11-1-2013 Comments

Yesterday was a distribution day on all indices. IBD missed a stall day on the S&P500 on 10/28, so there are three distribution events in the past 4 market days on that index and not 2 as they report. We also have had 4 distribution events in the past 8 days on the NASDAQ giving us a distribution cluster S13 sell rule. This takes us down to +1 exposure (30% invested). Any distribution in the next 2 days will take us out of the market. An old distribution day on 9/30 drops out of the count in two days. Distribution clusters are very rare in a healthy rally, they normally signify the volatility associated with a market top.

The Log Periodic Power Law from Didier Sornette also has indicated blow-off conditions as previously reported. I am down to one long and two shorts. The chart below shows the NASDAQ and an indicator called the High Jump. This term comes from Ian Woodward who created the concept. It is simply the intraday high percent above an index moving average. Shown here is the high jump for the 200-day moving average (black), 50-day moving average (red) and the 17-day moving average (green). Six years ago this indicator nailed the blow off top of October 31, 2007. On that day the 200-day high jump moved above its 4 year high. It is showing something similar today. If you pay attention to the black or red lines you will see that there is a range that when reached the market pulls back. We arrived last week at the highest high in this 3+ years. No way to tell if this is one of the really small pull backs or the start of something bigger and as usual an over bought market can stay overbought longer than expected.

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The next chart shows that the 20-day Average True Range (measured in percent) of the NASDAQ has been making higher highs and higher lows. This is the signature of a significant top in the making. The absolute value of ATR is small but the trend is there... So I am expecting a significant pull back or the start of something larger that has either already begun or will soon. So far this year every time the market has pulled back was a time to buy. My guess is that this will continue until every investor believes it will happen again. Then the market will move against the masses. Is this the time? I don't know. Every bear in recent history has been slain.

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