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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."

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."

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.

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.