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Nine Reasons Why This May Be a Sell Setup

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We should finally be in correction mode.

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The Setup

I apologize for not being able to get this out sooner, but I have been busier than a one-armed paperhanger since 5 a.m.

The Reader's Digest version of what defines a "setup" is the following. Setups typically occur when numerous factors come into alignment. Factors that comprise a setup are things such as the magnitude and duration of a recent move, a pop n' drop above a key level of resistance, psychology (market sentiment), rejection of good news, and valuations. Valuations are a little difficult to pin down, because there are so many different factors that come into play.

As far as psychology is concerned, you typically will have an instance of the most hardened of strategists burning some serious calories by backpedaling, coupled with the conversion of those who have been most reluctant to believe a big move finally getting long (usually on an opening gap). The aforementioned is a bearish setup; the inverse is applied to a bullish setup.

Technical:

My weekly work is extremely extended, but has been such for the better part of 2 weeks. Some of that extended nature was worked off during those two weeks by the markets trading sideways; thus digesting 6 weeks of almost vertical price action. Markets can continue to trade higher in overbought conditions and correct as exhibited by quick & sharp price declines, or they can trade sideways to digest the gains while preparing to test higher prices and thus valuations.


1. That being said, my daily work came into alignment yesterday with my weekly work (again) while at the same time this morning we had a pop n' drop over the December 2007 highs which were only previously eclipsed by a pop n' drop in early January; thus still keeping that resistance level in play. The S&P, Transports, and DJ also happen to be at the top end of their channels.

Psychological:

2.
Merrill's David Rosenberg (who was very right on the way down) put out a piece two days ago that was a mini mea culpa. Although he did maintain a fairly bearish tone.

3.
The I.I. sentiment survey numbers released yesterday were at levels usually seen at the end of a short-term move. In this case, too many bulls.

4.
A certain eccentric market commentator was falling all over himself yesterday evening doing a victory lap (the likes of which would make Jimmy Johnson jealous), while at the same time dancing on the graves of those bears who have been crushed. I'll leave you to figure out who that could be.

5.
Put-to-call ratios (both equity and index) were at ridiculous levels, usually seen at points of extreme.

6.
It got directionally "too easy."

News Rejection:

7. AXP yesterday afternoon & virtually all financials this morning. GS and MS gave you that wink 5 minutes after the open.

Internal Rotation:

8. The NDX (pure tech) gave me the underperformance wink yesterday when it broke its persistent trend of outperformance that we've seen over the past 5 months. Couple that with the fact that huge tech names such as AAPL, CSCO, HPQ etc. -- the leaders throughout the rally, with the exception of those near-bankrupt names who have seen stratospheric moves -- flashed the physical performance warning sign yesterday.

9. Also take notice how defensive groups such as health care, pharma, biotech and consumer goods were well bid yesterday and have been en fuego since the open.

Summary:

Suffice it to say, it looks like this morning's eager gap buyers have bitten the forbidden fruit for the moment. The variable in this equation is the employment report tomorrow morning.

In my humble opinion, unless we print something along the lines of -300,000, we should finally be in correction mode. This morning's 30-year auction was atrocious, and should also serve to put a lid on recent equity enthusiasm.

Spot S&P 871-875 is current support on the downside, despite it being a prior super-duper obvious resistance level.

Mind the gap!
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Position in FAZ, SPY
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