11:45 BST - SPX: Indicators and Internals still suggesting conditions are in place for a pullback - confirmatory price action still awaited

These charts, updated from the last time I posted them on 22 October (click here to view that post) continue to suggest that care is required on the long side:

SPX Daily:

The comments made in that last post with regard to the indicators on this chart continue to apply as price remains stuck around the median line of the pink pitchfork.

CBOE Equity Options Put/Call Ratio:

The 5ma has moved decisively above the 10ma and the latter is trying to break above the pink downward (bullish for the market) channel.

The McClellan Oscillator failed to make a new high with the market once again, simply backtesting the broken green upward channel and the zero line. It still paints a bearish picture.

SPX Percent of Stocks Above the 50ma:

The sell signal triggered on 19 October remains in force, but we now have the 13ma now appearing to roll over, which should reinforce the signal.

NYSE Tick:

The bearish divergence on this chart continued as the market shot up to the 1196.14 high, so, still indicates internal weakness.

In light of all of the above, short trades do seem to have a good risk reward, provided (and this is crucial, of course) proper stops are placed. This is because despite everything shown in the above charts, we still haven't seen any decisive downward action to confirm what these charts are suggesting. Until we see that, the trend remains up and these divergences and bearish configurations can feasibly continue and/or work themselves off as the market goes sideways or grinds higher.

8:39 BST - SPX Update: Conditions are in place for a top - price action has yet to confirm

Technical signs suggest that the market ought to be at or near a top. Here's the daily chart:

SPX Daily:

As you can see, the rally from the August low has been crawling up the median line of the pink pitchfork and, of course, it can continue to do so. 

The technical indicators should be a concern on the bullish side, however:

- the CCI seems to be stuck under +100;

- the MACD histogram has been showing significant bearish divergence;

- the RSI failed to make a new high with the market yesterday;

- the MACD is rolling over;

- the stochastic has turned down.

CBOE Equity Options Put/Call Ratio:

I last posted this and the following two charts on 9 October.

The 5ma has moved above the 10ma and the 10ma is itself moving up. However, both remain contained in the pink downward channel (bullish for the market).

As I've said before, technically, the action of the moving averages is a sell signal, but while they are below the blue dotted line, the risk of false signals is high.

A decisive break above the blue ine and out of the pink channel is needed. 

For the moment, this suggests a sell, but with caution.

The McClellan Oscillator broke the bear flag I had drawn in and failed to break above the red channel, which seems rather bearish along with the negative divergence it has displayed as against the rally in the market.

SPX Percent of Stocks Above the 50ma:

This triggered a sell signal with a break below its 13ma on 19 October.

NYSE $Tick:

The NYSE Tick continues to display bearish divergence against the market, suggesting some real underlying weakness.

However, until we actually see some price action to confirm that a top to the rally from the August low may be in, price can continue to creep up, as we've seen.

I've bored myself silly repeating numerous times over the last few weeks that the price action required is a clear impulsive 5 wave decline that breaks some significant price level. In elliott wave terms, this means three 5 wave declines linked by two 3 wave rallies with no overlap.

So far, on various occasions, we've seen an initial 5 wave move down that looks promising as the start of a larger 5 wave decline, followed by a 3 wave rally and then a second 5 wave move down. However, they've subsequently turned out to be part of a larger 3 wave decline when the second 3 wave rally has overlapped the low of the first 5 wave decline. This is what we saw yesterday, with the late rally turning the move down into yesterday's low into a 3 wave move. The best play in recent days has been to go long when you see a possible end to the second 5 wave move down.

It remains possible that the bearish count shown in Chart 2 of yesterday's end of day update will play out. Certainly, with the invalidation point so close by, it could be worth a short trade. However, if you want to play it safe, the benefit of the doubt has to be given to the upside in these circumstances and you have to wait for clearer price confirmation of a potential top.

12:04 BST - Update on the CBOE Options Equity Put/Call ratio, S&P 500 Stocks above their 50ma and NYSE Tick

The 5ma and 10ma on the $CPCE chart have given a sell signal by the 5ma crossing above the 10ma. However, you can see that for the past month or so, they've been stuck below the blue dotted line and as you can see from the two areas highlighted in green, when this has happened in the past, there have been false signals given while the market grinds higher - I've mentioned this problem in previous posts, most recently on 23 September - see here:

CBOE Equity Put/Call Ratio:

As at the time of that last post, with the market continuing to move up, we've seen the moving averages of the CPCE stay within the downward pink channel (a downward channel is bullish for the market). However, its interesting that they haven't actually moved down within the channel, but instead have moved sideways. Also, there are higher lows in both moving averages within this sideways movement. I consider both of these points as potentially bearish for the market.

As I've said before, there's nothing wrong taking a position on the moving average cross, but with the prevalence of false signals given whilst below the blue dotted line, its imperative to manage the trade with that risk in mind.

What I'm looking for is a clear break of these moving averages above the pink channel and above the blue dotted line while price falls. This would be bearish for the market. 

If any such price fall is sustainable, rallies should not result in the moving averages of the CPCE coming back significantly into the pink channel. 

On the other hand, if all we see is these moving averages move up to touch the upper line of the pink channel and then come back down again, that's only going to validate the channel further and would suggest more upside in the markets. As long as we stay in the pink channel, that is bullish for the markets.

I've re-drawn the black channel from last time.  It remains a tentative channel until I see more action in these moving averages. If they (and in particular the 10ma) can stay above the lower black line, that would be bearish for the market.

In the lower window you can see that there is significant bearish divergence between price and the McClellan Oscillator, not only since mid September, but also between the August and the October highs - I've drawn a red channel based on the latter divergence. 

To me, this indicates some serious underlying weakness in the market.  Of course, this could be negated with just one big push up in the Oscillator, but its certainly suggesting caution on the long side for the moment. A break of the small bear flag that I've marked in green may be a bad sign for the uptrend in the market.

The S&P500 Percent of Stocks above their 50ma has been lingering in the area where it has previously given good sell signals:

We did get a sell signal (the index moved below its 13ma) shortly after my last post on this, (see the last red vertical line) but it was quickly reversed, as I recall, the very next day (in fact, the futures reversed up overnight and so unless you had intra day data on this index, you wouldn't have taken a trade based on the signal).

At the moment, there's no sell signal, but there was divergence between this index and the market on Friday. It failed to make a new high while the market did. Its also notable that the technical indicators for this index are also showing bearish divergence against its recent push up.

So, this one is something I'm going to be watching closely.

The NYSE Tick is also showing bearish divergence in relation to market action:

The new highs we saw on Friday did produce a move up in the 13ma of the Tick, but its significantly below where it was at the August and September highs. Again, this suggests to me underlying weakness, so caution on the long side for the time being, unless it can start making new highs with the market.

12:06 BST - SPX Update: Equity Put/Call Ratio, Percent of Stocks above the 50ma and the 60 min time and price chart - lining up for sell signals

The CBOE Equity Put/Call ratio is once again, on the verge of giving a sell signal by the 5ma moving above the 10ma. There hasn't yet been a cross of the 5ma above the 10ma - they closed yesterday at the same level - exactly as they did on 10 September (see my post of 12 September). Then, no signal came as the 5ma dropped below the 10ma and they both stayed below the blue dotted line. Here's the updated chart:

CBOE Equity Put/Call ratio:

As I've mentioned before and reiterated in the 12 September post, we may get the cross of the 5ma above the 10ma and that can be taken as a sell signal, but while these moving averges are below the blue dotted line, there is always a higher risk of false signals, so trade management must take that into account.

There are however, features that might provide some support for a sell signal here. 

First, while the market has risen, the moving averages have stayed within the pink channel, which is presently a smaller downward channel (bullish for the market) within a larger upward channel (bearish for the market). The pink channel looks like a bull flag which should break to the upside (which is bearish for the market). The black channel was broken, but that may just need to be re-drawn. Importantly, so far, the red channel remains intact.

Second, the 5ma has formed a double bottom - you'll see that the 5ma made a triple bottom in early August (see the last vertical red dotted line marking the 9 August market high) and we then saw quite a substantial decline in the market.

Third, there is good divergence in the McLellan Oscillator which made a lower high while the market moved to a higher high. We didn't have this on 10 September (you'll see that we did have such divergence coupled with a cross of the 5ma above the 10ma at the 9 August market high).

If the market has topped, we should see the 5ma cross above 10ma and both should move emphatically above the pink channel and the blue dotted line and, preferably above the mid-line of the red channel. If one or other of these does not happen, it should be considered as a warning that any down move may not be sustainable.

The S&P 500 percent of stocks above their 50ma was in an area where it could have signalled a market top when I last posted it on 12 September, but, as mentioned in that post, there was no sell signal at that time and the risk remained to the upside. 

Since then, it moved up further along with the 13ma (and the market). Its now close to giving a sell signal, but hasn't yet done so. Its reached the overbought area where market tops have occurred previously and has truned down, but hasn't yet crossed down through the 13ma:

S&P 500 Percent of Stocks above the 50ma:

Whereas on 12 September this was telling me to be on the lookout for a potential market top, I think it may now be saying to be on high alert. 

Of course, there's nothing wrong taking trades in anticipation of a sell signal being given here, based on other analysis (eg elliott wave counts or other technical indicators), as long as risk is managed appropriately - its feasible that this indicator could move up again and make a lower high, while the market moves up to a higher high - that has certainly happened at previous market tops. 

If you were only trading off this indicator however, you'd wait for the cross and,  in general, once it falls below the 13ma in this area, its been a fairly reliable sell signal. So, something to keep a close eye on.

The 60 min time and price chart that I last posted on 21 September is aligning well with the potential sell signals referred to above:

SPX 60 min time and price chart:

You can see we're right at one of the time cycle lines so, while not guaranteed, there should be a good chance of a turn around the area of this line. Certainly, the longer term time cycle posted on 15 September would be consistent with a turn here and what we're seeing in the internals and indicators suggests that the turn should be down. 

However, none of these cycles can be precise turning points on every occasion, so more upside remains feasible and a turn down right now shouldn't be considered as guaranteed. Price action needs to be watched closely because sometimes, all you get is a brief pause in the prior trend and the market then continues in its original direction  (currently up) into the next cycle line.

So, looking at price action, it does seem to be behaving like it may now be struggling to make further upside to the next price level at about 1156. Once it fell below the current price level yesterday, it wasn't able to get back above it. 

It also fell below the midline of the channel (the construction of which is explained in the earlier post). Its the first time its done that since the big rally that got it into the upper part of the channel on 1 September. Obviously, this may be a false breakdown, so a quick recovery back into the upper half of the channel would potentially be bullish and we'd have to be thinking that the next price level up may be on the cards. 

However, if it fails to recover the upper half of the channel, that's going to look bearish and will suggest that the lower line of the channel may be reached and that will then open up the possibility of a breakdown out of the channel altogether.

You'll see that I've added some red dotted horizontal lines to the chart. These are Gann based price levels assuming a top at 1148.59. The first one has already been reached (it coincided with prior peaks in the market so was bound to provide support).  The lower ones may be the initial targets to watch for if we have topped and areas where price may pause. If we're only correcting an overall uptrend these levels may mark potential turning points for such a correction. If we're now entering a larger downtrend, these levels should only provide temporary support.

As for the technical indicators, while the bearish divergences did manifest themselves in lower prices yesterday, I really want to see more bearish moves in these indicators to have confidence that we will be seeing at least a reasonable pullback in the market.

The RSI needs to break the 50 level and get to oversold with price declining. The CCI needs to get to below zero and towards the -100 level with price declining. The MACD needs to fall below zero with price declining. The stochastic has reached oversold, but without too much of a sell-off in the market. If we see a market decline today, I'd like to see this indicator fall further into oversold without recovering above the oversold line.

So, the way things are lining up suggests that a top for the rally from the August low may be very near, if not already in at 1148.56. This is consistent with the wave counts, even on the overall bullish case (see yesterday's end of day update). Now we just need price to confirm with follow through to the last two day's bearish candles with a significant deline that takes out some meaningful price levels  to the downside (the ones I'm watching for the moment are set out in that end of day update).

 

16:30 BST - NYSE Tick bearish divergence against SPX highs

This divergence between the price action and the NYSE Tick occuring in an overbought area seems to be supporting a pullback of some sort in the market:

NYSE Tick:

We saw a divergence in the Mclellan Oscillator yesterday too. So maybe things are starting to at least line up for a reasonable pullback (if not the start of a larger move down).

11:39 BST - S&P 500 percent of stock above the 50ma and CBOE Equit Options Put/Call Ratio could be approaching sell signals

The S&P 500 percent of stocks above their 50 day ma gave a good buy signal on 31 August when it crossed back above its 13 ma  which, as I said in the post of 20 August, is what was needed for a buy signal.  Its is now in the area where it and the market topped out in early August:

S&P 500 percent of stocks above 50ma:

The line hasn't turned down yet, but its has the potential to double top here. However, the sell signal won't officially come until it crosses back below the 13ma. At the moment, that's still rising. While its above the 13ma, the risk is to the upside and there's alot of room for the line to move up into the area between the red lines if things get really bullish.

So, for the moment, this chart is telling me just to be on the look out for a potential top. In my view, it would be more favourable to the bear case if this line tops out under the red zone rather than pushing back into it. It generally seems to get into that zone in strong uptrends. Once it falls back, if the bearish case is playing out, I'd like to see it get down into the green zone before it turns back up. On the last decline into the end of August, it turned up above that zone which suggested that things were not quite bearish enough for a sustained market decline at that stage.

The CBOE Equity Options Put/Call Ratio is on the verge of giving a sell signal with the 5 and 10 day moving averages turning up. They haven't quite crossed yet - they closed at the same price on Friday:

CBOE Equity Options Put/Call Ratio:

Also, while they're below that blue dotted line, there's always the risk that they just chop around over and under it and criss-crossing each other while the market chops upwards like that August/October 2009 period highlighted in green, to which I've referred in earlier posts on this chart. So, while the 5ma may cross above the 10ma giving a sell signal, its important to realise that the signal could be quickly reversed, so trades taken on this signal while the averages are below the blue dotted line need to be managed accordingly.

You'll see that since I last posted this chart on 20 August (see here) I've added two channels to the red one that I originally drew on the chart back in June (see the 25 June post).

If the moving averages were to start moving up within the steeper black channel, that would suggest an acceleration in the market to the downside (an upward sloping channel is bearish for the market). Really, however, for the bear case, it would be more than satisfactory for the averages  (particularly the 10ma) to stay within the upper half of the red channel.

The downward sloping pink channel (which is bullish for the market) may be just be a normal downward swing in an overall uptrend, but its something to watch. If it becomes the dominant channel and leads these moving averages down and out of the black and/or red channels, that's going to suggest that the markets are in a sustainable uptrend.

At the moment, the pink channel looks like a bear flag that should break to the upside, which would be bearish for the market. But I don't think anything can be take for granted at this stage. The markets are clearly poised to move in either direction, even though a near term top may be in at Friday's high or not too far away (see Friday's end of day update showing the elliott wave counts for the bearish case and the update to which it refers for the elliott wave counts for the bullish case - both suggest a top of some sort should be in or near). The way it drops and to what level should give some clue as to whether its the bullish or bearish case that's playing out.

On this chart, if the next pullback in the market results in a convincing break above the pink channel which is not reversed, the bearish case will stand a good chance. Ideally, I'd like to see the next pullback in the market push the averages above the mid line of the red channel and for them to stay above that mid line. 

If, on the next pullback in the market, the pink channel isn't broken significantly to the upside or any such break is quickly reversed and the moving averages just continue trending down, then that's going to favour the bullish case for the market.

9:45 BST - Equity Options Put/Call Ratio and Percent of S&P 500 Stocks Above the 50ma

Here's an update of these two charts which I last posted on 12 August (you can read that post here):

CPCE Daily:

On 12 August, the moving averages of this ratio we stuck below the blue dotted line in a similar configuration to what we saw during the grind up in the market in August to October 2009 (see the green highlighted areas). The risk was that we would see the same thing happen again unless the moving averages started to get above the blue dotted line. A good sign for the bear case at that stage was a possible triple bottom in the 5ma and higher lows being formed in the 10ma.

Finally, as you can see from the chart above, we have seen the moving averages break above the dotted blue line and also above the mid-line of the red dotted upward channel. An upward channel in these moving averages is bearish for the market.

We're now headed towards the overbought zone, but you can see from the peaks in these moving averages during 2008, that they can get to the top end of the zone before the market bottoms. Obviously, that's not to say they will - market lows have occurred with these averages about where we are now. So, as ever, we need to be on alert for a possible market bottom. If you were looking at this chart alone for trading, it would take the form of a turn down in the 5ma and a flattening out in the 10ma which might be a warning that the 5ma is about to cross back below the 10ma, which is potentially bullish (but as with any signal, whipsaws occur).

Ideally, I would like to see the moving averages get to the top end of the red channel. If we're in 3rd waves down at multiple degrees as some of my counts suggest, this shouldn't be difficult to attain and we could well exceed the upper line of the channel.

The McClellan Oscillator in the bottom pane couldn't break the downtrend line on the recent rally in price. That rally enabled it to backtest the zero line from below and it was firmly rejected.

The only potential worry from this Oscillator is that while price moved below the 12 Aug low yesterday, the Oscillator did not - its still hgher than it was on 12 August. Having said that, the lows in price of 12 Aug and yesterday are not that far apart, so this possible bullish divergence may not be too great a concern. and may work itself off  if we push down further today. Also, other technical indicators don't show the same divergence at the moment. Just looking at two, the RSI is below its 12 August level and the MACD histogram bar for yesterday is lower then the bar formed on 12 August so these don't confirm the possible bullish sign showing in the McClellan Oscillator.

Still, this is something to keep an eye on, especially if this divergence starts to get confirmation from other technical indicators.

Percent of S&P 50 stocks above the 50ma:

As explained in the previous post, when this line crosses below its 13ma, its usually a good bearish signal. On this occassion, its worked pretty well again, with the cross occurring on 10 August, which was the day before the steep decline on 11 August.

With the rally into 17 August, we saw the line turn up, which was a potentially bullish sign - see the previous occassions when this happened above the buy zone, as marked on the chart. But you'll notice that in those cases, the low that gave the final bullish signal was a second low above the buy zone, not the first low.

So, we probably now have to be more on alert for a possible turn around in this line given that we did, yesterday, make a lower low than the low on 12 August. For the bear case, we don't want to see the line turn up from here. However, generally, while we're below the 13ma, the risk is weighted to the downside, so I wouldn't take a turn up in this line below the 13ma as a buy signal (without other indicators confirming) unless we actually cross back above the 13ma. Perhaps it would be a sign to tighten stops on shorts and/or to take a little bit of profit.

12:46 BST - Equity Options Put/Call Ratio and Percent of S&P stocks above the 50ma

Here's how the daily CPCE chart looks after yesterday's decline (updated from 7 August):

CPCE Daily:

You can see that we're still stuck just below the blue dotted line. The 5ma has crossed above the 10ma, which is good for the bearish case, but we need more. We need to clear the blue dotted line and get above the red dotted midline of that upward channel (which I first sketched in on 25 June). 

At the moment, the moving averages of the CPCE remain in a similar configuration as when we saw the grind up in the markets in August/October 2009 (the green highlighted area). That's why I think its important that we get above and away from the blue dotted line. Otherwise, the risk is that price just does what it did then.

Though the CPCE chart isn't yet confirming the bearish case, the failure of the Mcclellan Oscillator when re-testing the upward red line and its failure to get above the downward blue line, plus yesterday's drop below  zero should provide encouragement for the bear case. 

And here's something else that may be supporting that case:

Percent of S&P 500 stocks above the 50ma:

I use a 13ma with this because I've found that when the line crosses above or below, its usually a decent signal to buy or sell. Of course, its not 100% reliable, nothing is. But, it has caught some major moves at a reasonably early stage, as you can see from most of the red (sell signals) and green (buy signals) lines.

Currently, the line has crossed below the 13ma (it actually crossed marginally on Tuesday, prior to yesterday's steep decline). Generally, staying short while the line has been below the 13ma has been a good trade. Obviously, at such an early stage, there is the risk of being whipsawed, but that's trading.

If we see the 13ma really get going to the downside with price staying below it,  past behaviour suggests that it ought to be reasonably  safe to look to price action, elliott wave counts or whatever technical analysis you use, to enter or add to shorts. Worth keeping an eye on.

15:47 BST SPX and Options Equity Put/Call Ratio Update - Is the position the same as Aug-Oct 2009 with new highs in store?

Despite the recovery yesterday afternoon, its still difficult to feel completely confident on the long side in this market, and this, despite the fact that the trend is obviously up. 

In my view, there are contiuing warning signs of a potential top. approaching Of course, these may work themselves off in time, in which case, it will certainly be more comfortable to be in a long position, but until then, I remain cautious on the long side. 

Here's what I'm looking at.

Looking at this updated CPCE chart (last posted on 3 Aug), you can see that, it continues to struggle to get back above the blue dotted line, just as it did during the grind up in the market in Aug - Oct 2009 - see the green highlighted areas on the chart:

Equity Options Put/Call Ratio:

You can see that after this period SPX went on to make new highs. Perhaps this is what may be in store this time around also. The two areas of price action do look rather similar. But when I look at the daily chart of the SPX (last posted on 1 Aug), most of the indicators seem to be telling a different story - at least for now:

SPX Daily with picthforks:

Firstly, look at the CCI (144). In the August - October 2009 period, it was above the buy zone of 100 and pretty much stuck there. Look at it now - it can't get above zero.

Secondly, look at the MACD histogram. In the 2009 period highlighted, there was no marked negative divergence betwen it and price. Look at it now - the negative divergence is obvious. Although the MACD itself looks bullish, the divergence in the histogram suggests to me some underlying weakness. This is similar to what happened just before the April 2010 top when the histogram was diverging against price but the MACD itself was rising. 

Thirdly, look at the RSI (14). Its above 50, but the level that implies bullishness is actually 66.67. It can't seem to get to that level despite the significant rally we've seen off the July low. Look at what it did during the two main pullbacks in the rally from March 2009 - see the green circles on the RSI. It fell below 50 on each of those pullbacks, but did not fall to the level that implies bearishness, 33.33. That suggested to me that those pullbacks were against the larger trend. Once those pullbacks were complete, you can see how quickly the RSI moved up  and back to the bullish level. So, now, the failure of the RSI to reach 66.67 on this current rally (despite how far we've come from the July low) should suggest that the rally is a pullback against the larger trend. That's how I read it anyway, so until it can get above 66.67, I have to remain cautious on long trades.

So, while the behaviour of the CPCE is similar to its behaviour during the August to October 2009 move up, I'm not yet convinced that it means we have significantly more upside to go, and possibly new highs as occurred then. Neither the bearish case nor the bullish case is sealed at the moment, as far as I can see.

While looking at this chart, you can see that price continues to struggle at the lower line of the blue fork. Its touched the median line of the dark green fork twice since it started to rally from the July low, but this latest push up has so far failed to get to that median line. That suggests weakness for the moment. Against this, there have been bullish crosses of 3 of the moving averages and we closed above the 200ma thanks to the late push up on Friday. So, these signals are mixed.

I think caution is required on both sides with these conflicting signals as well as the outright bullish, near term bullish, near term bearish and outright bearish elliott wave counts that can be made from the price action.

 

10:27 BST - Options Equity Put/Call Ratio

Here's an updated chart of the CPCE. The last time I posted it, the 5 ma appeared to be forming a double bottom, but it had not yet moved above the 10ma. As of yesterday, we now have the 5ma above the 10ma and that double bottom, so far, has held:

CPCE Daily:

This might be taken as an early signal of a top in the market either being in or very close to being in. Remember that the signal doesn't necessarily catch the exact top or bottom and if these moving averages continue to struggle to stay above, or, in the case of the 10ma, get above, that blue dotted line, the risk of further upside in the market remains (see my post on 22 July).

I've added the McClellan Oscillator in the bottom window. Its diverging against the new price highs at the moment. It may perhaps be setting up a failed backtest of the upward sloping red trend line that it broke in the decline in the market into the end of July.  Its something to keep an eye on. 

If it does fail and the bearish divergence continues, that may provide another indication that the market may have topped or be very close to a top. 

If we're in one of the more bullish counts, then we'd expect to see the divergnce in the McClellan Oscillator work itself off and for the red trendline to be broken back above decisively. We'd also expect to see the 5 ma drop back down below that blue dotted line and the 10ma remain below it.

13:18 BST - Options Equity Put/Call Ratio Update

On 22 July we had a potential signal from the 5 and 10 moving averages of the CPCE that a market high might be near. However, it came with two warnings that the market could continue higher despite this signal. Both warnings played out and the markets did continue up, while those moving average of the CPCE continued to drop.

Yesterday, however, we saw both tick up, with the 5 ma possibly forming a double bottom. The 5 ma has not yet moved above the 10ma, so there's no real signal yet. Here's an updated chart:

CPCE Daily:

Still, its worth keeping an eye on this. If we have a top in on this rally from the July low, as one of my counts suggests, we should see these moving averages confirm it by the 5ma crossing above the 10 ma and both bursting up through the blue dotted line. If we have further upside to come, they will likely stay below the blue dotted line as they did in the area highlighted in green, while the market continues its climb higher.

For the moment, then, they are just saying that we should be alert to the possibility of a top, even though its not yet a confirmed sell signal.

12:02 BST - Options Equity Put/Call Ratio Update

On Friday 16 July the 5 day moving average of the CPCE had ticked up in an area of support, giving an early suggestion that we may be reaching a top of some kind in the market (you can see a longer term chart here). I said then that we needed to see the 10 day ma also tick up and the 5ma cross above it.

Well, we have those conditions in place now, so on past performance, there's a reasonable chance that we have seen, or are fairly close to, a top.

Here's the updated chart:

CPCE Daily:

A couple of points to note:

1) Just because the conditions mentioned have been met, does not mean that the market won't go higher - this signal doesn't necessarily occur at the precise price top;

2) note the period highlighted by the green rectangle where the moving averages got stuck under the blue line, even though the 5ma crossed above the 10ma a few times. You can see on the price chart in the window below that the market continued to move up during this period, quite signifcantly.

So, there's a reasonable prospect that a market high is in or near, based on the tick up in the moving averages of the CPCE and the cross of the 5ma above the 10ma, all at an area of prior support. However, watch the behaviour of these moving averages - if they begin to struggle to get above the blue line, it could be a warning that the markets will continue higher before a top is reached.

12:47 BST - SPX - Is a more sustained downtrend being signalled?

Just a quick look at the RSI (14) on the weekly and daily timeframes may be the confirmation that the bears are looking for, that we are more likely to be in for a sustained period of downward rather than upward movement in the markets.

Here's the weekly chart with the RSI in the window above price:

SPX Weekly RSI:

I've highlighted the behaviour of the RSI during recent bull and bear runs in the market. Clearly, it spends most of its time above the 50 level during a bull run and most of its time below the 50 level during a bear run.  

Looking at the far right of the chart, we seem to be seeing the RSI stuck largely below the 50 line since about early May, suggesting the current downtrend in the market could still have more to go.

Here's the daily:

SPX Daily RSI:

Obviously, the RSI is rather more volatile on this timeframe and its moves out of the bullish or bearish zone are deeper than on the weekly, so there's more scope to be whipsawed out of a position using the RSI alone. 

Still, since early May, its spent most of its time below the 50 line. Though its risen above 50 now, with the 50 day moving average having crossed below the 200ma, it suggests that RSI crosses above 50 may be only temporary in nature and not indicative of a change back to an uptrend.

The Bullish Percent line of the SPX is also behaving in a bearish manner - its been unable to recover above the 50 line and get back into the bullish zone, despite recent steep rallies. Its also below its 21 day moving average. This isn't bullish and seems more indicative of the beginnings of a sustained downtrend.

So, just a couple of things to keep an eye on as price action develops.

9:02 BST - Options Equity Put/Call Ratio

Here's an updated chart of the 5 and 10 day moving averages of the CPCE (updated from my post on 25 June) which may be giving us a warning of a possible turn down in the market:

CPCE Daily Chart:

You can see that we are in the area of that blue dashed line which marked a number of important highs in the market during the 2007 to 2009 decline (see the chart from 25 June). 

Its obvious from the chart that the moving averages can drop further before a market top is formed, but with the 5 ma ticking up, its a warning that a market top may be forming near current levels. 

We need to see the 10ma tick up, however, and the 5 ma cross back above it. This has usually been a good signal of some sort of market top in the past. Its not 100% perfect, but what is.

For the moment, it should be taken as a warning to at least tighten stops on long positions.

 

11:50 BST - CPCE - Options Equity Put/Call Ratio

Just looking at my CPCE chart, we may have the beginnings of a new uptrend in the 5 and 10 day moving averages (I think these are a fairly standard means of smoothing out the movements in the CPCE itself, so no magic there), which would be overall bearish for the markets - see the red dotted lines at the right end of the chart below:

CPCE Daily chart:

Obviously its very tentative at this stage, but every trend has to start somewhere!

What I found of interest is that the recent high on 21 June occured at a level in the CPCE which marked a number of high points during the 2007-2009 downtrend in the markets (and the early stages of the new uptrend) - see the blue dotted horizontal line and the highs I've highlighted with magenta circles.

Clearly, the moving averages are going to move up and down within any new trend and we do have to be aware that they are currently at levels where previous lows have occured. It doesn't mean that the markets can't go lower (there is certainly scope for these moving averages to push further up as you can see from the chart), it just means we need to be alert for signs of a low. I find that the 10 day moving average often turns down ahead of a low - it doesn't always work out, but its worth keeping an eye on.