There are several key technical indicators suggesting that the market is ready to make a massive move one way or the other, and the evidence is pretty compelling on both sides of the tape - though I think the bears have an edge here. Yet, one thing is for sure. Whichever way the market goes, it will be a big move in the coming weeks.
We're either going to see a February to April type melt-up or another huge downdraft to at least test the correction lows. I suspect this move will begin within the next few trading sessions. I'm currently positioned on the short side of the trade, however, to take advantage of very overbought conditions as exhibited in the NYMO and cumulative tick.
The Bear Case
There are four central technical indicators suggesting that this current rally is on its last legs, and the market is about to see some major selling pressure starting within the next few trading sessions.
First, the $NYMO is simply way too high. In fact, it's sitting at levels not seen since the bear market lows set over a year ago. An 80 on the $NYMO usually indicates that the market is getting a little over extended - it current sits at 97.25 set at yesterday's close.
Secondly, the cumulative tick on the NASDAQ has hit levels suggesting that a major sell-off sits on the horizon. The last 11 times we saw such overzealous buying on the NASDAQ a significant sell-off in the markets followed within a few days.
Thirdly, the last two trading sessions of the last nine or so months have generally been met with significant weakness. Those who have shorted the broader market at the close of the third to last trading session, and covered that position at the close of the last trading session has been very profitable for nearly every month of the past year. See here.
Finally, the volume on the market's recent move up through several key technical levels of resistance has been very abysmal. This indicates a serious lack of conviction on the part of market participants taking this market higher. The S&P 500 closed above the 200-day moving average yesterday on very weak volume, and continues to flirt with that level today but without the necessary conviction to bring real buyers into this market.
The Bull Case
The bulls have some very compelling arguments of their own. First, recent weakening of the trend on the TLT seems to indicate that there may be an impending flight from the safety of fixed income instruments to the higher risk assets in the equity markets. The TLT appears to have put in a double top at around $102 and is currently flirting with the 50-day moving average. There's an inherent inverse relationship between the TLT, a 20+ Year Treasury Bond Fund, and the equity markets.
Secondly, the $TNX (10-Year Treasury Note Yield Index) seems to support this view as it appears the yield on the 10-year treasury note has put in a double bottom at the 29 level. Moreover, the $TNX is currently testing the upper trend line of the April to July downtrend suggesting that market participants are getting ready to shift to an equity strategy.
Thirdly, the $VIX is at the cusp of breaking down from the April to July bearish pennant, and appears that it's set to close below the 200-day moving average for the second day in a row. A shift to an equity environment of lower volatility will clearly be conducive to much higher stock prices.
For a more detailed analysis of the equity markets, please see Cobra's Market View - easily one of the best technicians I've had the pleasure to follow over the past several months.
Disclosure: At the time of this writing, the author holds August 2010 puts on the QQQQs. The information contained in this column is not to be taken as either an investment or trading recommendation, and serious traders or investors should consult with their own professional financial advisors before acting on any thoughts expressed in this publication.