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Path of Maximum Frustration



At this point, the path of maximum frustration for the remainder of the summer seems to be a coming selloff that draws in the circling shorts but proves to be more shallow than expected; a move higher that forces them to cover and draws in the performance-chasers and overly aggressive bulls, followed by a more severe move lower.

I've received a ton of emails from Minyans asking about the current status of the NYSE Bullish Percent, our main market indicator. In my earlier piece on the NYSE Bullish Percent I mentioned that since 1955 this indicator has been above 70% just 26 times. Currently we're at 75.8% (through Tuesday), the highest this indicator has been since 1998.

In looking back to the previous times this indicator has been above 70%, the initial move to defense has not been the most ideal shorting opportunity. More often than not, the initial move down for this indicator occurs within a correction of the initial rally that moved it to 70% followed by a recovery high that typically falls short of the previous rally peak. The recovery is what proves to be the ideal shorting opportunity and the "meat" of the selloff from the70% area is typically contained within the reversals to defense that follow the initial reversal down. This potential scenario, and it's just that -- a potential scenario, not a prediction -- would seem to correspond very well to the path of maximum frustration that I outlined above.

Meanwhile, in addition to the short-term indicators I follow, which should give us a heads up when pullbacks in this rally begin to cause technical damage, I'm watching the Biotech sector, which was among the leading groups for this current rally. Topping is typically a process rather than an event, so within that process I would expect the leaders of this rally on the way up to be the leaders on the way down as well.

Below is a point and figure chart of the Amex Biotech Index (BTK). Since the initial breakout for this index at 365 back in April, we have yet to see a single sell signal on this chart. Now, however, we're seeing the first signs of waning momentum. If the BTK ticks at 470 today, that will cause a reversal to a column of Os on this chart and result in a lower high at 485. Although a reversal is not necessarily a prelude to a sell signal, a lower high is significant since it will be the first lower high on a point and figure basis we've made since the April breakout.

Source: Dorsey Wright

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