After a day like yesterday it is usually important to not get so tied up in one day and to view things in a higher time frame. I know these charts are hard to see detail in, so just focus on the bigger picture. As nice as this rally from the March lows which I did call has been, it is still a rally in a longer term downward trend.
The red arrows indicate a proprietary combination of several things that tell me when to short the market. I also have them for buys but as you can see none of them show up on the chart which speaks loudly just by itself. You can see that on the way down they worked well, were a bit early on the way up. This is typical, they are not designed to pick exact spots, they are alerts to look for entries. We have been flashing these for awhile now, so once we find ourselves in July and in a known seasonal down period, have sell signals in a long term downtrend, that means we need to be looking to short individual stocks and the indices. This is what I have been doing and will continue to do until this picture changes.
If we combine this with what appears to be a top in commodities and currencies, and low in bonds, everything speaks in the same direction, lower prices for stocks. I posted about a month ago that it was time to get out of stocks, and we did rise a bit more from there. That was a general comment and not a day trading comment. It was made based on what is displayed here. It would be better to have the bottom pane more bullish which is actually a bearish signal. Fading sentiment is what we want to do, not go with it. The shift toward the emini's with commercials is underway and that weekly chart shows a more bullish reading with sentiment, which is bearish for stock prices. The preponderence of the evidence suggests down. It is possible that if during this decline the sentiment gets really negative it would support a test of the low and another leg up. That is something I will be watching as we move lower.
Big picture I think 2012 is when the ultimate low will be made and it will represent one of the greatest buying opportunities of all time. Between now and then we will have good swings both ways but I expect the big picture trend to remain down. If things develop in a way to change this view I will post something here to indicate my change in posture.
One of the very interesting developments is the very tight link between stocks and virtually everything else that is traded. You can watch intraday and when the dow rises literally everything on the board rises, and vice versa for declines. I have never seen anything like this and what it tells me is that the only thing that has really improved in the economic picture is that we have had a stock rally. As a result, when that appears to falter, everthing else that has been artificially lifted by it also falters.
Intermarket relationships tend to come and go making it impossible to model a trading approach after them, but I find this particular link very interesting. I just think it foretells of trouble not prosperity. There is really no fundamental reason for this link to be this tight.