market and the only question is when this bullish pattern will see a bullish breakout, starting with a rally above its 200-week MA and the top of the descending wedge, at 14.28 and 13.92, respectively. A close above 14.28 would be strong confirmation that a bottom is in for the VIX and a top for the stock market.

Volatility index, VIX, Weekly chart

The very low VIX is a result of a steady rise in the stock market with little to no retracements along the way. Every month of 2017 finished positive, a first, and the market has now gone 428 days with a correction of 3% of more. For SPX a 3% correction would be about 80 points, or a drop to about 2630 from the current level. That would only be back to about where SPX was trading in early December. With so few corrections since November 2016 and the nearly straight-up ride since the small pullback last August, it's no wonder investors are feeling fearless.

The absolute daily percentage change for SPX in 2017 was just 0.3%, which makes it the tightest range since 1964 (53 years). Along with the continuing stream of new all-time highs for the indexes, the VIX closed lower 47 times last year. Of the 56 lowest closes since 1990 the majority of them were just last year.

This period of calm could continue much longer than most think possible but it's also true that the time to be afraid is when fear has left the building. The Minsky Moment is when stability leads to instability, as it always does, when that last snowflake falls (a seemingly insignificant event that normally would not shake the market) and the avalanche takes out everyone in its path. Do have your protective gear in the event of an avalanche? For us that would mean methods of protecting against a strong decline, such as puts, short positions or inverse ETFs. If you don't want to sell then it's at least a good time to buy some insurance (and then hope you don't need to use the insurance, like all the other insurance plans we buy).

The stock market rally is stretched to the upside, which I think we can all agree on. If you don't believe that statement then I'll suggest you're not investing with your eyes wide open and looking for danger. Most of the fundamental measures of the stock market, such as P/E ratios (both forward and trailing) are extraordinarily high and the highest among other nations as well (Europe, UK, Asia and Emerging Markets). The CAPE (Cyclically-Adjusted Price-to-Earnings multiple) is accepted by most as one of the more accurate measures of stock value and it's not at a comforting level if you're leverage long the market.

The CAPE compares the S&P 500 to its average, annual inflation-adjusted earnings over the past 10 years and its current reading is 31. This is well above its 15-year average of 25 and almost twice its long-term average (since 1881) of 16.8. At 31 it joins only two other times it got above 30 -- in 1929 and between 1997 and 2002. Both of those times were not good times to be complacent about the upside and while it could certainly continue higher, it's prudent to be cautious. It's kind of like playing with the cryptocurrencies right here.

And with that I'll move to the charts. As I had mentioned a week ago, I was looking for the rally to continue into this week and a possible high by January 3rd, today. The consolidation went a little longer than I had expected (into the end of last week) and therefore there's a possibility we'll see the rally continue into the end of this week. But at this point I think we're very close to putting in an important high and it could soon be the bear's turn at the feeding trough.

S&P 500, SPX, Weekly chart

With today's rally SPX achieved its first and second upside targets that I've been watching for. The first one is near 2705, which is where the extended 5th wave of the rally from 2009 is 162% of the 1st wave. As shown on the daily chart further below, that's also where the extended 5th wave of the leg up from August equals the 1st through 3rd waves. So that check is now in the block. The second target is 2711, which I'll point out on the 60-min chart further below and it's a potentially important level on the Gann Square of 9 chart, also discussed further below.

On the weekly chart I show a projection at 2718, which is where the 5th wave of the rally from February 2016 equals the 1st wave and with today's high at 2714 it's only 4 points higher. A little higher is the trend line along the highs of the rally from February 2016, currently near 2727. With the market overbought on all time frames I think it's a good time to pull up your stops on trading positions as SPX reaches potentially strong resistance.

S&P 500, SPX, Daily chart

Last week's break of the uptrend line from November 15th turned into a head-fake break (bear trap) as it recovered back above the line today. As mentioned above, the trend line along the highs from April 2016 - March 2017 is now near 2727 and the trend line along the highs of the rally from August is also near 2727 and it will be near 2732 by the end of the week. As shown on the 60-min chart further below, there's a projection at 2734, which I consider the highest we'll see but if we're into a true blow-off top then it could go much higher. Above 2740 would tell me to watch in awe as the blow-off rally continues. Just watch out for the reversal back down if that happens. A drop below last Friday's low near 2673 is what would tell us a top is in place.

Key Levels for SPX:
- more bullish above 2740
- bearish below 2673

S&P 500, SPX, 60-min chart

As mentioned above, 2711 is an upside target and that was achieved today. That level is where the 5th wave of the rally from December 1st is 62% of the 1st wave. At this point all the pieces are now in place to call a top at any time. The rally could stretch higher but now is a good time to be extra cautious on the long side and start preparing for what you want to play on the short side (but not yet). As shown on the 60-min chart, there's further upside to the trend line along the highs from September-October, near 2730 by midday Friday, and then the projection at 2734, which is where the 5th wave of the rally from December would equal the 1st wave.

The reason I keep mentioning all these 5th wave projections is because we're in 5th waves at multiple degrees of the pattern (each 5th wave consists of its own 5-wave move, right down to the intraday patterns). The 5th wave of the rally from December 1st is the leg up from last Friday and it will complete the larger 5th wave of the rally from August, which will complete the 5th wave of the rally from February 2016, which will complete the 5th wave of the rally from 2009. If I have the wave count correct, this is going to be an important high, one which will stand for a very long time.

Besides the wave, Fib and trendline projections for SPX, and why I'm interested in watching the upside targets carefully for signs of topping, I have the Gann Square of 9 chart also highlighting potentially important levels in the same area. I don't want to get into the weeds with this technical tool (I can see your eyes already glazing over with all this Elliott Wave talk) but I think it's important to try to cover it. Many will poopoo this Gann chart and just throw it into the same bin as Elliott Wave and Fibonacci, or maybe astrology, but these tools can be very enlightening, as the Gann Sof9 chart was at the October 2007 high and March 2009 bottom.

The confluence of similar levels is always a reason to pay attention and while they don't predict a trend reversal they are reason to watch for the possibility of one. The portion of my Gann Sof9 chart below is squished to fit it onto the page so I apologize for the tiny print. I added some larger numbers to point out the potentially important levels.

Gann Square of 9 chart

The red vector pointing to 11:00 is the one through the October 2002 low at 768 and the October 2007 high at 1576. There was clearly a direct relationship between those two numbers, especially being 6 "circles" away from each other. There are six squares or sides of a cube and the relationship between these two numbers was one of the reasons I was pounding the table back in October 2007 to watch out for a potentially important high, which it was.

The blue vector pointing to 1:00 goes through the March 2009 low at 666. A little harder to see, there's a green vector just to the right of the blue one and it is square to March 6th (just visible at the bottom right side of the chart). The green vector goes through 667 and the March 6, 2009 low was 666.79, arguably closer to 667 than 666. There was clearly a Gann reason to look for that low on March 6th to be an important one, which it was.

To the right, the red vector pointing to 2:00 is "square" to the red one through the October 2007 high. These square relationships are often very important and it goes through 2711, which was achieved today. Not visible at the bottom of my Gann Sof9 chart is the end of the red vector pointing to 5:00. The date that it's pointing to is January 3rd, which of course is today. That makes the square at 2711 especially important and it's possible today's rally is all we'll see but there's still a little higher potential to the 2721-2723 area on the chart.

If the rally continues on Thursday, the blue vector pointing to 4:00 is square to the 2009 low at 666 and it crosses through 2721. The green vector that is square to 667 crosses through 2723, all of which gives us the next Gann target zone at 2721-2723. Again, this is not a prediction that the market will top at any of these levels but in combination with what I'm seeing on the SPX charts I think it's very important to stay aware of the potential for an important market high this week.

And now back to our regularly scheduled charts.

Dow Industrials, INDU, Daily chart

Since early December I've been watching for an upside target zone for the Dow at 24775-25026. That's a fairly wide zone and once the Dow reached 24775 and consolidated sideways near that level it began to look like the higher target was in play. This week's rally has made the upper target at 25026 likely and it could head even higher if it's going to reach for the top of a rising wedge for the rally from December 1st, which will be near 25340 by the end of the week. I don't think we'll see the Dow that high but with this market I certainly wouldn't rule out the possibility.

The Dow is back-testing the bottom of the rising wedge, which it broken below last Friday. The short-term pattern for the rally can be considered complete at any time and if the market gaps down on Thursday, instead of the usual gap up, we could selling pick up speed in a hurry. There are a lot of fund managers with their fingers resting on the sell button to protect profits, especially now that we're into the new year and the lower tax rates. A drop below last Friday's low at 24719 would tell us a top is in place.

Key Levels for DOW:
- bullish above 25,026
- bearish below 24,719

Nasdaq Composite index, COMPQ, Daily chart

The Nasdaq made it through a price projection at 7006, where the 5th wave of the rally from August equals the 1st wave, where it had stopped on December 18th and again yesterday, and today it made it up to the next resistance level, near 7070 (today's high was 7069). A trend line along the highs since August 2016 and a shorter-term one along the highs from November 28 - December 18 are both near 7070 and will be near 7086 by the end of the week. Not shown on the daily chart below, there's also a price projection at 7070, which is where the 2nd leg of the rally from December 6th is 62% of the 1st leg up.

As with the other indexes, the pieces are now in place to be able to call a top at any time and any sharp reversal back down would be reason to believe a top is in place. In the meantime there's further upside potential to at least the top of its parallel up-channel for the rally from August, which will be near 7130 by the end of the week. A strong rally much above 7140 would indicate the blow-off top is in progress and don't get in its way.

Key Levels for COMPQ:
- more bullish above 7140
- bearish below 6903

Russell-2000, RUT, Daily chart

The RUT has been acting weak since last Friday and that's a bit concerning if you're a bull. It has barely been able to make a new high above its December 18th high at 1552, with today's high at 1555, but it has not been able to climb above its December 4th high near 1560. A trend line along the highs from December 2016 - October 2017 is currently near 1559 and there's a price projection at 1562, which is where the 5th wave of the rally from February 2016 would equal the 1st wave. I think 1559-1562 is a good upside target zone for the RUT and then more bullish above 1562.

Key Levels for RUT:
- bullish above 1562
- bearish below 1535

U.S. Dollar contract, DX, Daily chart

The US$ is at an interesting place and it's time to flip a coin for direction. Once it dropped back below 94 and back-tested it in mid-December I've been short-term bearish with an expectation for a decline to the $90 area to complete a 5-wave move down from January 2017. But where it dropped to yesterday and now with today's bounce I'm beginning to wonder if we'll see the start of the next rally leg.

Notice where yesterday's low stopped -- it could be viewed as a bullish back-test of the top of the broken down-channel for the decline from January 2017. Granted it's the 2nd back-test and that's often a sign of weakness, not impending strength. But it also achieved two equal legs down from November 7th, at 91.57, and that could be the completion of an a-b-c pullback correction in a new bull market for the dollar, starting off its September low. Daily RSI is curling up from oversold and that's another supporting factor for the bulls.

If the dollar does continue lower I'll be looking for $90, especially if any bounce/consolidation looks choppy and corrective. But if the bounce turns into a sharp rally then it would support the idea that the pullback is complete and a new rally leg has started. Back above 94 would confirm the new rally but there should be confirming evidence before that line is crossed.

Gold continuous contract, GC, Daily chart

Gold has rocketed higher over the past 3 weeks, from a low at 1238.30 on December 12th to a high today at 1323.0 (+$85, +6.9%) and broke through several layers of resistance with the strong rally, the last of which was price-level resistance at 1300. It certainly looks like it's in breakout mode and could very well be but short term I think it's ready for at least a pullback correction before heading higher.

Paradoxically, the strong 3-week rally could turn into a bull trap since the leg up from December 12th fits well as the c-wave of an expanded flat correction off the higher low on October 6th. This kind of pattern, with the lower low in December and then the blast higher out of that, is a common completion to a correction to the initial decline from September. It's too early to tell if this is the correct pattern interpretation but if it is then we're going to see gold start back down.

If we see a corrective pullback over the next week or so that finds support at or above its moving averages, which should be near 1280, it would be a good setup for a continuation of the rally. But back below its nested 20-, 50- and 200-dmas and it will be stronger confirmation that that the 3-week rally was only completing a correction to the decline and not something more bullish.

Oil continuous contract, CL, Weekly chart

Commodities look like they could be starting a bullish move and that would very likely include oil. If oil can get above resistance near 62.30 (today's high so far in after-hours trading is 61.97) we could see a continuation of its rally from June and potentially up to the $85 area to achieve its inverse H&S price objective. But there is a corrective pattern inside a rising wedge for the rally from February 2016 that suggests its rally is about to end. Interestingly it bottomed in February 2016 with the stock market and now it could be putting in a top at the same time as the stock market.

The top of the rising wedge is the resistance near 62.30 that oil needs to get through (with something more than a quick pop above that level and then a collapse back down, which would then give us a sell signal. Daily and weekly oscillators are overbought and therefore it's a risky time to bet on further upside until it can prove it can get through resistance and stay above it.

Economic reports

Thursday morning's economic reports will include the ADP Employment Change, which is expected to show only a minor gain in December -- up 5K from the 190K in November. Unemployment data and oil and gas inventories will also be reported and therefore nothing much in the way of market moving reports. Friday we'll get the NFP and other employment data before the opening bell and then Factory Orders and ISM Services at 10:00. The NFP is expected to show +195K (same as ADP expectations) in December, which would be a drop from the +228K in November.


As Ronald Reagan said to Jimmy Carter in the presidential debates, "there he goes again." That would be me trying to pick a top and in this market that has been an exercise in frustration. All I can do is point out where I think a top could occur but actually predicting a top is a fool's errand. And right now I see plenty across the indexes, and even for oil, gold and the dollar, that tells me I should be looking for reversals and potentially major reversals. I'm not predicting a top; I'm warning you of one.

That would mean a reversal back down for the stock market, oil and gold (and possibly other commodities) and a rally for the dollar. The stock market indexes look especially vulnerable until they can power through some important resistance/target levels, which I outlined above and are shown on the charts. If you're long and looking to exit trading positions I would pull stops up real tight right now. If you're in longer-term hold (otherwise known as hodl in the crypto world) positions and you don't want to liquidate them then I'd think very seriously about hedging your positions. Buy the insurance and hope you never need to use it.

As mentioned above, the pieces are now in place to be able to call a market top at any time but I do see further upside potential at least into Friday. I'd be surprised if I'm still looking for higher highs this time next week (but of course I've been surprised by this market more than a few times).

Picking a top in a bull market is obviously a challenging thing to do and obviously trying to catch rising knives is not for the risk averse. I challenge myself to pick tops and bottoms because I like to play reversals (put options are cheaper on the way up than on the way down at the same price level). Others prefer to play just the trend until the trend breaks and take whatever loss there is (hopefully only a loss of some of the profits) when that trend is confirmed broken.

We have a long way to go before the uptrend is broken and therefore it's important to understand what I'm attempting to do. If you're sticking with the trend (obviously a winning strategy for a very long time) then you're still good. If you like to play reversals and/or hedge yourself against reversals, now is a good time to watch very carefully since I think an important one is about to hit us.

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



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