The market has had quite a run since December 20th and there are signs that it is getting a bit long in the tooth and that a near term retracement may be in the cards. Nothing substantial, but a near term correction. This evening we have the State of the Union Address and tomorrow the Fed will announce the results of their two day meeting. With these two big events coming when the market is quite extended short term I think this could set up a sell on the news scenario. I don’t believe President Obama is going to announce anything earth-shattering this evening and I believe that the market could once again be disappointed with no formal announcement of QE 3.0. I still believe that will come but more likely sometime in Q2. The swap lines that the Fed worked out with the European Central Bank have juiced equity markets higher so in their view there is no reason for them to step in with QE 3.0 here (the swap lines were essentially QE 2.5). Had the market continued to come down from the end of the year into this meeting the odds for QE 3.0 would be much higher. As mentioned in my post on 12/31/11 I still see April and July of 2012 being key turning points for the market. I had anticipated a bad first half for the market (with bottoms in April and July) followed by a rally into the end of the year. Now I have to wonder if the market will top in March/April for the 3rd year in a row.

As you can see below the S&P 500 is butting up against the trendline dating back to the May 2011 high of 1371 and has barely made it through the regression line from the March 2011 low. Any correction that the market has from here should not break the trendline from the October low (which means not below 1250) and likely may not even break the trendline from the November low. Also note that the RSI is near the same levels that have produced the major tops dating back to May 2011.

Here is a longer term monthly view of the S&P 500. It is on the verge of challenging the downtrend from the October 2007 high of 1576 and you can see the support that held (the regression from 944). Also note how important the 1220 level is in terms of a pivot level. It has twice marked key turning points since 2006. Coincidentally, two of the longer term moving averages that I watch are right around this 1220 level as well. Those include the 89 week SMA and the 20 month SMA. In the chart below you can see that the S&P 500 is well above the 55 month SMA and the 20 month SMA which is bullish. Even more bullish is the fact that the 20 month SMA has started sloping upward again here in the past few months after really flattening out in September and October, just as it did back in May 2008 just before the market turned to the downside. A break above the upper trendline from 1576 would suggest that it is POSSIBLE that the market could challenge the old highs. Note that I said ‘POSSIBLE”. We will take things one step at a time.

Last Friday we saw silver decisively break through $30. This puts silver into a confirmed uptrend which is generally good for the market. As a general rule, the equity market has had a tendency to move with silver and oil since early-2009. In other words this means that the reflationary efforts of the Fed are proving effective in their eyes as they are avoiding asset deflation. Banks need asset prices to hold up in order to prevent their assets from declining. This is key because they are leveraged so any decline in asset prices really takes its toll on their balance sheets. The government also doesn’t want deflation because they can’t tax it. If asset prices decline, tax revenues decline. The next resistance for silver is the 50 week moving average up around $35-$36.

Near term the market is vulnerable to a small correction but last week the near term bearish case was essentially put to rest. Silver decisively breaking over $30 on Friday just further strengthened the bullish case for equities.

Here is a very good presentation from Eric Sprott regarding the apparent discrepancy between the supply and demand of physical silver.

http://www.silverhoarders.com/content/eric-sprott-who-not-getting-silver-1942/

After yesterday many of the technical snags that had held the bearish case were nullified. However, I continue to have concerns based on the Treasury market as well as the sentiment indicators that I follow. AAII and Investor’s Intelligence are near levels that produce market peaks. The 10dma of the OEX put/call ratio remains extremely elevated while CBOE and Equity put/call ratios remain at more than 6 month lows. On the flip side, the OEX put/call ratio had its lowest daily reading in almost a year in yesterday’s trading session. Could this be the signal of a turn to come?

Everything seemed to turn yesterday when it was announced that there would be an agreement on another voluntary haircut on Greek debt announced by the end of the week. The terms seem to be similar to what was announced in late-October so I’m not exactly sure why it will be different this time. We will have more “color” on this agreement by sometime next week.

The big picture is still a bit off in my view. I received some very solid bear market signals in September/October. The monthly MACD crossed over bearish, we saw monthly closes below the 20 and 55 month moving averages, and the 17 x 43 weekly EMA saw a bearish cross. However, it has since crossed back to the bullish side over the past two weeks. This signal generally has follow through so this is a very interesting juncture. The last time there were false signals like this on the 17 x 43 cross was back in the 1990-1994 period. Fast forward to today, are we simply looking at a multi-year range bound market from 2010-2013 or so like 1990-1994? (1075-1575 on the S&P 500?)

So the big picture has given sells but now the intermediate term trend is on a buy based on the proprietary mix of 6 internal indicators that I follow as of late-last week. The optimal period for the market to turn down has passed and has moved beyond the technical levels that should have held for the bearish case. This is looking more and more like a stock-pickers market in one must be nimble and leave capital available for hedging strategies.

I will elaborate on my thoughts in the coming days.

Here is a great read from Jim Puplava of www.financialsense.com.

http://www.financialsense.com/contributors/james-j-puplava/debt-supercycle-reaches-its-final-chapter

Just for review, here is my outlook on gold as of 12/14/11:

http://equitybriefcapital.wordpress.com/2011/12/14/a-technical-look-at-gold-2/

As you can see from the chart below, there is quite a bit of resistance between $1675 and $1700 just based on trendlines and moving averages (the 150 day was key as it had held for almost 3 years and gave way in the most recent downdraft). In addition, $1700 is the 62% retracement of the leg down from $1804 to $1524.

Gold hasn’t performed well on a relative basis either. In fact, it has been in a downtrend vs. the S&P 500 since mid-August. I want to see the relative strength here begin to improve before re-entering the position.

While I still believe in the secular bull market in gold I am near term neutral. It has already had quite a run off of the lows and is now approaching key resistance at $1675-$1700. I have my doubts it will break through that big resistance zone on the first try.

Yesterday I not only decided to eliminate my gold hedge, I actually decided to liquidate my brokerage holdings as well (PHYS is my holding of choice since I know the gold is actually there). Allow me to explain. This DOES NOT change my view of the secular bull market in gold and I do not recommend selling any physical holdings that I have advised. The fact is that I believe that the upside for gold is limited in the near term and carrying 30% of my portfolio in gold that was fully hedged just didn’t make sense. If the charts change and I am wrong I will be the first to admit it and will jump back in. For now I will be a spectator. I see big resistance at $1675-$1700 on gold and yesterday it hit $1667 so that is close enough. In addition, I want to see gold pick up relative strength again. Relative strength vs. other asset classes, particularly stocks before jumping back in.

Once again, this DOES NOT change my long term view and I would not sell any physical gold that I have advised buying to this point. This was simply a decision based on the size of my position and the fact that I just don’t see any big upside for gold in the near future. If I am wrong, I will jump back in on the long side.

I will show some charts later today explaining why I believe that the upside is limited near term.

I had anticipated that the most recent congestion period would break to the downside and thus far I have been wrong. However, today is NOT the kind of action I would have liked to see on a breakout above the gap at 1285.09 on the S&P 500. Volume is low and the internals aren’t anywhere close to a 1500/4000 day that I would expect if this was a big breakout. In addition, the Treasury market isn’t giving an “all clear” on the upside either. Sentiment as measured by www.sentimentrader.com (shown last night), AAII, and the CBOE/Equity put/call ratios would suggest to a contrarian that this market is closer to a top than a bottom. The alarming level of the OEX put/call 10dma remains of concern. I would point out that this indicator doesn’t necessarily hit tops to the day but can come in a general window as was seen from January-April of 2011 just before the top in early-May 2011.

Next Monday the U.S. market is closed in observance of Martin Luther King Jr. Day. That happens to be the day that the Troika (The ECB, IMF, and EU) will be meeting with Greece to make sure they are complying with their austerity measures. I believe the odds that Greece is in compliance are close to nil. Is this priced into the market? I’m not so sure. In my eyes this definitely has the potential for a “risk off” scenario.

On the positives today semiconductors, financials, small caps, energy, and precious metals are having nice days. Not to mention that the Nasdaq Composite has indeed decisively broken above the trendline from late-July as shown late last week. I also can’t discard the fact that 5 of my 6 intermediate internal indicators are on buy signals as well as the fact that the S&P 500 continues to trade above the key lines in the sand between 1184 and 1230 (55 month MA, 89 Week MA, 20 Week MA, and 20 Month MA). Let’s examine some potential scenarios here which I have been watching for a while.

Using simple TA one could argue that the action since late-October on the S&P 500 is a bullish inverse head & shoulders pattern. Using a low point of 1159 as the head and 1267 as the breakout point of the right shoulder (1267-1159=108) one could come up with an upside objective of 1375 (108+1267). Interestingly, this would suggest a test of the May 2011 high of 1371.

Now I want to look at some potential wave counts. See the chart below for reference.

I can count a clear 5 waves down into the low of October 4th at 1075 as shown in my update last night. That would suggest that this rally is counter-trend and thus should unfold in 3 wave ABC fashion. Here are some potential counts that would suggest the market still has unfinished business on the downside once this rally concludes.

A= 1075-1293= 218

B= 1293-1159= 134

C= .618 x A @ 1294

C= A @ 1377

Inside the C wave I can also make out the following:

(a)= 1159-1267= 108

(b)= 1267-1202= 65

(c)= (a) @ 1310

So we have 3 targets using waves. 1294, 1310, and 1377. 1294 would suggest that the market is topping today. 1310 would suggest a bit more upside into the congestion zone of last summer (1295-1312), and the other would suggest a full retest of the May 2011 high of 1371. Remember that coincidentally the inverse head & shoulders also gave a target of ~1375. So two potential scenarios suggest retests of the old highs before moving back down again. This could generate a pattern known as a flat. This would suggest that after testing the high at 1371 we see another move down to retest the October low at 1075 which holds.

Essentially if the flat plays out we will spend a year or so bouncing around between 1075 and 1371 before the next leg up in the market begins. For now I just want to focus on the near term and figure out just how far this breakout will go. Is today the top or does the market have legs up to the 2011 high of 1371? That is the big question for now. Once I get confirmation of a top I will spend more time on potential scenarios. On the other hand, if market internals and credit market conditions improve I will consider the fact that a new bull leg to the upside has begun. However, I see those odds as low at the moment. A bearish outcome or a trading range seems more likely.

* The Euro is headed to 1.20 and eventually will fail, but not necessarily in 2012.

* He wants to own gold for the first 7 months of 2012.

* He wants to own stocks from August into the end of the year.

* He believes that Obama will not be re-elected. If he is, the market will take a hit.

http://video.cnbc.com/gallery/?video=3000066499

This is similar to the 2012 road map that I gave on 12/31/11. Agree with him for the most part although I continue to find the lack of relative strength in gold and silver vs. the S&P 500 to be of concern.

From 12/31/11:

“My only two 9 month cycles in 2012 are April and July. I expect the first quarter to be rocky and for the Fed to step in with a new QE program (in which they call it something else but essentially buy $550 billion in MBS) as a result. In addition, Angela Merkel may say that this European debt crisis will take years to fix but the markets aren’t going to give them that long. Sometime in Q1 or or Q2 we could very well see Europe staring at a situation similar to what we were when TARP passed. As per one of my posts earlier in December I believe Europe needs to talk about over $2 trillion before they even get started trying to recapitalize their banks. So, let’s say we get one low in March/April and then a retest in June/July followed by a rally into the election? A bottom in April or so would make this cyclical bear market about 11 months. If the final low comes in July it would be about 14 months from the high of early-May 2011. A fibonacci 13 months would fall for a bottom in June which would fit into my July time window.”

This is the kind of reading one would expect near a peak in the market.

Courtesy of www.sentimentrader.com.

As of today’s close, 5 of the 6 internal indicators that I follow are on buy signals. The lone holdout is the same one that went to a buy right as the market peaked in late-October. I would also point out that it would only take a couple of nasty days on the downside to take 2 or 3 of these buy signals back to sells. If the market is going to break out here it needs to go ahead and do it. It needs to do so with volume and solid internals. The internals this market has shown since the low in November leave a lot to be desired.

The put/call ratios continue to be quite skewed towards a bearish bias. In other words the smart money (OEX put/call) 10dma is now at its highest reading since the market peak in April 2011. On the flip side the dumb money (CBOE and Equity) 10dma’s are at their lowest levels in six months.

Note that on Friday the OEX put/call ratio posted its single highest daily reading since late-May 2011 at 3.21 and today was still a solid 2.15.

I believe that a big key to the market here is which way the financials and semiconductors go. They tend to be the cyclical leaders. Interestingly, both indexes are below their late-October highs and still under downtrend lines that have been intact for almost a year now.

For semiconductors, I am watching the Philadelphia Semiconductor Index (SOX). Note that it is challenging the downtrend line but I would like to see it get above the 200 day moving average (which it hasn’t done since July 2011) and the 50% retracement of the entire move down from 474-322. This key range is 390-398. Today’s close was 383.

For financials I am watching the XLF. I am watching similar metrics here. The trendline, 50% retracement, and 200dma come into play around $13.90. The late-October high is $14.08. $13.90 needs to be taken out for me to get bullish.

While looking over the various indexes here in the U.S. I noticed something interesting. Included in this observation is the Dow Jones Industrials, Dow Jones Transports, Wilshire 5000, Dow Jones MicroCap Index, Nasdaq Composite, Nasdaq 100, S&P 100, S&P 400, S&P 500, S&P 600, Russell 2000, Value Line Arithmetic Index, Philadelphia Semiconductor Index, and the Finanicals ETF (XLF).

There are 14 indexes in all. Interestingly, only 5 of the 14 indexes are trading above their late-October highs. These would be the Dow Industrials, Dow Transports, Dow Jones MicroCap Index, S&P 100, and the S&P 600.

Interestingly 8 of the 14 indexes are currently trading above their 200 day moving averages. Many modestly so. As I detailed in an update last week the Nasdaq Composite is facing strong trendline resistance at current levels. Today was the 3rd day in a row that the Nasdaq Composite has closed over its 200dma (but barely). This is the first time it has spent more than two trading sessions above its 200dma since July. We will see if it can keep it up.

6 of the 14 indexes haven’t overlapped their March or June 2011 lows which is bearish for those indexes as with no overlap there is still the potential that the rally off of the October lows is a only a 4th wave and that a 5th wave is still to come on the downside. These include the Dow Jones MicroCap Index, S&P 400, Russell 2000, Value Line Arithmetic Index, the SOX, and the XLF. A few examples below.

Russell 2000 has no overlap, has not filled its gap from 8/8/11 at 775, and is having big trouble at its 62% retracement of 766.

The 921-922 range has been key resistance for the S&P 400. 925 is also an important level when one takes into account that it was the peak back in 2007 before the big melt down. Bottom line is 920-925 is big resistance. Note that the late-October high was only 920.04. I have also shown a potential truncated C wave. Any index that hasn’t moved above its late-October high has the potential for a truncated C wave here.

Those that have broken above their March/June lows have done so in interesting fashion. For instance, look at a few of the charts below. There still hasn’t been a decisive break above the trendlines connecting the March and June lows. In these cases we have potential completed ABC counter-trend advances from the October lows in which the c wave goes beyond the a wave, unlike what I just showed above on the S&P 400.

Dow Industrials

The S&P 500 looks somewhat similar although if it were to run out of gas here it too would have a truncated c-wave (due to not moving above the high of late-October.

The Wilshire 5000 looks very similar to the S&P 500.

Some of these actually date back to the highs of April 2010.

Dow Jones Industrials

Wilshire 5000

S&P 500

As I was looking over these charts I couldn’t help but notice that through the “flash crash” in May 2010, the summer of 2010, the QE II rally, the plunge of this past summer/fall, and recent rally, the S&P 500 has only risen about 60 points since its April 2010 high of 1220. All of this volatility, for a less than 5% return over a 20 month period.

Actually, many indexes have really gone nowhere since late 2009/April 2010. Is this one big consolidation or part of a bigger topping pattern? Could this be one big head head & shoulders top in which the market is working on the right shoulder now? See the Russell 2000 below.

Also note that the S&P 500 is in a bit of a different situation. The left shoulder isn’t very clear but the measurements are quite clear. The peak of the left shoulder is 1220. The head would be 1010 and 1075. Add 65 points to 1220 and you get 1285 which is right about where it is right now. It isn’t ideal but it is worth mentioning as a possibility.

I had really expected a resolution from this market between Thursday and today but it remains in limbo with 4 days left to go this week ahead of a holiday shortened week next week. It will be interesting to see which way the current congestion resolves itself. Most of the evidence says to the downside but time is beginning to run against a downside resolution. If it is going to happen, it needs to happen soon. When I say soon, I mean by the end of this week.