We go to “Red Flag Flying” status this after last week’s sell off and the technical damage done to the major indexes and sectors. We expect still lower prices ahead.

The markets remain overvalued and clearly investor sentiment has dramatically changed over the past few days. As fast as this market has climbed, it’s perfectly plausible to imagine an unwind that could be just as fast and aggressive.

This week found us in cash as the markets appear to be hitting the ceiling at approximately 1100 on the S&P 500. We remain in "Yellow Flag" mode and expect choppy prices ahead.

Dow 10,000 is Nothing to Celebrate

Last Wednesday, October, 14, 2009, the Dow Jones Industrials closed above 10,000, and this milestone was met with the predictable cheerleading among the financial media.

We switched to "Red Flag Flying" mode, expecting lower prices ahead.

Mid-week we entered inverse positions in both the standard and leveraged portfolios and have unrealized gains/losses ranging from -0.8% to +5.3%.

Things turned south this week, with the major indexes posting their first losing week in three. Our long positions gave up some ground along with the general indexes.

Markets remain overbought and we are very close to a "Red Flag Flying" signal, indicating lower prices ahead. The environment remains difficult and in my opinion, caution is in order.

The markets remain overbought but are still rising.

Significant resistance lies 2-3% ahead.

The bulls and bears fought to a standoff on Friday and next week could be a significant turning point in the course of the markets this year. Bull or bear is "dealer's choice" because this market feels much more like a poker game than a stable platform upon which to make investing and trading decisions.

Here are the current cross currents and arguments for each side:

Our inverse positions slid backwards on Friday with the strong pre-weekend rally and we currently have the following unrealized gains/losses in our positions:

Standard Portfolio:

This ETF seeks a return that is either 300%, 200%, -100%, -200% or -300% of the return of an index or other benchmark (target) for a single day. Due to the compounding of daily returns, ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. Investors should monitor their ProShares holdings consistent with their strategies, as frequently as daily. For more on correlation, leverage and other risks, please read the prospectus.

It was a wild week that began with panic selling and ended with panic buying.

On the Point and Figure Charts, the Dow Jones went from a “sell” on Monday to a “buy” on Friday and all the major indexes have returned to a much overbought state as of close on Friday.

On Friday, we closed our 5 positions in the Standard Portfolio for the following gains:

EEM: +2.2%

It was another wild week as the bulls continued their stampede. This market continues defying gravity and is certainly due for a breather, long overdue, in fact.

The chart below shows the long tail UP, which is a warning of "too far, too fast."

As we enter August, the market finds itself approaching significant resistance at approximately 1,000 on the S&P 500.

Has the last bear died?

With last week's decisive breakout to the upside on all the major indexes, it appears that indeed, at least for now, the bears have died and gone to "urus heaven."

We had a difficult week as our inverse positions were squeezed by the market moving higher towards the top band of its trading range and then stalling right below the June 11th highs.

We remain in the "Red Flag Flying" mode, expecting lower prices ahead.

On Monday, the S&P 500 and Dow Jones Industrials both went to "sell" signals using Point and Figure Charting methodology.

This week things got a lot uglier with Thursday's employment report along with other news in the financial world that we'll discuss in a moment.