It appears that the U.S. stock market is being held up with tooth picks. With so many bearish patterns on the charts and sell volume increasing on down days the prospect of Dow 9000 into September-October seems inevitable. While a drop of this magnitude would be somewhat painful, ultimately it would be a good thing as it would present a tremendous buying opportunity.

While Apple may be a great company, at $250. per share it is hardly a bargain. At $150-$200. per share with an upside target of $300-$400. per share investor interest should be aroused. Keep your eye on Apple as it is a good indicator of where the broader markets may be headed. Apple is in the process of breaking down and appears to be heading to its 200 day ma at around $230. If that price doesn’t hold it could drop to as low as $150. per share, it’s 200 day ma on the 2 year charts.

The Good:

1) The 21 day moving average on the S&P and Dow has crossed upward of the 50 day moving average on the 1 year chart giving a short term buy signal.

2) The 21 day moving average on the QQQQ has crossed above both the 50 and 200 day moving averages on the 1 year chart giving both a short and intermediate term buy signal.

3) The U.S. dollar is falling. It appears that the carry trade is back on where dollars are sold and stocks, bonds and the euro are bought. In the old days if the economy was good then stocks, bonds and the dollar would rally simultaneously. In the new world economic order, however, a strong dollar is bad for the U.S. economy. Since the U.S. consumer is financially tapped out then corporations must look to exports in developing countries for profits. The cheaper the dollar the more cost effective it is to buy U.S. exported goods. It should be noted, however, that sales of luxury items are strong. Apparently Mercedes-Benz is doing wonderfully in this economic environment. This means that doctors and lawyers are doing very well regardless of the rest of the economy.

4) A falling dollar automatically increases the dollar value of anything denominated in it including stocks and bonds. This is a concept that many analysts do not seem to grasp as they are befuddled as to how the market can rally in the face of economic weakness.

5) China is stress testing its banks. If U.S. and European banks can pass a stress test with all their accumulated bad debts on the books then I’m certain Chinese banks that are flush with cash will pass with flying colors.

The Bad:

1) The chart of leading economic indicators has just fallen off a cliff indicating a potentially large economic slowdown sometime in the near future.

2) Volume is decreasing on the major indices as the market moves higher. This indicates that it is a trader’s market and any hint of really bad news can send the market much lower.

3) If some bad news comes out of Europe, there could be a mad rush out of the Euro and back into the dollar thereby sinking the market.

4) We are heading into the negative market cycle of September-October.

5) Commodity prices including oil and gasoline are rising. This is extra overhead for both businesses and the consumer.

The Ugly:

1) The S&P and Dow are both rallying within a bearish ascending wedge pattern. This pattern usually breaks out to the downside. A push above the upper trend line on heavy volume would be extremely bullish. As we are heading into the September-October time frame, however, it seems unlikely that the retail investor is going to jump on this bandwagon as the memory of October, 2008 is still fresh on everyone’s mind.

Right now the S&P is bumping its head against the 21 day moving average (the light grey line) and appears to be hitting stiff resistance here. The MACD is below 0 but may be turning up and the stochastic is heading higher. Volume has been steadily decreasing since the April top. If the market does rally it will probably be capped at the upper downtrend line that is about 1200 on the S&P. A decline would bring us to at least the lower uptrend line that is around the 1020 area.

A break of either trend line in the current time frame would indicate approximately a 200 point move on the S&P in the breakout direction. If the break is to the downside, the move could be doubled. If that were to happen things could get really ugly as we could be testing the bear market lows of 2008.

It should also be noted that the longer the index stays in this pattern the smaller the breakout move will be. In any event the S&P is going to be forced to breakout in either direction within the next few months. If it breaks out right at the apex there may not be any significant move in the market in either direction and we could wind up with a range bound market.

Since we are very near the treacherous September-October time frame, the leading U.S. economic indicators are weakening, and there are numerous other bearish patterns and indicators on the major charts, I suspect the ultimate resolution will be to the downside although that is in no way a definite outcome.

The market has been reacting to dollar weakness and Euro strength, but the Euro at 130 is hitting resistance from a long term downtrend line and this situation could reverse on a dime. Interestingly enough, the pundits have been wrong about bonds. All we have been hearing for the past year is that yelds have to go up due to the massive debt that is being accrued by world governments but so far the exact opposite has happened. Any one who has attempted to short bonds during this time period has gotten crushed.

Volume has been steadily declining since the April top, the MACD is under 0 and has stayed there since May even though there have been counter trend rallies, and the stochastic is in overbought territory. If you compare the stochastic movements to the SPY price movements, the stochastic has been a reliable timing indicator for market turning points.

The VIX has dropped to the uptrend line formed from the April low and it has also formed an equilateral triangle. According to the stochastics the VIX is in oversold territory. While it is not shown in the chart, the VIX has pulled back right to it’s 200 day moving average.

The problem here is that the VIX has never really dropped to more normal levels during any of these rallies. This indicates that the professional traders are not buying into the rosey scenario currently being announced by the talking heads at CNBC.

While the market did reverse to the upside from below the neckline of the head and shoulders pattern, I suspect that this rally is just about done and another right shoulder will be formed before the market plunges.

Due to good earnings being announced by Intel and other companies, I would not be surprised to see an initial move up tomorrow followed by a larger move down. The problem with earnings is that it is past history that is already priced in. While intel did give good future guidance on chip sales, that guidance has not been affirmed by the computer manufacturers.

We can now see a well defined left shoulder, a head, and the left side of a right shoulder. The shoulder line is at 1050 that historically has been a transitioning area between up and down markets.

We are definitely heading to the shoulder line. The question is what will happen when we get there. If the market can reverse to the upside on good volume that would be bullish and would negate the head and shoulders pattern. A break through the neckline, however, has a projected downside to 900.

According to Elliot Wave Theory, market declines occur in 3 waves. So far we have one wave down, a smaller wave up and the third wave down should be the longest. I believe the market is headed lower and the decline is going to be contained within the 2 downtrend lines 1 & 2.

The first thing you will notice is that a massive diamond topping formation has occurred. The lower left leg of the diamond is the upper part of an intermediate term downtrend channel.

Between May and June the market found support at it’s long term uptrend support line, hit resistance at it’s alternate long term support line, dropped back down to it’s long term uptrend support line and then bounced off that and rallied back to it’s alternate long term support line. That is where we stand now.

If we take a look at the volume indicator it has been declining and hitting a lower high on each rally attempt. This is a negative divergence indicative of a weak market.

The MACD is also indicating a negative divergence as it hit a lower low in June than it did in February even though the SPY was at 1050 both times.

While they are not shown in this chart, the 21 day moving average crossed under the 50 day moving average on May 18 giving a short term sell signal and it then crossed under the 200 day moving average on June 7 giving an intermediate term sell signal.

When taken together from a technical point of view the chart of the SPY looks totally bearish and it is my guess that the current rally is a bear trap that has peaked out. I expect the rug to be pulled out from under investors feet very shortly.

We should anticipate a drop of the SPY into the intermediate down trend channel. If the Dow drops to 9000 that would be a full 20% correction from its peak on April 26. A 20% correction in the S&P from it’s peak would bring it to 976. In all likelihood both indices will overshoot to the downside scaring the living daylights out of investors.

Since the talking heads at CNBC are of the opinion that a 20% correction is a bear market, the day they announce the fact that we are now in a bear market will be the buying opportunity of a lifetime.

It is possible that what looks like the right shoulder may actually be part of the head as the large sell off on May 6 was quite abrupt. There are 3 possible scenarios that may occur:

1) Upon reaching the neckline the market will resume its rally and break out to new highs. Based upon current market conditions this seems the least likely outcome.

2) Upon reaching the neckline the market will retrace about 50% of the current sell off bringing the S&P to 1150 and Dow to 10,500. There will then be a decline to the neckline forming another right shoulder. At this point the market will either A) reverse to the upside thereby negating the head and shoulders pattern or B) it will fall through to the projected lows as stated in the title. B seems the more likely outcome.

3) The market will break through the neckline without any further rally. In all likelihood there will be a back test of the neckline and then further declines to the projected lows.

The target for the head and shoulders pattern is calculated as follows: The neckline – (the top of the head – the neckline). This is the same as 2 x the neckline – the head. On the SPY that is (105 x 2) = 210 – 122 = 88. On the DIA that is (99 x 2) = 198 – 112 = 86.

Interestingly enough, the neckline that defined the reverse head and shoulders bottoming pattern that preceded the rally from the March, 2009 lows is right around the level of the projected decline of the current head and shoulders topping pattern on both the SPY and DIA. That is where I believe the market will find major support and the bull market will resume. The mathematics of this situation works out so precisely it seems inevitable that it is going to happen. The projected time frame for this drop is approximately 2 months.

With Germany expected to ratify the Euro agreement to bail out Greece I anticipate that there will be a short covering rally that will bring the SPY to about 115 and DIA to 105. Therefore I am inclined to believe that option 2B will be the actual outcome.

Noble Corp (NE), an oil and gas drilling contractor, has been trading in a well defined parallel channel ranging roughly between $39. and $45 since Oct., 2009. This looks like an extended bull channel and NE has just bounced off the bottom of the channel and is now trading at $39.27.

The slow stochastic has just given a buy signal and from oversold levels. There is also a doji candle stick that many times indicates a price reversal. The chart on NE looks bullish and the stock has been consolidating for 7 months. I believe NE could quickly trade to the upper end of the channel at $45 and then break through the top end to see even higher prices.

I don’t believe the Gulf situation will stifle world-wide oil exploration and NE has clients around the world. China and India are thirsting for oil so exploration will continue regardless of any mishaps. With rising oil prices and more equipment being tied up in the Gulf of Mexico I believe NE’s assets will become more valuable.

One could buy the stock here for a possible 15% gain. I would set a stop loss at $37.70 and look to take profits at or near $45. You are risking $1.57 per share loss for a $5.73 per share gain. Your reward to risk ratio on the trade is a healthy 3.64 or 364%. In other words you will make $3.64 profit per share if the trade goes well as opposed to taking a $1.00 loss per share if it doesn’t.

I have drawn a line where the current bear market downtrend was broken. This coincides with a horizontal line drawn at the S&P 1150 area. This line clearly separates the upper half of the chart from the lower half. When 2 major trend lines intersect at a price point it gives that price more importance. Therefore S&P 1150 should see extremely strong price support. If that level is broken the S&P could drop to as low as 1050 or lower and still be trading above the bear market downtrend line. If the downtrend line is penetrated that would be an indication that the bear market has resumed and a re-test of the bottom of the channel should be anticipated.

The improving worldwide economic situation so far has not resulted in a meaningful improvement to the U.S. employment picture. It is not unusual for workers to have to re-train themselves after a recession as improving technology and world wide competition causes jobs in older industries to fade away. Therefore we should expect the stock market to continue its march upward. If the bear market in stocks does manage to resume and the S&P subsequently hits the bottom of the megaphone pattern, we would be looking at about S&P 600 and Dow 5500, not a pretty picture.

One money manager called the rally off the March, 2009 lows a sucker’s rally. The only suckers are the ones who didn’t participate in at least some part of a 70% market move. Obviously one should not mindlessly just buy and hold a stock forever as profits should be taken along the way. Another event that is being waited for is the 10% correction. I’m not sure why a market has to correct 10% or at all but I suspect that is another event that may not happen since so many people are expecting it.

The market move upward from the March, 2009 lows has been fast and strong and at this point shows no signs of slowing down. If the world economy performs better than anticipated, it would not be surprising to see the stock market continue its meteoric rise to the top of the channel.