Don’t let anyone fool you: Markets are not making it easy for anyone here. Traders and investors alike have to constantly evaluate the risk/reward equation in a market that moves now wildly in every direction every single day. The massive moves in yields, currencies, commodities are continuing while we see the larger market still confined to a 5% range off of all time highs. Aside from a few exceptions earnings are largely disappointing with heavy downward revisions and economic news is so so at best while central banks are on the horn every single day trying to manage their message.

This week it was the FOMC following Draghi’s big QE announcement. Consider the flow: Wednesday’s FOMC statement disappointed and resulted in a sell-off, a magic Yellen related leak on Thursday resulted in a sharp bounce (think mark-ups), then Bullard was on the wire Friday morning and stayed on the rate raising message and stocks sank, then Williams came out and said not to worry about the disappointing GDP number. Promptly stocks ramped to highs for the day only to give it all back into month end close, debt troubles in Greece being again a likely proximate cause.

In short, this is a very complex chess game and traders can easily get caught up in a war of attrition if they overtrade, overexpose, or pick wrong directions or levels. A very dangerous time for most traders. Investors have learned that any stock can get shot to bits. Think $MSFT.

Yet stocks are still in the middle of the range as they don’t break down nor sustain rallies.

The charts tell an interesting tale so let me walk you through the story as we see it at the moment:

First off, please note January closed basically in similar fashion as the analogs indicated they would at the beginning of the month (Choppy Waters): Down

Both of these analogs had hard bounces coming into February. In fact in 2014 we observed one more big flush in early February that then marked the bottom for the year. In 2000 we saw a blow-off top coming in the March/April time frame.

Can we expect something similar here?

While it is perfectly conceivable that we have seen the lows already there are numerous factors that speak against it. Let’s review some signal indicators first before going into index charts:

The $NYSI generally has 3 bottom zones that indicate a bottom depending on the severity of a correction. At this stage we haven’t quite made into the first zone yet:

The $NYAD has shown weakness, but also not an extreme low yet:

Stocks above their 50MA are approaching the bottom zone, but could still have a ways to go:

And the $NASI is still on a sell signal:

High/Lows? Still positive! No signs of extremes at all. At least the 2014 February bottom had some negativity to it:

And the weekly $SPX chart below also shows that both the participation index and $NYMO are not at key low levels, in fact the $NYMO is far from any bottom signal:

In summary: None of your standard signal indicators show that markets have made any sort of good low.

In fact, the chart above shows that we just witnessed a trend line break on the $SPX. This break reflects weakness and highlights an emerging change in the risk/reward equation toward further downside.

Let me walk you through some key charts here that are raising major red flags:

Monthly $SPX: Unlike 2014 this January’s monthly close came with a major shift in the chart: The first monthly close below the 8MA in 32 months, the first back to back red candles in 32 months, the first negative MACD divergence in years and first monthly RSI cross below the 70 line in a very long time as well:

This doesn’t mean we are now collapsing, but it is a notable change in this long term bull market. A look at the monthly $WLSH chart shows an even more pronounced pattern of weakness:

And the monthly $XLU has put in rejection candles very similar to prior market turns of size:

Bottom line: The monthly charts are showing major red flags. And, sneakily, we can observe a major shift in money flows while the Ryder Bull/Bear ratio still shows a very much maximum bullishly allocated market:

Clever and subtle distribution? We can’t know, but it’s clear that several sectors are showing signs of stress. One of these sectors is the banks. Take Goldman Sachs:

Basically back to October lows and broken below its 200MA. In fact the entire financial sector is hit hard and at key support:

The driver of financial weakness of course is found in the collapse of yields as investors are racing into bonds.

But exactly here we may find some potential, at least short term, positive news for investors. The $TLT is not only vastly overbought, but is also close to reaching a major weekly trend line (chart courtesy Mella_TA):

Is a retrace feasible in the near future? Yes, but as the chart shows it still has a bit of room to move, and there’s nothing bearish about it. So a pullback may be all there is to have for a bit.

Consider the following two charts (also from Mella):

The $SPX BP shows further downside risk, but for a potential buy signal:

A break below the descending trend line however could be a signal for the cup and handle pattern on the $VIX to play out:

The picture that seems to be emerging is that the next step in the banks may well be the deciding factor here whether we see a nice bounce in the coming days/weeks.

The main picture shows no clear bottom signals at the moment and further downside risk on most index charts as trend lines have been broken:

What is the range of the downside risk here? The banks are already flirting with the 200MA and as long as they remain weak a break of support makes a visit for the main market of this area a likely proposition. Trend lines and previous gaps outline additional risk to the downside and with RSIs still in the 40s a potential path to the lower range is clearly open:

Let me repeat what I said at the outset: Markets are not making it easy for anyone here. Traders that are able to be flexible and disciplined with stops and can take advantage of the volatility are doing really well. Anyone else will get slapped on some level. Now while I’m pleased to say that January has been fantastic for us, I’m also keenly aware that these markets are extremely hard to read here and one needs to stay humble and responsive to this fact. The daily charts are shaping up to show that a bounce of size may be near, but sizable downside risk remains first as signals have not yet lined up with a traditional bottom. How far such a bottom will take us will depend on a myriad of factors. At the moment the earnings picture does not signal that it will be the primary driver of new highs. The monthly charts signal that the days of smooth travel for this market may well be coming to an end, if they not already have. But one cannot ignore the $2 trillion in combined European and Japanese QE hitting markets this year either.  Our take:  Don’t be stubborn one way or the other.