Here is what so far is another fake trapping short sellers on the wrong side of the market this morning. There was a legitimate short entry below the low of Friday, that was penetrated last night. So far this is another fakeout at this same level, the 1035 level seems to be very strong support here. If you look at where I have marked downtrend pointing to the momentum oscillator, you can see this has been diverging for quite awhile. My first thought about this and one that I have operated on for a couple of years, is that this is very bearish. However, upon further researching this pattern I have found that when it stays like this for awhile and produces no price correction, it is actually quite bullish. There are likely alot of stops in this 1035 area now so if the market were able to penetrate that area, it is likely we could fall quickly at least for a short period of time. I am talking about a short term time horizon with that remark.
We are right on the verge of that point right now, if we don't break here in the next day or two, I think we are going to have another powerful leg up. The one fly in the ointment is the significant divergence in the purple line, Larry Williams POIV indicator. This accumulation/distribution indicator rarely diverges this much, and is usually not wrong when it does. This would tell us we should get a move down. Researching this just stand alone, produces very bearish projections, so we have two somewhat contradictory items here. They do intersect in that they both are bearish for the next few days, the difference is that the momentum oscillator after a couple more days, if this "tool" stays here, will probably be telling us to look for another upward move.
If we were to have another powerful upward move from here, it is possible the POIV divergence could be nuetralized and higher readings above the recent ones that we are diverging from could be reached. Probably the correct strategy is just to look for shorts with the knowledge that this is not a great setup at this point, but one worth a swing at. Maybe you take smaller size knowing you are trading against a very strong trend here. Usually, these types of setups produce immediate reversals or do not produce them at all. If you look at the next chart you will see the seasonal inversion we had in September.
We had been following the seasonal pattern to a "T" for quite some time here until September saw that huge rally. Now that we have somewhat of an inversion, it is my opinion that the strong seasonal for the fall does not mean as much because the move has already happened. This does not mean we will not continue to rally, but what it does mean is the seasonal influence is now not a consideration until we get back in sync with it. The next chart shows what a projection tool forecasts for the times in the past where we have had big rallies in the face of seasonal down cycles. It is interesting in that it almost is telling is that mother nature will invert again to get us back to where we should have been.
Will this happen? That is why they turn the machines on every day so we can find out. I think in weighing all of this the odds favor the short side of the market right here. Currently I am still short the NAZ from last week and long the VXX. I am also trying to short a couple currencies today but it does not appear at this point these orders will be filled..