Will the Train Derail?

The Major averages all made new intraday highs for the year Friday on the NFP report. At this point the up trend is solidly intact, with no obvious big picture ominous signs yet. As I have written about previously, we are into a price zone that has the potential to mark a significant top. However, that is not enough to just blindly run out and short the market. It is my belief that the next move down when it comes will be very sharp and shocking to market bulls. When and where this will start from is anyone's guess.

My Commercials Hybrid Index is pegged at 0, in the sell zone. The would mean alot more if we were in a downtrend and bouncing up against that trend. It being squarely against the trend does not have nearly the same significance. The Bradley Astrological model seems to be telling us to look in the Feb time zone for a decline to begin. There has been a tendency in recent years for first quarter declines, so that makes sense on some levels. I really do not follow that, it is more a study project for me at this point. It has undeniably been pretty accurate, although you can see one place where I have OOPS written, where it was dead wrong this year.

I will cut it some slack during that period because almost everything else I look at was also indicating this rally might stall there. As I have stated in here previously, this rally has defied alot of logic, not so much the gloom and doom recession talk, but with trading indicators. I cannot remember a move that was so wrongly identified by all the techniques I have learned or developed over the years. Virtually everything I look at was wrong in the middle of this move. So be it, we are never going to get them all. Most of the top traders I know have also been wrong about the length and extent of this move.

At this point the trend is up, so until we see a break of 1026, there is no reason from a big picture standpoint to be short. With all that aside, lets move into the daily charts to look at a current opportunity for a trade. The first chart is depicting a very large current short position by the commercials in the Nazdaq Index. This is a proprietary chart from Insider Capital written by Steve Briese. Steve is one of the COT experts, and I subscribe to his monthly newsletter. For what it is worth, he is predicting new lows under March on the next decline.

This is kind of a messy chart, but just focus on the red arrows. They indicate the last occurences where the level of shorts by Commercials were where they are now. As you can see we had declines in every instance. This at the very least is a wake up call that something could happen here to the downside. Keep in mind the US Government through the PPT activities are out there lurking ready to support any decline that starts and threatens to Derail this. The one problem I see with this is that even though this net position is historically low which triggerred the 2007 top, it is only 20000 contracts. The PPT can certainly play in that size very easily, so they can probably stop anything other than a huge liquidation situation.

This is why from a big picture standpoint until we get under 1026 in the SP 500, short trades need to be played as short term trades. Speaking of that, the next chart shows what I consider to be a shorting opportunity that is there right now.

Notice how the Large Trader Index is actually under it's Momentum line even though the market has been moving higher. Also the other 2 Momentum oscillators below are also displaying the same thing. Combining this with the divergence in the Pro Go Indicator in Green on the price chart, we have a pretty good short term setup to short this market. I have indicated one sell entry possibility on the chart, which is likely the one I am going to play. At this point I view this as a short term opportunity. If it were to trigger and start gaining some steam, I would consider holding it longer for a bigger move.

Fund managers along with the PPT will fight hard to contain any selloff into years end so I do not expect a big one. However, when a setup like this arises I have to play them and just see what the market delivers. If we always knew what would happen there would be no reason to turn on the machines everyday.

Thanks for checking in, I have noticed that I am attracting some readers from all over the world. Our world truly is flat nowadays which is a good thing.