Friday, October 27, 2006

Warning signs for longs

Per my Oct 13 comments, we were in a topping zone from 1365-1388. Yesterday SPX cash hit 1389, satisfying that objective. We are now right at the top of the channel. While the first 120 point rally off of the June lows barely had any believers, the last 30 point rally has generated enough cocky bulls and the parabola dreamers. Now a reaction off of this zone has to be expected any day. There will come a out of the blue decline, for which there will be no reason or no news behind it.

One of my indicators has flashed a warning sign for the first time since this rally leg begun on 9/11/06. Look at the fast MACD, which had a series of higher highs from 9/11/06. For the first time since 9/11/06 , this indicator generated a momentum divergence yesterday. Also we have the Full Stoch crossed over and ready to plunge below 80. Again this is just a divergence at this point. If we get a strong rally today, the divergence can get erased. On the other hand, if we close in red today, not only will the MACD crossover, but the Full Stoch will also drop below 80. This would then be the first traedable decline since 9/11. At this point, it's only a warning to longs, but not a short signal yet. Will know by the end of the day. Stay tuned...