Very Ugly Charts...

I can't tell you how sick and tired I am at being short. Ninety percent of the time I feel like a fool. Just look at all the people making money hand over fist - buy, buy, buy... The arrogance of the participants who say - "Fundamentals don't apply, technicals don't apply, the market is going up, up, up!" - and it does. Then there are those who are convinced that "they" won't let the market fall. "They" meaning the PPT, the specialists, and of course GS. Very disturbing.

Now here is the thing, there is no secret force controlling the market - at least not at the tick by tick level. No specialist can make the S&P close at exactly 1108.46 - GS can not control the herd when the herd is spooked by a news item - and the PPT does not work at a trading desk every day with the specific goal of screwing the shorts. All of this is emotional non-sense and it distorts analysis.

The fact of the matter is that the markets have grown tired and it is becoming much more difficult for a rally to maintain momentum. If you compare the last two rally legs to the prior legs since March, you will see what I mean. We are rolling over, volume is decreasing, RSI is weakening, and volatility is increasing as big money distributes across the top. This is normal, it is healthy, it is predictable. Until the market gets on with the correction it can not rally any further. A correction of 15-20% is what it will take to get the hesitant participant interested in the game. The problem is as the market corrects, participants (with the aide of the media) will have to analyze the fundamentals - which may not support the present (or corrected) price levels.

For those of you who doubt that we will see a correction, just look at the following Daily chart of the ES futures contract:




Let's start with the RSI divergence over the last three rally legs. When price increases as RSI decreases, a warning signal is generated to reduce your longs and consider shorting. The divergence is getting more and more dramatic. In fact, look at how the price and RSI diverge even within this last rally leg top. This single indicator has been extremely accurate in all time frames for me. I trust it implicitly.

Never, never, never make a TA decision with one indicator. Let's look at others, like volume. If you look at the prior two rally legs, the up segments were somewhat supported with periods of increasing volume. During the last rally leg - the most dramatic rally leg of the series - saw a divergence in the volume levels. Volume levels decreased while price increased. This is the second signal.

Now look at how volatile things started to get - particularly in the last two tops. Increased volatility is usually a sign that big money is shifting - usually distributions are being made by major participants and the "less informed" and "late to the gamers" are on the buy side.

Interesting enough, we did not make it to the top trend line of the up channel on this last rally leg. This is a sign of weakening - a process where the tops are rolling over. There have been SIX attempts at new highs in this topping process - SIX! After a while, things begin to breakdown. In fact, we saw what can happen to the downside on Thanksgiving evening. The futures market blew off 31 points. It has been a long time since I saw that kind of take down.

Now, I encourage folks to study SPX and you will see that we are currently at a double resistance level - one from the major down trend line formed across the tops since the October 08 crash and another from the up trend line formed across the bottoms of the March rally. We are also right about the 50% retracement level. All of these things contribute to my confidence in going short.

My advice - don't "personalize the market" and make it an enemy. The market is an object - a puzzle - meant to be solved, but also meant to be put down when it frustrates you. Don't try to be in every trade - you'll lose too often and you'll be ill prepared to take a chance when a chance is warranted.

Let's see if we rally tomorrow or reverse course. Either must happen as moving sideways does not seem to be an option! Look to the dollar for a clue!

Cheers.