Quick Note

The S&P 500 exceeded 1175 this morning and is thus far holding up. A reversal this afternoon could form a bearish candlestick pattern, but right now it seems unlikely that will be the case.

Of note, the Nasdaq 100 QQQQ set a new yearly high today above the April high. This has created a kind of non-confirmation between it and the other indexes. We probably shouldn't read too much into this, but it may be a bearish sign.

The next unfilled gap on the SPY etf is at 120.35. That is higher than I would like to see the market go if a top is forming here, but it is within reach now.

Bond Update - IEF and TLT

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This chart is IEF, a 7-10 year bond ETF. Notice is has made new rally highs recently. But there is a great bearish divergence on the MACD indicator. This is a nice bearish set-up.

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Now this is TLT which is longer term bonds (20+ years). Notice it has not made new rally highs with IEF. In the past this has often led to bond market weakness over the coming weeks.

I am inclined to stay with the current TBT trade because these charts and technical analysis lead me to believe that bonds will fall from here.

Updates - S&P, US Dollar, VIX, VIX/VXV

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This is the S&P 500 cash chart. Today the market formed a doji candlestick right at the upper channel line of the channel drawn. I noted yesterday that the 78.6% retracement level of the decline is at 1175. That is a little overhead from here. A doji means that the market is in a state of balance. After a sustained trend that can indicate a turning point. However, if there is no reaction to the downside from here, then it may not mean a lot.

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This chart is the US Dollar index. Of significance is that the dollar index was up today. It has been so negatively correlated with stocks recently, that I wonder if it is a tell that these markets may be at a turning point. A close above the 5 day EMA would be a first early signal that the current trend is weakening or reversing. Again, sentiment is very negative against the dollar, and it is due to rally. So even if it doesn't from here, keep it on the radar.

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The VIX made a big move today. It gapped down and opened below the lower bollinger band. That doesn't happen too often. The last 2 times were mid Jan 2010 and mid April 2010 - not good times to be long. Times before those over the last couple years were generally near short-term highs at least, though not all were at intermediate term highs.

At times the VIX will diverge with stocks before stocks turn. So maybe the VIX will bottom but prices may move higher a bit before topping. I don't know - just stating some past tendencies.

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Now this chart gets my attention!! The VIX/VXV ratio, which is short-term volatility divided by longer term volatility, is at a new low. The VXV is only about 3 years old, but today is the lowest ratio since the VXV inception.

This ratio has been good at highlighting rally highs over the last few years. There was one exception in July 2009 which threw me off, though in retrospect, it occurred after a correction rather than at a high, so that should maybe have been somewhat discarded. But looking at the chart above, the prior lows in the ratio were April and January of this year, early August of this year, and May 2008. Those were all times which saw significant corrections.

So, while there are not a huge amount of indicators screaming market top here, there are some high quality ones, and some confirming sentiment amongst related markets like the US Dollar, Euro, and gold. In addition, the market still may be forming a nice harmonic/fibonacci topping pattern.

Don't be surprised to see this market begin a significant pullback very soon.

Bearish Gartley Pattern on SPX @ 1175

As of right now with the SPX pushing above the 1160 level, I would expect a move to 1175 before any reversal down. The 78.6% retracement of the entire April-July correction is at 1175 and the high of the bounce after the "flash crash" is at 1174ish. This is somewhat compelling in that most Elliott wave enthusiasts seem to believe that the move down from April to July 2010 was a "leading diagonal" in Elliott Wave Principle parlance. According to the experts, a leading diagonal is often retraced 78.6%. Even if the market does not top at that level, I would be somewhat surprised if it doesn't oblige or entice sellers at least temporarily at that level.

Also the market right now is in the wide price range of the mini crash in 2008 on the day of Lehman bankruptcy (Sept 29 2008). So I think this area (1100-1200) is a key level for the market. If the market pushes to new highs (above the April 2010 highs) then it would seem to me that the market accepts that those issues are behind us.

As of now there is no reversal candlestick pattern on the daily or weekly chart of the S&P 500. So for intermediate term bets to the downside, it would be nice to see something along those lines.

Gold and Silver

If anyone was riding the gold and silver train up, I think this should be your exit. As long as they close around where they are now (1:30 ET) then they will form wide range bearish engulfing patterns.

I don't necessarily have a great reason to believe this will be a major top and lead to a bear market, but at least for the intermediate term, the sentiment is too bullish on silver, gold, and the Euro and way too bearish on the US dollar. So I think there will be a substantial reversal in all those markets.

I still believe the stock market will correct from near these current levels, but there are admittedly few sentiment extremes to note.

Update

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If the market is topping it here, it would be a nice harmonic pattern. The size and time consumption of what I have noted as wave "c" above is almost the exact same as wave "a". There are several fibonacci time relations pointing to late Sept/early Oct for a turn present on the chart above as well if you look at in depth.

Assuming the market does reverse down from here, one key will be to see if the market retraces more than 61.8% of the Sept rally. I have the retracements drawn on the chart. 61.8% would be a little below 1090 as of now.

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One thing I often look at is what sectors are not confirming new rally highs, and in particular I look at the financial sector in the current market environment. You can see it is not confirming new highs on this rally the last week or so. When that has happened in the past, the market has usually been near a new correction.

If these charts mean anything, I would expect the market to fall this week.

Stocks, Silver, Gold - Topping I Think

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Sentimentrader.com just noted this today. There was a huge jump in the net short level of commercial hedgers, which are typically "smart money," on Nasdaq 100 futures this week. Looking at the chart you can see it hasn't paid to be long the market after similar past spikes.

This data fits right in with my posted outlook that the S&P 500 (or markets in general) is likely topping at the 1160 area. Also the sentiment is very bearish on the US dollar and it should be primed for a good move higher, which typically will coincide with a falling stock market in the current market environment.

On other notes, sentiment on silver is very excessively bullish, and other than long term holders, I would definitely exit silver stocks or ETF's, etc. Sentiment on gold is starting to get too bullish and should be due for a pullback soon. I may post a chart of this, but in case I don't, if you look at the price of gold divided by the euro (i.e. FXE etf) you can see that the price of gold is not at new highs relative to the Euro, even though it is against the US dollar. In the past this has been a tell that gold should move down and the US dollar up over the coming weeks. So that adds to the technical and sentiment evidence .