Tuesday's gap up and then strong reversal back down turned into another one-day selloff that the dipsters couldn't resist. Starting with another gap up this morning, the buyers did some follow-through buying and drove the indexes back up near yesterday's highs or made new highs, like the Dow. The Teflon bulls continue to shed bear attacks like water off a duck's back.

Today's Market Stats

Not to be dissuaded from their belief in the bulls, the dipsters piled in today to pick up some perceived bargains after the selloff on Tuesday. Another 1-day selloff led to a resumption of the rally in the land of micro pullbacks. The dipsters have had a winning strategy for a long time and as long as it keeps working, like off yesterday's low, they'll keep doing it.

There wasn't much in the way of news to prompt either the selling or the buying and there wasn't much attention paid to this morning's economic reports either. This is a market that's now driven primarily by momentum and until that momentum peters out there's no reason for the bears to fight it. Sit back and relax and enjoy the ride. Well, don't relax too much because there are some indications that the rally's end of life could be close, at least for something more than a 1-day pullback.

Last Thursday and Friday, when the market rallied strong, the VIX also rallied. I said to myself, "Self, that's not normal." When the market gapped up big Tuesday morning the VIX also gapped up. Once again Self wondered if this was a strong warning sign. It was of course a caution flag on the race track that told the drivers to slow down and be cautious. Some big players were selling/hedging the rally and that continued today. The market was up big but the VIX again finished in the green. A strong market rally with a rising VIX is a time for concern, not exuberant bullishness.

Another area of concern is in fact the level of exuberant bullishness. The latest Investors Intelligence report shows bulls at 66.7%, up from 64.4%, which equals the high reading on November 17th. The market held up through the Thanksgiving holiday and peaked on November 28th, which led to a decent pullback into early December. The bullish reading is also the highest since April 1986 so we're clearly talking nosebleed territory here.

The Investors Intelligence report show bears now at 12.7%, which is the lowest reading since April 1986 as well. That has created an abnormally high spread of nearly 52 points between the bulls and bears and that qualifies as a boat-tipping spread.

The Fear & Greed index is high, finishing at 75 today and down from near 80 last Friday. It's not as high as we've seen in the recent past but as can be seen on the chart below, when the F&G index gets to 80 or above it's time to be careful. The vertical lines show the market often only pulled back slightly, if at all, but some of the larger corrections occurred after this index showed excessive bullishness. This in combination with a very high bullish reading in the Investors Intelligence report is a clear warning sign. We'll of course only know in hindsight whether or not it will matter this time.

CNN Fear & Greed index vs. S&P 500

Moving to a review of the charts, last week I started with a top-down look at the RUT and this week I'll start with the Nasdaq since the tech indexes are also important to watch for clues for how long this rally could continue.


Nasdaq Composite index, COMPQ, Weekly chart

The Nasdaq's rally has it near the top of a parallel up-channel from 2010, currently near 7400 and about 70 points above Tuesday's high and 100 points above today's close. So there's certainly more upside potential if that's where it's headed. The lack of bearish divergence on the weekly chart suggests there could be higher prices as well.

There's a rising wedge shape for its rally from February 2016 and last week's rally had it popping above the top of the wedge, which is the trend line along the highs from April 2016 - June 2017 and it's currently near 7225. This trend line was used for support to stop Tuesday's decline and therefore the Nasdaq remains bullish above that level. From a weekly perspective the Naz doesn't break its uptrend until it drops below the bottom of its rising wedge, which is the uptrend line from June 2016 - August 2017 and currently near 6880, about 400 points lower.


Nasdaq Composite index, COMPQ, Daily chart

There are several short- and longer-term trend lines that are coming together and currently at about 7200-7280 and rallying above this zone last week was a bullish move. You can see on the daily chart how it's fighting with the trend line along the highs from March 2014 - July 2015, near 7280, and how it held above the April 2016 - June 2017 trend line yesterday and today. If the Naz drops below 7200 I'd become a little more worried about the rally but in reality the bears need to see a drop below the December 18th high before the uptrend could be declared complete.

Key Levels for COMPQ:
- bullish above 7330
- bearish below 7003


Nasdaq Composite index, COMPQ, 60-min chart

Getting in a little closer, the 60-min chart shows an idea for how this rally might finish by next week. The bold green projection is based on a wave pattern for the leg up from December 6th. A 4th wave correction off Tuesday morning's high would look better with another leg down to create a larger a-b-c pullback, maybe to 7167 for a 38% retracement of the 3rd wave (the leg up from December 29th). From there another rally would complete the 5th wave and the 7400 area would be the upside target. This is obviously speculation but something to watch for in the coming week.


S&P 500, SPX, Daily chart

With last Friday's rally SPX climbed above the trend line along the highs from July 2016 - March 2017 and then used that line for support with Tuesday's pullback. At the same level, near 2768, was its short-term uptrend line from December 29th so there was double support at that level. Once it looked like that was going to hold it was the green light for the buyers to come back in.

Today's high was 50 cents shy of Tuesday's high so we'll see if they continue to make new all-time highs. I see the potential for a sharp pullback before pressing higher but in either case, another rally up to the top of a narrow up-channel from December 29th could see SPX up near 2840 before a larger pullback/decline. For now, until I see evidence to the contrary, it's looking like we could see the rally continue into February, just not in a straight line.

Key Levels for SPX:
- stay bullish above 2768
- bearish below 2713


Dow Industrials, INDU, Weekly chart

Does the phrase "What goes up must come down" apply to the Dow? It might not if the Dow has achieved escape velocity, otherwise it might not be pretty after this rally ends. This week has added to the portion of the rally that has gone vertical and it's clearly in a parabolic climb, as evidenced by the increasing steepness of its uptrend lines. The steepest one on the weekly chart is from August and on the daily chart they've continued to get steeper from there.

The scary thing is that parabolic rallies tend to return to their starting point, which I'll argue is the February 2016 low. That's when the rally's uptrend lines started steepening. That could mean a drop down to the 16K area or maybe price-level support at 15700. A 10K (-38%) race to that level could challenge even the strongest of the buy-and-holders. I'm not making a prediction that the Dow will make it down to that level (I actually think it will drop lower in the next bear market) but it should be considered by those who want to hold through the next "correction."

Key Levels for DOW:
- bullish to the moon with the achievement of escape velocity
- bearish below 24,700 (December 29th low)


Russell-2000, RUT, Daily chart

Last Friday and again Tuesday morning the RUT poked above the top of its rising wedge for the rally from August (the trend line along the highs from October-December), currently near 1606, but was unable to close above it. Tuesday's selloff left a throw-over and the reversal back down created a sell signal, which can only be negated with a rally to a new high (above 1604). But even then it could still have trouble breaking above the top of its rising wedge.

There is a parallel up-channel for the leg up from December 14th, the top of which will be near 1609 by the end of the week, so there's slightly more upside potential the RUT is once again showing relative weakness after its dash higher last week. Bears need to respect the upside while bulls should be fully aware of the potential to simply start dropping lower from here.

Key Levels for RUT:
- stay bullish above 1568
- bearish below 1535


10-year Yield, TNX, Weekly chart

Since early November we've seen bond yields chop their way higher but the price pattern does not look bullish. Even as TNX now tests its December 2016 and March 2017 highs it's doing so with a significant bearish divergence on its weekly MACD. This is not the stuff of a new rally but instead looks like it will result in a double top. A stronger rally above 2.62% would look a little more bullish (bearish for price) and I do see upside potential to the 2.75-2.78 area but only if it can get above 2.62 and stay above that level. In the meantime the more bearish pattern for yields calls for a strong decline below 2%. Interestingly, a move down in Treasury yields (rally in prices) could coincide with a stronger selloff in the stock market (flight to safety?).


High Yield Corporate Bond ETF vs. S&P 500, Weekly chart

The chart below is the market's version of the Hawaiian alert of an inbound ballistic missile. Strange that a missile from N. Korea would supposedly take 37 minutes to hit Hawaii and the alert lasted 38 minutes. But I digress. While SPX is in the ballistic phase of its rally we see HYG unable to get through its broken 50- and 200-week MAs, currently at 87.89 and 87.75. The lack of new highs since last July while the stock market goes parabolic is a MAJOR warning sign since it shows a reluctance to take on risk in the corporate bond market (smarter investors) and that tells us the stock market rally is momentum driven and it will end badly.


Transportation Index, TRAN, Weekly chart

The transports have been in full agreement with the Dow and that has kept things bullish. But I can't help but wonder if this week's weakness portends a more challenging time for the bulls. There's an EW count and pattern that supports the idea that TRAN's rally completed with Tuesday morning's high. The selloff from there leaves a failure, so far, at the trend line along the highs from March 2016 - March 2017 (the 1st and 3rd wave highs in the rally from January 2016. The 5th wave of the rally achieved equality with the 1st wave at 11131 and therefore the pieces are in place for a top. What we don't have yet is any kind of proof from price action that a top is in place, although today's consolidation while the Dow zoom climbed higher is a warning sign and says the TRAN is ready to continue lower.


U.S. Dollar contract, DX, Weekly chart

The US$ might finally be ready to rally after declining for a year. Yesterday, in the after-hours session, the dollar made a low at 89.96, missing a price projection at 89.94 by 2 cents (the projection was based on the wave pattern for the leg down from November). It also stopped a little short of the trend line along the lows from 2015-2016, which fits as the bottom of an expanding triangle. I've been showing this triangle pattern for the past two years and I think it's still in play. It's a bearish topping pattern but I think it needs one more leg up to complete it, which means a year-long rally before the dollar bears could be correct.

If the dollar does rally back up to the top of the expanding triangle it could reach the $107 area (+19%) before setting up a stronger decline. Today's low was a test of yesterday's low and it has since shot higher, including into the after-hours session. The daily candle is a bullish engulfing pattern (outside up day) and that fits as a key reversal day. The rally should continue if so and that would leave a strong bullish divergence on the weekly chart. Until we get proof of a reversal I do see the potential for a drop down to its uptrend line from 2011-2014, near 87.50, before setting up the next rally leg.


Gold continuous contract, GC, Weekly chart

I'm not getting any warm and fuzzy feelings about gold's bullish potential here. I am feeling warm and fuzzy from the gold bears starting to crowd near me. Gold has had a corrective pattern to its bounce since its December 2016 low and it's been difficult for me to turn bullish. If it can get above 1381 resistance and hold above that level I'd feel more bullish about its prospects. But if the dollar starts to rally it could put extra downward pressure on gold.


Oil continuous contract, CL, Weekly chart

Oil's rally has stalled over the past week and the daily oscillators are starting to turn down from overbought as the price pattern puts in what looks like a small rounding top. I continue to see upside potential to the $85 area but bullish sentiment on oil is now running high and I see a big risk to the downside, especially if oil drops back below its trend line along the highs from June 2016 - January 2017, currently near 62.50. Oil stays bullish above 63.70 but short term I'm seeing evidence that suggests it's rolling back over.


Economic reports

Thursday's economic reports include the usual unemployment data as well as housing starts and permits (no changes expected) and the Philly Fed index (slight improvement is expected). Friday morning we'll get the Michigan Sentiment number, which is expected to show a small improvement. Nothing market moving.


Conclusion

The stock market's rally has been extremely strong and in fact one could argue too strong. A rally that goes parabolic tends to suck in the remaining wannabe bulls while spitting out the last holdout bears. The combination then soon leaves the market with a loss of buyers and it's that simple fact that often causes a reversal. Not some news event, although that can be a trigger, but usually just because the market exhausts its buying fuel. The rocket flames out and then returns to earth. We're waiting for the flameout.

Parabolic rallies can go a lot further than most think possible and the current melt-up has the potential to go much higher. The advance-decline line might be weakening a little but it remains fully supportive of the rally. What few bears are left in this market, it would be wise for them to stay away -- stabbing at highs to get short has been a good way to die from a thousand paper cuts as you try, stop out, try, stop out... It's what has helped fuel the rally.

Once we see an impulsive decline that breaks support levels then we'll know to start looking to short the bounces. But buying the dips has been the winning strategy and that could continue to be true for a while longer. Just don't be complacent about the upside since you are joined by the majority now. Extreme bullish sentiment in a parabolic rally is a recipe for a surprise selloff and it could be a painful one. Trade carefully and know your risks.

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