This Week's Lesson

“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this:  It never was my thinking that made the big money for me.  It always was my sitting.  Got that?  My sitting tight!  It is no trick at all to be right on the market.  You always find lots of early bulls in bull markets and early bears in bear markets.
Men who can both be right and sit tight are uncommon.  I found it one of the hardest things to learn.  But it is only after a stock operator has firmly grasped this that he can make big money.  It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.” 
                                      – Reminiscences of a Stock Operator

My favorite section of Reminiscences rings resoundingly true.  I had a target of ES at 1038.50 made on Tuesday afternoon and it reached there on Wednesday.   Yet I closed out my short trade at higher prices.  I called for a weak close on Friday, was bearish as all get out before the trading day started. I covered too early and didn’t make as much as I should have.  You’ve got to be a pig to make the big bucks.  I still have the problem of not letting my winners run.  If I could only solve this problem, which I’ve battled my entire trading career, trading would be much easier.  Even with this big flaw in my trading, I’ve still done OK.  The saying that you can’t get broke taking a profit is bunk.  If you keep cutting your winners short and ride your losers, you will go broke.

The new market

From March to middle of October, you could buy dips and be assured of being bailed out because the dips were brief and market kept going up.

Only problem is  that stocks have gone up so much and are overvalued.   The value investors, insiders, secondary offerings, IPOs, and private equity guys are all dumping size into the market at every opportunity.  Momentum cannot overcome that, especially in a fragile market like this one.

We are going to have a rough November because all the indicators are flashing red, and investors are still conditioned to buy dips and hope that things pop back up.  Market ain't that easy.  When everyone knows the drill, market mixes things back up to screw the majority.

Buying dips will be treacherous, and only extremely good buy set ups should be taken.  I will be aggressive on the short side going forward.

Time machine to 2008

Today felt like it was ripped out of the annals of 2008. After an up day, you would get oscillations early in the trading session and then dump down making new lows and trend down for most of the day, with meager short covering attempts between 2 - 4 PM EST.  We're in a downtrend, shorting rallies and hanging on to shorts till you see the whites of their eyes should be very profitable going forward.  I don't see us going above SPX 1070 for the rest of the year.  My previous projections were too optimistic.  I think we can test the 960-970 area in November and that should scare the bulls enough to set up for a nice rally in January 2010.

Probably a gap up

Based on the weak close, I expect a gap up on Monday as the dipsters come in to buy the open.  Also, it is the 1st trading day of the month, which is a much more reliable bullish seasonality indicator than the last day of the month. A gap up should set up a bull trap and we should sell off for first half of Monday, we may get a reversal midday, depending on the price action.  Those are the scenarios I see as most likely to happen. 

Monday will be the day to buy

If we gap up on Monday, that will be a gap and crap.  If we close near the lows today, the chances of a gap up are higher.  If we rally into the close, chances of a gap up are lower. 

In any case, I expect to be able to buy at lower prices on Monday regardless.  If we gap down hard on Monday, then we could rally all day on Monday. 

So much for seasonality

Well, who would have thunk it?  A weak day at the end of the month.  Well, most pundits thought that the end of the month would lift stocks and there would be fund managers marking up stocks.  Today's carnage is proof.  Another myth busted. 

Hesistation

I hesistate to get long unless we really selloff deeply because I saw how giddy traders got off the GDP numbers yesterday.  That kind of giddiness isn't usually dissolved in 1 day, although the Fast Money traders are bearish for the close, days like today usually don't reverse hard to the upside, so I will only wait for premium setups on the long side to buy, such a plunge down to 1025 on the ES.

I think weakness on Monday is a gimme buy setup so I am hoping for that.  For now I wait.

Everyone is bearish now

Haha.  now that we trade 25 points lower on the SPX, everyone is bearish.  Where were these fools yesterday?  Fast Money halftime is 3 to 0 bearish, so I've got to take the other side, even though I am a bear in the intermediate term. 
I think we're going to squeeze higher near the close.  I may get long or not, not sure yet.

I am seeing some panic

I have gotten out of my short postion on this short term panic in the markets, I will reevaluate later in the day, I may get long if we go lower, but for now, I am on the sidelines.

Market transformation

From March to earnings season this month, we've gone pretty much straight up with only slight dips.  But with the negative divergences of breadth and the weakening of the financials to overt dollar bearishness, we hit a top.  I see very little chance of us piercing those highs we made last week.  Yes, last week!  We were at a new 52 week high last week on the SPX and I don't think we'll be seeing those again till next year.

The key now will be to find ideal short entries and cover when the longs puke out their shares on sharp selloffs.

Those failing to make the adjustment to this new market will get crushed buying dips and chasing rallies as stocks trend lower.  I believe we'll stabililize on Monday, but I am sticking with the trend till at least 2:30 pm EST.  At that point, I'll reanalyze the situation.

Back to selling

We had the one day bounce and now we're back to our new mode, which is to oscillate in the first 30 minutes and then sell till the close.  I am looking for further weakness throughout the day as people "hope" to be bailed by fund managers marking up portfolios, but most of that seems to have been done yesterday.  Notable is weakness in crude oil.  I am looking for a repeat of Wednesday.

Chicago PMI and Consumer confidence

We've got a couple of reports today that might move the market a bit during the first 30 minutes of trading.  Actually, buyers seems to be brave again so I would not be surprised to see a pop on the news from the Chicago PMI and the Michigan consumer confidence number.  Even if we pop on the data, I don't think it will last into the close. 

Yesterday's big rally stole a lot of thunder that could have been used for today so I think the market has got ahead of itself.  The anticipators were buying ahead of the so-called fund managers marking up portfolios for end of October.  I don't know how much marking up actually gets done but I am willing to bet that its a lot smaller than most people think.

I expect a weak close today and will be setting up for that.

Sharp rally

This was the oversold bounce, and quite a vigorous bounce.  A classic bear market bounce which is sharp and swift.  Bulls are jumping the gun again on the long side, you have your end of month anticipatory buying today along with buyers of "good" news.  I am looking for selling tomorrow in the morning.  I don't have a strong opinion about it gapping up or down. I will stay short.

Wrong intraday

The oversold bounce occurred sooner than expected, the bulls are very eager to buy here.  Fast Money halftime bull bear on the close indicator is a tie, 2 - 2, so nothing to take away from there.  I am sticking with the short because I see very little upside from current prices, good risk reward on the short side.  I'm risking 3 or 4 points to make 20.

Not like end of September

The last time we had a string of down days was at the end of September.  During that downswing, there was fear of a bad nonfarm payrolls number which came, but we bottomed and rocketed higher for 2 weeks.  We had the same fear of a bad GDP number which didn't come as Goldman Sachs predicted and we've rocketed higher today.  But, the big difference is that last selloff was accompanied by more fear and more put buying than this past selloff.  Also, this selloff is similar in terms of S&P points (about 60) but worse in terms of breadth, a negative divergence.

Getting more bearish

We are watching a very slow motion crash in action.  Based on today's action so far, I feel like people still haven't learned from the markets of the last 2 years.  I feel even more bearish now after this GDP report and the investor reaction.  Its almost as if everything is fine now and we are free to go higher into month end and the beginning of next month.  I think we're going to sell off for most of the day and we'll maybe getting a little rally in the final hour.  But I'm bearish today.

Fading the gap

Well, well, everyone has turned bullish again based on these cooked GDP numbers. That leaves me but one choice, and that is to fade the enthusiasm off this GDP number that has formed.

Bulls actually should want a gap down to wash out the sellers, this will just delay the selloff by a few hours and prevent the needed negativity that forms hard bottoms. Optimism reigns again for the moment anyway.

I am dancing between the raindrops, cause I know the bulls will try one hard rally today, but I think it will be in the 2nd half of the day, not off the open.  I'm feeding the ducks here.

CNBC survey

Just saw the CNBC survey of money managers, all of them were looking for the S&P to be higher by the end of the year, with ranges from 1100 to 1200.  Wow!  They all agree that this is not the big bad correction and that the market will rally in November and December.

This would give me the chills being long.  It gives me a lot more confidence to go short for the intermediate term on any rally as I think we've got to go lower before we can shake out all the weak longs in this market.
Here is the article: http://www.cnbc.com/id/33508638

Gap and crap

I think odds are significantly higher that we gap up than we gap down.  If we gap up at the open, the market should sell off immediately and we could get a fear based bottom sometime during the middle of the day, only to close strongly.  If we gap down, then we'll likely rally right off the open.
We are extremely oversold being down 4 days in a row, but we are nearing another area of strong support around 1030 on the SPX.  

Getting out of shorts

Covering shorts before the close.  I think we may be higher and the market is close to my price objective so I'm closing out.
Still think we go even lower on Friday.  But tomorrow, I think we'll get a reprieve from the selling or an intraday reversal midday closing strong.

Small cap annihilation

Dow is hardly down and very little mention of the under the surface weakness on CNBC.  The Russell 2000 is getting crushed for 2.5% at the moment.  We are still only down about 1.2% on the SPX so there is still a lot of downside available for today despite the horrible breadth readings.  Bulls are not liking what they see at the moment and will probably push the eject button if we start trading lower into the close.

Bulls used up all their ammo yesterday

The heavy volume yesterday were bulls making a stand at SPX 1060, they were too eager to defend that line and buy the dip.  Today is the flood after the dam at 1060 burst.  The selling force is powerful, and we'll likely selloff further, there is solid support down around 1040, which is another 10 points from here. Cascade selling is where one can accumulate a bunch of points on the short side quickly. 

Recent pattern of early strength

Over the past few days, in the first 30 minutes of the day, we've been having strength but its faded after the first hour and have continued weakness throughout the day. 
This tells me that the longs don't want to miss a rally and shorts don't want to be caught in a squeeze higher, but there is no back up firepower behind the buying.
We need to go lower to relieve the building selling pressure, otherwise, it just gets pent up and explodes to the downside at a later date.

Goldman lowered their GDP forecast from 3% to 2.7%.  I guess they are looking to buy today or cover their shorts.

EIA Crude Oil Inventory numbers

The past 2 weeks, the EIA crude oil inventory numbers have boosted crude oil to higher highs.  Tuesday afternoon, we received the API numbers, which usually gives  a good preview of the EIA numbers.  Crude jumped higher on the data, but then has been steadily going downhill in line with the weaker equity futures. It feels like oil speculators are waiting for the EIA data to sell the news expecting a spike higher.  I believe we'll sell off today in crude oil which should drag down the energy equities, one of the stalwarts during this selloff.

Santa Claus Rally?

Despite being down 3 days in a row, the bulls remain stubborn and view this pullback as being temporary.  Yesterday's equity put call ratios were still  relatively low despite the weakness.  Almost all believe in a year end rally based on a chase for performance.  Even Jeremy Grantham who is bearish now is allowing for the possibility that we'll rally to year end in his newsletter.  But let's look at it from the viewpoint of the buyer.  If the majority are looking for a year end rally, won't the majority just buy ahead of it?

This stubborn belief may just delay the true killer selloff into the middle of November after nonfarm payrolls report is out and everyone thinks the waters are safe.

ES Target 1038.50

There is a gap still open at 1038.50 from October 5.  I am looking for that to fill as we free fall lower.  A sell the news reaction to the GDP numbers/energy inventory numbers could be the catalyst. 

Cascade sell off coming

We hardly bounced off of very oversold breath indicators and market is churning here.  The volume is heavy for going nowhere on the S&P which tells me bulls are making a stand here at 1060.  Bulls have used up most of their bullets.  They have very few bullets left to defend lower levels.  If we break 1057 on ES, we're gonna free fall down to low 1040s in one day. That could happen tomorrow or Thursday.
I don't want to miss it.  I am gonna get short again by the close with a gap down likely for tomorrow.

Weaker than I thought

This market is very oversold on the McClellan oscillator and it should have bounced today but the bounce faded away in a couple of hours.  The buyers are absent, and the sellers are getting a bit nervous.  I am hoping for higher prices to reshort but I don't think I'll get it today.  Tech stocks are lagging, and pharma is outperforming.  This tells me longs are liquidating their winners and going defensive to protect their leads.

Seasonality

As we all know, seasonality is based a lot on money inflows and automatic investments into stocks at the beginning of the month.  The only problem is, when investors are no longer putting money into equity funds, which is the case since 2008, does seasonality go away?  It should, which is part of the reason why I think we saw such severe weakness on the first 2 days of September and October. 

I don't think you can bank on seasonality as much as when equities were a favored asset class.  It probably applies more to bonds now than to equities.

S&P 1060

I think we've flushed out the weak longs on this down move this morning, and bulls came out in droves to defend 1060 on the SPX.   I am out of my shorts and will reshort later in the day if we rally. 

Who doesn't expect us to go up again?

I have been reading financial articles, watching Bubblevision, and getting a feel for traders' views and the majority seem to agree that we will go right back up after this little pullback.  And I think most people are expecting only a little pullback.

I see a lot of hardcore economic bears but not too many hardcore stock market bears.  Its almost as if most bears feel like liquidity from Banana Ben will hose them down so they don't bother shorting.  The bears that I see seem like pansies, only willing to stay short for a couple of days and then bailing out looking to reshort higher.  Sometime in November, I expect there to be a 8-10% correction, and very little bounce.  That will surprise the bulls and only the hardcore bears will be left to reap the rewards.

In premarket, we got the typical chicken little shorts and eager beaver longs buying here afraid that we'll shoot straight higher off the open.
I'm calling for a sell off at the open, but I don't see it being sustained.  Then a countertrend midday rally with a slight selloff near the close.  We still need to generate more fear and that's going to take time.

Overnight action should be weak

Past couple of trading days we've had stronger markets overnight, I think a gap down is coming as investors fear the market being up too much despite horrible fundamentals.  Technical damage has been done by breaking 1072 on the ES and now we're churning below those levels right above support at 1062.  Once 1062 goes, look for the 50 day MA at around 1050 SPX, or ES at 1054 to provide support.

Support broken

We are skating on thinner ice, below 1060 on the ES is a lot of air down to low 1050s.  Below that and bulls can fall flat on their face down to 1025.

Gap down play

I believe this market is setting up for a gap down on Tuesday morning.  I don't see the market bouncing up much from here, the support at S&P 1075 was broken and the market has been churning under that level for the past few hours.  Beyond Tuesday, it's a toss up, we could rebound or drop further.  But I think we need to do some more work on the downside this week before we can rebound.

From my studies of historical charts, a reversal like we saw today shows you the increased level of volatility at these prices.  The higher volatility is showing that the market is rejecting these higher price levels for the current time.  This market needs to consolidate more before making its next move.

Looking for blood

I believe we will see bloodshed this afternoon and have repositioned accordingly.  This reversal is for real, and a sign that the market is in for some pain for at least a couple more days.  This market wants to test 1060 on the S&P.

An unforgiving market for shorts

That sudden push was short sellers and weak longs that dumped on Friday suddenly deciding that the market wasn't going down so they all bought at the same time.  The Monday morning fund buyers just had to get in.  I expect weakness near the close, but they can keep this up midday with the lack of volume out there.

Short squeeze

Very unusual action today shooting straight up off the trend sell day on Friday.  This isn't a common occurence, especially right from the opening bell.   I cut down my position size because I had a time stop but I'm going to watch and see what happens over the next hour.  Financials are lagging thanks to BAC, and energy is leading here.  This rally smells suscipicious to me and I'm thinking we'll revisit lower prices before the close. 

ES buyers at 1082+. Why?

I know its mostly computer black boxes that are just using FESX and DAX movements to automatically buy or sell the ES, but after a trend down day on Friday and running up into 1083 resistance, its a poor risk reward buy in the wee hours EST.

It is difficult to get the ES futures gapping up more than 5 points in this low volatility environment, so what kind of risk reward is ther for buying those contracts at those prices ahead of the US market?

I still think we go lower in the first hour of US trade.

The Next 3 months

Right now, most traders are in agreement that the market will be unsettled and a bit weak for the next few trading days, but once we get past the next couple weeks, with the Fed and nonfarm payrolls report 2 weeks from now, people are projecting a rally to the year end based on a chase for performance and the Santa Claus Rally.
I have other things in mind. I believe we will sell off next week and then rally at the beginning of November and then selloff again more sharply surprising those expecting the year end rally as the economic realities and overoptimism about the market takes the market lower. Then I expect a sharp rally at the beginning of January which will test the 52 week highs.

This is all still far away into the future so I don't want to get too far ahead of myself. Anything can happen, but its better to have a general projection and make adjustments based on market action than to fly blind on the seat of my pants.

Most Investors' Projection:



My Projection:

Chess game

There are mad men that think about the markets all day long. I guess I am one of those mad men. This blog is a release of that pent up thought that I want to get out of my system. I don't try to monetize my blog, sell subscriptions to a service, or have some grand plan to make money off this. I may write a book in the future, but it won't be for the money. It will be for the same reason that I write this blog. A release for my pent up thoughts.

What I write here is what I am thinking about the market. I am not thinking about charts or systems. I am thinking about the other "thinkers", or traders out there. I view the market as a game, a game in which a minority win and the majority lose. People are trying to beat each other's brains out with any edge that they can get. The key to the game is to realize how to get that edge and to push it when you really feel it. Most weeks, I don't have a strong feel for the market and I don't push it. This past week, my reads felt stronger so I traded more aggressively.

Like chess, traders need to think a few moves ahead and anticipate reactions to the news as well as trader's positioning ahead of the news. The recent case is earnings, and last week I was a bit early, and I realized this, so I stepped back off the pedal and focused on hitting the bulls in the mouth this week. I was going to sell the news, it was just a matter of when. Timing it.

In this game, you've always got to think a step ahead, but not 2 steps ahead. My problems in the past have been when I have thought 2 steps ahead and have sold too early or bought too soon. I still have this problem, but measuring foot steps and timing are tricky things that one gets better at with experience. But I will say this. I have rarely had problems thinking 1 step behind.

Earnings season

In April and July, earnings season was a catalyst to catapult the market to new highs. Expectations were low, and they were soundly beat. Stocks went higher on the news. Well, the expectations were low this time as well, and most bellwethers beat the numbers. But stocks have not gone up on the news. Since INTC earnings, the market has gone nowhere. The bulls were ready for a good earnings season and had already bought ahead of it. Only the fools were left to buy on the news. The cat is out of the bag. Sure, overall market sentiment is still skeptical about this 7 month rally, but actions speak louder than words. People are still complacent as seen by the put call ratios over the past couple weeks. And I don't know too many diehard bears left standing after a 60% up move in 7 months. Those that are left standing are reluctant to short. The bears still need to be nimble here because the trend is still clearly up in the intermediate term. But now its more of a two sided game, no longer is it going to be straight up moves.

Fear Factor

Traders are now getting a tad bit scared about the market. Still a lot of complacency with the put call ratios not very high despite being deep in the red. The action today was very bearish, especially on top of the churning that we saw on Wednesday and Thursday.
I am looking for a gap down on Monday as traders digest the action over the past week. The bulls threw everything they could at the bears, INTC, AAPL, JPM, MSFT, AMZN and the market has basically gone nowhere.
Fear is now a factor.

A little squeeze at the close

Fast Money half time report was a dud, 3 sellers and 1 buyer. Looks to me to that we'll probably get a little squeeze near the close. I have covered most of my position and may take a trading long to dump into a strong close.
I am banking on a gap down on Monday morning so I will be fully short at the close barring a complete collapse in the market.

Adjusting to the volatility

The volatility has gone straight down from March basically in a straight line, but things have woken up the past few days. However, we are still trading in 12-15 point ranges on most days, and it is unusual for us to have greater than 20 point ranges in a day. We've got to adjust to the new volatility which means less daytrading and more swing trading. Also targets should be adjusted to be less ambitious. All this means that profitability will be lower than in the past, but that is the game that is played. 2008 was a boom for daytraders, and now its like pulling teeth to capture big moves. This makes the entry and exits all the more important because of the reduced volatility.

MSFT blowout numbers

We now have a catalyst for the gap up in the futures, an excuse to buy up. That is the scenario I was looking for to sell the news. Still looking for them to sell the news as I do think this market is churning at these levels before going lower. If we don't have a selloff today or Monday, then I am wrong, and will cover. But I am betting on the short side now.

Gap and Crap

I don't want to be short overnight, I think earnings news and relief after today's rebound will cause a gap up, so I will wait for tomorrow morning to feed the ducks. I think we will sell off hard from the open on a gap up tomorrow.
This market is clearly showing topping action, the volume today was above average, as was yesterday, and we've basically gone nowhere. Volume was the missing ingredient that I was waiting for, as well as intraday volatility to tell me that a turn was near. We are getting that these past 2 days.

Everyone is a trader

The new paradigm for stocks is not to invest, but to trade the moves. This is the new mentality for those that buy and sell stocks. It used to be buy and hold, but not anymore. Everyone is on to the game and know that they were sold a load of bull by the mutual fund industry with the buy and hold mantra over the years. From what I see, the longs don't believe in this rally, meaning that upon signs of weakness, they will bail out of their positions quickly. They are trading the market, not investing in it. They are what one would call a weak long. There are a lot of weak longs in this market. The shorts are mostly absent. They are either buried 6 feet under or have been conditioned to cover quickly on any weakness or cut their losses immediately for fear of getting their face ripped off. Most people are deathly afraid to short this thing after having been burned shorting repeatedly for 7 months.

Weak longs + Absense of shorts = Free fall waiting to happen.

Controlled selloff

I don't look for anything crazy today as I believe weak long traders likely bailed yesterday afternoon and that leaves the hardier longs hanging on. I expect slight weakness early on in the day due to yesterday's reversal, and then we'll probably just chop for most of the day and rally into the close.
Either Friday or Monday I am expecting a continuation of this selloff, if we don't get it, then I am wrong about this market having topped. But I believe odds are that we will. Bears are finally hitting back against the bulls, should make for some more exciting trade in the coming weeks.

TIMBERRRRR!

The market emphatically rejected the 1100 level on the SPX and we saw a brutal reversal, blamed on Dick Bove's downgrade of WFC. It was coming anyway, the market was diverging and weakening regardless of the news, good or bad.
Looks to me like we will be in a period of consolidation for a few weeks, today was a statement day made by the equity bears, despite the weak dollar and roaring commodities. The easy trade now is the short side.

Commodities fever

Oil broke through $80 and is trading above $81 as I write. Short squeezes in the grains market and further dollar weakness has added to the commodities fever. So far, commodities strength has been a positive for the stock market, but at a certain point, it becomes self destructive and hurts the consumer. We're probably at that point now.

Fast Money contrarian indicator

This market is in trouble. The Fast Money crew all had buys into the close for the halftime report, that in addition to my reads on the market and I feel like we'll have a sell into the close scenario, I would not want to be long here and today feels like a top to me.

False break of 1100

Looking for a false break of 1100 to get S&P traders excited and I believe that will be the top for this move. A very good short opportunity is setting up for later today, I am trying to remain patient but it is very tempting to push the sell button.

Looking for early strength

Based on the pre market weakness, there is a good risk reward daytrade on the buyside, buying before the open and selling midday. The market will not collapse immediately, it is weakening, but I still believe there is one last gasp for this run up before it goes down for the count.
Looking for early strength which will provide a possible good midday entry on the short side.

When the bell tolls

They don't ring a bell at the top, but they sure do give all kinds of hints. The market action today is reinforcing my belief that we will have a final intraday rally with a selloff in the final hour either today or tomorrow. The crude oil inventory numbers will be a sell the news event for crude and for stocks.
Get ready to sell.

Small caps continue to lag

Russell 2000 is down 1.5%, while the S&P 500 is down 0.65%. This continues a pattern of narrowing leadership in the market and small cap underperformance. The crowd is now rushing into tech and energy stocks and selling off other stocks to raise cash for those purchases. The market is teetering here, I believe there will be a top this week, either tomorrow or Thursday. I am still looking for heavy intraday volume and an intraday reversal to signal the top.

Put Call ratio divergences

On the CBOE and the ISE, there is a noticeable divergence occurring today between the index and ETF options traders and the equity options traders. The equity put call ratios are on the low side, the index / ETF put call ratio is extremely high. The pros are beginning to fade this move and retail remains stubbornly long.

TD Sell setup

I don't think TA is the end all of trading, but it helps. One of things I like to look at are Tom Demark (ego, huh?) indicators. With a new closing high yesterday on bar 9 of the TD sell setup, the sell setup has been perfected. A sell countdown begins today, meaning we are likely to sell off soon within 4 trading days. Another arrow in the bear's quiver.

AAPL of my eye

AAPL blows out low ball estimates. What a surprise. This is setting up a possible blow off top catalyst, but I expect the gap up to be muted, if it gaps up at all. Perhaps an intraday meltup will get enough bulls on board with enough volume to finally set the top of this rally. What has continually been missing is volume on the upmove. Perhaps this will be the catalyst to do so.
Timing tops is difficult, but I can smell the fever and I want to bet on the other side.

Deteriorating Breadth

When the market reached a new closing high for the year on Thursday, one would have expected the Advance Decline line to be healthy, but it has been lagging. The small caps are lagging, and the rally is narrowing. Even with a modest decline on Friday, down volume overwhelmed up volume. These are small signs to watch closely this week for a top. Risk reward on the long side is poor at these price levels for the next month or so.

Expecting a strong close

Gut tells me that ahead of the AAPL earnings, we will have a strong close today, so I will be very careful to avoid getting caught short in a steady drift higher on the 2nd half of the day.

The top is near, point wise we are very close, the timing is the tricky part. Market seems hell bent on squeezing as many bears as possible for as long as possible.
There will be that sweet pot of honey at the end of the rainbow, but only for the most persistent and tenacious bears willing to overcome all the arrows thrown their way for the next 4 months.

Sell the close

All the traders on Fast Money Halftime Report had buy calls for the close, as with my tendency to fade the Fast Money traders, I would sell expecting lower prices at the close. But I don't think the top will be a point, I expect strength in the market again, the dip buyers will not go away easily.

Lots of complacency

Maybe its just because its options expiration Friday, but there is a ton of complacency out there today with all the call buying and the put call ratios are once again very low.
This in a down market that is trending down intraday. Looks like we're probably not gonna be able to have that strong close that people are conditioned to.

Everyone knows the pattern, buy the dip at 10:30 AM and sell at the close for a quick profit. But who's gonna be the idiot buying the close today when they could have bought it earlier in the day??
Everyone is looking for a strong close on opex Friday, I don't think its gonna quite work out that way...not with this kind of rampant call buying in a down market. Market is not that easy.

S&P 1100

The market closed at 1096.5 for the S&P 500. That is awfully close to 1100, an intermediate target for a lot of bulls. Plus we are at options expiration and the call buying has been fast and furious. The risk reward for buying here is extremely poor, we are overbought and today is options expiration. We are right around what will be strong resistance at 1100, and most of the positive catalysts are already spent (good earnings).
Expectations are high. Looking at the reaction to GE and BAC, missing analyst expectations is not easily forgiven in this environment.

Asia underperfomance

There are canaries in the coal mine. They are the Asian markets, in particular, Japan and Korea. They are not on an artificial US dollar confetti standard/peg like Hong Kong or China, their currencies have been appreciating recently, and those equity markets don't seem to like it.
China, Japan, and Korea have all topped out, and aren't making new highs as the U.S. and European markets keep going higher. Remember at the bottom, the Asian equities moved first off the bottom, now that they are overvalued, they are the first to move off the top.

Looking for the pullback

I just viewed some CNBC and people are still looking for that pullback. That is not something I wanted to hear. There is still not much enthusiasm for this rally. Despite the low put call ratios.
What seems to be happening is that we're grinding higher due to a lack of sellers, not a bunch of buyers. Thus the low volume up move.
We need to see that high volume high energy trade intraday to mark a turn. Until that happens, a slow grind higher is the most likely scenario, with perhaps 1 or 2 day dips, even with the ridiculously low put call ratios.

Fast Money traders

Although most of what you see on CNBC is useless, I do like to watch it to measure investment sentiment, especially short term sentiment. The Fast Money halftime show is one such segment where the traders make a buy or sell call into the close. Well today, even with the market basically, flat, 3 out of 4 traders said sell and Joe Terranova said buy just to be contrarian.
From what I've noticed over the past couple of months, these traders are usually a fade at the close and a good indication of intraday market sentiment.
That tells me that we're not likely to sell off today.
Also, there is a S&P 500 adjustment being made at the close due to the Pfizer Wyeth deal closing which should result in some index buying at the end of the day.

Bulls get frightened quickly

So the bulls have a quick trigger finger these days, as noted by the quick sell reaction to the C and GS earnings reports. However, as advertised, the bulls were all over the 6 point gap down on the open and rallied them near flat on the day.
Today seems like a nothing day where bulls will probably have the upper hand most of the day. These days, if the bears can't scare the bulls within the first hour of trading, its almost as if they have no shot at a down day.
Although I am bearish, I am not suicidal. Being a bear in a steady uptrend is grueling and not the easiest way to make a dime. But tops are processes that take time, while bottoms are usually brief and quick.
However, options expiration hangover on Monday looms large and its dicey to try to pick up a few extra points on the upside in an overbought environment.

New Market High, But...

The bigger they are, the harder they fall. With extreme call buying in both equity and index options, as well as a new all time high with bullish news everywhere and near 1100 on the S&P, one has to wonder: who's going to flinch? Bears have been mauled here, and the market hardly has a dip even intraday. It can only mean one thing: we will have to have a blowoff top on heavy volume. The thing missing right now is the big volume up move. It's required to signal that bears have capitulated and bulls have panicked by buying recklessly. I think there is a greater than 50% chance that the blowoff top happens tomorrow.

CBOE equity put call ratio at 0.35

Over on the CBOE, as of 10:00 am, the put call ratio is at 0.35!
The speculators are out in full force today in the options arena and they are leaning long.

ISEE equity sentiment index hits 327

As of 9:50, the ISE equity sentiment index has ringed up a 327 number, a huge imbalance of call buying over put buying. How long can this madness last? Surprisingly, the index options number is also over 100, which is not common after such a big gap up.
Seems almost everyone is bullish, retail and the pros.

JP Morgan beats by .30, beat expected revenues

Another beat by another company. Another squeeze higher of a few S&P points, but we are trading back to where we were before the JP Morgan earnings announcement.
What is funny is that JP Morgan calls its balance sheet a "fortress balance sheet". They are levered extremely high, not through the eyeballs like some of the other banks, but their Tier 1 capital ratio is low, considering how dependent their balance sheet is on asset prices rather than cash flow. But all that stuff doesn't matter when you can mark to model/myth.

S&P futures are trading at 1083.50, all kind of great earnings news is out, much of it expected, and we have a gap up well over 1%. We have rallied from 1015 a week and a half ago and have gone relentlessly higher. If that doesn't scream sell, I don't know what will.

It's a classic.

Classic buying panic after hours on the INTC earnings announcement. The price action told the story, and in general, when the markets are strong ahead of an awaited announcement, the tendency is to overshoot to the upside and then reverse.
INTC will be the excuse for those on the sidelines to buy, the sheep will no longer wait for the pullback and will rush head on.....over the cliff.
A false breakout to mark the top of this move up, based on INTC blowout earnings, you can not script it any better. Classic Wall Street.

INTC could be the catalyst

Everyone knows to be long ahead of earnings. Its the tried and tested method of making money, right? The crowd has now been conditioned to buy ahead of earnings reports that beat ridiculously low expectations. Will it happen again that we squeeze higher during earnings season to new highs? By the call option volume relative to puts, it would seem most are thinking that way. Its a dangerous time to be a long investor.
INTC could just be the catalyst for the blowoff top which marks the top for this rally.

Put Call ratios flash warning signs

The CBOE equity put call ratio over the past 2 trading sessions have been lingering between 0.50 to 0.53, while over on the ISE, the ISE option sentiment index is putting up very large numbers, going over 350 at the beginning of the session,and currently at 234 as of 3:50 pm, showing call buying overwhelming put buying on equities.

This is showing the complacency among stock investors which will set this market up for a big downdraft soon. I believe earnings this quarter will be the catalyst for that selloff.

Market Top is forming this week

The market is ripe to drop huge over the next few weeks as a gigantic top is being formed at the moment.

The pillars of the top are 1. Complacency among bulls 2. Lack of improvements in top line earnings 3. A trend change in the dollar 4. Reintroduction of fear due to nonexistent job growth, swine flu, and a double dip recession 5. An abundance of weak longs buying based on performance chasing, not a belief that economy is better or stocks are cheap

By November, I expect the S&P to be trading under 1000 as the bulls remain complacent. Also commodities should sell off on a dollar rally and equity selloff. There are too many bulls in commodities in contrast to the bearish fundamentals.

Bulls are complacent , Bears are scared

I think an important intermediate top will be put in this week. The market strongly rejected the 1070-1080 level from 2 weeks ago, and now we have more bulls and fewer bears than we did back then when we were at these same levels.
Shorts are definitely getting scared, CNBC’s Guy Adami who has been bearish since August finally threw in the towel and said you can’t fight it. Today on the CNBC Fast Money Halftime show, all 4 guests called for buying into the close. Bulls are complacent. Bears are scared to short. The top is coming soon.