Get Ready To Short
The bulls tried to recover some of last Friday's losses earlier this morning, but the bears quickly regained control in the final hours. This is a classic example of the bears taking over control which should set the stage for deeper losses ahead.
I wrote on my last posts (which seems like a decade ago) that the S&P bullish percent index negative divergence was confirmed which should flagged us a deeper correction is upon us. However, the bulls managed to extend the rally longer than I had anticipated. Judging by the actions of the last several sessions, it's clearly the party is about to end. Having said that, I'm patiently waiting for the S&P to violate its 20 day moving average before shorting this market. As you can see from the chart above, we closed right above the 20 dma which is 1,197. Keep in mind, we've not violated the 20 dma since the rallies began in early September and you can see why it's important to wait.
Bottom line - the market remained quite extended based on the S&P bull trend index. The fact it has reversed back to O's column from the overbought area reminded us this party is done - it's time to head for the exit. Better yet, it's time to put together a short list and prepare to attack.
Negative Divergence Is Confirmed
The bulls had enjoyed a fantastic ride the past few weeks, but all good things must come to an end.
As you can see from the chart above, the S&P has consistently traded above both its 10 & 20 day moving averages since early September. But while the price continues to climb higher, the S&P P&F breadth (the bottom window) has topped out on September 21st. In fact, it oscillates in the overbought territory for the past few weeks. Today's huge reversal in the S&P was enough to trigger this momentum indicator to drop below its September 24th lows - thus making a lower highs and lower lows. This confirms the bearish divergence which has taken effect for sometimes now.
With the bearish divergence now confirms, we must carefully watch the price actions. Specifically, I'm watching for the price to drop below its 20 day moving average which is now 1,161. So if you're bearish on the market you've finally have something to work on. I'd suggest you prepare your shorts lists and get ready to attack when the bears are taking over control.
