Sunday, January 27, 2013

Preparing For A Pullback This Week

On Wednesday, my experimental market indicator signaled a short-term top. This signal has yet to  play out; if you review the past signals you can see it sometimes takes a few days for the signal to start working. Along with this signal and other indicators I look at, I really think the market is ready to pull back. More specifically I think the Dow Jones ($DIA), the most overbought, will  probably pull back the most (versus the S&P 500). The chart below is the $DIA (Dow Jones ETF). Note there are several gaps as the Dow Jones went parabolic. I think there is an excellent chance one of these gaps will fill this week. So far, the market has been able to work off the overbought conditions in the mornings and proceed higher toward the close each day. However, I think the market is getting to a point where it cannot correct enough during the day, and a daily correction is needed. At the moment I have no short position, but will probably enter one if I see a great opening.

The chart below is the Aussie-Yen (currency exchange rate) verus the S&P 500, which are both highly correlated. There is a very unique property between the two; when the Aussie-Yen makes a divergent top versus the S&P 500, the Aussie-Yen direction tends to be the correct direction to where the S&P 500 will be heading. Currently, the Aussie-Yen has not made a higher high (stayed flat), while the S&P 500 has made a higher high. Usually, when this occurs, the S&P 500 tends to enter a correction phase soon after (may take a while, refer to chart for past examples).

Below is the ratio adjusted Summation Index, which is a very long-term bull/bear indicator. It has correctly called the bull market since the start of last summer. Right now, it is saying months from now the market will be higher, as it has stayed well above +500 for almost a month. So, despite what correction I think the markets will have the next week (or maybe longer), this indicator is saying we will see higher highs.