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Saturday, May 3, 2014

Saturday, 5/3/14 update

The recent action in the ES/SPX was characterized as tentative in last weekend's update, and that adjective still applies.  The chart pattern sure looks like a top of some sort is being formed.  In addition to the chart pattern there are a number of other factors which are threatening to the bulls.

The first is the fact that the RUT is seriously under performing the SPX.  The RUT is in black and the SPX in red in the below chart (the indicator on the bottom is a simple ratio of RUT/SPX).
What this is saying is that the broader market as represented by the RUT is much weaker than the blue chips as represented by the SPX.  This is a classic topping pattern in equities.  It signals that the appetite for equity investments is waning.

Secondly there are indications that commercial players have swung to a net bearish sentiment as measured by Alex Roslin in his very excellent analysis of the weekly Commitment of Traders report:

Finally, the Fed continues to decelerate the POMO machine.  Air is being let out of the balloon - kind of hard for it to continue levitating when that happens.

It's probably true that these factors are interrelated to some extent, but the fact is that the bull case remains threatened nevertheless.

The current alternates have been modified somewhat since last week.  One alternate (#2 below) has the ES laying down a failed 5th wave which terminated at yesterday's high, a not unusual event given the position of that 5th wave as the last rally in an almost 3 year bull market run.  Details of these alternates can be found here and here

Alternate #1

 Alternate #2

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