Quick Important Note

As of yesterday's close the Smart Money indicator from Sentimentrader.com made another sharp drop and is now at its lowest level in over 2 years and is at levels last seen in late May 2007 as the bull market was approaching its final highs. Remember that this is a real money gauge, indicating that the Smart Money is showing increased aggression against a further advance in stocks. The Dumb Money Indicator remains elevated to near bear market highs, and the Smart to Dumb money spread is also right near bear market highs.

Additionally, on a technical note, the S&P made a third attempt at new highs above the January 2009 highs yet reversed. From experience and reading on this type of action, a 4th advance above the highs would likely have a bullish resolution, but any decline below last week's low without a 4th push will likely result in major further downside in the next 6-8 weeks.

In sum, from both a sentiment and price pattern perspective this is easily the best bearish topping set-up to enter short/inverse trades that we have seen during this rally. While it will take some downside to "confirm" the bearish reversal, I believe the risk to reward is the best right now. Looking out 2-3 months from now, I would gauge there is a bare bones minimum of 3 times the downside risk versus upside potential, but realistically it is probably closer to 6 or 7 to 1, and if yesterday was the high of the rally then probably 10 or more to 1.

I feel it is imperative to continue to take bearish set-ups for short and intermediate term traders and also to maintain the current BGZ blog trade for the time being.

Pete

Shooting Stars and DIA Northern Doji

Click on Chart to Enlarge

The chart above is DIA which is the Dow 30 ETF. The late day revesal today caused DIA to form a classic doji candlestick. The doji is a fairly reliable reversal candlestick in and of itself and dojis marked both the January 2009 top and the March 2009 bottom. Additionally, the S&P 500 has been stalling at a key chart based resistance point around the 945 level and the January highs. The Dow has been lagging and has not reached the January highs. Today DIA filled the breakaway gap down from early January and then reversed.

This set-up looks very promising for topping potential. If this is a significant top, then it would typically be followed by some strong follow through to the downside over the next 1-2 days. A gap down and a solid black candle tomorrow would provide enough confirmation for aggressive entry on short positions with a stop above today's high in the indexes. Additionally, a sell stop corresponding to last week's lows could be used to enter short on further weakness.

Over the last month or so, just about every bullish extreme conceivable has been objectively reached. The most recent ones from composite surveys and Nasdaq/NYSE volume ratio are typically longer term signals. I don't cover breadth data too much on the blog because I really don't think it is that useful for short-term trading. However, when looking for major turns and the health of market rallies, it is much more important. I'm not going to cover it here either other than to say that on the push to new highs above the May highs, the participation has been waning in terms of peak advancers versus decliners as well as stocks making new highs. So while we have seen extremely/"excessively" bullish breadth for a couple months, we are only recently seeing a breadth divergence with new price highs. This divergence is also confirmed by On Balance Volume in the indexes.

The investment herd has, as measured by objective and historically proven data covered in recent weeks on the blog, shifted to a decisively bullish posture. I think the current consensus is borderline manic from some anecdotal evidence as well. I frequently read the comments sections of a number of blogs looking for reader comments about what they think the market will do. I basically look for the type of comments that are non quantitative yet stated as matter of fact (or at least charmingly ignorant). Recently I have seen a surprising number of comments of people who are just now looking to re-enter the stock market because they are in danger of missing out on the new bull market, etc. Call me stupid, but I don't think you've done your homework if that is your view. I think you are panicing about missing an opportunity. That is raw emotion.

Maybe I'll go into more detail this weekend, but I've covered just about all the relevant data that one should need to see that the market is in danger of a significant pullback. The only missing piece is price confirmation in the form of a larger % decline than any pullback during this rally since the March lows. The largest pullback in the S&P 500 since March 6th was about 6.5%. So I think any decline greater than that, especially if it reaches 8% or so, should be treated like the angel on your right shoulder telling you that the market is going on to significantly lower price in coming weeks/months.

Pete

BGZ Update

I am going to leave the BGZ posted trade entry the same as it is currently, but am just following up to suggest that if you missed the last trade entry on BGZ, then I am recommending to buy today before the close ASAP.  I will probably post a stop for that trade tomorrow, but I want to see if there is any follow through down from today's reversal or not.  For any new entry today, use today's low in BGZ as a stop loss point and follow the money management post guidlines in the "Best Posts" section for how much to devote to the trade.

Today looks like a high reliability bearish engulfing pattern in the making in conjunction with a "sell the news" type mentality among smart money in recent days.  


Pete

A Few More Topping Signs

It is late and I don't have the fortitude for charts tonight. Penguins won which was more important.

However, for a good market recap check out Cobra's market view from the links sections on the right. The Nasdaq/NYSE volume ratio is getting stretched to extremes indicative of longer term tops in the past. Sentimentrader.com posts basically the same chart and it is showing a lesser extreme but still on par with some past peaks. Quote vendors differ in volume readings I guess.

Also, for those who are familiar with the VIX/VXV ratio, it closed at 0.92 - its lowest level since the January 2009 top. The close was also outside its bollinger band which has been good for a short-term pullback at least on the last few occurences.

Also, for anyone interested in even more geeky ways to analyze put/call data, check out this link from Schaeffer's Research from yesterday. It discussed a "gamma weighted" put/call open interest ratio which is showing a great overabundance of near the money calls versus puts.

Other than that, the only major technical things are another failure for the S&P to breakout from the January highs and a short term potential head and shoulders top easily seen on a 5 day chart of SPY, IWM, etc.


Pete

SDS Trade Exit

The short-term model just touched into oversold territory giving an exit signal for the current SDS trade.


Trade Recommendation:

Sell SDS today with a market order. Current price is 54.70 which will be the blog exit price.

I will update later on the BGZ trade if necessary.


Pete

Optional Protective Stop on SDS

In all probability anyone who took the SDS trade entry on Friday got in at a significantly better/lower price than the posted entry which is good. So if you got in around 53.00, then I would suggest getting a breakevenish stop (or a little better) in for today.

I will still post if/when a short-term oversold signal comes, but the rationale here is that if "the high" is not in for this advance yet, the market will likely find support soon, and could move explosively to a new high.

Looking at the S&P futures chart (symbol ES) for Friday, a classic long-legged doji formed. With the gap down this morning, this sets the potential for a longer term reversal based on that pattern. This makes me think that new highs are unlikely the next few days, if at all. But keeping losses to a minimum is the name of the game, and quickly reducing risk to nothing if possible can be a good pyschological tactic to allow you to stay with a good trade until the signal comes and avoid the risk of the trade going negative and stubbornly holding on to a loser if the market does not follow your expectations.


Pete

S&P 500 Update Video

This video covers the stock market with focus on the importance of the 950ish level on the S&P 500 as resistance as well as analysis of fund flows and investor opinion surveys.

There are 2 main scenarios here: either this rally is the first move up in a new bull market, or it is a middle/late stage glorified bear market rally. In either case, by historical comparison of past similar occurrences and their duration, % advance, rate of gain, etc, this rally is long in the tooth. Also, even IF this is a new bull market, the corrections after the first rally of a new bull market have tended historically to be very deep (about 75%ish) when the bear market was very severe (say 50% or greater decline).

If you are considering entering long-term investments, my suggestion is to not be fooled with all the recent media hype and technical excitement about the market regaining the 200 day MA, etc. Wait for a more substantial and longer duration correction and then consider if the time looks right.

Pete