Pattern Watch

This channel on the /ES futures has contained all price action dating back to early February. This 60 day, 60 minute chart shows more room for upside before testing the upper channel line...

Seems like a test of the prior highs for the S&P is inevitable at this point. Still no signs of weakness and 1150 is less than 12 points away...

The Nasdaq has managed to pop above the prior highs and is the relative strength leader...

The DOW is sitting roughly 160 points off prior highs and is the laggard of the group...

I remain just as bearish as described in previous posts, but if forced to take on some long exposure, it will likely come from the list of breakout candidates below...

AMED

BAP

CTRP

GIL - Broke out on 3/5. Not too extended.

NFX

WPZ

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The Endless Climb

I continue to see prices struggle to retake the lower /ES futures channel line and I still expect a sharp break lower from here. Perhaps, the most important thing to takeaway from the following chart is the volume pattern. Those red candles dwarf the black ones and despite the past year of nonsense, I remain a firm believer that volume leads price...

Turning to the short term chart of the S&P, the neckline of the inverse head and shoulders pattern has provided support for the pullbacks both yesterday and today. If this is a breakout, it's a weak one at best and I think the odds of failure are high. Anyway, I see upside resistance at 1130-1131 and a neckline failure could quickly see prices below 1115 and probably down to test the rising 10 dma around 1108...

If you consider the /ES price action a slight overshoot, the same could be said for the Nasdaq. Prices have poked above my resistance line, but not by much. Note that the Nasdaq could drop nearly 35 points before testing the 10 dma as prices again get stretched to the upside...


It's a different story for the DOW. Prices sit only 30 points above the 10 dma and it wouldn't take much weakness here to get our confirmed sell signal. Remember, we want to see prices below the 10 dma and the average line itself roll over before becoming confident in the termination of this seemingly endless climb...

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Every once in awhile, we like to take a look at the charts and price action overseas. The Hang Seng broke down from a head and shoulders pattern earlier this year and tagged the price target of 11,000 on February 8th. It's now confirmed an inverse head and shoulders pattern with a target of 12,600. That target might be difficult to achieve with prices currently battling the 50 dma. I also see firm resistance at 12,400...

Next, the Shanghai has rallied back up to resistance from its multiple top breakdown in January. The declining 50 dma also looms just overhead...

Looking at the Nikkei, I see a symmetrical triangle taking shape and this continuation pattern would target about 9600 once confirmed...

Charts of Foreign Exchanges Courtesy of Http://Stockcharts.com

What Gives?!

Prices were able to complete a right shoulder on the S&P 60 minute chart today, but the 1115 level remained a difficult hurdle after several tests throughout the session. A confirmation here targets nearly 1170...

The Nasdaq paused right where we'd expect it to...

The DOW continues to lag...

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So if we have an inverse head and shoulders ready to confirm and a target of 1170, what am I doing fully short? We'll, for one, prices popped back above the 50 dma today, but it came on one of the weakest volume days of 2010...

I've been pointing to the lack of buying conviction on the up days and today was no different. While the Nasdaq volume was higher, the same lack of institutional support can be seen on the DOW. We have a bull flag breakout and a solid move back above a major moving average that's been acting as resistance, yet the move comes on one of the most pathetic volume days of the year. What gives??

For such a strong move up, why is the $CPC rising? This ratio should have moved much lower today given the price action...

Taking a closer look, the $CPCE (supposed dumb money) fell off the cliff today. Actually, this action makes perfect sense and this is exactly how I'd expect this ratio to move...

However, the $CPCI (supposed smart money) saw traders loading up on index puts. When this type of divergence takes place, it's usually wise to side with the smart money - at least in the short run...

Chart Courtesy of http://stockcharts.com/

I could also point to the bearish divergence on the $NYMO or the continued, repetitive selling on strength in the SPY's, but I'll spare you the details and simply give you the links.

I remain fully short heading into tomorrow's session and will continue to look for spots to add more short exposure. There's a good chance I may get stopped out here on continued strength, but I'll be ready to fire another shot from the short side as soon as the next opportunity presents itself. The day of reckoning is coming soon and I will be more than ready to profit from it! As always, don't do what I do!! :)

Holding Short

Very little has changed in the short term charts since my last update. While I still don't have a confirmed signal to sell short, I'm out in front with a few inverse ETF holdings. I plan on adding to these positions once prices break below the 10 dma and the average line rolls over...

I will point out that I now have zero interest in being long anything in this market that's not inversely correlated. I'll remain short or on the sideline and will even venture to say that the high for 2010 has already been printed. That's 2326 on the Nasdaq for those keeping score...

Looks like the DOW is the laggard and if things play out as I expect, this index will be the first to break below the 10 dma...


While I'm not one to usually go out on a limb with big, bold predictions, I think there's a good chance we'll look back on the recent rally as the completion of a 50% retracement on the S&P before a more serious correction pushes prices much lower. Here's a monthly view...

I view the move in the Nasdaq similarly, only the retracement here is 62%...

It's also 50% for the DOW and note the volume fade that has accompanied the climb...

While this entire rally has been fueled by soft volume, the most recent action again highlights the lack of buying conviction behind the rallies and the stronger volume behind the selling. This is classic distribution...

Chart Courtesy of http://stockcharts.com/

We also continue to see large selling on strength numbers in the SPY and the dollar has been able to hold above the $80 mark, which may now act as support. I don't see anything I like here from the long side and as I stated earlier, I'll continue to pick my spots from the short side or sit it out completely until I see some increased buying conviction.