More Distribution

I'm becoming more convinced that the failed breakout you see highlighted below marks the intermediate high for this rally. The next level to watch for short term support would be the bottom of the recent range around 1086, followed by the 50 day moving average (not shown) at 1080...

Today marked yet another day of distribution for all three major averages and there's little doubt that institutions are unloading shares. I highlighted the SPY selling on strength number ($675 million) back on November 25th and it should come as no surprise that the S&P was unable to close above that day's high...

Not yet convinced in the value of selling on strength numbers? The second place selling on strength figure on November 25th was in the GLD. That served as fair warning for the imminent decline that was to come...

The dollar finding a bottom has everything to do with the weakness we've seen in the indices, gold, other commodities and to some extent, oil. I do not believe this market will find its footing and be ready to make new highs until the dollar is ready to roll back lower. I'm looking for a bounce to a minimum of the $78 level and possibly higher before I'd look for signs of weakness. Using the UUP for reference, I think we'll see a move to at least $23 and change or possibly higher...


Having said all that, short term indicators are very oversold going into tomorrow and I'd expect some strength soon as the dip buyers come back in. Perhaps another move just above 1100 to test a declining 5 dma would work off the oversold conditions and that fits in well with the first chart I posted tonight. That would give me an opportunity to increase my short exposure to financials, energy, and commercial real estate. Financials and energy have been relative strength laggards and I'm playing real estate as an anticipatory trade on a double top in the IYR...

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I realize this IYR trade is very aggressive and some will look at this chart and see a cup and handle pattern. If I thought the market was headed higher, this would likely be a position I'd look to take from the long side on a breakout. Instead, I'll use any breakout as a signal to exit the trade. This set-up takes some serious conviction to pull the trigger and without complete faith in my system, plus a very favorable risk/reward, I'd likely have passed. We'll see how it plays out.