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We witnessed another upside gap today and in my opinion the bears were handed a gift, at least for the short-term.

Most of the highly- liquid ETFs I follow here at Crowder Options have pushed into a short-term overbought extreme, with several actually reaching a very overbought extreme.

Typically, when we see this type of price action, that is an upside gap into overbought to very overbought territory at strong overhead resistance, a short-term reprieve is to be expected. However, if you recall, I expected to see a reprieve after last Tuesday's large upside gap, but the gap in the tech-heavy Nasdaq 100 (one of my positions at the moment) has yet to close.


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But, now that we have seen the all of the major ETFs, SPY, DIA, IWM and QQQ fail at major resistance levels (as witnessed today) the probability of a short-term downside move has increased. Again, couple a failure at strong overhead resistance with short-term overbought readings in over half of the ETFs I follow and the probability increases even further. And, if aforementioned bearish leanings weren't enough, the market is entering a period of seasonal bearishness.

IF that wasn't enough talented sentiment analyst Jason Goepfert of Sentimentrader.com recently stated, "

Mostly what we've looked at over the past couple of weeks has been either market-neutral or positive. We're starting to see some negatives now. We looked at one of those yesterday, the ratio of speculative Nasdaq volume to NYSE volume. That's a minor indicator, but it's at extreme levels.

Another negative is the spike in the OEX Put/Call Ratio. This means that traders have been busy trading put options on the S&P 100 index, the largest companies in the S&P 500. These options are normally traded by more experienced traders. With that put/call ratio high and the Equity Put/Call Ratio low, the spread between the two is at an extreme. This is kind of a poor man's proxy for smart money (OEX options) versus dumb money (equity options). Such a wide disparity between the two has not been a good sign."

Combine all of the aforementioned and you can quickly see why I expect to see a short-term decline that closes the 1/3 gap.


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Source: Why A Short-Term Decline Is Highly Probable