Week of 10/9/2011 Mousetrap

[Timothy Clontz]

Just a quick note:

The other day I mentioned that the bearish configuration of the sectors was breaking down, as normal in a rally. Yesterday’s action put the sectors back into a bearish pattern. I doubt we’ll make my 1250 target on this swing.

I’ll do a more complete explanation in my sector paper, but I use price momentum, acceleration, and volume-breadth to determine the most likely position in a market cycle:

5 XLY Cyclicals Bottom
6 XLK Technology Bull 1
8 XLI Industrial Bull 2
9 XLB Basic Industry Bull 3
4 XLE Energy Top
2 XLP Staples Bear 1
1 XLV Services Bear 2
3 XLU Utilities Bear 3
7 XLF Finance Bear 4

When the first two positions are adjacent to each other (Bear 2 and 1), that’s strong confirmation. They break apart during bull corrections or bear rallies. When I wrote the other day that the configuration was breaking down, it was because XLU was no longer in the third position and the sector rotation basically had nowhere to go before a break would happen.

After yesterday, that is no longer the case. The first four positions are very strongly correlated here, and I’m doubtful we’ll have a full rally at this point in the cyclical bear. It’s more likely we’ll retest the lows before shooting for 1250 on the S&P.

Yesterday’s strong move is likely a bull trap.

Tim