The thing with divergences is that they can continue for some time even though the stars may seem aligned. In other words, we are still waiting for a shorter time frame breakdown before we go short. I believe this is just around the corner but until then we patiently wait for that to happen. The risk for being long here is too high in my opinion because that downside catalyst can happen any day now and when it does, it will transpire very quickly.

SELL, SELL, SELL:

I want to update the listening audience that I am placing a major sell signal for next week. I am seeing some incredible divergence signals on all major indexes (SEE S&P 500 CHART BELOW), divergences in the high-lows list to Wilshire 5000 that we have not seen since May 2011 (SEE BELOW), and copper broke down last week preceded by divergence similar to the breakdown in Feb 2011 a few months prior to the stock market peak (SEE BELOW). Overall the market is about to correct BIG TIME in my opinion very likely next week now that OPEX is done for this month. Once we get a daily close below 1338, we should see a fairly swift and significant decline of 5-10%.

As Brian Shannon likes to say, what is the "essence of the trend"? This is how the different indexes look right now on the hourly chart since the rally started in November. Dow looks weakest in my opinion regardless of the fact that it pierced the 2011 highs. The other indexes have yet to break their downtrend lines. I don't think it is time to short just yet:

It's been a little while since my last post. My stance still remains bearish, but it all depends on the monthly close tomorrow. I am expecting a monthly close below an important fib level at 1307 for the S&P 500. A close below this level will keep the much longer (multi-year) trend in a bearish stance based the way I look at fibs. Having said that, the SP500 is currently above that 1307 level, although it did break below it this morning. So, tomorrow's close is critical.

I want to shift the topic to something that has caused me a lot of pain as of late and many others that I know that were part of NWAtrading. This is regarding the recent drop in TVIX. Now, as you probably know leveraged ETF's have their own inherent risks. First, from the fact that they are LEVERAGED! Second, due to their decay factor over time. Third, this is something you may not already know and that is some of these ETFs (or ETNs) are positively or negatively affected by 'backwardation' and 'contango.' Typically ETFs that are based on futures contracts are affected by this phenomenon. So, these would include most commodity ETFs (exception is USCI) and other ETFs such as TVIX.

TVIX is based on VXX which is the VIX short-term futures ETN. VXX is affected by backwardation and contango. I will not get into the details of backwardation and contango here, there are plenty of resources on the internet if you are interested in reading further. The basic idea is that when a futures are in contango, the forward contract price is greater than the spot price and reverse is true for when in backwardation. Checkout the intelligent investor blog that goes into this in a lot more detail and explains it well.

So, my thought is this...VXX or TVIX should not be traded unless we are in backwardation. When it is in contango, you are dealing with 3 negative forces - 1) Loss of value due to leverage factor, 2) Decay factor, 3) Backwardation/Contango factor. Many of us made money while TVIX was in backwardation from mid August to end of December, but many have lost money in TVIX since it has been in contango since end of December. Would love to hear some comments. Thanks.

BULLISH AND BEARISH ARGUMENTS ON THE STATE OF THE MARKETS:

BULLISH:

1) Financials have been strong and have been leading the market as of late.
2) We are still in a daily uptrend, although in the backdrop of a larger bear market.
3) Market is shrugging off bad news and continuing higher - i.e., s&p downgrade of the eurozone
4) Macro data improving slowly - jobless claims, employment situation

BEARISH:

1) Broader markets still in a larger bear market and are at critical retracement levels (78.6% on monthly)
2) $TED spread has been rising since the August drop with only a minor decline in January. (TED spread is an indicator of perceived credit risk in the general economy.[1] This is because T-bills are considered risk-free while LIBOR reflects the credit risk of lending to commercial banks. When the TED spread increases, that is a sign that lenders believe the risk of default on interbank loans (also known as counterparty risk) is increasing.
3) 10 year yield which has generally been following the broader equity market in same direction has been diverging. In other words, in the recent weeks while markets have moved higher, the 10 year yield has not. (The bond market is not believing this rally).
4) The CBOE put/call ratio is at .74 (quite low). This is a contrarian indicator.
5) The investment sentiment numbers have posted a 2 week consecutive highly bullish bias (not seen in 6 years). This is also a contrarian indicator.
My viewpoint remains unchanged. I believe we have the potential for a quick rally to 1307 area this week and that's it. We will see panic setting in through end of this month and into February of a potential Greek default. That will take center stage for the next few weeks.

NEW TA VIDEO:

6-12-2011

I am writing this quick post to update my video from Sunday given some critical price action on Monday and Tuesday.

STOCKS:
Critical after hours session going on right now in the futures markets. We are approaching some very significant support levels in the equity futures markets. If these levels hold (particularly 1290 for /ES (e-mini 500)) we should see a decent rally in the next day or so.
COMMODITIES:
gold has already started back upward and oil is looking quite ready to pop back up. USO would be a superb low risk play with a stop below the recent low at 37.72.
BONDS:
have staged an incredible rally since end of April, however, as of monday's close, the rally has officially been broken. I think we will see bonds slide again (contrary to my video on sunday since critical break of support occurred on monday)
DOLLAR:
still in an uptrend, but started to flirt with some key resistance levels above

SUMMARY:
I expect equities and commodities to move back up in the next day or so and bonds and dollar to slide once again.