State of the Markets - No longs, 20% Short

The markets are showing that they are overextended, even though they showed a massive bullish rally off the 1560 lows. I will break it down with the various daily indicators I use to identify swing points in the market. Please understand that these views don't come without drawdowns or straight out losses, but they are some indicators I use to judge future movements in the markets.

The first chart I would like to post is of the previous call of a wave 4 correction down. It bottomed right in the area I thought it would.

The wave 4 Target was 1560-1540 and the market found it's low at 1560. Since then we have seen a quick rally off the lows, but that that has given negative divergence across many indicators. The first I'd like to start with is the EW Oscillator, which is just a modified MACD signal for anyone interested. There is nothing special behind the indicator, just another to watch.

The EWO has reached a level marked by the white horizontal line that claims it's currently overbought. Additionally, it is showing negative divergence (the high of the oscillator is below the previous high, while price has printed a higher high) to the previous high. This, along with my wave count, lead me to be bearish in the MEDIUM term, which is 1-2 months.

The MACD on the SP-500 is similarly in overbought territory, producing a lower high, as well as breaching the uptrend line before price has. This leads me to believe that price will follow the signal and break the uptrend line from November 2012. The chart is below.

In fact, I'm looking at the current MACD as a backtest of the broken uptrend line, even though it exceeded it by a few ticks.

The RSI has yet to break it's uptrend, nor put in negative divergence on a large scale. 

We may see a higher high and that's why I'm currently on 20% short with zero long positions. It can take some time for the RSI to show a top, so it is only one indicator in the bag of tricks for a reason.

The Stoch RSI is one of my favorite indicators. Drawing trendlines on this indicator can be deadly for timing purposes. 

This indicator is showing a QUICK uptrend which is normally followed my a BRIEF selloff which is great for options traders. This indicator is telling me to buy some SPY puts and take profit after a 10-15 pt. decline which leads to 30-40% profits. I believe the uptrend is broken and will again buy puts tomorrow. This can also lead to large declines, so make sure to leave some runners on (breakeven positions after taking profits on your initial position). It is showing me that this may be a brief pullback with new highs to come. As you can see from the chart above, most straight up trajectory lines were part of a 2nd or 4th waves. Something for the bears to be wary of. PLEASE NOTE that all short term bearish setups have held above the 40 or Bullish above line. If the indicator drops below that line, and you're a bull, you're on the WRONG side of the trade.

Finally (sorry so long-winded), comes my FAVORITE INDICATOR!!! The ADX on ALL major US Indices has rolled over on a daily level to a sell position. On the SP-500 the indicator DID NOT REACH the sell level usually associated with a major sell, but this year it has also not reached the buy level, so I really don't know what to think about it but trust the rollover. It gave a rollover sell signal. On a side note, the RUT (Russell 2000 Index) gave a major rollover sell signal, so I'm inclined to believe the SP-500 Is following suit.

Please scroll or gander at the next 4 posts to see the intermarket analysis which adds to my thoughts on these posts, including the fate of the US Dollar Index along with the most correlated VIX cycle. All analysis is based on intermarket analysis including Bonds, FX, Sentiment, Price Action and my gut hunch. Everyone should look at all markets (beside my gut hunch) before taking a trade.

Best of luck people.

Jim Genosky