Nearing Confirmation of A Correction- But Short-Term Oversold

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This is a 60 min chart of SPY.  The MACD is oversold indicating the market may attempt a rally.  It would be better to see a bullish divergence develop before considering a new long entry.

Given the momentum set-up with the weekly and monthly stochastics overbought and the weekly now in a sell signal formation, I think the better opportunity is to wait for the likely rally and then look to short/inverse on the next sell signal if price meets resistance at or below the recent highs of 9/14/12.

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The spread between the smart money commercial futures traders and the large speculators is at a 3 year low indicating the smart money is heavily short with a bearish outlook for prices.  The last times the spread was this large were June 2009 before a 4 week correction, around New Year's 2009 before the final plunge into the 2009 bear market low, and the first week of Oct 2008 before "the crash" plunge into the Oct 10th low.  The time before that was late February 2007 just before a surprise 4% plunge day in the markets and an 8% overall correction.

The point being that there is no other real interpretation of this than at least a modestly bearish one.

The correction off the recent high in the SPY etf is now 8 days long.  The prior longest correction since the June low was 9 days.  If the decline continues to 1415 on the S&P 500 cash, the decline will be larger than any other pullback since the June low as well.  So further downside would create an overbalancing of both price and time suggesting a correction of at least the June-Sept leg up is occurring.

Of note is that open interest rose sharply in the last reporting period with an increase in the commercial net short position.  This indicates that there is NEW hedging or commercial short interest coming in at these level.  While this may seem trivial, another pattern which occurs is for commercials to go heavily short, and then cover their shorts on falling open interest as the market pushes higher and puts them at a loss.  That pattern tends to lead to a sustainable price advance.  We are NOT seeing that right now, which indicates that we may be making a very important high here.

Again my suggestion is to exit longs and growth stocks, or trail stops tightly.