We are 24 days into this cycle. We’ve got signs that institutional money has exited. Sentiment levels have pegged several bullish extremes. The dollar has closed above the 50 DMA. We still don’t have anything that really looks like an intermediate term correction. At this point any rally is likely to be short lived. It’s just not worth the risk to try and catch the last few points…if there are actually any left. Didn’t we learn our lesson about that one recently with gold? Trust me there will be a correction at some point and sentiment will return to the bearish side and we will see signs that institutional money is coming back into the market. This is just one of those times where there is no edge and thus nothing for us to do besides wait.

At the very least we need to see the market close back below 1100 before assuming the correction has started though. A move below Fridays intraday low would be even better as that would form a swing high. We can’t start the drop into the cycle low until we at least have a swing high in place.

I noted the other day that the COT for the NDX had reached extreme short levels. Here is a chart with the last 4 times the commercials reached the current level of short positions. None of them were exceptionally good times to be long.

You can see the 1800 level has proven to be a major pivot point several times in the past. I don’t think I would be willing to bet heavily that we are just going to blast right through this level on the first try. And apparently a big chunk of the commerical traders are betting against it also.

For what it’s worth I’m looking for two things before I exit my OIH position. I will sell half my position as soon as the OIH fills the September 8 gap. I prefer to short only ETF’s if I’m going to play counter trend trades in bull markets. (Shorting individual stocks is dangerous in bull markets. One never knows if some kind of company specific news might send the thing soaring even if the general market is trending down.) I also prefer to short ETF’s that have a gap. Gaps are hedge funds bread and butter trades. It doesn’t hurt if every hedge fund manager is also gunning for that gap. That probably guarantees some downside pressure all by itself.

I’m going to sell half my position when the gap fills and the other half on any heavy buying on weakness day. If I see a monster buying on weakness day prior to the gap fill I will exit the position entirely.

Dollar:

The dollar made it’s first attempt to close back above 76 this morning.

I’m going to suggest a close back above 76 would be another level of confirmation that bears might want to wait on before taking or adding to short positions. I may increase my OIH position to 10% if the dollar can close above 76.

Breadth:

I’m going to keep an eye on the McClellan oscillator for the next couple of days. Usually when we see 2 or 3 days of small changes like today it’s followed soon after by a big volatile move. Since we are getting deep into the daily cycle I’m going to assume that move will be down when it comes.

Gold:

Let me remind everyone that the shortest length of time it has taken gold to reach a daily cycle bottom since last November has been 7 days. I don’t think we even need to consider buying anything precious metals related until at least 7 days have gone by.

Even then I won’t be a buyer. I’m not going to try and spot the bottom of the correction in gold, that would just be a coin toss anyway. All we have to do is spot the bottom of the correction in the stock market. Since miners have bottomed either right along with stocks or within a day or two all we have to do is watch for the signs that the stock market is bottoming. That means some fairly bearish sentiment readings, heavy buying into weakness day or days. Some kind of exhaustion selling climax and oversold oscillators are also seen at cycle bottoms especially if they occur in conjunction with a test of some kind of support zone. And of course a swing low, preferably at least half way into the timing band for the next cycle low.

In case you haven’t noticed, bull market intermediate tops tend to come on good news. Big money has a much easier time selling into good news. That’s when the emotional retail trader is willing to buy everything they offer and they don’t have to deal with moving the market down with their sell orders. That’s another reason I think we probably got the intermediate top on Fridays job report. I can pretty much guarantee there were a ton of buy stops sitting right above the old highs. Since Friday didn’t turn into a trend day we have to assume there was someone willing to sell into all those buy orders. That someone was probably smart money unloading stock in preparation for a correction.

On the other hand smart money will usually buy into bad news at intermediate bottoms. Big money traders know the trend is up so buying into the negative media spin at intermediate bottoms is the best time to get emotional retail traders to puke up their shares at bargain prices. Unless the bull has come to an end the trend will eventually reverse so buying into these selling climaxes actually has very little risk.

Short term indicators are neutral.

Gary

www.garyscommonsense.blogspot.com

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