Market Showing Increasing Signs of Intermediate Term Top

A reasonably strong case could have been made the last couple weeks for a more significant pullback than we have seen. Now this past week's data makes it a very strong one. There was a big drop in "smart money" confidence this past week as measured by Sentimentrader.com. Also, the intermediate term models from Sentimentrader.com are now basically all overbought (they weren't last week).

When Oct. option expiration has occurred when the S&P futures were within 2% of a 3 month high it has always led to a pullback of a couple percent or so. Also the VIX made a bollinger band sell signal last week. It closed below it, and now is back inside. I have noted in the past the cyclical tendency for the market to rise into options expiration for the last year and a half, and then to fall or consolidate in the couple week following OpEx. So they expired Friday and look set to pull back soon this time.

The DIA (Dow 30) made an outside day reversal bar, and bearish engulfing candlestick. The Nasdaq composite made a hanging man top reversal candlestick. These need some confirmation to the downside for more confidence, but there is at least a hint of topping here. The US Dollar Index has formed a nice bottom reversal candlestick pattern amongst great bearish sentiment. This should be a catalyst for the stock market to decline.

The largest decline in the S&P since the early Sept. low has been 2.3%. So any decline larger than that would give added evidence that a larger correction will play out based on the tendency for trends to experience uniform corrections. The rule I have suggested in the past is to look for a move 1.2 or 1.25 times larger than any prior counter trend move. Currently this could require a 2.8+% decline to hit that threshold.

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There are a few basic time relations that I look for that relate a move to its prior moves. One of them is that often one move may take the time of the two prior moves combined. This seems more often the case if the prior 2 moves were similar in time. There are time relations as well, but as pertains to the current situation, this is the longer time relation and is coming up the first couple days of this week.

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Here is the Shooting Star in the Nasdaq Composite.

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Here is the DIA bearish engulfing outside day. It is occurring right at a fibonacci confluence area and at the time relation mentioned above.

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The NYSE McClellan Oscillator is showing some continuing strong bearish divergence on this move up. That basically means the amount of stocks driving the market higher is narrowing. Fewer and fewer stocks are holding up with the market. That is a signs of a tired leg up.

Cobra's Market View notes that the institutional selling is starting to perk up and is forming a bearish divergence right now. The charts he mentions are from StockTiming.com. So this fits in with the diverging McClellan Oscillator.

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This is the US Dollar Index chart showing the nice candlestick reversal pattern after undercutting a prior wing low. The FXE (Euro Dollar) ETF made a bearish engulfing pattern Friday, and the UUP (US Dollar Bull ETF) made a bullish engulfing. These may reverse and drive the stock market lower.

On account of these I am posting a new inverse ETF trade on SDS.