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SPX Update: Are Bulls Overconfident?


A second consecutive all-time high in one sentiment indicator, and a new sell signal in another indicator; both suggest bulls may be getting overconfident.

MINYANVILLE ORIGINAL In yesterday's analysis, I suggested that the market was finally ready to move out of the two-week trading range. The market obliged; and in the process reached the next short-term preferred target of 1415-1421, which was published on Tuesday.

The market is now in the zone for a potential double-top with 1415-1422 -- and many metrics are indicating that sentiment is more than a bit frothy, which usually suggests that some type of correction lower is due. In fact, the Nasdaq total volume to NYSE total volume ratio reached a second consecutive all-time high on Thursday.

Again, the reason this indicator generally works is because it indicates that investors are pouring relatively high amounts of money into the high-beta Nasdaq vs. the "safer" NYSE. This suggests that traders are feeling rather invincible on the bullish side of the trade, and are essentially throwing caution to the wind.

We're getting into the territory where one has to ask themselves how long these types of readings can continue, but the challenge I'm seeing is that there aren't currently any real signs of weakness in the actual price action.

Click to enlarge

Next is one of my proprietary sell indicators (though I've shared it previously, so it may have made its way into the public world by now). This is a ratio of the Nasdaq 100 (NDX) to the Dow Jones Utility Average (UTIL). It operates in a fashion similar to the chart shown above, though its signals are much less frequent. Over the prior decade, it's been 80% accurate at finding short-to-intermediate-term tops, with the only signal failure coming in late 2003.

Note the last time this indicator issued a sell signal was at the end of February, which hit the short-term top well, but led the intermediate-term top by a month.

Click to enlarge

The Preferred Outlook

Based on numerous signals such as the ratios just discussed, I remain in favor of the view that an intermediate top is under construction. It's not always possible to call intermediate turns within a few points; so I obviously can't be certain if the assumed turn will come from within my 1415-1421 target zone -- but that would be the perfect world scenario. In a moment I'll discuss the "but what if no turn comes" outlook.

Click to enlarge

Daily chart of the Dow Jones Industrials (INDU):

Click to enlarge

A brief discussion of the short-term SPX on the chart below:

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An Alternate Outlook:

The outlook shown above hinges on what happens over the near term. If the 1422 resistance level is claimed, then that will eliminate certain potentials, and when trying to anticipate the pattern in advance, one has to recognize when the market dictates that it's time to evolve. The outlook shown below only becomes a consideration if the more bearish pattern shown above is invalidated.

If the 1422 level is solidly claimed in the near term, then that suggests a different pattern (than the one shown above) is unfolding, and the outlook below attempts to anticipate what that pattern might be. This path still suggests an intermediate top is close in terms of price, but the pattern below would be more near-term bullish and would allow the time component to stretch out for several weeks (or longer).

Again, this pattern is being shown in advance, but it is not a consideration unless 1422 is solidly claimed by the bulls.

Click to enlarge

In conclusion, a high number of sell signals have triggered recently, and these are causing me to favor a bearish intermediate-term hypothesis. Sometime in the next few sessions we need to see some price confirmation to add confidence to that hypothesis. Trade safe.

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