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Monday, October 17, 2011 - Short Term Update

|Includes:DIA, FXE, IWM, QQQ, SPDR S&P 500 Trust ETF (SPY), TLT, UUP, VXX, XLF
Short update tonight.

Friday Recap:

A quote from Friday's update: "The sell setup is here, I am just waiting for a convincing reversal in price. Owning stocks while everyone is celebrating may feel good, but probability dictates that this is actually the very high risk play."

Monday:
After Friday's close the put call ratio dropped to about to about -1.5 standard deviations below 1 trading month's mean; the rally had finally convinced traders to start buying calls and take their hedges off. The XLF produced a hugely bearish non-confirmation, which I highlighted here. Usually that type of behavior bookends rallies.

The trading indicators reached extremes last week and started showing bearish divergence since about Wednesday/Thursday. Today they stand between "high" and "average" indicating to me that the downside move is not yet finished. The one risk here that I see to the bearish case: the shortest time frame Walter Bressert cycle study is showing a possible short term cycle bottom, indicating there could be one more pop higher. I doubt this however since the other longer term cycles are topping and will probably override the short term cycle. The majority of the other evidence I look at argues against it as well. If it does occur however, it would produce a pretty clear head and shoulders pattern on hourly charts. But that is conjecture, what we have in front of us is a severely overbought market, and price momentum is down. I believe it is best  trade the market we have and not the "what ifs."

Summary:
Traders:
Trading indicators are coming off very high levels, swing indicators are suggesting that the next big swing is down, cycles are topping = short. Moving back above 121 would be the first indication I'm wrong. A close above 121.85 would produce a stop.

Investors:
We are in a bear market, continue to use overbought readings to reduce all long positions to cash (or even get short if you are less risk averse).

Next update tomorrow after the close,
-Bill L.
Stocks: SPY, DIA, QQQ, IWM, UUP, TLT, VXX, FXE, XLF