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Market Topping? Weekly Stock Market Outlook for 10-26-2009

|Includes: FAS, FAZ, SPDR S&P 500 Trust ETF (SPY), SPY, VXX, VXZ

 Hope all is going well for all of the traders and investors out there. I apologize for no updates last week as I have been battling a knee injury and adapting to crutches has not been helping me with a constraint of time! Long story short, I am back and bringing you next week's battle plan tonight. Let's look at where the market is going to go next week.

First thing I would like to note is that the 50% retracement from the all time high of the S&P 500 Index (1576.09 in October of 2007) is sitting at roughly 1,120. We have come within less than 19 points of this market. With a high this last week of 1,101.36, many technical analysts will consider this retracement is completed. What does this mean? It means that if this was just a technical bounce, things could get really ugly for bulls moving forward. This market could turn south in a hurry.

I think it is important to note that a market top gets a "toppy feeling." It will start to chop and as a result, we should see volatility start to increase again. It is going to be imperative for us to keep our eyes on the volatility index as well. Let's look at the weekly chart for the $SPX.


The weekly chart is starting to give me a sense of a break down in the market happening on a long term basis. Although the coming correction may just be a small correction again, it is showing me signs of a bigger correction coming. Many different indicators deteriorating. CCI still strong but I think that if it closes below 100 on Friday, you get short and for a big move. MACD is falling apart. RSI still remains strong which gives me a feeling that we may hit the 50% retracement of 1,120 on the S&P possibly next week.

Zooming in, let's look at the daily chart:


Zooming into the daily chart, we get further objective confirmation of the market breaking down. MACD has crossed bearish, CCI as well (notice CCI is front running and ahead of MACD in timing) and I see RSI wanting to push the 50 level. All of this is telling me we have 1-10 days (10 MAX) to sell stocks and get short. With this chart, I think it may be closer to 1-5 days. It may start Monday, but I have a good gauge of two weeks top for a interim top to this rally.

More Confirmation

Ok, so you want some more confirmation? How about this. Let's look and see what the Volatility Index (VIX) is telling us. As I mentioned earlier, a market top should bring in new volatility to the market. Is VIX ready to pop confirming this hypothesis?

VIXdailyChartAs the chart annotations clearly point out, VIX is set to pop. Keep your radars on as I see a break (confirmed close) of VIX above 25 is a giant bearish sign for stocks. The market could see a possibly a 10% correction which could send us back under 1,000 on the S&P 500. Keep your eyes out as crappy stocks like AIG continue to break down.

As investors bought up both good and bad stocks in this rally, the ones holding crap companies should start to sell these frantically. Who wants to seriously hold AIG at these levels? Not many investors. Just as good stocks and bad stocks popped in this bull market rally, I think that both good and bad stocks will break down in the correction that is apparently coming.

Good luck and happy trading!